1-32146
|
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)
|
Explanatory Note | ||||
PART I
|
FINANCIAL INFORMATION
|
|||
Item 1
|
Financial Statements
|
|||
Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010 (Audited)
|
3
|
|||
Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (Unaudited)
|
4
|
|||
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (Unaudited)
|
5
|
|||
Notes to Interim Consolidated Financial Statements (Unaudited)
|
6
|
|||
Item 2
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
18
|
•
|
Part I — Item 1 — Financial Statements
|
||
•
|
Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
June 30, 2011
|
December 31, 2010
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
(Restated) | (Restated) | ||||||
Current assets:
|
||||||||
Cash
|
$ | 1,512,161 | $ | 4,086,574 | ||||
Accounts receivable, net of allowance of $66,000 ($66,000- 2010)
|
1,523,261 | 2,227,877 | ||||||
Inventory
|
916,690 | 601,359 | ||||||
Prepaid expenses and other current assets
|
140,784 | 231,190 | ||||||
Total current assets
|
4,092,896 | 7,147,000 | ||||||
Equipment and leasehold improvements, net
|
2,415,495 | 2,543,494 | ||||||
Other assets
|
315,299 | 325,953 | ||||||
Goodwill
|
3,153,668 | 3,084,121 | ||||||
Other intangible assets, net
|
2,146,074 | 1,847,859 | ||||||
Total assets
|
$ | 12,123,432 | $ | 14,948,427 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 1,286,391 | $ | 1,828,138 | ||||
Accrued expenses and other current liabilities
|
657,029 | 1,312,363 | ||||||
Revolving lines of credit
|
504,081 | 614,833 | ||||||
Current portion of long-term debt
|
424,432 | 300,000 | ||||||
Current portion of capital lease obligations
|
94,618 | 88,776 | ||||||
Total current liabilities
|
2,966,551 | 4,144,110 | ||||||
Revolving note from related party
|
- | 583,000 | ||||||
Long-term debt
|
1,953,810 | 1,578,242 | ||||||
Capital lease obligations
|
37,486 | 98,532 | ||||||
Deferred tax liability
|
99,253 | 89,779 | ||||||
Derivative liabilities
|
- | 3,866,836 | ||||||
Commitments and contingencies (see Note 7)
|
||||||||
Stockholders' equity
|
||||||||
Common stock, $.02 par value; 200,000,000 shares authorized, 19,420,780 shares issued and outstanding (19,391,319 in 2010)
|
388,415 | 387,825 | ||||||
Additional paid-in capital
|
48,163,003 | 44,178,569 | ||||||
Accumulated other comprehensive loss
|
(22,156 | ) | (25,834 | ) | ||||
Accumulated deficit
|
(41,462,930 | ) | (39,952,632 | ) | ||||
Total stockholders' equity
|
7,066,332 | 4,587,928 | ||||||
Total liabilities and stockholders' equity
|
$ | 12,123,432 | $ | 14,948,427 |
For The Three Months Ended June 30,
|
For The Six Months Ended June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Revenue
|
(Restated) | |||||||||||||||
Printing
|
$ | 789,232 | $ | 1,172,102 | $ | 1,510,996 | $ | 2,432,184 | ||||||||
Packaging
|
1,183,249 | 1,329,955 | 2,219,651 | 2,070,580 | ||||||||||||
Plastic IDs and cards
|
636,727 | 655,899 | 1,329,706 | 1,257,593 | ||||||||||||
Licensing and digital solutions
|
266,319 | 167,516 | 500,415 | 339,845 | ||||||||||||
Total Revenue
|
2,875,527 | 3,325,472 | 5,560,768 | 6,100,202 | ||||||||||||
Costs of revenue
|
||||||||||||||||
Printing
|
754,032 | 1,003,954 | 1,384,095 | 1,955,934 | ||||||||||||
Packaging
|
919,681 | 1,058,072 | 1,637,968 | 1,617,181 | ||||||||||||
Plastic IDs and cards
|
374,718 | 385,510 | 777,147 | 797,652 | ||||||||||||
Licensing and digital solutions
|
19,099 | - | 19,099 | 5,476 | ||||||||||||
Total costs of revenue
|
2,067,530 | 2,447,536 | 3,818,309 | 4,376,243 | ||||||||||||
Gross profit
|
807,997 | 877,936 | 1,742,459 | 1,723,959 | ||||||||||||
Operating expenses:
|
||||||||||||||||
Selling, general and administrative
|
1,720,621 | 1,474,113 | 3,235,875 | 3,109,564 | ||||||||||||
Research and development
|
73,818 | 66,688 | 125,111 | 132,355 | ||||||||||||
Amortization of intangibles
|
62,076 | 183,801 | 134,040 | 430,200 | ||||||||||||
Operating expenses
|
1,856,515 | 1,724,602 | 3,495,026 | 3,672,119 | ||||||||||||
Operating loss
|
(1,048,518 | ) | (846,666 | ) | (1,752,567 | ) | (1,948,160 | ) | ||||||||
Other income (expense):
|
||||||||||||||||
Change in fair value of derivative liability
|
- | - | 360,922 | - | ||||||||||||
Interest expense
|
(59,225 | ) | (84,407 | ) | (109,179 | ) | (149,510 | ) | ||||||||
Loss on equity investment
|
- | (20,000 | ) | - | (71,679 | ) | ||||||||||
Amortizaton of note discount
|
- | (40,732 | ) | - | (81,464 | ) | ||||||||||
Other income
|
- | - | - | 143,063 | ||||||||||||
Loss before income taxes
|
(1,107,743 | ) | (991,805 | ) | (1,500,824 | ) | (2,107,750 | ) | ||||||||
Income tax expense (benefit)
|
4,737 | 4,737 | 9,474 | (1,131,565 | ) | |||||||||||
Net loss
|
$ | (1,112,480 | ) | $ | (996,542 | ) | $ | (1,510,298 | ) | $ | (976,185 | ) | ||||
Other comprehensive income (loss):
|
||||||||||||||||
Interest rate swap income (loss)
|
- | (9,559 | ) | 3,678 | (25,834 | ) | ||||||||||
Comprehensive Loss
|
$ | (1,112,480 | ) | $ | (1,006,101 | ) | $ | (1,506,620 | ) | $ | (1,002,019 | ) | ||||
Net loss per share -basic and diluted:
|
$ | (0.06 | ) | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.06 | ) | ||||
Weighted average common shares outstanding, basic and diluted
|
19,420,780 | 17,769,726 | 19,416,786 | 17,390,570 |
2011
|
2010
|
|||||||
(Restated) | ||||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (1,510,298 | ) | $ | (976,185 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities:
|
||||||||
Depreciation and amortization
|
351,548 | 641,548 | ||||||
Stock based compensation
|
201,543 | 204,961 | ||||||
Amortization of note discount
|
- | 81,464 | ||||||
Loss on equity investment
|
- | 71,679 | ||||||
Deferred tax benefit | - | (1,141,040 | ) | |||||
Change in fair value of derivative liability
|
(360,922 | ) | - | |||||
(Increase) decrease in assets:
|
||||||||
Accounts receivable
|
773,970 | 889,660 | ||||||
Inventory
|
(315,331 | ) | 201,010 | |||||
Prepaid expenses and other assets
|
34,760 | (17,923 | ) | |||||
Increase (decrease) in liabilities:
|
||||||||
Accounts payable
|
(610,130 | ) | (424,409 | ) | ||||
Accrued expenses and other current liabilities
|
(457,137 | ) | 140,594 | |||||
Net cash used by operating activities
|
(1,891,997 | ) | (328,641 | ) | ||||
Cash flows from investing activities:
|
||||||||
Purchase of equipment and leashold improvements
|
(4,509 | ) | (85,400 | ) | ||||
Purchase of other intangible assets
|
(24,472 | ) | (43,137 | ) | ||||
Acquisition of business
|
61,995 | (2,272,405 | ) | |||||
Net cash provided (used) by investing activities
|
33,014 | (2,400,942 | ) | |||||
Cash flows from financing activities:
|
||||||||
Net borrowings on related party revolving line of credit
|
- | 100,000 | ||||||
Net payments on revolving line of credit
|
(349,911 | ) | - | |||||
Borrowings on long-term debt
|
- | 1,500,000 | ||||||
Payments of long-term debt
|
(150,000 | ) | (100,000 | ) | ||||
Payments of capital lease obligations
|
(55,204 | ) | (44,344 | ) | ||||
Issuance of common stock, net of issuance costs
|
(160,315 | ) | 1,134,005 | |||||
Net cash (used) provided by financing activities
|
(715,430 | ) | 2,589,661 | |||||
Net decrease in cash
|
(2,574,413 | ) | (139,922 | ) | ||||
Cash beginning of period
|
4,086,574 | 448,895 | ||||||
Cash end of period
|
$ | 1,512,161 | $ | 308,973 |
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
June 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Finished Goods
|
$
|
671,226
|
$
|
193,346
|
||||
Work in process
|
94,544
|
86,776
|
||||||
Raw Materials
|
150,920
|
321,237
|
||||||
$
|
916,690
|
$
|
601,359
|
June 30, 2011
|
December 31, 2010
|
|||||||||||||||||||||||||
Useful Life
|
Gross Carrying
Amount
|
Accumulated
Amortizaton
|
Net Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortizaton
|
Net Carrying
Amount
|
||||||||||||||||||||
Acquired intangibles
|
5 -10 years
|
$ | 2,446,300 | $ | 920,085 | $ | 1,526,215 | $ | 2,038,300 | $ | 815,177 | $ | 1,223,123 | |||||||||||||
Patent application costs
|
Varied (1)
|
867,948 | 248,089 | 619,859 | 843,693 | 218,957 | 624,736 | |||||||||||||||||||
$ | 3,314,248 | $ | 1,168,174 | $ | 2,146,074 | $ | 2,881,993 | $ | 1,034,134 | $ | 1,847,859 |
Derivative
Liability
|
||||
Balance, January 1, 2011
|
$
|
3,866,836
|
||
Fair
|
||||
Change in fair value
|
(360,922)
|
|||
Reclass to equity on date of amendment that eliminated derivative liabilities to net proceeds
|
(3,505,914)
|
|||
Balance, June 30, 2011
|
$
|
-
|
Estimated Useful
Lives
|
|||||
Fair value of consideration transferred |
$
|
274,232 | |||
Fair value of assets acquired and liabilities assumed:
|
|
||||
Cash
|
$ | 61,995 | |||
Accounts receivable
|
69,355 | ||||
Prepaid expenses
|
10,050 | ||||
Computer equipment
|
85,000 |
3 to 7 years
|
|||
Other intangible assets
|
408,000 |
5 to 10 years
|
|||
Goodwill | 69,547 | ||||
Fair value of assets acquired
|
$ | 703,947 | |||
Liabilities assumed:
|
|||||
Accounts payable
|
$ | 68,353 | |||
Outstanding credit card balances
|
90,207 | ||||
Revolving credit lines
|
148,952 | ||||
Accrued liabilities and deferred revenue
|
122,203 | ||||
Fair value of liabilities
|
$ | 429,715 | |||
Total Purchase Price
|
$ | 274,232 |
For The Three Months Ended June 30,
|
For The Six Months Ended June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
As restated | ||||||||||||||||
Revenue
|
$ | 2,958,689 | $ | 3,530,178 | $ | 6,007,105 | $ | 6,545,657 | ||||||||
Net Loss
|
(1,150,000 | ) | (981,052 | ) | (1,471,480 | ) | (932,650 | ) | ||||||||
Basic and diluted loss per share
|
(0.06 | ) | (0.06 | ) | (0.08 | ) | (0.05 | ) |
For the Six
Months Ended
June 30, 2011
|
For the Six
Months Ended
June 30, 2010
|
|||||||
Cash paid for interest
|
$ | 228,000 | $ | 112,000 | ||||
Non-cash investing and financing activities:
|
||||||||
Equity issued for severance agreements
|
$ | - | $ | 54,000 | ||||
Equity issued for acqusition
|
$ | 274,000 | $ | 2,567,000 | ||||
Retirement of derivative liability instruments
|
$ | 3,506,000 | $ | - | ||||
Refinance of related party revolving line of credit and accrued interest
|
$ | 650,000 | $ | - |
Licenses security printing technologies and manufactures and sells secure documents such as vital records, transcripts, safety paper, secure coupons, voter ballots, event tickets, among others. In addition, sells general commercial printing services utilizing digital and offset printing capabilities.
|
|
DSS Plastics
|
Manufactures and sells secure and non-secure plastic printed products such as ID cards, event badges and passes, and loyalty and gift cards, among others. Plastic cards include RFID chips, magnetic strips with variable data, high quality graphics with overt and covert security features.
|
DSS Packaging
|
Manufactures and sells secure and non-secure custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others.
|
DSS Digital
|
Develops, installs, hosts and services IT services including remote server and application hosting, cloud computing, secure document systems, back-up and disaster recovery services and customer program development services.
|
Three months ended June 30, 2011
|
DSS Printing
|
DSS Plastics
|
DSS Packaging
|
DSS Digital
|
Corporate
|
Total
|
||||||||||||||||||
Revenues from external customers
|
$ | 960,000 | $ | 637,000 | 1,183,000 | 96,000 | $ | - | $ | 2,876,000 | ||||||||||||||
Depreciation and amortization
|
35,000 | 44,000 | 86,000 | 5,000 | 1,000 | 171,000 | ||||||||||||||||||
Net loss
|
(576,000 | ) | (6,000 | ) | (99,000 | ) | (23,000 | ) | (408,000 | ) | (1,112,000 | ) | ||||||||||||
Three months ended June 30, 2010
|
||||||||||||||||||||||||
Revenues from external customers
|
$ | 1,339,000 | $ | 656,000 | 1,330,000 | - | $ | - | $ | 3,325,000 | ||||||||||||||
Depreciation and amortization
|
135,000 | 75,000 | 99,000 | - | 1,000 | 310,000 | ||||||||||||||||||
Net loss
|
(529,000 | ) | (33,000 | ) | (92,000 | ) | - | (343,000 | ) | (997,000 | ) | |||||||||||||
Six months ended June 30, 2011
|
||||||||||||||||||||||||
Revenues from external customers
|
$ | 1,915,000 | $ | 1,330,000 | 2,220,000 | 96,000 | $ | - | $ | 5,561,000 | ||||||||||||||
Depreciation and amortization
|
74,000 | 99,000 | 173,000 | 5,000 | 1,000 | 352,000 | ||||||||||||||||||
Net (loss) profit
|
(864,000 | ) | 21,000 | (171,000 | ) | (23,000 | ) | (473,000 | ) | (1,510,000 | ) | |||||||||||||
Identifiable assets (as Restated)
|
2,125,000 | 2,122,000 | 5,766,000 | 761,000 | 1,350,000 | 12,124,000 | ||||||||||||||||||
Six months ended June 30, 2010
|
||||||||||||||||||||||||
Revenues from external customers
|
$ | 2,771,000 | $ | 1,258,000 | 2,071,000 | - | $ | - | $ | 6,100,000 | ||||||||||||||
Depreciation and amortization
|
365,000 | 150,000 | 126,000 | - | 1,000 | 642,000 | ||||||||||||||||||
Net income (loss) (as Restated)
|
(1,126,000 | ) | (158,000 | ) | (75,000 | ) | - | 383,000 | (976,000 | ) | ||||||||||||||
Identifiable assets at December 31, 2010 (as Restated)
|
2,294,000 | 2,063,000 | 6,465,000 | - | 4,126,000 | 14,948,000 |
As Originally Reported
|
As Adjusted
|
Effect of Change
|
||||||||||
Current assets
|
$ | 7,147,000 | $ | 7,147,000 | - | |||||||
Goodwill
|
$ | 1,943,081 | $ | 3,084,121 | 1,141,040 | |||||||
Total assets
|
$ | 13,807,387 | $ | 14,948,427 | 1,141,040 | |||||||
Total current liabilities
|
$ | 4,144,110 | $ | 4,144,110 | - | |||||||
Total liabilities
|
$ | 10,360,499 | $ | 10,360,499 | - | |||||||
Accumulated deficit
|
$ | (41,093,672 | ) | $ | (39,952,632 | ) | 1,141,040 | |||||
Total stockholders' equity
|
$ | 3,446,888 | $ | 4,587,928 | 1,141,040 | |||||||
Total liabilities and stockholders' equity
|
$ | 13,807,387 | $ | 14,948,427 | 1,141,040 |
As Originally Reported
|
As Adjusted
|
Effect of Change
|
||||||||||
Current assets
|
$ | 4,092,896 | $ | 4,092,896 | - | |||||||
Goodwill
|
$ | 2,012,628 | $ | 3,153,668 | 1,141,040 | |||||||
Total assets
|
$ | 10,982,392 | $ | 12,123,432 | 1,141,040 | |||||||
Total current liabilities
|
$ | 2,966,551 | $ | 2,966,551 | - | |||||||
Total liabilities
|
$ | 5,057,100 | $ | 5,057,100 | - | |||||||
Accumulated deficit
|
$ | (42,603,970 | ) | $ | (41,462,930 | ) | 1,141,040 | |||||
Total stockholders' equity
|
$ | 5,925,292 | $ | 7,066,332 | 1,141,040 | |||||||
Total liabilities and stockholders' equity
|
$ | 10,982,392 | $ | 12,123,432 | 1,141,040 |
Originally Reported
|
As Adjusted
|
Effect of Change
|
||||||||||
Revenue
|
$ | 6,100,202 | $ | 6,100,202 | - | |||||||
Cost of revenue
|
$ | 4,376,243 | $ | 4,376,243 | - | |||||||
Gross profit
|
$ | 1,723,959 | $ | 1,723,959 | - | |||||||
Operating expense
|
$ | 3,672,119 | $ | 3,672,119 | - | |||||||
Operating loss
|
$ | (1,948,160 | ) | $ | (1,948,160 | ) | - | |||||
Other expense
|
$ | (159,590 | ) | $ | (159,590 | ) | - | |||||
Loss before income taxes
|
$ | (2,107,750 | ) | $ | (2,107,750 | ) | - | |||||
Income tax expense (benefit)
|
$ | 9,475 | $ | (1,131,565 | ) | (1,141,040 | ) | |||||
Net Loss
|
$ | (2,117,225 | ) | $ | (976,185 | ) | 1,141,040 | |||||
Comprehensive loss
|
$ | (2,143,059 | ) | $ | (1,002,019 | ) | 1,141,040 | |||||
Net Loss per share -basic and diluted
|
$ | (0.12 | ) | $ | (0.06 | ) | 0.06 |
Originally Reported
|
As Adjusted
|
Effect of Change
|
||||||||||
Net Loss
|
$ | (2,117,225 | ) | $ | (976,185 | ) | 1,141,040 | |||||
Adjustments to reconcile net loss to net cash used by operating activities:
|
||||||||||||
Deferred tax benefit
|
$ | - | $ | 1,141,040 | 1,141,040 | |||||||
Net cash used by operating activities
|
$ | (328,641 | ) | $ | (328,641 | ) | - | |||||
Net cash used by investing activities
|
$ | (2,400,942 | ) | $ | (2,400,942 | ) | - | |||||
Net cash provided by financing activities
|
$ | 2,589,661 | $ | 2,589,661 | - | |||||||
Net decrease in cash
|
$ | (139,922 | ) | $ | (139,922 | ) | - |
·
|
Our limited operating history with our business model.
|
·
|
Our ability to effect a financing transaction to fund our operations could adversely affect the value of your stock.
|
·
|
The loss in current litigation in which we may lose certain of our technology rights, which may affect our business plan.
|
·
|
The inability to adequately protect our intellectual property.
|
·
|
Intellectual property infringement or other claims against us, our customers or our intellectual property that could be costly to defend and result in our loss of significant rights.
|
·
|
The failure of our products and services to achieve market acceptance.
|
·
|
Changes in document security technology and standards could render our applications and services obsolete.
|
·
|
The inability to compete in our market, especially against established industry competitors with greater market presence and financial resources.
|
·
|
The inability to meet our growth strategy of acquiring complementary businesses and assets and expanding our existing operations to include manufacturing capabilities.
|
·
|
AuthentiGuard™ DX™
|
·
|
AuthentiGuard® Laser Moiré™
|
·
|
AuthentiGuard® Prism™
|
·
|
AuthentiGuard® Pantograph 4000™
|
·
|
AuthentiGuard® Phantom™
|
·
|
AuthentiGuard® VeriGlow™
|
·
|
AuthentiGuard® Survivor 21®
|
·
|
AuthentiGuard® Block-Out™
|
·
|
AuthentiGuard® MicroPerf™
|
Three Months
Ended June 30,
2011
|
Three Months
Ended June 30,
2010
|
% change
|
Six Months
Ended June 30,
2011
|
Six Months
Ended June 30,
2010
|
% change
|
|||||||||||||||||||
Revenue
|
||||||||||||||||||||||||
Printing
|
$ | 789,000 | $ | 1,172,000 | -33 | % | $ | 1,511,000 | $ | 2,432,000 | -38 | % | ||||||||||||
Packaging
|
1,183,000 | 1,330,000 | -11 | % | 2,220,000 | 2,071,000 | 7 | % | ||||||||||||||||
Plastic IDs and cards
|
637,000 | 656,000 | -3 | % | 1,330,000 | 1,258,000 | 6 | % | ||||||||||||||||
Licensing and digital solutions
|
266,000 | 168,000 | 58 | % | 500,000 | 340,000 | 47 | % | ||||||||||||||||
Total Revenue
|
$ | 2,875,000 | $ | 3,326,000 | -14 | % | $ | 5,561,000 | $ | 6,101,000 | -9 | % |
Three Months
Ended June 30,
2011
|
Three Months
Ended June 30,
2010
|
% change
|
Six Months
Ended June 30,
2011
|
Six Months
Ended June 30,
2010
|
% change
|
|||||||||||||||||||
Costs of revenue
|
||||||||||||||||||||||||
Printing
|
$ | 754,000 | $ | 1,004,000 | -25 | % | $ | 1,384,000 | $ | 1,956,000 | -29 | % | ||||||||||||
Packaging
|
920,000 | 1,058,000 | -13 | % | 1,638,000 | 1,617,000 | 1 | % | ||||||||||||||||
Plastic IDs and cards
|
375,000 | 386,000 | -3 | % | 777,000 | 798,000 | -3 | % | ||||||||||||||||
Licensing and digital solutions
|
19,000 | - | 100 | % | 19,000 | 5,000 | 280 | % | ||||||||||||||||
Total cost of revenue
|
2,068,000 | 2,448,000 | -16 | % | 3,818,000 | 4,376,000 | -13 | % | ||||||||||||||||
Gross profit
|
||||||||||||||||||||||||
Printing
|
35,000 | 168,000 | -79 | % | 127,000 | 476,000 | -73 | % | ||||||||||||||||
Packaging
|
263,000 | 272,000 | -3 | % | 582,000 | 454,000 | 28 | % | ||||||||||||||||
Plastic IDs and cards
|
262,000 | 270,000 | -3 | % | 553,000 | 460,000 | 20 | % | ||||||||||||||||
Licensing and digital solutions
|
247,000 | 168,000 | 47 | % | 481,000 | 335,000 | 44 | % | ||||||||||||||||
Total gross profit
|
$ | 807,000 | $ | 878,000 | -8 | % | $ | 1,743,000 | $ | 1,725,000 | 1 | % |
Three Months
Ended June 30,
2011
|
Three Months
Ended June 30,
2010
|
% change
|
Six Months
Ended June 30,
2011
|
Six Months
Ended June 30,
2010
|
% change
|
|||||||||||||||||||
Gross profit percentage:
|
28 | % | 26 | % | 8 | % | 31 | % | 28 | % | 11 | % |
Three Months
Ended June 30,
2011
|
Three Months
Ended June 30,
2010
|
% change
|
Six Months
Ended June 30,
2011
|
Six Months
Ended June 30,
2010
|
% change
|
|||||||||||||||||||
Operating Expenses
|
||||||||||||||||||||||||
Sales, general and administrative compensation
|
$ | 845,000 | $ | 859,000 | -2 | % | $ | 1,604,000 | $ | 1,691,000 | -5 | % | ||||||||||||
Professional Fees
|
163,000 | 133,000 | 23 | % | 364,000 | 345,000 | 6 | % | ||||||||||||||||
Sales and marketing
|
162,000 | 57,000 | 184 | % | 286,000 | 126,000 | 127 | % | ||||||||||||||||
Research and development
|
74,000 | 67,000 | 10 | % | 125,000 | 133,000 | -6 | % | ||||||||||||||||
Rent and utilities
|
188,000 | 166,000 | 13 | % | 354,000 | 308,000 | 15 | % | ||||||||||||||||
Other
|
231,000 | 163,000 | 42 | % | 364,000 | 372,000 | -2 | % | ||||||||||||||||
1,663,000 | 1,445,000 | 15 | % | 3,097,000 | 2,975,000 | 4 | % | |||||||||||||||||
Other Operating Expenses
|
||||||||||||||||||||||||
Depreciation and software amortization
|
31,000 | 31,000 | 0 | % | 63,000 | 62,000 | 2 | % | ||||||||||||||||
Stock based compensation
|
101,000 | 65,000 | 55 | % | 202,000 | 205,000 | -1 | % | ||||||||||||||||
Amortization of intangibles
|
62,000 | 184,000 | -66 | % | 134,000 | 430,000 | -69 | % | ||||||||||||||||
194,000 | 280,000 | -31 | % | 399,000 | 697,000 | -43 | % | |||||||||||||||||
Total Operating Expenses
|
$ | 1,857,000 | $ | 1,725,000 | 8 | % | $ | 3,496,000 | $ | 3,672,000 | -5 | % |
Three Months
Ended June 30,
2011
|
Three Months
Ended June 30,
2010
|
% change
|
Six Months
Ended June 30,
2011
|
Six Months
Ended June 30,
2010
|
% change
|
|||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||
Change in fair value of derivative liability
|
$ | - | $ | - | 0 | % | $ | 361,000 | $ | - | 100 | % | ||||||||||||
Interest expense
|
(59,000 | ) | (84,000 | ) | -30 | % | (109,000 | ) | (150,000 | ) | -27 | % | ||||||||||||
Amortizaton of note discount
|
- | (41,000 | ) | -100 | % | - | (81,000 | ) | -100 | % | ||||||||||||||
Loss in equity investment
|
- | (20,000 | ) | -100 | % | - | (72,000 | ) | -100 | % | ||||||||||||||
Other income
|
- | - | 0 | % | - | 143,000 | -100 | % | ||||||||||||||||
Other income (expense), net
|
$ | (59,000 | ) | $ | (145,000 | ) | -59 | % | $ | 252,000 | $ | (160,000 | ) | -258 | % |
Three Months
Ended June 30,
2011
|
Three Months
Ended June 30,
2010
|
% change
|
Six Months
Ended June 30,
2011
|
Six Months
Ended June 30,
2010
(as Restated)
|
% change
|
|||||||||||||||||||
Net loss
|
$ | (1,112,000 | ) | $ | (997,000 | ) | 12 | % | $ | (1,510,000 | ) | $ | (976,000 | ) | 54 | % | ||||||||
Net loss per share, basic and diluted
|
$ | (0.06 | ) | $ | (0.06 | ) | 0 | % | $ | (0.08 | ) | $ | (0.06 | ) | 33 | % | ||||||||
Weighted average common shares outstanding, basic and diluted
|
19,420,780 | 17,769,726 | 9 | % | 19,416,786 | 17,390,570 | 12 | % |
As Of And For The Period Ended:
|
||||||||||||
June 30, 2011
|
June 30, 2010
|
% change vs.
2010
|
||||||||||
Cash flows from:
|
||||||||||||
Operating activities
|
$ | (1,892,000 | ) | $ | (329,000 | ) | -475 | % | ||||
Investing activities
|
33,000 | (2,401,000 | ) | 101 | % | |||||||
Financing activities
|
(715,000 | ) | 2,590,000 | -128 | % | |||||||
Working capital
|
1,126,000 | (798,000 | ) | 241 | % | |||||||
Current ratio
|
1.38 | x | 0.75 | x | 84 | % | ||||||
Cash
|
$ | 1,512,000 | $ | 309,000 | 389 | % | ||||||
Funds Available from Open Credit Facilities
|
$ | 730,000 | $ | 1,317,000 | -45 | % | ||||||
Debt (excluding unamortized debt discount) and Capitalized Leases
|
$ | 3,014,000 | $ | 3,674,000 | -18 | % |
Item 31.1
|
Certification of Chief Executive Officer as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
|
Item 31.2
|
Certification of Chief Financial Officer as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
|
Item 32.1
|
Certification of Chief Executive Officer as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
Item 32.2
|
Certification of Chief Financial Officer as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
101** | The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) related notes to financial statements, tagged as blocks of text. |
DOCUMENT SECURITY SYSTEMS, INC.
|
||
November 14, 2011
|
By:
|
/s/ Patrick White
|
Patrick White
Chief Executive Officer
|
||
November 14, 2011
|
By:
|
/s/ Philip Jones
|
Philip Jones
Chief Financial Officer
|
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/s/ Patrick White
|
||||
Patrick White
|
|
|||
Chief Executive Officer
|
|
/s/ Philip Jones
|
||||
Philip Jones
|
|
|||
Chief Financial Officer
|
|
(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.
|
/s/ Patrick White
|
||||
Patrick White
|
|
|||
Chief Executive Officer
|
|
(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.
|
/s/ Philip Jones
|
||||
Philip Jones
|
|
|||
Chief Financial Officer
|
|
Consolidated Balance Sheets (Parenthetical) (USD $) | Jun. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Accounts receivable, allowance | $ 66,000 | $ 66,000 |
Common stock, par value | $ 0.02 | $ 0.02 |
Common stock, shares authorized | 200,000,000 | 200,000,000 |
Common stock, shares issued | 19,420,780 | 19,391,319 |
Common stock, shares outstanding | 19,420,780 | 19,391,319 |
Consolidated Statements of Operations (USD $) | 3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011 | Jun. 30, 2010 | Jun. 30, 2011 | Jun. 30, 2010 | |
Revenue | ||||
Printing | $ 789,232 | $ 1,172,102 | $ 1,510,996 | $ 2,432,184 |
Packaging | 1,183,249 | 1,329,955 | 2,219,651 | 2,070,580 |
Plastic IDs and cards | 636,727 | 655,899 | 1,329,706 | 1,257,593 |
Licensing and digital solutions | 266,319 | 167,516 | 500,415 | 339,845 |
Total Revenue | 2,875,527 | 3,325,472 | 5,560,768 | 6,100,202 |
Costs of revenue | ||||
Printing | 754,032 | 1,003,954 | 1,384,095 | 1,955,934 |
Packaging | 919,681 | 1,058,072 | 1,637,968 | 1,617,181 |
Plastic IDs and cards | 374,718 | 385,510 | 777,147 | 797,652 |
Licensing and digital solutions | 19,099 | 19,099 | 5,476 | |
Total costs of revenue | 2,067,530 | 2,447,536 | 3,818,309 | 4,376,243 |
Gross profit | 807,997 | 877,936 | 1,742,459 | 1,723,959 |
Operating expenses: | ||||
Selling, general and administrative | 1,720,621 | 1,474,113 | 3,235,875 | 3,109,564 |
Research and development | 73,818 | 66,688 | 125,111 | 132,355 |
Amortization of intangibles | 62,076 | 183,801 | 134,040 | 430,200 |
Operating expenses | 1,856,515 | 1,724,602 | 3,495,026 | 3,672,119 |
Operating loss | (1,048,518) | (846,666) | (1,752,567) | (1,948,160) |
Other income (expense): | ||||
Change in fair value of derivative liability | 360,922 | |||
Interest expense | (59,225) | (84,407) | (109,179) | (149,510) |
Loss on equity investment | (20,000) | (71,679) | ||
Amortizaton of note discount | (40,732) | (81,464) | ||
Other income | 143,063 | |||
Loss before income taxes | (1,107,743) | (991,805) | (1,500,824) | (2,107,750) |
Income tax expense (benefit) | 4,737 | 4,737 | 9,474 | (1,131,565) |
Net loss | (1,112,480) | (996,542) | (1,510,298) | (976,185) |
Other comprehensive income (loss): | ||||
Interest rate swap income (loss) | (9,559) | 3,678 | (25,834) | |
Comprehensive Loss | $ (1,112,480) | $ (1,006,101) | $ (1,506,620) | $ (1,002,019) |
Net loss per share -basic and diluted: | $ (0.06) | $ (0.06) | $ (0.08) | $ (0.06) |
Weighted average common shares outstanding, basic and diluted | 19,420,780 | 17,769,726 | 19,416,786 | 17,390,570 |
Document and Entity Information | 6 Months Ended | |
---|---|---|
Jun. 30, 2011 | Aug. 12, 2011 | |
Document Information [Line Items] | ||
Document Type | 10-Q | |
Amendment Flag | true | |
Amendment Description | Document Security Systems, Inc (the “Company”) is filing this Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2011 originally filed with the Securities and Exchange Commission (the “SEC”) on August 12, 2011 (the “Original Quarterly Report”), to restate the Consolidated Balance Sheet as of June 30, 2011 and December 31, 2010, the Consolidated Statements of Operations for the six month period ended June 30, 2010, the Consolidated Statements of Cash Flows for the six month period ended June 30, 2010, and certain footnote disclosures thereto. The Company identified an error in the Company’s accounting treatment relating to the deferred tax liability created as a result of an acquisition in the first quarter of 2010, On February 12, 2010, the Company purchased all of the outstanding stock of Premier Packaging Corporation for $2,000,000 in cash and 735,437 shares of the Company’s common stock with a value of $2,566,675 plus the assumption of liabilities at February 12, 2010. Among the various assets and liabilities acquired, the Company allocated $1,557,500 to machinery and equipment and $1,372,000 to other intangible assets. The tax basis for the machinery and equipment and other intangible assets as of the date of acquisition was zero, resulting in a deferred tax liability of $1,141,040 as a result of the acquisition. As part of the business combination accounting, the Company properly recorded the deferred tax liability that was caused by the acquisition, but erroneously reduced a deferred tax asset valuation allowance. The Company has determined that the deferred tax liability should have been included in the business combination accounting, resulting in an additional $1,141,040 of goodwill. Also, the Company in a separate entry should have recorded a deferred tax benefit along with a reversal of the deferred tax asset valuation allowance. As a result of this determination, the Company recorded an additional deferred tax benefit and additional goodwill in the amount of $1,141,040 as of the March 31, 2010 and subsequent periods. The correction of this error had no impact on previously disclosed revenue, cost of sales, gross profit, operating expenses and other income and expense. Additionally, this error had no impact on net loss for the interim periods ended June 30, 2011 and March 31, 2011. See footnote 11 included in the accompanying financial statements for more information regarding the restatement. | |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q2 | |
Trading Symbol | DSS | |
Entity Registrant Name | DOCUMENT SECURITY SYSTEMS INC | |
Entity Central Index Key | 0000771999 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 19,420,780 |
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Commitments and Contingencies | 6 Months Ended |
---|---|
Jun. 30, 2011 | |
Commitments and Contingencies |
7. Commitments and
Contingencies
Legal Matters - On August 1, 2005,
the Company commenced a suit in the European Court of First
Instance in Luxembourg against the ECB alleging patent infringement
by the ECB and claimed unspecified damages (the
“ECB Litigation”). We brought the suit in the European
Court of First Instance in Luxembourg. We alleged that
all Euro banknotes in circulation infringe the Company European
Patent 0 455 750B1 which covers a method of incorporating an
anti-counterfeiting feature into banknotes or similar security
documents to protect against forgeries by digital scanning and
copying devices. In 2006, the Company received notices
that the ECB had filed separate claims in each of the United
Kingdom, The Netherlands, Belgium, Italy, France, Spain, Germany,
Austria and Luxembourg courts seeking the invalidation of the
Patent. Proceedings were commenced before each of the
national courts seeking revocation and declarations of invalidity
of the Patent. On August 20, 2008, the Company
entered into an agreement with Trebuchet Capital Partners, LLC
(“Trebuchet”) under which Trebuchet agreed to pay
substantially all of the litigation costs associated with validity
proceedings in eight European countries relating to the
Patent. The Company provided Trebuchet with
the sole and exclusive right to manage infringement litigation
relating to the Patent in Europe, including the right to initiate
litigation in the name of the Company, Trebuchet or both and to
choose whom and where to sue, subject to certain limitations set
forth in the Trebuchet Agreement, and in consideration
for Trebuchet's funding obligations, the Company assigned and
transferred a 49% interest in the Company's rights, title and
interest in the Patent to Trebuchet which allows Trebuchet to have
a separate and distinct interest in and share of the Patent, along
with the right to sue and recover in litigation, settlement or
otherwise and to collect royalties or other payments under or on
account of the Patent. In addition, the Company and Trebuchet have
agreed to equally share all proceeds generated from litigation
relating to the Patent, including judgments and licenses or
other arrangements entered into in settlement of any such
litigation. Trebuchet is also entitled to recoup any litigation
expenses specifically awarded to the Company in such
actions.
On
March 26, 2007, the High Court of Justice, Chancery Division,
Patents Court in London, England ruled that the Patent was deemed
invalid in the United Kingdom, and on March 19, 2008 this decision
was upheld on appeal. As a result of these decisions,
the Company paid the ECB costs for both court cases in
the amount of ₤356,490. On March 27, 2007
the Bundespatentgericht of the Federal Republic of Germany ruled
that the German part of the Patent was valid, having considered the
English Court’s decision. However, on July 6,
2010, the Company was notified that the German Court had reversed
the ruling on appeal and the Patent was deemed invalid in
Germany. The Court of First Instance in
Luxembourg ruled on September 5, 2007 that it does not have
jurisdiction to rule on the patent infringement
claim. On January 9, 2008 the French Court held
that the Patent was invalid in France and on March 10, 2010, this
decision was upheld on appeal. On March 12, 2008
the Dutch Court ruled that the Patent was valid in the
Netherlands. However, on December 21, 2010 the Dutch
Court reversed the ruling on appeal and the Patent was deemed
invalid in the Netherlands. On November 3, 2009,
the Belgium Court held that the Patent was invalid in
Belgium. On November 17, 2009, the Austrian Court held
that the Patent was invalid in Austria. On March
24, 2010 the Spanish Court ruled that the Patent was
valid. The decision is being appealed by the
ECB. In July 2010, the Company was notified that
the Italian Court deemed the patent invalid. The
decision was not appealed.
In
certain jurisdictions in the ECB Litigation, the losing party is
responsible for the other party’s legal fees, subject to
court approval. The Company paid a total of
₤356,490 to the ECB for the United Kingdom
case. Trebuchet paid for the costs reimbursements
due, if any, for all of the other jurisdictions involved, except
for approximately €156,000 for the Germany case and
approximately €175,000 for the Netherlands case,
which are due as of June 30, 2011. In July 2011,
Trebuchet transferred funds to the Company for disbursement of
these amounts. In addition, the ECB formally requested
the Company to pay attorneys and court fees for the Court of First
Instance case in Luxembourg in the amount of €93,752 which,
unless the amount is settled will be subject to an assessment
procedure that has not been initiated. The Company will accrue the
assessed amount, if any, as soon as it is reasonably
estimable.
On
February 18, 2010, Trebuchet, on behalf of the Company, filed an
infringement suit in the Netherlands against the ECB and two
security printing entities with manufacturing operations in the
Netherlands, Joh. Enschede Banknotes B.V and Koninklijke Joh.
Enschede B.V. Upon determination on December 21, 2010, that
the patent was invalid in the Netherlands, the infringement case
was terminated by Trebuchet. Trebuchet will be
responsible for costs reimbursement associated with the case, if
any, when determined by the Dutch Court.
There
are no other material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of
its property is subject, other than ordinary routine litigation
incidental to the Company’s business.
Contingent Litigation Payment – In May 2005, the
Company made an agreement with its legal counsel in charge of the
Company’s litigation with the European Central Bank which
capped the fees for all matters associated with that litigation at
$500,000 plus expenses, and a $150,000 contingent payment upon a
successful ruling or settlement on the Company’s behalf in
that litigation. The Company will record the $150,000 in
the period in which the Company has determined that a successful
ruling or settlement is probable.
In
addition, pursuant to an agreement made in December 2004, the
Company is required to share the economic benefit derived from
settlements, licenses or subsequent business arrangements that the
Company obtains from any infringer of patents formerly owned by the
Wicker Family. For infringement matters involving
certain U.S. patents, the Company will be required to disburse 30%
of the settlement proceeds. For infringement matters
involving certain foreign patents, the Company will be required to
disburse 14% of the settlement proceeds. These payments
do not apply to licenses or royalties to patents that the Company
has developed or obtained from persons other than the Wicker
Family. As of June 30, 2011, there has been no
settlement amounts related to these agreements.
Contingent Purchase Price -In December, 2008, the Company
acquired substantially all of the assets of DPI of Rochester, LLC
in which the Company guaranteed up to $50,000 to certain parties
depending on whether certain conditions occurred within five years
of the acquisition. As of June 30, 2011, the Company
considers the likelihood that the payment will be required as
remote.
|
Other Intangible Assets | 6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Intangible Assets |
3. Other Intangible
Assets
Other
intangible assets are comprised of the following:
(1)-
patent rights are amortized over their expected useful
life which is generally the legal life of the patent. As
of June 30, 2011 the weighted average remaining useful life of
these assets in service was 14.2 years.
|
Segment Information | 6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Segment Information |
9. Segment Information
The
Company's businesses are organized, managed and internally reported
as four operating segments. In the second quarter 2011,
the Company acquired ExtraDev Inc. for its DSS Digital
Group and the Company launched a new corporate identity and logo,
along with a new website that grouped the Company under four
distinct divisions. In conjunction with this, the
Company determined that an expansion of its segment reporting to
align with the new internal structure was
appropriate. We have reclassified certain prior period
segment information amounts to conform to the current period
presentation of segment information. A summary of the four
reportable segments follows:
Approximate
information concerning the Company’s operations by reportable
segment for the three and six months ended June 30, 2011 and 2010
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:
|
Subsequent Events | 6 Months Ended |
---|---|
Jun. 30, 2011 | |
Subsequent Events |
10. Subsequent Events
On
July 26, 2011, Premier Packaging Corporation (“PPC”), a
wholly-owned subsidiary of Document Security Systems, Inc.
(“DSS”), entered into a Second Amended and Restated
Credit Facility Agreement with RBS Citizens, N.A.
(“Citizens”), a national banking association (the
“Second Credit Facility Agreement”) for the purpose of
amending the Amended and Restated Credit Facility Agreement dated
as of October 8, 2010, as amended on February 24, 2011 (the
“Original Credit Facility Agreement”). The Second
Credit Facility Agreement provides for a revolving line of credit
up to $1,000,000 and a loan of $1,075,000 to PPC. The Second Credit
Facility Agreement contains certain customary affirmative and
financial covenants and negative covenants against incurring
indebtedness, liens, liabilities and certain corporate actions, and
is secured by all of the assets of PPC. In addition,
PPC’s affiliates, DSS, P3 and Secuprint are guarantors of all
of PPC’s payment and other obligations to
Citizens.
On
July 26, 2011, in conjunction with the Second Credit Facility
Agreement, PPC entered into an Amended and Restated Acquisition
Term Loan Note with Citizens (the “Note”) for the
purpose of restating and reconfirming an indebtedness of PPC to
Citizens in the amount of $1,075,000, as evidenced by the
Acquisition Term Loan Note (the “Original Note”) dated
February 12, 2010, given by PPC to Citizens in the amount of
$1,500,000. Monthly payments are $25,000 plus
interest. Interest under the Note accrues on a monthly basis
at LIBOR plus 3.75%. If a Default occurs, the LIBOR rate of
interest shall automatically be converted to the then prime rate as
announced by banks in New York. PPC may prepay the Note in
accordance with the terms of the Note, subject to a prepayment fee.
The Note matures on February 1, 2015.
On
July 26, 2011, in conjunction with the Second Credit Facility
Agreement, PPC entered into an Amended and Restated Revolving Line
Note with Citizens (the “Revolving Note”) for the
purpose of restating and confirming an indebtedness of PPC to
Citizens in the amount of $1,000,000, as evidenced by the Revolving
Line Note dated February 12, 2010 (the “Original Revolving
Note”), given by PPC to Citizens in the amount of $1,000,000.
Under the Revolving Note, PPC may request advances from time to
time provided PPC is not in Default. Interest on the outstanding
principal amounts shall accrue at a rate per annum equal to the sum
of the LIBOR Advantage Rate fixed by the British Banker’s
Association plus 3.75%. Interest shall be due and payable monthly
and on the maturity date. The proceeds from the Revolving Note will
be used for working capital purposes. Unless extended in writing by
Citizens, the Revolving Note will terminate on the earlier of (i)
May 31, 2012 or (ii) the date of an Event of Default, as defined
under the Second Credit Facility Agreement.
Under
the Second Credit Facility Agreement, Events of Default for the
Note and the Revolving Note (“Default”) include with
respect to PPC or any of its affiliates, including DSS, (i) failure
to make any payment within five days of due date, (ii) failure to
observe or perform any condition, covenant or term of the Note,
Revolving Note or Second Credit Facility Agreement or of any other
agreement with Citizens, (iii) failure of any
representation or warranty to be accurate and truthful in all
material respects in connection with the execution or performance
of the Second Credit Facility Agreement, (iv) financial
difficulties resulting in an inability to pay debts when due, a
bankruptcy filing, assignment for the benefit of creditors, or the
appointment of a trustee, or (v) material changes in the business
or operations, including a change of control. If the entire amount
of any required principal and/or interest is not paid in full under
the Note or Revolving Note within ten days after the same is due, a
late fee of up to 5% of the required payment will be charged to
PPC.
The
effect of the Second Credit Facility Agreement, the Note, and the
Revolving Note, is to (a) extend the payment term of the Original
Note to February 1, 2015 and eliminate the $625,000 balloon payment
originally due on July 1, 2013 under the Original Note, and (b)
eliminate the “borrowing base” component of the
Original Revolving Note.
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Supplemental Cash Flow Information | 6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Supplemental Cash Flow Information |
8. Supplemental Cash Flow
Information
|
Basis of Presentation and Significant Accounting Policies | 6 Months Ended | |||||||||
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Jun. 30, 2011 | ||||||||||
Basis of Presentation and Significant Accounting Policies |
1. Basis of Presentation and Significant
Accounting Policies
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with U.S. generally accepted
accounting principles 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.
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying balance
sheets and related interim statements of operations and cash flows
include all adjustments, consisting only of normal recurring items,
necessary for their fair presentation in accordance with U.S.
generally accepted accounting principles. All significant
intercompany transactions have been eliminated in
consolidation.
Interim
results are not necessarily indicative of results expected for a
full year. For further information regarding Document Security
Systems, Inc.’s (the “Company”) 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, 2010.
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States (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.
Reclassifications -Certain prior period amounts in the
accompanying consolidated financial statements and notes thereto
have been reclassified to current period
presentation. These classifications had no effect on the
results of operations for the period presented.
Fair Value of Financial Instruments -The
Company accounts for financial instruments measured at fair value
on a recurring basis and on a non-recurring basis. The accounting
guidance defines fair value, establishes a framework for measuring
fair value in accordance with U.S. GAAP and expands disclosures
about fair value measurements.
Fair
value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The Fair Value
Measurement Topic of the FASB Accounting Standards Coded
(“ASC “) establishes a three-tier fair value hierarchy
which prioritizes the inputs used in measuring fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level
3 measurements). These tiers include:
The
carrying amounts reported in the balance sheet of cash, accounts
receivable, accounts payable and accrued expenses approximate fair
value because of the immediate or short-term maturity of these
financial instruments. The fair value of revolving credit lines,
notes payable and long-term debt approximates their carrying value
as the stated or discounted rates of the debt reflect recent market
conditions. Derivative instruments are recorded as assets and
liabilities at estimated fair value based on available market
information. One of the Company's derivative instruments is an
interest rate swap that changes a variable rate into a fixed rate
on the term loan and qualifies as a cash flow hedge and is included
in accrued expenses on the accompanying Consolidated Balance Sheet
as of June 30, 2011 and December 31, 2010. Gains
and losses on this 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 Consolidated Statement of Operations on the same line
item as the underlying transaction. The cumulative
net loss attributable to this cash flow hedge recorded in AOCl at
June 30, 2011, was approximately $22,000 ($26,000 at December 31,
2010).
The
Company accounts for warrants and other rights to acquire capital
stock with exercise price reset features, or
“down-round” provisions, as derivative liabilities.
Similarly, down-round provisions for issuances of common stock are
also accounted for as derivative liabilities. These derivative
liabilities are measured at fair value with the changes in fair
value at the end of each period reflected in current period income
or loss. The fair value of derivative liabilities is estimated
using a binomial model or Monte Carlo simulation to model the
financial characteristics, depending on the complexity of the
derivative being measured. A Monte Carlo simulation
provides a more accurate valuation than standard option valuation
methodologies such as the Black-Scholes or binomial option models
when derivatives include changing exercise prices or different
alternatives depending on average future price targets. In
computing the fair value of the derivatives, the Company uses
significant judgments, which, if incorrect, could have a
significant negative impact to the Company’s consolidated
financial statements. The input values for determining
the fair value of the derivatives include observable market indices
such as interest rates, and equity indices as well as unobservable
model-specific input values such as certain volatility
parameters. Future changes in the fair value of the
derivatives liabilities, if any, will be recorded in the statement
of operations as gains or losses from derivative
liabilities.
Investment - On October 8,
2009, the Company entered into an Asset Purchase Agreement with
Internet Media Services, Inc. (“IMS”) whereby the
Company sold the assets and liabilities of Legalstore.com, a
division of the Company, in exchange for 7,500,000 shares of common
stock of IMS. The Company recorded its investment in IMS as an
equity method investment at the fair market value of the business
sold. Management determined that the transaction qualified as a
derecoginition of a subsidiary under ASC 810-10-40. The Company
recognized gains or losses on its investment under the equity
method of accounting for investments. During 2010,
the Company recorded a cumulative loss on its investment of
approximately $121,000. On September 23, 2010, the
Company’s Board of Directors declared a dividend whereas the
Company distributed to its stockholders of record on October 8,
2010 on a pro-rata basis its 7,500,000 shares of stock of
IMS. During the six months ended June 30, 2010, the
Company recognized a loss on its investment in IMS of approximately
$72,000. There was no loss on investment in IMS during the six
months ended June 30, 2011 since the Company no longer owned shares
in IMS as of September 23, 2010.
Business Combinations -
Business
combinations and non-controlling interests are recorded in
accordance with the Business Combination Topic of the FASB
ASC. Under the guidance, the assets and liabilities of
the acquired business are recorded at their fair values at the date
of acquisition. The excess of the purchase price over the estimated
fair values is recorded as goodwill. If the fair value
of the assets acquired exceeds the purchase price and the
liabilities assumed then a gain on acquisition is
recorded. Under the guidance, all acquisition costs are
expensed as incurred and in-process research and development costs
are recorded at fair value as an indefinite-lived intangible asset.
The application of business combination and impairment accounting
requires the use of significant estimates and
assumptions.
Earnings Per Common Share - The Company presents
basic and diluted earnings per share. Basic earnings per
share reflect the actual weighted average of shares issued and
outstanding during the period. Diluted earnings per share are
computed including the number of additional shares that would have
been outstanding if dilutive potential shares had been issued. In a
loss year, the calculation for basic and diluted earnings per share
is considered to be the same, as the impact of potential common
shares is anti-dilutive.
For
the six months ended June 30, 2011 and 2010, there were up to
3,281,705 and 2,522,946, respectively, of shares potentially
issuable under convertible debt agreements, options, warrants,
restricted stock agreements and employment agreements that
could potentially dilute basic earnings per share in the future
were excluded from the calculation of diluted earnings per share
because their inclusion would have been 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, 2011 and 2010, one customer accounted for 16% and 18%,
respectively, of the Company’s consolidated
revenue. As of June 30, 2011 and 2010, this
customer accounted for 20% and 22%, respectively, of the
Company’s trade accounts receivable balance. The
risk with respect to trade receivables is mitigated by credit
evaluations we perform on our customers, the short duration of our
payment terms for the significant majority of our customer
contracts and by the diversification of our customer
base.
Recent Accounting Pronouncements- In May, 2011, the FASB
issued Accounting Standards Update No. 2011-04, Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and
IFRS. This update results in common principles and
requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with U.S.
GAAP and IFRS. ASU 2011-04 is required to be applied
prospectively in interim and annual periods beginning after
December 15, 2011. Early application is not
permitted. The Company is currently evaluating the
impact that the adoption of ASU 2011-04 will have and does not
believe the adoption will have a material impact on the
consolidated financial statements.
|
Debt | 6 Months Ended |
---|---|
Jun. 30, 2011 | |
Debt |
4. Debt
Revolving Note - Related Party
- On January 4, 2008, the Company entered into a Credit
Facility Agreement with Fagenson and Co., Inc., as agent, a related
party to Robert B. Fagenson, the Chairman of the Company's Board of
Directors (the “Fagenson Credit Agreement” or
“Credit Facility”). Under the Fagenson Credit
Agreement, as amended on December 11, 2009, the Company could
borrow up to a maximum of $1,000,000 from time to time up to and
until January 4, 2012. Any amount borrowed by the
Company pursuant to the Fagenson Credit Agreement had annual
interest rate of 2% above LIBOR and was secured by the Common Stock
of P3, the Company's wholly owned subsidiary. Interest
was payable quarterly in arrears and the principal was payable in
full at the end of the term under the Fagenson Credit
Agreement. On June 29, 2011, the Credit
Facility was paid in full from the proceeds of a Commercial
Term Note as described below along with approximately $119,000 of
accrued interest owed to the lenders.
Revolving Credit Lines- On February 12, 2010, the Company
entered into a Credit Facility Agreement with RBS Citizens, N.A.
(“Citizens Bank”) in connection with the
Company’s acquisition of Premier Packaging
(“Premier”) pursuant to which Citizens Bank provided
Premier with a revolving credit line of up to
$1,000,000. The revolving line of credit
is accessible by the Premier Packaging division subject to
certain terms, matures on July 13, 2011 and is payable in monthly
installments of interest only beginning on March 1, 2010. Interest
accrued at 1 Month LIBOR plus 3.75% (3.94% at June 30,
2011). As of June 30, 2011, the revolving
line had a balance of $270,332. On July 26, 2011, the
Company entered into a second amended and restated credit facility
related to this loan as described in Note 10.
On
May 12, 2011, in conjunction with the Company’s acquisition
of ExtraDev, Inc. the Company assumed revolving credit lines and
open credit card accounts totaling approximately $239,000,
comprised of a $100,000 revolving line of credit with a
bank at 4.5% with an outstanding balance of $63,000, a
$100,000 revolving line of credit with a bank at 8.09% with an
outstanding balance of $86,000, and various credits cards with an
aggregate outstanding balance of approximately
$90,000. All of the credit lines are secured
by personal guarantees of the Former ExtraDev
owners. In accordance with the purchase agreement with
ExtraDev, the Company committed to paying these balances within 90
days of acquisition. In August, the Company
reached an informal agreement with the owners of ExtraDev whereas
the Company would make monthly payments against the balances of
these accounts of at least $25,000 in order to pay-down these
liabilities. As of June 30, 2011, the aggregate balance
of the ExtraDev credit lines was approximately
$234,000.
Long-Term Debt - On December 9, 2009, the Company entered
into a $575,000 promissory note with an accredited investor
(“Note”) which matures November 24, 2012 and accrues
interest at 10% annually, payable quarterly. The
Note is secured by the assets of the Company’s wholly owned
subsidiary, Secuprint Inc. (a/k/a DSS Printing
Group). Under the terms of the Note, the Company
is required to comply with various covenants. As
of June 30, 2011, the Note had a balance of $575,000 ($575,000 at
December 31, 2010) and the Company was in compliance with the debt
covenants.
On
February 12, 2010, in conjunction with the Credit
Facility Agreement, the Company entered into a term loan with
Citizens Bank for $1,500,000. The proceeds of the term
loan were used to partially satisfy the purchase price of Premier
Packaging. The Credit Facility Agreement contains
customary representations and warranties, affirmative and negative
covenants, including financial covenants (minimum coverage
ratio, debt to EBITDA ratio, and current ratio requirements) and
events of default and is secured by all of the assets of
Premier. The $1,500,000 term loan was
scheduled to mature on March 1, 2013 and was payable in
35 monthly payments of $25,000 plus interest commencing March 1,
2010 and a payment of $625,000 on the 36 month. Interest
was accruing at 1 Month LIBOR plus 3.75% (3.94% at June 30,
2011). The Company subsequently entered into an interest
rate swap agreement to lock into a 5.6% effective interest over the
life of the term loan. As of June 30, 2011, the term
loan had a balance of $1,100,000 ($1,250,000 as of
December 31, 2010). On July 26, 2011, the Company
entered into a second amended and restated credit facility related
to this loan as described in Note 10.
On
June 29, 2011, the Company and Plastic Printing Professionals, Inc.
(“P3”), a wholly owned subsidiary of the Company
entered into a Commercial Term Note (the “Note”) with
Neil Neuman (”Neuman”) whereby the Company borrowed
$650,000 from Neuman. The applicable interest rate under the Note
is 6.5% per annum, and the term is forty-eight months (the
“Term”). Commencing on August 1, 2011, the Company will
pay monthly installments of $13,585 for the Term of the Note, and a
final balloon payment of $100,000 on August 1, 2015. Any reasonable
expense incurred by Neuman (including reasonable attorneys’
fees and disbursements) in connection with the administration or
enforcement of the Note shall be paid by the Company and, if not
timely paid, shall earn interest at the same rate as the
principal. The Company may prepay all or a portion of
the outstanding principal balance prior to maturity at any time,
without penalty. The Note is collateralized by all
of the machinery and equipment of P3. Neuman is neither
an affiliate of, nor a related party to, the Company or
P3. The proceeds from the Note were used to pay in full
all sums owed by the Company under a Credit Agreement executed
between the Company and Fagenson & Co., Inc., as agent for
certain lenders, including Neuman, dated January 4, 2008. Upon such
payment the Credit Agreement between the Company and Fagenson &
Co., Inc. was terminated in its entirety. As of June 30,
2011, the Note had a balance of $650,000.
Stand-By Term Note - On October 8, 2010, the Company amended
the Credit Facility Agreement with Citizens Bank to add a Standby
Term Loan Note pursuant to which Citizens Bank will provide Premier
with up to $450,000 towards the funding of eligible equipment
purchases. The Company has 12 months to draw upon
this line of credit, after which the balance of funds advanced from
the line is converted into a 5 year term loan. Interest
accrues at1 month LIBOR plus 3.00% (3.19% at June 30,
2011). As of June 30, 2011, the
Company has drawn approximately $53,000 ($53,000 at December 31,
2010) from the Standby line for the purchase of
equipment.
|
Stockholders' Equity | 6 Months Ended | |||||||||||||||||||||||||||||||||||
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Jun. 30, 2011 | ||||||||||||||||||||||||||||||||||||
Stockholders' Equity |
5. Stockholders’ Equity
On
February 18, 2011, the Company entered into an Amended and Restated
Agreement (“Amended Agreement”) with Fletcher for the
purpose of modifying the terms of an agreement (“Original
Agreement”) previously entered into between the Company and
Fletcher on December 31, 2010.
Under
the Original Agreement, Fletcher purchased $4,000,000 of the
Company’s common stock (756,287 shares) at a price of
approximately $5.29 per share on December 31, 2010 (the
“Initial Investment”). In conjunction with the Initial
Investment, Fletcher received a warrant (the “Initial
Warrant”) to purchase up to $4,000,000 of the Company’s
common stock at a price of approximately $5.29 per share at any
time until December 31, 2019, subject to adjustment as set forth in
the Initial Warrant. Under the Original Agreement,
Fletcher also received the right to make additional equity
investments of up to $4,000,000 in total (the “Later
Investments”) by May 2, 2011 at the average of the daily
volume-weighted price of the Company’s common stock in the
calendar month preceding each Later Investment notice date at
prices no lower than approximately $4.76 per share and no greater
than approximately $6.35 per share, subject to adjustment as set
forth in the Original Agreement. The
warrants issued to Fletcher have down-round and anti-dilution
provisions as of December 31, 2010, and are considered derivative
liabilities recorded at fair value. The down-round provisions
result in the number of shares to be issued determined on a
variable that is not an input to the fair value of a
“fixed-for-fixed” option. Under the Original
Agreement, Fletcher also received a second warrant (the
“Second Warrant”) to purchase shares of the
Company’s common stock with an aggregate purchase price of up
to the total dollar amount of the Later Investments at a per-share
exercise price of 120% of the per-share price paid in the final
Later Investment to occur, subject to adjustment as set forth in
the Second Warrant. The Initial Warrant and the
Second Warrant each also have a cashless exercise
provision.
Under
the Amended Agreement, the purchase price for the Initial
Investment made on December 31, 2010 was increased to $5.38 per
share, increasing the aggregate purchase price paid by Fletcher for
the Initial Investment from $4,000,000 to $4,068,825. The Initial
Warrant received by Fletcher was amended and reissued (the
“Amended Initial Warrant”) entitling Fletcher to
purchase newly-issued shares of common stock at $5.38 per share
(the “Warrant Price”) at any time until February 18,
2020 (the “Warrant Term”), up to an aggregate purchase
price of $4,300,000 (the “Warrant Amount”). Under the
Amended Agreement, Fletcher also received the right to make an
additional equity investments (“Later Investments”) of
up to $4,068,000 (the “Aggregate Later Investment
Amount”) provided notice is given to the Company prior to
July 2, 2011 of Fletcher’s intention to make the Later
Investment. Fletcher did not make the Later
Investment. The Second Warrant received by Fletcher was amended
(the “Amended Second Warrant”, and together with the
Amended Initial Warrant, the “Warrants”) to fix the
Warrant Price at $5.38 per share. The Second Warrant entitles
Fletcher to purchase newly-issued shares of common stock up to the
aggregate purchase price of the Later Investments. The Amended
Initial Warrant and the Amended Second Warrant each have a cashless
exercise provision.
In
connection with the Amended Agreement, the Company filed a
registration statement with the Securities and Exchange Commission
(“SEC”) covering the Initial Investment of 756,287
shares and 799,256 shares underlying the Initial
Warrant. The registration statement was declared
effective on April 13, 2011.
On
March 14, 2011, the Company and Fletcher executed further
amendments to the Amended and Restated Agreement and Warrants
addressing stockholder approval and pricing provisions relating to
Change of Control (as defined therein). The March 14, 2011
amendments were executed by the Company and Fletcher in response to
an NYSE Amex inquiry, and were required to solidify NYSE Amex
approval of the Company’s additional listing applications,
which approval was received from NYSE Amex on March 15,
2011.
Certain
events, such as dividends, stock splits, and other events specified
in the Amended Agreement and in the Warrants may result in
additional shares of Common Stock being issued to Fletcher,
adjustments being made to the terms of the Later Investments, the
Initial Warrant or the Second Warrant, or other results, in each
case as set forth in the Amended Agreement, the Amended Initial
Warrant and the Amended Second Warrant. The terms
of the Amended Agreement granted Fletcher certain participation
rights in certain later equity issuances by the
Company (except for certain exclusions) and certain
other rights upon a change of control, in each case as set forth in
the Amended Agreement, the Amended Initial Warrant and the Amended
Second Warrant.
Proceeds
from the transaction were used primarily for sales and marketing,
product development, and working capital. The Company paid WM Smith
& Co., as placement agent, a cash placement fee of 6% of all
cash investments received under the Amended Agreement, or in the
case of the cashless exercise of the Warrants, common stock equal
to 6% of the shares issued to Fletcher in conjunction with the
cashless exercise. During the first quarter
of 2011, the Company paid $240,000 in accrued placement
agent fees.
Derivative Liability -The financial instruments issued to
Fletcher had down-round and anti-dilution provisions as of December
31, 2010, which were considered a derivative liability recorded at
fair value. The down-round provisions result in the number of
shares to be issued determined on a variable that is not an input
to the fair value of a “fixed-for-fixed” option. The
Company recognized the derivative liability at the fair value at
inception. The derivative liability was considered a
Level 3 liability on the fair value hierarchy as the determination
of fair value includes various assumptions about the
Company’s future activities and the Company’s stock
prices and historical volatility as inputs. To determine the fair
value of the various components of the Fletcher investments, the
Company selected the binomial option model and the Monte Carlo
Simulation to model the financial characteristics of the various
components. The derivative liability was initially
recorded in the consolidated balance sheet upon issuance as of
December 31, 2010 at a fair value of
$3,866,836. On February 18, 2011 the Company
entered into certain amendments with Fletcher for the purpose of
modifying the terms of the previous agreement entered into between
the Company and Fletcher on December 31, 2010. As a
result of the amendments, the down-round and anti-dilution
provisions were eliminated; therefore, the Company determined that
the derivative liability that existed under the terms of the
original agreement no longer existed. As a result, the
Company determined the fair value of the derivative liability
instrument as of the modification date of February 18, 2011 and
recorded the change in fair value of the derivative liability since
December 31, 2010 amounting to $360,922 which is reflected in the
statement of operations. With the elimination of
the derivative liability provision, the Company reclassed the fair
value of the financial instruments amounting to $3,505,914 from
derivative liability to additional paid in capital.
The
table below provides a reconciliation of the beginning and ending
balances for the derivative liability measured at fair value using
significant unobservable inputs (Level 3). There were no assets as
of or during the period ended June 30, 2011 measured using
significant unobservable inputs.
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3):
Restricted Stock –
In May 2011, the Company issued an aggregate of 82,352 restricted
shares of the Company’s common stock, pursuant to the
Company’s 2004 Employee Stock Option Plan, as amended, valued
at $3.33 per share to the owners of ExtraDev, which the Company
acquired. Such restricted stock vests in equal
installments annually over four years. The restricted
stock granted to the owners of ExtraDev was classified
as consideration for the acquisition of ExtraDev at a fair
value of approximately $274,000, which upon termination any
unvested restricted stock shall immediately vest. In
addition, as of June 30, 2011, there are 45,000 restricted shares
that will vest only upon the occurrence of certain events prior to
May 3, 2012, which include, among other things a change of control
of the Company or other merger or acquisition of the Company, the
achievement of certain financial goals, including among other
things a successful result of the Company’s patent
infringement lawsuit against the European Central
Bank. These 45,000 shares, if vested, would result
in the recording of stock based compensation expense of
approximately $563,000, the grant date fair value, over the period
beginning when any of the contingent vesting events is deemed to be
probable over the expected requisite service period. As
of June 30, 2011, vesting is not considered probable and no
compensation expense has been recognized related to the performance
grants.
Stock Options – The Company records stock-based
payment expense related to these options based on the grant date
fair value in accordance with FASB ASC
718. During the six months ended June
30, 2011, the Company issued an aggregate of 172,648 options to
purchase its common shares at an exercise prices ranging from $3.33
to $5.52 per share to employees and non-employee
directors. The fair value of these options
amounted to approximately $285,000 determined by utilizing the
Black Scholes option pricing model of the options
issued. Of the options issued in May 2011, the Company
issued five-year options to purchase an aggregate of 77,648 shares
of the Company’s common stock, pursuant to the
Company’s 2004 Employee Stock Option Plan, as amended, at an
exercise price of $3.33 per share, to the owners of
ExtraDev. Such options vest in equal installments
annually over four years. The fair value of these
options amounted to approximately $121,000 determined by utilizing
the Black Scholes option pricing model. Additionally,
pursuant to the employment agreements with the previous owners of
ExtraDev, the Company awarded earn-out options to purchase an
aggregate of 450,000 shares of common stock at an exercise price of
$4.50 per share that will be granted if Digital achieves
certain annual revenue targets by the end of fiscal year
2016. If the annual revenue targets are met or are deemed
probable to occur, then the Company will record stock
based compensation expense at the then current fair
value. As of June 30, 2011 vesting is considered
remote. All options granted to the owners of ExtraDev
were classified as compensation for post combination services since
the vesting of each grant is based on the length of
employment, with all unvested option forfeiting upon
termination of employment. Therefore, the fair value of these
equity instruments was not considered a component of the purchase
price of the acquisition.
Stock-Based Compensation - 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, 2011,
the Company had stock compensation expense of approximately
$202,000 ($0.01 per share) ($205,000- 2010; $0.01 per
share).
As
of June 30, 2011, there was approximately $449,000 of total
unrecognized compensation costs (excluding the $563,000 that vest
upon the occurrence of certain events) related to non-vested
options and restricted stock granted under the Company’s
stock option plans which the Company expects to vest over a period
of not to exceed five years.
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Business Combination |
6. Business Combination
On
May 12, 2011, the Company entered into an agreement
(“Agreement”) to purchase all the issued and
outstanding common stock of ExtraDev, Inc., a privately-held New
York corporation (“ExtraDev”), pursuant to which the
Company purchased 10,000 shares of ExtraDev common stock, par value
$.01 per share, from each of ExtraDev’s two owners,
representing all of ExtraDev’s issued and outstanding common
stock.
The
Agreement provided that as consideration for the purchase of the
ExtraDev common stock, the Company would acquire all of
the assets of ExtraDev in exchange for the assumption of all the
liabilities of Extradev, employment agreements with the two owners
of Extradev, and an aggregate of 94,336 restricted shares of the
Company’s common stock valued at $3.33 per share and
five-year options to purchase an aggregate of 65,664 shares of the
Company’s common stock, at an exercise price of $3.33 per
share, were granted to the owners of ExtraDev pursuant to the
Company’s 2004 Employee Stock Option Plan, as
amended. Such restricted stock and options vest in
equal installments annually over four years and were subject
to adjustment based upon ExtraDev’s working capital deficit
as set forth in its final financial statements, which were provided
within 30 days of closing. The subsequent adjustment
resulted in a reduction in the aggregate number
of restricted shares issued to the two
ExtraDev owners to 82,352 and an increase in the
aggregate number of options issued to the ExtraDev owners to
77,648. The fair value of the restricted shares
was approximately $274,000 and shall vest immediately
upon termination. Therefore, restricted shares were
recorded as consideration transferred. The options were valued
using the Black-Scholes Option Pricing Model, at approximately
$121,000. The options granted are based on
the length of employment with all unvested options
forfeiting upon termination of employment. Therefore they
are being recorded as post combination compensation
expense and not a component of the purchase price of the
acquisition. The fair value of
the options will be expensed pro-ratably over the 4-year
vesting period.
The
acquisition was accounted for as a business combination, whereby
the Company measured the identifiable assets acquired and
liabilities assumed based on the acquisition date fair
value. The Company is required to recognize and
measure any related goodwill acquired in the business combination
or a gain from a bargain purchase. Based on
management’s assumptions, the fair value of the assets
acquired, which included customer lists of $258,000 and non-compete
agreements of $150,000, and the liabilities assumed was less than
the purchase price resulting in the recording of goodwill of
approximately $70,000. The goodwill recorded with this
transaction has been recorded in the Digital segment and is not
deductible for income taxes.
The
preliminary allocation of the purchase price and the fair values of
the assets acquired and their associated useful lives and
liabilities assumed were estimated by management as
follows:
Set
forth below is the unaudited proforma revenue, operating loss, net
loss and loss per share of the Company as if ExtraDev had been
acquired by the Company as of January 1, 2010.
In
conjunction with the acquisition of ExtraDev completed on May 12,
2011, ExtraDev’s two owners entered into five-year employment
agreements (with an option to renew for three years on mutually
agreed upon terms) with the Company (the “Employment
Agreements”), pursuant to which Michael Roy (former ExtraDev
owner) will serve as the President and Timothy Trueblood (former
ExtraDev owner) will serve as the Chief Technology Officer of the
Company’s newly-formed Digital Division
(“Digital”), each at an annual base salary of $100,000.
Under the Employment Agreements, each of the former ExtraDev
shareholders will be eligible for an annual (i) earn-out bonus
based upon Digital’s earnings, before interest, taxes
depreciation and amortization for the prior year as described in
the Employment Agreements payable within days of the end of the
year and (ii) earn-out options to purchase common stock of the
Company at an exercise price of $4.50 per share under the
Company’s Option Plan that vest if Digital achieves certain
annual revenue targets by the end of fiscal year
2016. Both the earn-out bonus and earn-out options
will be recorded as post combination compensation expense, if
earned, since both are based on length of employment and forfeit
upon termination. The Employment Agreements also provide for
health care insurance for each former ExtraDev shareholder and his
family. The Company may terminate the Employment Agreements at any
time upon 30 days notice, in which event, any
vested earn-out options, will be exercisable for 90
days and the former ExtraDev shareholders will be entitled to
receive an annualized salary of $50,000 and continued health
insurance coverage for the remainder of the term of the Employment
Agreement.
ExtraDev
was a privately owned company founded in 1998 and headquartered in
Rochester, NY. ExtraDev provides data center centric
solutions to businesses and governments. The acquisition of
ExtraDev is expected to enhance the Company’s digital
security solutions capabilities, including the ability of the
Company to offer its digital security products in a “cloud
computing” format. ExtraDev had approximately
$837,000 in revenue for the year ended December 31, 2010 and
lost $10,000 on a tax basis. The acquisition did
not create a significant subsidiary in accordance with the
Securities and Exchange Commission Regulation S-X 210.1-2(w).
Since the date of the acquisition, ExtraDev has generated
approximately $96,000 of revenue and experienced a loss of
approximately $23,000.
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Inventory |
2. Inventory
Inventory
consisted of the following:
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Restatement | 11.
Restatement
The
Company identified an error in the Company’s accounting
treatment relating to the deferred tax liability created as a
result of an acquisition in the first quarter of
2010, On February 12, 2010, the Company purchased
all of the outstanding stock of Premier Packaging Corporation for
$2,000,000 in cash and 735,437 shares of the Company’s common
stock with a value of $2,566,675 plus the assumption of liabilities
at February 12, 2010. Among the various assets and
liabilities acquired, the Company allocated $1,557,500 to machinery
and equipment and $1,372,000 to other intangible
assets. The tax basis for the machinery and equipment
and other intangible assets as of the date of acquisition was zero,
resulting in a deferred tax liability of $1,141,040 as a result of
the acquisition. As part of the business combination
accounting, the Company properly recorded the deferred tax
liability that was caused by the acquisition, but erroneously
reduced a deferred tax asset valuation allowance. The
Company has determined that the deferred tax liability should have
been included in the business combination accounting, resulting in
an additional $1,141,040 of goodwill. Also, the Company
in a separate entry should have recorded a deferred tax benefit
along with a reversal of the deferred tax asset valuation
allowance. As a result of this determination, the
Company recorded an additional deferred tax benefit and additional
goodwill in the amount of $1,141,040 as of the March 31, 2010 and
subsequent periods. The correction of this error had no
impact on previously disclosed revenue, cost of sales, gross
profit, operating expenses and other income and
expense. Additionally, this error had no
impact on net loss for the interim periods ended June 30, 2011 and
March 31, 2011.
To
the extent not addressed herein or in the original filing, events
occurring subsequent to the quarter ended June 30, 2011, have been
or will be addressed in the Company’s filings with the SEC
for subsequent periods.
The
following table represents the impact of the restatement
adjustments on the Company's Condensed Consolidated Balance
Sheet as of December 31, 2010:
The
following table represents the impact of the restatement
adjustments on the Company's Condensed Consolidated Balance
Sheet as of June 30, 2011:
The
following table represents the impact of the restatement
adjustments on the Company's Condensed Consolidated Statement
of Operations for the six months ended June 30,
2010:
The
following table represents the impact of the restatement
adjustments on the Company's Condensed Consolidated Statement
of Cash Flows for the six months ended June 30,
2010:
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