0001493152-16-009900.txt : 20160516 0001493152-16-009900.hdr.sgml : 20160516 20160516161707 ACCESSION NUMBER: 0001493152-16-009900 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 47 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160516 DATE AS OF CHANGE: 20160516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUMENT SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000771999 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 161229730 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32146 FILM NUMBER: 161654048 BUSINESS ADDRESS: STREET 1: 36 WEST MAIN ST STREET 2: SUITE 710 CITY: ROCHESTER STATE: NY ZIP: 14614 BUSINESS PHONE: 585 232 1500 MAIL ADDRESS: STREET 1: 36 W MAIN ST STREET 2: SUITE 710 CITY: ROCHESTER STATE: NY ZIP: 14614 FORMER COMPANY: FORMER CONFORMED NAME: NEW SKY COMMUNICATIONS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: THOROUGHBREDS USA INC DATE OF NAME CHANGE: 19861118 10-Q 1 form10-q.htm

 

 

 

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 March 31, 2016

 

[  ] 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.)

 

  200 Canal View Boulevard, Suite 300  
  Rochester, NY 14623  
  (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 May 12, 2016, there were 51,881,948 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   3
  Condensed Consolidated Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015 (Audited)   3
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2015 (Unaudited)   4
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited)   5
  Notes to Interim Condensed Consolidated Financial Statements (Unaudited)   6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
Item 4 Controls and Procedures   18
       
PART II OTHER INFORMATION    
Item 1 Legal Proceedings   19
Item 1A Risk Factors   19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   19
Item 3 Defaults upon Senior Securities   19
Item 4 Mine Safety Disclosures   20
Item 5 Other Information   20
Item 6 Exhibits   20
Signatures     21

 

 2 
 

 

PART I – FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

As of

 

   March 31, 2016   December 31, 2015 
   (unaudited)     
ASSETS          
Current assets:          
Cash  $1,049,535   $1,440,256 
Restricted cash   282,889    293,043 
Accounts receivable, net   1,913,990    2,097,433 
Inventory   990,213    937,830 
Prepaid expenses and other current assets   435,211    313,528 
           
Total current assets   4,671,838    5,082,090 
           
Property, plant and equipment, net   4,885,521    5,003,818 
Other assets   45,823    44,050 
Goodwill   2,453,349    2,453,349 
Other intangible assets, net   2,894,959    3,017,544 
           
Total assets  $14,951,490   $15,600,851 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $2,164,579   $1,945,073 
Accrued expenses and other current liabilities   1,819,069    1,964,726 
Short-term debt   4,008,504    3,984,316 
Current portion of long-term debt, net   819,653    1,553,061 
           
Total current liabilities   8,811,805    9,447,176 
           
Long-term debt, net   2,772,167    2,240,596 
Other long-term liabilities   90,015    63,697 
Deferred tax liability, net   166,844    162,107 
           
Commitments and contingencies (Note 5)          
           
Stockholders’ equity          
Common stock, $.02 par value; 200,000,000 shares authorized, 51,881,948 shares issued and outstanding (51,881,948 on December 31, 2015)   1,037,639    1,037,639 
Additional paid-in capital   103,115,665    103,041,941 
Accumulated other comprehensive loss   (90,015)   (63,697)
Accumulated deficit   (100,952,630)   (100,328,608)
Total stockholders’ equity   3,110,659    3,687,275 
           
Total liabilities and stockholders’ equity  $14,951,490   $15,600,851 

 

See accompanying notes to the condensed consolidated financial statements

 

 3 
 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

For the Three Months Ended March 31,

(Unaudited)

 

   2016   2015 
Revenue          
Printed products  $3,975,018   $3,019,886 
Technology sales, services and licensing   363,968    409,645 
           
Total revenue   4,338,986    3,429,531 
           
Costs and expenses          
Cost of revenue, exclusive of depreciation and amortization   2,610,948    1,986,301 
Selling, general and administrative (including stock based compensation)   1,909,695    2,608,115 
Depreciation and amortization   360,501    379,593 
Total costs and expenses   4,881,144    4,974,009 
           
Operating loss   (542,158)   (1,544,478)
           
Other expense:          
Interest expense   (77,127)   (78,382)
Net loss on debt modification and extinguishment   -    (19,096)
           
Loss before income taxes   (619,285)   (1,641,956)
           
Income tax expense   4,737    4,737 
           
Net loss  $(624,022)  $(1,646,693)
           
Other comprehensive loss:          
Interest rate swap loss   (26,318)   (15,752)
           
Comprehensive loss:  $(650,340)  $(1,662,445)
           
Loss per common share:          
Basic and diluted  $(0.01)  $(0.04)
           
Shares used in computing loss per common share:          
Basic and diluted   51,881,948    46,239,404 

 

See accompanying notes to condensed consolidated financial statements

 

 4 
 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

(Unaudited)

 

   2016   2015 
Cash flows from operating activities:          
Net loss  $(624,022)  $(1,646,693)
Adjustments to reconcile net loss to net cash used by operating activities:          
Depreciation and amortization   360,501    379,593 
Stock based compensation   73,724    324,598 
Paid in-kind interest   19,500    20,000 
Net loss on debt modification and extinguishment   -    19,096 
Change in deferred tax provision   4,737    4,737 
Foreign currency transaction gain   -    (29,400)
Amortization of deferred financing costs   5,290    5,290 
Decrease (increase) in assets:          
Accounts receivable   183,443    651,937 
Inventory   (52,383)   (202,540)
Prepaid expenses and other assets   (123,456)   (33,622)
Restricted cash   10,154    18,486 
Increase (decrease) in liabilities:          
Accounts payable   219,506    310,744 
Accrued expenses and other liabilities   (145,657)   (351,167)
Net cash used by operating activities   (68,663)   (528,941)
           
Cash flows from investing activities:          
Purchase of property and equipment   (51,827)   (27,791)
Purchase of intangible assets   (67,792)   - 
Net cash used by investing activities   (119,619)   (27,791)
           
Cash flows from financing activities:          
Payments of long-term debt   (202,439)   (195,084)
Net cash used by financing activities   (202,439)   (195,084)
           
Net decrease in cash   (390,721)   (751,816)
Cash beginning of period   1,440,256    2,343,675 
           
Cash end of period  $1,049,535   $1,591,859 

 

See accompanying notes to the condensed consolidated financial statements.

 

 5 
 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

 

Document Security Systems, Inc. (the “Company”), through two of its subsidiaries, Premier Packaging Corporation, which operates under the assumed name of DSS Packaging Group, and Plastic Printing Professionals, Inc., which operates under the assumed name of DSS Plastics Group, operates in the security and commercial printing, packaging and plastic ID markets. The Company develops, markets, manufactures and sells paper and plastic products designed to protect valuable information from unauthorized scanning, copying, and digital imaging. The Company’s subsidiary, Extradev, Inc., which operates under the assumed name of DSS Digital Group, develops, markets and sells digital information services, including data hosting, disaster recovery and data back-up and security services. The Company’s subsidiary, DSS Technology Management, Inc., acquires intellectual property (“IP”) assets and interests in companies owning intellectual property assets, or assists others in managing their intellectual property monetization efforts, for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial litigation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments, considered necessary for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.

 

Interim results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2015.

 

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure.

 

Restricted Cash – As of March 31, 2016, cash of $282,889 ($293,043 – December 31, 2015) is restricted for payments of costs and expenses associated with one of the Company’s IP monetization programs.

 

Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

  Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
     
  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

 6 
 

 

The carrying amounts reported in the balance sheet of cash, accounts receivable, prepaids, notes 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, as discussed below, are recorded as assets and liabilities at estimated fair value based on available market information.

 

Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap contracts to minimize significant fluctuations in cash flows that are caused by interest rate volatility. The Company has one interest rate swap that changes variable rates into fixed rates on one term loan. The swap qualifies as a Level 2 fair value financial instrument. The swap agreement is not held for trading purposes and the Company does not intend to sell the derivative swap financial instrument. The Company records interest swap agreements on the balance sheet at fair value because such agreements qualify as cash flow hedges under accounting principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive loss until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss (“AOCI”) to the consolidated statement of operations on the same line item as the underlying transaction. The valuations of the interest rate swap has been 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 interest rate swap agreements. However, the Company does not anticipate non-performance by the counter parties. The cumulative net loss attributable to the cash flow hedge is recorded in accumulated other comprehensive loss and other liabilities at March 31, 2016 was approximately $90,000 ($64,000 - December 31, 2015), which is included in other long-term liabilities on the accompanying balance sheets.

 

The Company has a notional amount of approximately $1,008,000 as of March 31, 2016 on its interest rate swap agreement for its debt with RBS Citizens, N.A. (“Citizens Bank”) (see Note 4) which changes a variable rate into a fixed rate on a term loan as follows:

 

Notional   Variable        
Amount   Rate   Fixed Cost   Maturity Date
$1,008,156    3.59%   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.

 

Contingent Legal Expenses - Contingent legal fees associated with our commercial litigation involving our IP are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any unamortized patent acquisition costs will be expensed in the period in which a conclusion is reached in an enforcement action that does not yield future royalties potential.

 

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.

 

 7 
 

 

As of March 31, 2016 and 2015, there were 10,576,908 and 11,468,047 respectively, of common stock share equivalents potentially issuable under convertible debt agreements, employment agreements, options, warrants, and restricted stock agreements, that could potentially dilute basic earnings per share in the future. These shares are excluded from the calculation of diluted earnings per share in periods in which the Company had a net loss because their inclusion would be anti-dilutive to the Company’s losses in the respective periods.

 

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.

 

During the three months ended March 31, 2016 and 2015, one customer accounted for 27% and 14%, respectively, of the Company’s consolidated revenue and accounted for 24% and 8%, respectively, of the Company’s accounts receivable balance as of March 31, 2016 and March 31, 2015. In addition, during the three months ended March 31, 2016, an additional customer accounted for 12% of the Company’s consolidated revenue and accounted for 4% of the Company’s accounts receivable balance as of March 31, 2016. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers, the short duration of its payment terms for the significant majority of its customer contracts and by the diversification of its customer base.

 

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 in the first quarter of 2016. The Company’s ability to fund its current and future commitments out of its available cash and cash generated from its operations depends on a number of factors. Some of these factors include the Company’s ability to (i) increase sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s intellectual property monetization business; and (iii) continue to generate operating profits from the Company’s packaging and plastic printing operations. During 2015, the Company raised gross proceeds $1.1 million from the sale of its equity. As of March 31, 2016, the Company had approximately $1,050,000 in unrestricted cash and $283,000 in restricted cash and up to $800,000 available under a revolving credit line at its packaging subsidiary, which may not be sufficient to cover the Company’s future working capital requirements if these and other factors are not met. If the Company cannot generate sufficient cash from its operations in 2016, the Company will need to 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

 

Recent Accounting PronouncementsIn May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. 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 its currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires all costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the debt. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the provisions of this ASU in the first quarter of 2016, and reclassified approximately $51,000 and $57,000 from “Other assets” as of March 31, 2016 and December 31, 2015, respectively, as a reduction to the carrying value of the respective debt instrument.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The guidance requires that certain inventory, including inventory measured using the first-in-first-out method, be measured at the lower of cost or 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. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

 8 
 

 

In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases”, which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined the effect of the standard will have on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

 

2. Inventory

 

Inventory consisted of the following:

 

   March 31, 2016   December 31, 2015 
Finished Goods  $696,462   $718,601 
Work in process   202,935    167,779 
Raw Materials   90,816    51,450 
   $990,213   $937,830 

 

3. Intangible Assets

 

Intangible assets are comprised of the following:

 

      March 31, 2016   December 31, 2015 
   Useful Life  Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
   Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
 
Acquired intangibles- customer lists and non-compete agreements  5 -10 years   1,997,300    1,656,782    340,518    1,997,300    1,635,257    362,043 
Acquired intangibles-patents and patent rights  Varied(1)  3,650,000    1,711,878    1,938,122    3,650,000    1,562,526    2,087,474 
Patent application costs  Varied(2)  1,130,750    514,431    616,319    1,062,958    494,931    568,027 
      $6,778,050   $3,883,091   $2,894,959   $6,710,258   $3,692,714   $3,017,544 

 

  (1) Acquired patents and patent rights are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31, 2016, the weighted average remaining useful life of these assets in service was approximately 4.1 years.
     
  (2) Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31, 2016, the weighted average remaining useful life of these assets in service was approximately 9.0 years.

 

Intangible asset amortization expense for the three months ended March 31, 2016 amounted to $190,377 ($241,275 - March 31, 2015).

 

 9 
 

 

4. Short-Term and Long-Term Debt

 

Revolving Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving credit line with Citizens Bank of up to $800,000 that bears interest at 1 Month LIBOR plus 3.75% (4.19% as of March 31, 2016) and matures on May 31, 2017. As of March 31, 2016, the revolving line had a balance of $0 ($0 at December 31, 2015).

 

Long-Term Debt - On December 30, 2011, the Company issued a $575,000 convertible note that was due on December 29, 2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note was convertible at any time during the term at lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion price of $2.21 per share. On February 23, 2015, the Company entered into Convertible Promissory Note Amendment No. 2 to extend the maturity date to December 30, 2016, eliminate the conversion feature, and to institute principal payments in the amount of $15,000 per month plus interest through the extended maturity date, and a balloon payment of $230,000 due on the extended maturity date. On April 12, 2016, the Company entered into Convertible Promissory Note Amendment No. 3 to extend the maturity date to May 31, 2017 and change the balloon payment to $155,000 due on the extended maturity date. As of March 31, 2016, the balance of the term loan was $365,000 ($410,000 at December 31, 2015).

 

On May 24, 2013, the Company entered into a promissory note in the principal sum of $850,000 to purchase three printing presses that were previously leased by the Company’s wholly-owned subsidiary, Secuprint Inc., and carries an interest rate of 9% per annum. Interest is payable quarterly, in arrears. On February 23, 2015, the Company entered into Promissory Note Amendment No. 2 to extend the maturity date to May 31, 2016 and to institute principal payments in the amount of $15,000 per month plus interest through the extended maturity date, and a balloon payment of $610,000 due on the extended maturity date. On April 12, 2016, the Company entered into Promissory Note Amendment No. 3 to extend the maturity date to May 31, 2017 and change the balloon payment to $430,000 due on the extended maturity date. As of March 31, 2016, the balance of the term loan was $640,000 ($685,000 at December 31, 2015).

 

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% (3.44% at March 31, 2016). As of March 31, 2016, the balance under this term note was $6,212 ($8,874 at December 31, 2015).

 

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 March 31, 2016, the loan had a balance of $755,812 ($819,681 at December 31, 2015).

 

On April 28, 2015, Premier Packaging entered into a term note with Citizens Bank for $525,000, repayable over a 60-month period. The loan bears interest at 3.61% and is payable in equal monthly installments of $9,591. Premier Packaging used the proceeds of the term note to acquire a HP Indigo 7800 Digital press. As of March 31, 2016, the loan had a balance of $435,810 ($460,448 at December 31, 2015).

 

Promissory Notes - On August 30, 2011, Premier Packaging purchased the packaging plant it occupies in Victor, New York, for $1,500,000, which was partially financed with a $1,200,000 promissory note obtained from Citizens Bank (“Promissory Note”). The Promissory Note calls for monthly payments of principal and interest in the amount of $7,658, with interest calculated as 1 Month LIBOR plus 3.15% (3.59% at March 31, 2016). Concurrently with the transaction, the Company entered into an interest rate swap agreement to lock into a 5.87% effective interest rate for the life of the loan. The Promissory Note matures in August 2021 at which time a balloon payment of the remaining principal balance will be due. As of March 31, 2016, the Promissory Note had a balance of $1,008,156 ($1,021,926 at December 31, 2015). This note is presented net of approximately $17,000 ($18,000 at December 31, 2015) of debt issuance costs on the condensed consolidated balance sheet.

 

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% (3.59% at March 31, 2016), which payments commenced on July 1, 2014. The note matures in July 2019 at which time a balloon payment of the remaining principal balance of $300,000 is due. As of March 31, 2016, the note had a balance of $397,747 ($405,247 – December 31, 2015).

 

 10 
 

 

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 quarter ended March 31, 2016, Premier Packaging was in compliance with the covenants. The Citizens Bank obligations are secured by all of the assets of Premier Packaging and are also secured through cross guarantees by the Company and its other wholly-owned subsidiaries, Plastic Printing Professionals and Secuprint.

 

Other Debt - On February 13, 2014, the Company’s subsidiary, DSS Technology Management, Inc. (“DSSTM”), entered into an Investment Agreement (the “Agreement”) dated February 13, 2014 (the “Effective Date”) with Fortress Credit Co LLC, as collateral agent (the “Collateral Agent”), and certain investors (the “Investors”), pursuant to which DSSTM contracted to receive a series of advances up to $4,500,000 (collectively, the “Advances”). Under the terms of the Agreement, on the Effective Date, DSSTM issued and sold a promissory note in the amount of $1,791,000, fixed return equity interests in the amount of $199,000, and contingent equity interests in the amount of $10,000, to each of the Investors, and in return received $2,000,000 in proceeds. To secure the Advances, DSSTM placed a lien in favor of the Investors on ten semi-conductor patents (the “Patents”) and assigned to the Investors certain funds recoverable from successful patent litigation involving these Patents, including settlement payments, license fees and royalties on the Patents. DSSTM is a plaintiff in various ongoing patent infringement lawsuits involving certain of the Patents.

 

On March 27, 2014, DSSTM received an additional $1,000,000 under the Agreement comprised of a promissory note for $900,000 and fixed and contingent equity interests of $100,000. On September 5, 2014, DSSTM received the remaining $1,500,000 under the Agreement comprised of a promissory note for $1,350,000 and fixed and contingent return interests of $150,000. As of March 31, 2016, DSSTM has made aggregate payments of $150,000 on the notes. As of March 31, 2016, total net advances equaled $4,350,000, which consisted of $4,041,000 in notes and an aggregate of $459,000 of fixed and contingent equity interests, less aggregate payments of $150,000. Aggregate accrued interest totaled $151,500 as of March 31, 2016 ($132,000 as of December 31, 2015).

 

The Agreement defines certain Events of Default, one of which is the failure by DSSTM, on or before the second anniversary of the Effective Date, which was February 13, 2016, to make payments to the Investors equal to the outstanding Advances. On February 13, 2016, DSSTM failed to make these payments.

 

Under the Agreement, upon an Event of Default, the Collateral Agent and the Investors have a number of remedies, including rights related to foreclosure or direct monetization of the Patents. As a result of the Event of Default discussed above, the sole and exclusive recourse of the Investors and the Collateral Agent is to form a special purpose entity to take possession of the Patents, subject to a perpetual, non-transferable, non-exclusive worldwide royalty-free license back to DSSTM. The Agreement further provides that, in the case of this default, the Collateral Agent and Investors will not, individually or collectively, seek to enforce any monetary judgment with respect to or against any assets of DSSTM other than the Patents and any payments received in respect of the Patents, including settlement payments, license fees and royalties on the Patents. In the event that the Collateral Agent or Investors foreclose on, and take possession of the Patents, DSSTM will still be entitled to receive any payments received in respect of the Patents in the event of a recovery by any substituted plaintiff in any related litigation proceedings, subject to payment of amounts owed under the Agreement to the Investors and the Collateral Agent. In addition, as a result of the default, the interest rate on the unpaid amounts due increased to 2% per year effective February 13, 2016.

 

As a result of the event of default, the Company has classified the remainder of the amounts due on the notes of approximately $4,043,000 as short-term debt as of March 31, 2016. The balance on the condensed consolidated balance sheet is presented net of approximately $34,000 of debt issuance costs. The Company has been in discussions with the investors to amend the Agreement or otherwise to remedy the event of default; however, there can be no assurance as to the ultimate success of these discussions.

 

5. Commitments and Contingencies

 

On November 26, 2013, DSS Technology Management filed suit against Apple, Inc. (“Apple”), in the United States District Court for the Eastern District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSS Technology Management’s patents that relate to systems and methods of using low power wireless peripheral devices. DSS Technology Management is seeking a judgement for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, the case was transferred to the Northern District of California. In December 2014, Apple filed two Inter Partes Review (“IPR”) petitions with USPTO’s Patent Trial and Appeal Board (“PTAB”) for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. Oral arguments of the IPRs took place on March 15, 2016, with a decision expected from PTAB by the end of June 2016.

 

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On March 10, 2014, DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as TSMC), Samsung Electronics Co., Ltd, Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung Austin Semiconductor LLC (referred to collectively as Samsung), and NEC Corporation of America (referred to as NEC), for patent infringement involving certain of its semiconductor patents. DSS Technology Management sought a judgment for infringement, injunctive relief, and money damages from each of the named defendants. In June, 2014, TSMC filed an IPR petition with PTAB for review of the patents at issue. Samsung then filed an IPR petition relating to the same patents in September 2014, and filed a corrected IPR petition in October 2014. On December 31, 2014, the PTAB instituted review of several of the patent claims at issue in the case. Samsung then filed a motion with PTAB to join TSMC’s IPR proceeding. The request was granted by PTAB. On November 30, 2015, the PTAB issued a decision invalidating the patent claims at issue in the case. A Markman hearing was held in the Eastern District of Texas. Based on the District Court’s claim construction order issued on April 9, 2015, DSS Technology Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal the court’s claim construction order to the Federal Circuit, thus preserving the status quo in the event an appeal results in a remand for further proceedings in the District Court. On March 22, 2016, the Federal Circuit ruled in favor of TSMC in the appeal. On April 28, 2015, DSS Technology Management reached a confidential settlement with NEC, ending the litigation with NEC. On April 1, 2016, TSMC and DSS Technology Management reached a confidential settlement, which included a transfer of certain of the Company’s patent assets, to TSMC, ending the litigation with TSMC.

 

On February 16, 2015, DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation, Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks judgment for infringement of two of DSSTM’s patents, injunctive relief and money damages. On December 9, 2015, Intel filed IPR petitions with PTAB for review of the patents at issue in the case. PTAB has not yet made a determination whether the IPRs will be instituted. On March 18, 2016, the District Court issued an Order granting Intel’s motion to stay the case until completion of the IPR proceedings.

 

On July 16, 2015, DSS Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging infringement of certain of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and money damages. On November 12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at issue in their case. On March 18, 2016, Samsung filed an IPR petition as well. As of the date of this Report, PTAB has not yet made a determination whether those IPRs will be instituted.

 

On January 29, 2016, the Company received notice of the dismissal of a shareholder derivative suit filed in New York State Court in April 2015 by Benjamin Lapin, derivatively and on behalf of all others similarly situated, Plaintiff v. Robert Fagenson, Jeffrey Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants, and the Company, as Nominal Defendant.

 

In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, in the opinion of management, none of the legal proceedings to which we are a party, whether discussed herein or otherwise, will have a material adverse effect on its results of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss is probable and reasonably estimable.

 

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 March 31, 2016, the Company has not accrued any contingent legal fees pursuant to these arrangements.

 

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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 March 31, 2016, there are no contingent payments due.

 

6. Stockholders’ Equity

 

Stock Options - In March 2016, three of the Company’s senior management voluntarily cancelled an aggregate of 1,200,000 options to purchase shares of the Company’s common stock with exercise prices of $3.00 per share, of which 166,667 of the options were unvested on the date of cancellation.

 

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 three months ended March 31, 2016, the Company had stock compensation expense of approximately $74,000 or less than $0.01 basic and diluted earnings per share ($325,000; $0.01 basic and diluted earnings per share for the corresponding three months ended March 31, 2015).

 

As of March 31, 2016, there was $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. Supplemental Cash Flow Information

 

Supplemental cash flow information for the three months ended March 31, 2016 and 2015 is approximately as follows:

 

   2016   2015 
Cash paid for interest  $58,000   $58,000 
Non-cash investing and financing activities:          
Loss from change in fair value of interest rate swap derivatives  $(26,000)  $(16,000)

 

8. Segment Information

 

The Company’s businesses are organized, managed and internally reported as four operating segments. Two of these operating segments, Packaging and Printing, and Plastics are engaged in the printing and production of paper, cardboard and plastic documents with a wide range of features, including the Company’s patented technologies and trade secrets designed for the protection of documents against unauthorized duplication and altering. The two other operating segments, 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.

 

 13 
 

 

Approximate information concerning the Company’s operations by reportable segment for the three months ended March 31, 2016 and 2015 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:

 

Three Months Ended March 30, 2016  Packaging and
Printing
   Plastics   Technology   Corporate   Total 
Revenues from external customers  $2,927,000    1,048,000    364,000    -   $4,339,000 
Depreciation and amortization   153,000    29,000    178,000    1,000    361,000 
Stock based compensation   17,000    10,000    13,000    34,000    74,000 
Net income (loss) to common shareholders   244,000    111,000    (565,000)   (414,000)   (624,000)
Identifiable assets   9,345,000    2,178,000    2,767,000    661,000    14,951,000 

 

Three Months Ended March 30, 2015  Packaging and
Printing
   Plastics   Technology   Corporate   Total 
Revenues from external customers  $2,082,000    938,000    410,000    -   $3,430,000 
Depreciation and amortization   128,000    34,000    216,000    2,000    380,000 
Stock based compensation   17,000    10,000    33,000    265,000    325,000 
Net income (loss) to common shareholders   41,000    87,000    (1,055,000)   (720,000)   (1,647,000)
Identifiable assets   8,654,000    2,132,000    13,894,000    1,457,000    26,137,000 

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Document Security Systems, Inc. desires to avail itself of certain “safe harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate”, “project”, “anticipate”, “plan”, “expect”, “intend”, “believe”, “hope”, “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, as previously set forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2015 that could cause actual results to differ materially from the results anticipated in the forward-looking statements.

 

Overview

 

Document Security Systems, Inc. (referred to in this report as “Document Security Systems”, “DSS”, “we”, “us”, “our” or “Company”) 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.

 

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.

 

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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 November 26, 2013, DSS Technology Management filed suit against Apple, Inc. (“Apple”), in the United States District Court for the Eastern District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSS Technology Management’s patents that relate to systems and methods of using low power wireless peripheral devices. DSS Technology Management is seeking a judgement for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, the case was transferred to the Northern District of California. In December 2014, Apple filed two Inter Partes Review (“IPR”) petitions with PTAB for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. Oral arguments of the IPRs took place on March 15, 2016, with a decision expected from PTAB by the end of June 2016.

 

On March 10, 2014, DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as TSMC), Samsung Electronics Co., Ltd, Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung Austin Semiconductor LLC (referred to collectively as Samsung), and NEC Corporation of America (referred to as NEC), for patent infringement involving certain of its semiconductor patents. DSS Technology Management sought a judgment for infringement, injunctive relief, and money damages from each of the named defendants. In June, 2014, TSMC filed an IPR petition with PTAB for review of the patents at issue. Samsung then filed an IPR petition relating to the same patents in September 2014, and filed a corrected IPR petition in October 2014. On December 31, 2014, the PTAB instituted review of several of the patent claims at issue in the case. Samsung then filed a motion with PTAB to join TSMC’s IPR proceeding. The request was granted by PTAB. On November 30, 2015, the PTAB issued a decision invalidating the patent claims at issue in the case. A Markman hearing was held in the Eastern District of Texas. Based on the District Court’s claim construction order issued on April 9, 2015, DSS Technology Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal the court’s claim construction order to the Federal Circuit, thus preserving the status quo in the event an appeal results in a remand for further proceedings in the District Court. On March 22, 2016, the Federal Circuit ruled in favor of TSMC in the appeal. On April 28, 2015, DSS Technology Management reached a confidential settlement with NEC, ending the litigation with NEC. On April 1, 2016, TSMC and DSS Technology Management reached a confidential settlement, which included a transfer of certain of the Company’s patent assets, to TSMC, ending the litigation with TSMC.

 

On February 16, 2015, DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation, Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks judgment for infringement of two of DSSTM’s patents, injunctive relief and money damages. On December 9, 2015, Intel filed IPR petitions with PTAB for review of the patents at issue in the case. PTAB has not yet made a determination whether the IPRs will be instituted. On March 18, 2016, the District Court issued an Order granting Intel’s motion to stay the case until completion of the IPR proceedings.

 

On July 16, 2015, DSS Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging infringement of certain of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and money damages. On November 12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at issue in their case. On March 18, 2016, Samsung filed an IPR petition as well. As of the date of this Report, PTAB has not yet made a determination whether those IPRs will be instituted.

 

 15 
 

 

Results of Operations for the Three Ended March 31, 2016 Compared to the Three Ended March 31, 2015

 

This discussion should be read in conjunction with the financial statements and footnotes contained in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Revenue

 

   Three Months   Three Months     
   Ended   Ended     
   March 31, 2016   March 31, 2015   % change 
Revenue               
Printed products  $3,975,000   $3,020,000    32%
Technology sales, services and licensing   364,000    410,000    -11%
Total revenue  $4,339,000   $3,430,000    27%

 

For the three months ended March 31, 2016, total revenue was approximately $4.3 million, representing an increase of 27% from the corresponding three months ended March 31, 2015. Revenues from the sale of printed products increased 32% during the three months ended March 31, 2016, as compared to the same period in 2015, which reflected increases in revenues from both packaging and plastic card sales. Technology sales, services and licensing revenue decreased 11% during the three months ended March 31, 2016 as compared to the same period in 2015, which generally reflected a decrease in sales from the Company’s digital product group which was primarily due to a decrease in hardware and software resales. Partially offsetting the decrease in digital sales was the approximately 6% increase in licensing revenues during the 2016 period.

 

Costs and expenses

 

   Three Months
Ended
March 31, 2016
   Three Months
Ended
March 31, 2015
   % change 
Costs and expenses               
Cost of goods sold, exclusive of depreciation and amortization  $2,611,000   $1,986,000    31%
Sales, general and administrative compensation   852,000    1,006,000    -15%
Depreciation and amortization   361,000    380,000    -5%
Professional fees   424,000    719,000    -41%
Stock based compensation   74,000    325,000    -77%
Sales and marketing   76,000    103,000    -26%
Rent and utilities   138,000    159,000    -13%
Other operating expenses   232,000    180,000    29%
Research and development   113,000    116,000    -3%
Total costs and expenses  $4,881,000   $4,974,000    -2%

 

Costs of goods sold, exclusive of depreciation and amortization includes all direct costs of printed products revenues, including materials, direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs associated with technology sales, services and licensing including hardware and software that are resold, and fees paid to inventors or others as a result of technology licenses or settlements, if any. Costs of goods sold increased 31% during the three months ended March 31, 2016 as compared to the same period in 2015. The increase correlated with the increase in revenue experienced by the Company during the period and generally reflected a higher concentration of packaging sales during the 2016 quarter.

 

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Sales, general and administrative compensation costs, excluding stock-based compensation, decreased 15% during the three months ended March 31, 2016, as compared to the same period in 2015, primarily due to a reduction of employee headcount, a reduction in bonus compensation and a reduction in executive management compensation.

 

Depreciation and amortization includes the depreciation of machinery and equipment used for production, depreciation of office equipment and building and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer lists, trademarks, non-compete agreements and patents, and internally developed patent assets. Depreciation and amortization expense decreased by 5% during the three months ended March 31, 2016 as compared to the same period in 2015, due to the decrease in the carrying value of the Company’s patent and equipment assets.

 

Professional fees decreased 41% for the three months ended March 31, 2016 as compared to the same period in 2015. The decrease was due to a decrease in professional fees incurred by the Company related to the intellectual property infringement suits the Company is currently involved in, and the elimination of legal fees associated with a derivative suit that was filed against the Company and its officers and directors in April 2015 and which was dismissed in January 2016.

 

Stock-based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. Stock-based compensation costs for the three months ended March 31, 2016 decreased 77% as compared to the same period in 2015, which reflects a decrease in the number and value of equity compensation granted by the Company since 2014.

 

Sales and marketing costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses, decreased 26% during the three months ended March 31, 2016, as compared to the same period in 2015, primarily due to decreases in travel costs.

 

Rent and utilities decreased 13% during the three months ended March 31, 2016 as compared to the same period in 2015, primarily due to a decrease in rent costs as the result of the move of the Company’s corporate and digital group to a new location in Rochester, New York which occurred in December 2015.

 

Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense and insurance costs. Other operating expenses increased 29% for the three months ended March 31, 2016, as compared to the same period in 2015 primarily due to an increase in office and equipment expenses associated with the Company’s move of its corporate and digital group location and the absence of a foreign currency transaction gain generated by the Company in the 2015 period.

 

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 months ended March 31, 2016 as compared to same period in 2015 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.

 

Net Loss

 

   Three Months
Ended
March 31, 2016
   Three Months
Ended
March 31, 2015
   % change 
Net loss   (624,000)   (1,647,000)   -62%
Loss per common share:               
Basic and diluted  $(0.01)  $(0.04)   -75%
Shares used in computing loss per common share:               
Basic and diluted   51,881,948    46,239,404    12%

 

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For the three months ended March 31, 2016, net loss was $624,000, a 62% decrease from a net loss of $1.6 million in the three months ended March 31, 2015. The decrease primarily reflects the combined impact of an increase in revenue and decrease in nearly all general and administrative cost categories.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2016, the Company had cash of approximately $1.0 million and restricted cash of approximately $283,000. In addition, the Company had $800,000 available to its packaging division under a revolving credit line.

 

Operating Cash Flow – During the first three months of 2016, the Company used approximately $69,000 of cash for operations, representing a 87% reduction in cash used for operations during the first three months of 2015. The significant reduction in operating cash use generally reflects the significant reduction in the Company’s net loss during the first three months of 2016 over the same period in 2015 and the impact of non-cash expenses including depreciation, amortization and stock based compensation on the Company’s net loss.

 

Investing Cash Flow – During the first three months of 2016, the Company expended approximately $52,000 on equipment for its packaging plant. In addition, the Company spent approximately $68,000 for the prosecution of several patent applications.

 

Financing Cash Flows - During the first three months of 2016, the Company made aggregate principal payments for long-term debt of approximately $202,000, up slightly from the same period in 2015.

 

Future Capital Needs -As of March 31, 2016, the Company had approximately $1.0 million in unrestricted cash and $283,000 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. In the absence of any of these, we will need to raise capital to fund our operations. 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 when the Company raised gross proceeds of $950,000 in September 2015 and an additional $250,000 in October 2015 from the sale of its equity. However, there is no assurance the Company will be able to raise sufficient funds in the future if necessary to do so.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.

 

Critical Accounting Policies and Estimates

 

As of March 31, 2016, our critical accounting policies and estimates have not changed materially from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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 such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated as of March 31, 2016 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, as of March 31, 2016 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.

 

 18 
 

 

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, 2015. This material weakness still remains as of March 31, 2016.

 

The Company’s controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. GAAP were ineffective. In addition, the Company determined that it did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties.

 

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

 

There has been no 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 first quarter of 2016 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 January 29, 2016 the Company received notice of the dismissal of a shareholder derivative suit that was filed in New York State Court in April 2015 by Benjamin Lapin, derivatively and on behalf of all others similarly situated, Plaintiff v. Robert Fagenson, Jeffrey Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants, and the Company, as Nominal Defendant.

 

ITEM 1A - RISK FACTORS

 

There have been no material changes to the discussion of risk factors previously disclosed in our most recently filed Annual Report.

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

None

 

 19 
 

 

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.

 

 20 
 

 

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.
         
  May 16, 2016   By: /s/ Jeffrey Ronaldi
        Jeffrey Ronaldi
        Chief Executive Officer (Principal Executive Officer)
         
  May 16, 2016   By: /s/ Philip Jones
        Philip Jones
        Chief Financial Officer (Principal Financial Officer)

 

 21 
 

 

EX-31.1 2 ex31-1.htm

 

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 March 31, 2016;

 

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: May 16, 2016

 

/s/Jeffrey Ronaldi  
Jeffrey Ronaldi  
Chief Executive Officer (Principal Executive Officer)  

 

   
 

 

EX-31.2 3 ex31-2.htm

 

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 March 31, 2016;

 

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: May 16, 2016

 

/s/ Philip Jones  
Philip Jones,  
Chief Financial Officer (Principal Financial Officer)  

 

   
 

 

EX-32.1 4 ex32-1.htm

 

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 March 31, 2016 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: May 16, 2016

 

/s/ Jeffrey Ronaldi  
Jeffrey Ronaldi  
Chief Executive Officer (Principal Executive Officer)  

 

   
 

 

EX-32.2 5 ex32-2.htm

 

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 March 31, 2016 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: May 16, 2016

 

/s/Philip Jones  
Philip Jones  
Chief Financial Officer (Principal Financial Officer)  

 

   
 

 

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May. 12, 2016
Document And Entity Information    
Entity Registrant Name DOCUMENT SECURITY SYSTEMS INC  
Entity Central Index Key 0000771999  
Document Type 10-Q  
Document Period End Date Mar. 31, 2016  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   51,881,948
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2016  
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Cash $ 1,049,535 $ 1,440,256
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Accounts receivable, net 1,913,990 2,097,433
Inventory 990,213 937,830
Prepaid expenses and other current assets 435,211 313,528
Total current assets 4,671,838 5,082,090
Property, plant and equipment, net 4,885,521 5,003,818
Other assets 45,823 44,050
Goodwill 2,453,349 2,453,349
Other intangible assets, net 2,894,959 3,017,544
Total assets 14,951,490 15,600,851
Current liabilities:    
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Accrued expenses and other current liabilities 1,819,069 1,964,726
Short-term debt 4,008,504 3,984,316
Current portion of long-term debt, net 819,653 1,553,061
Total current liabilities 8,811,805 9,447,176
Long-term debt, net 2,772,167 2,240,596
Other long-term liabilities 90,015 63,697
Deferred tax liability, net $ 166,844 $ 162,107
Commitments and contingencies (Note 5)
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Depreciation and amortization 360,501 379,593
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Operating loss (542,158) (1,544,478)
Other expense:    
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Net loss on debt modification and extinguishment (19,096)
Loss before income taxes $ (619,285) (1,641,956)
Income tax expense 4,737 4,737
Net loss (624,022) (1,646,693)
Other comprehensive loss:    
Interest rate swap loss (26,318) (15,752)
Comprehensive loss: $ (650,340) $ (1,662,445)
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Basic and diluted $ (0.01) $ (0.04)
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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
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Stock based compensation 73,724 324,598
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Change in deferred tax provision $ 4,737 4,737
Foreign currency transaction gain (29,400)
Amortization of deferred financing costs $ 5,290 5,290
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Inventory (52,383) (202,540)
Prepaid expenses and other assets (123,456) (33,622)
Restricted cash 10,154 18,486
Increase (decrease) in liabilities:    
Accounts payable 219,506 310,744
Accrued expenses and other liabilities (145,657) (351,167)
Net cash used by operating activities (68,663) (528,941)
Cash flows from investing activities:    
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Purchase of intangible assets (67,792)
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Cash flows from financing activities:    
Payments of long-term debt (202,439) (195,084)
Net cash used by financing activities (202,439) (195,084)
Net decrease in cash (390,721) (751,816)
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Basis of Presentation and Significant Accounting Policies
3 Months Ended
Mar. 31, 2016
Accounting Policies [Abstract]  
Basis of Presentation and Significant Accounting Policies

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 and interests in companies owning intellectual property assets, or assists others in managing their intellectual property monetization efforts, for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial litigation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments, considered necessary for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.

 

Interim results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2015.

 

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure.

 

Restricted Cash – As of March 31, 2016, cash of $282,889 ($293,043 – December 31, 2015) is restricted for payments of costs and expenses associated with one of the Company’s IP monetization programs.

 

Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

  Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
     
  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

  

The carrying amounts reported in the balance sheet of cash, accounts receivable, prepaids, notes 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, as discussed below, are recorded as assets and liabilities at estimated fair value based on available market information.

 

Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap contracts to minimize significant fluctuations in cash flows that are caused by interest rate volatility. The Company has one interest rate swap that changes variable rates into fixed rates on one term loan. The swap qualifies as a Level 2 fair value financial instrument. The swap agreement is not held for trading purposes and the Company does not intend to sell the derivative swap financial instrument. The Company records interest swap agreements on the balance sheet at fair value because such agreements qualify as cash flow hedges under accounting principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive loss until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss (“AOCI”) to the consolidated statement of operations on the same line item as the underlying transaction. The valuations of the interest rate swap has been 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 interest rate swap agreements. However, the Company does not anticipate non-performance by the counter parties. The cumulative net loss attributable to the cash flow hedge is recorded in accumulated other comprehensive loss and other liabilities at March 31, 2016 was approximately $90,000 ($64,000 - December 31, 2015), which is included in other long-term liabilities on the accompanying balance sheets.

 

The Company has a notional amount of approximately $1,008,000 as of March 31, 2016 on its interest rate swap agreement for its debt with RBS Citizens, N.A. (“Citizens Bank”) (see Note 4) which changes a variable rate into a fixed rate on a term loan as follows:

 

Notional     Variable            
Amount     Rate     Fixed Cost     Maturity Date
$ 1,008,156       3.59 %     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.

 

Contingent Legal Expenses - Contingent legal fees associated with our commercial litigation involving our IP are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any unamortized patent acquisition costs will be expensed in the period in which a conclusion is reached in an enforcement action that does not yield future royalties potential.

 

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.

  

As of March 31, 2016 and 2015, there were 10,576,908 and 11,468,047 respectively, of common stock share equivalents potentially issuable under convertible debt agreements, employment agreements, options, warrants, and restricted stock agreements, that could potentially dilute basic earnings per share in the future. These shares are excluded from the calculation of diluted earnings per share in periods in which the Company had a net loss because their inclusion would be anti-dilutive to the Company’s losses in the respective periods.

 

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.

 

During the three months ended March 31, 2016 and 2015, one customer accounted for 27% and 14%, respectively, of the Company’s consolidated revenue and accounted for 24% and 8%, respectively, of the Company’s accounts receivable balance as of March 31, 2016 and March 31, 2015. In addition, during the three months ended March 31, 2016, an additional customer accounted for 12% of the Company’s consolidated revenue and accounted for 4% of the Company’s accounts receivable balance as of March 31, 2016. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers, the short duration of its payment terms for the significant majority of its customer contracts and by the diversification of its customer base.

 

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 in the first quarter of 2016. The Company’s ability to fund its current and future commitments out of its available cash and cash generated from its operations depends on a number of factors. Some of these factors include the Company’s ability to (i) increase sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s intellectual property monetization business; and (iii) continue to generate operating profits from the Company’s packaging and plastic printing operations. During 2015, the Company raised gross proceeds $1.1 million from the sale of its equity. As of March 31, 2016, the Company had approximately $1,050,000 in unrestricted cash and $283,000 in restricted cash and up to $800,000 available under a revolving credit line at its packaging subsidiary, which may not be sufficient to cover the Company’s future working capital requirements if these and other factors are not met. If the Company cannot generate sufficient cash from its operations in 2016, the Company will need to 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

 

Recent Accounting PronouncementsIn May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. 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 its currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires all costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the debt. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the provisions of this ASU in the first quarter of 2016, and reclassified approximately $51,000 and $57,000 from “Other assets” as of March 31, 2016 and December 31, 2015, respectively, as a reduction to the carrying value of the respective debt instrument.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The guidance requires that certain inventory, including inventory measured using the first-in-first-out method, be measured at the lower of cost or 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. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases”, which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined the effect of the standard will have on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

XML 19 R7.htm IDEA: XBRL DOCUMENT v3.4.0.3
Inventory
3 Months Ended
Mar. 31, 2016
Inventory Disclosure [Abstract]  
Inventory

2. Inventory

 

Inventory consisted of the following:

 

    March 31, 2016     December 31, 2015  
Finished Goods   $ 696,462     $ 718,601  
Work in process     202,935       167,779  
Raw Materials     90,816       51,450  
    $ 990,213     $ 937,830  
XML 20 R8.htm IDEA: XBRL DOCUMENT v3.4.0.3
Intangible Assets
3 Months Ended
Mar. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets

3. Intangible Assets

 

Intangible assets are comprised of the following:

 

        March 31, 2016     December 31, 2015  
    Useful Life   Gross Carrying
Amount
    Accumulated
Amortization
    Net Carrying
Amount
    Gross Carrying
Amount
    Accumulated
Amortization
    Net Carrying
Amount
 
Acquired intangibles- customer lists and non-compete agreements   5 -10 years     1,997,300       1,656,782       340,518       1,997,300       1,635,257       362,043  
Acquired intangibles-patents and patent rights   Varied (1)   3,650,000       1,711,878       1,938,122       3,650,000       1,562,526       2,087,474  
Patent application costs   Varied (2)   1,130,750       514,431       616,319       1,062,958       494,931       568,027  
        $ 6,778,050     $ 3,883,091     $ 2,894,959     $ 6,710,258     $ 3,692,714     $ 3,017,544  

 

  (1) Acquired patents and patent rights are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31, 2016, the weighted average remaining useful life of these assets in service was approximately 4.1 years.
     
  (2) Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31, 2016, the weighted average remaining useful life of these assets in service was approximately 9.0 years.

 

Intangible asset amortization expense for the three months ended March 31, 2016 amounted to $190,377 ($241,275 - March 31, 2015).

XML 21 R9.htm IDEA: XBRL DOCUMENT v3.4.0.3
Short Term and Long Term Debt
3 Months Ended
Mar. 31, 2016
Debt Disclosure [Abstract]  
Short Term and Long Term Debt

4. Short-Term and Long-Term Debt

 

Revolving Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving credit line with Citizens Bank of up to $800,000 that bears interest at 1 Month LIBOR plus 3.75% (4.19% as of March 31, 2016) and matures on May 31, 2017. As of March 31, 2016, the revolving line had a balance of $0 ($0 at December 31, 2015).

 

Long-Term Debt - On December 30, 2011, the Company issued a $575,000 convertible note that was due on December 29, 2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note was convertible at any time during the term at lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion price of $2.21 per share. On February 23, 2015, the Company entered into Convertible Promissory Note Amendment No. 2 to extend the maturity date to December 30, 2016, eliminate the conversion feature, and to institute principal payments in the amount of $15,000 per month plus interest through the extended maturity date, and a balloon payment of $230,000 due on the extended maturity date. On April 12, 2016, the Company entered into Convertible Promissory Note Amendment No. 3 to extend the maturity date to May 31, 2017 and change the balloon payment to $155,000 due on the extended maturity date. As of March 31, 2016, the balance of the term loan was $365,000 ($410,000 at December 31, 2015).

 

On May 24, 2013, the Company entered into a promissory note in the principal sum of $850,000 to purchase three printing presses that were previously leased by the Company’s wholly-owned subsidiary, Secuprint Inc., and carries an interest rate of 9% per annum. Interest is payable quarterly, in arrears. On February 23, 2015, the Company entered into Promissory Note Amendment No. 2 to extend the maturity date to May 31, 2016 and to institute principal payments in the amount of $15,000 per month plus interest through the extended maturity date, and a balloon payment of $610,000 due on the extended maturity date. On April 12, 2016, the Company entered into Promissory Note Amendment No. 3 to extend the maturity date to May 31, 2017 and change the balloon payment to $430,000 due on the extended maturity date. As of March 31, 2016, the balance of the term loan was $640,000 ($685,000 at December 31, 2015).

 

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% (3.44% at March 31, 2016). As of March 31, 2016, the balance under this term note was $6,212 ($8,874 at December 31, 2015).

 

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 March 31, 2016, the loan had a balance of $755,812 ($819,681 at December 31, 2015).

 

On April 28, 2015, Premier Packaging entered into a term note with Citizens Bank for $525,000, repayable over a 60-month period. The loan bears interest at 3.61% and is payable in equal monthly installments of $9,591. Premier Packaging used the proceeds of the term note to acquire a HP Indigo 7800 Digital press. As of March 31, 2016, the loan had a balance of $435,810 ($460,448 at December 31, 2015).

 

Promissory Notes - On August 30, 2011, Premier Packaging purchased the packaging plant it occupies in Victor, New York, for $1,500,000, which was partially financed with a $1,200,000 promissory note obtained from Citizens Bank (“Promissory Note”). The Promissory Note calls for monthly payments of principal and interest in the amount of $7,658, with interest calculated as 1 Month LIBOR plus 3.15% (3.59% at March 31, 2016). Concurrently with the transaction, the Company entered into an interest rate swap agreement to lock into a 5.87% effective interest rate for the life of the loan. The Promissory Note matures in August 2021 at which time a balloon payment of the remaining principal balance will be due. As of March 31, 2016, the Promissory Note had a balance of $1,008,156 ($1,021,926 at December 31, 2015). This note is presented net of approximately $17,000 ($18,000 at December 31, 2015) of debt issuance costs on the condensed consolidated balance sheet.

 

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% (3.59% at March 31, 2016), which payments commenced on July 1, 2014. The note matures in July 2019 at which time a balloon payment of the remaining principal balance of $300,000 is due. As of March 31, 2016, the note had a balance of $397,747 ($405,247 – December 31, 2015).

 

Under the Citizens Bank credit facilities, the Company’s subsidiary, Premier Packaging, is subject to various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants. For the quarter ended March 31, 2016, Premier Packaging was in compliance with the covenants. The Citizens Bank obligations are secured by all of the assets of Premier Packaging and are also secured through cross guarantees by the Company and its other wholly-owned subsidiaries, Plastic Printing Professionals and Secuprint.

 

Other Debt - On February 13, 2014, the Company’s subsidiary, DSS Technology Management, Inc. (“DSSTM”), entered into an Investment Agreement (the “Agreement”) dated February 13, 2014 (the “Effective Date”) with Fortress Credit Co LLC, as collateral agent (the “Collateral Agent”), and certain investors (the “Investors”), pursuant to which DSSTM contracted to receive a series of advances up to $4,500,000 (collectively, the “Advances”). Under the terms of the Agreement, on the Effective Date, DSSTM issued and sold a promissory note in the amount of $1,791,000, fixed return equity interests in the amount of $199,000, and contingent equity interests in the amount of $10,000, to each of the Investors, and in return received $2,000,000 in proceeds. To secure the Advances, DSSTM placed a lien in favor of the Investors on ten semi-conductor patents (the “Patents”) and assigned to the Investors certain funds recoverable from successful patent litigation involving these Patents, including settlement payments, license fees and royalties on the Patents. DSSTM is a plaintiff in various ongoing patent infringement lawsuits involving certain of the Patents.

 

On March 27, 2014, DSSTM received an additional $1,000,000 under the Agreement comprised of a promissory note for $900,000 and fixed and contingent equity interests of $100,000. On September 5, 2014, DSSTM received the remaining $1,500,000 under the Agreement comprised of a promissory note for $1,350,000 and fixed and contingent return interests of $150,000. As of March 31, 2016, DSSTM has made aggregate payments of $150,000 on the notes. As of March 31, 2016, total net advances equaled $4,350,000, which consisted of $4,041,000 in notes and an aggregate of $459,000 of fixed and contingent equity interests, less aggregate payments of $150,000. Aggregate accrued interest totaled $151,500 as of March 31, 2016 ($132,000 as of December 31, 2015).

 

The Agreement defines certain Events of Default, one of which is the failure by DSSTM, on or before the second anniversary of the Effective Date, which was February 13, 2016, to make payments to the Investors equal to the outstanding Advances. On February 13, 2016, DSSTM failed to make these payments.

 

Under the Agreement, upon an Event of Default, the Collateral Agent and the Investors have a number of remedies, including rights related to foreclosure or direct monetization of the Patents. As a result of the Event of Default discussed above, the sole and exclusive recourse of the Investors and the Collateral Agent is to form a special purpose entity to take possession of the Patents, subject to a perpetual, non-transferable, non-exclusive worldwide royalty-free license back to DSSTM. The Agreement further provides that, in the case of this default, the Collateral Agent and Investors will not, individually or collectively, seek to enforce any monetary judgment with respect to or against any assets of DSSTM other than the Patents and any payments received in respect of the Patents, including settlement payments, license fees and royalties on the Patents. In the event that the Collateral Agent or Investors foreclose on, and take possession of the Patents, DSSTM will still be entitled to receive any payments received in respect of the Patents in the event of a recovery by any substituted plaintiff in any related litigation proceedings, subject to payment of amounts owed under the Agreement to the Investors and the Collateral Agent. In addition, as a result of the default, the interest rate on the unpaid amounts due increased to 2% per year effective February 13, 2016.

 

As a result of the event of default, the Company has classified the remainder of the amounts due on the notes of approximately $4,043,000 as short-term debt as of March 31, 2016. The balance on the condensed consolidated balance sheet is presented net of approximately $34,000 of debt issuance costs. The Company has been in discussions with the investors to amend the Agreement or otherwise to remedy the event of default; however, there can be no assurance as to the ultimate success of these discussions.

XML 22 R10.htm IDEA: XBRL DOCUMENT v3.4.0.3
Commitments and Contingencies
3 Months Ended
Mar. 31, 2016
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

5. Commitments and Contingencies

 

On November 26, 2013, DSS Technology Management filed suit against Apple, Inc. (“Apple”), in the United States District Court for the Eastern District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSS Technology Management’s patents that relate to systems and methods of using low power wireless peripheral devices. DSS Technology Management is seeking a judgement for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, the case was transferred to the Northern District of California. In December 2014, Apple filed two Inter Partes Review (“IPR”) petitions with USPTO’s Patent Trial and Appeal Board (“PTAB”) for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. Oral arguments of the IPRs took place on March 15, 2016, with a decision expected from PTAB by the end of June 2016.

  

On March 10, 2014, DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as TSMC), Samsung Electronics Co., Ltd, Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung Austin Semiconductor LLC (referred to collectively as Samsung), and NEC Corporation of America (referred to as NEC), for patent infringement involving certain of its semiconductor patents. DSS Technology Management sought a judgment for infringement, injunctive relief, and money damages from each of the named defendants. In June, 2014, TSMC filed an IPR petition with PTAB for review of the patents at issue. Samsung then filed an IPR petition relating to the same patents in September 2014, and filed a corrected IPR petition in October 2014. On December 31, 2014, the PTAB instituted review of several of the patent claims at issue in the case. Samsung then filed a motion with PTAB to join TSMC’s IPR proceeding. The request was granted by PTAB. On November 30, 2015, the PTAB issued a decision invalidating the patent claims at issue in the case. A Markman hearing was held in the Eastern District of Texas. Based on the District Court’s claim construction order issued on April 9, 2015, DSS Technology Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal the court’s claim construction order to the Federal Circuit, thus preserving the status quo in the event an appeal results in a remand for further proceedings in the District Court. On March 22, 2016, the Federal Circuit ruled in favor of TSMC in the appeal. On April 28, 2015, DSS Technology Management reached a confidential settlement with NEC, ending the litigation with NEC. On April 1, 2016, TSMC and DSS Technology Management reached a confidential settlement, which included a transfer of certain of the Company’s patent assets, to TSMC, ending the litigation with TSMC.

 

On February 16, 2015, DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation, Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks judgment for infringement of two of DSSTM’s patents, injunctive relief and money damages. On December 9, 2015, Intel filed IPR petitions with PTAB for review of the patents at issue in the case. PTAB has not yet made a determination whether the IPRs will be instituted. On March 18, 2016, the District Court issued an Order granting Intel’s motion to stay the case until completion of the IPR proceedings.

 

On July 16, 2015, DSS Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging infringement of certain of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and money damages. On November 12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at issue in their case. On March 18, 2016, Samsung filed an IPR petition as well. As of the date of this Report, PTAB has not yet made a determination whether those IPRs will be instituted.

 

On January 29, 2016, the Company received notice of the dismissal of a shareholder derivative suit filed in New York State Court in April 2015 by Benjamin Lapin, derivatively and on behalf of all others similarly situated, Plaintiff v. Robert Fagenson, Jeffrey Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants, and the Company, as Nominal Defendant.

 

In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, in the opinion of management, none of the legal proceedings to which we are a party, whether discussed herein or otherwise, will have a material adverse effect on its results of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss is probable and reasonably estimable.

 

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 March 31, 2016, the Company has not accrued any contingent legal fees pursuant to these arrangements.

  

Contingent Payments – The Company is party to certain agreements with funding partners who have rights to portions of intellectual property monetization proceeds that the Company receives. As of March 31, 2016, there are no contingent payments due.

XML 23 R11.htm IDEA: XBRL DOCUMENT v3.4.0.3
Stockholders' Equity
3 Months Ended
Mar. 31, 2016
Stockholders' Equity Note [Abstract]  
Stockholders' Equity

6. Stockholders’ Equity

 

Stock Options - In March 2016, three of the Company’s senior management voluntarily cancelled an aggregate of 1,200,000 options to purchase shares of the Company’s common stock with exercise prices of $3.00 per share, of which 166,667 of the options were unvested on the date of cancellation.

 

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 three months ended March 31, 2016, the Company had stock compensation expense of approximately $74,000 or less than $0.01 basic and diluted earnings per share ($325,000; $0.01 basic and diluted earnings per share for the corresponding three months ended March 31, 2015).

 

As of March 31, 2016, there was $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.

XML 24 R12.htm IDEA: XBRL DOCUMENT v3.4.0.3
Supplemental Cash Flow Information
3 Months Ended
Mar. 31, 2016
Supplemental Cash Flow Information [Abstract]  
Supplemental Cash Flow Information

7. Supplemental Cash Flow Information

 

Supplemental cash flow information for the three months ended March 31, 2016 and 2015 is approximately as follows:

 

    2016     2015  
Cash paid for interest   $ 58,000     $ 58,000  
Non-cash investing and financing activities:                
Loss from change in fair value of interest rate swap derivatives   $ (26,000 )   $ (16,000 )

 

XML 25 R13.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information
3 Months Ended
Mar. 31, 2016
Segment Reporting [Abstract]  
Segment Information

8. Segment Information

 

The Company’s businesses are organized, managed and internally reported as four operating segments. Two of these operating segments, Packaging and Printing, and Plastics are engaged in the printing and production of paper, cardboard and plastic documents with a wide range of features, including the Company’s patented technologies and trade secrets designed for the protection of documents against unauthorized duplication and altering. The two other operating segments, 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 months ended March 31, 2016 and 2015 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:

 

Three Months Ended March 30, 2016   Packaging and
Printing
    Plastics     Technology     Corporate     Total  
Revenues from external customers   $ 2,927,000       1,048,000       364,000       -     $ 4,339,000  
Depreciation and amortization     153,000       29,000       178,000       1,000       361,000  
Stock based compensation     17,000       10,000       13,000       34,000       74,000  
Net income (loss) to common shareholders     244,000       111,000       (565,000 )     (414,000 )     (624,000 )
Identifiable assets     9,345,000       2,178,000       2,767,000       661,000       14,951,000  

 

Three Months Ended March 30, 2015   Packaging and
Printing
    Plastics     Technology     Corporate     Total  
Revenues from external customers   $ 2,082,000       938,000       410,000       -     $ 3,430,000  
Depreciation and amortization     128,000       34,000       216,000       2,000       380,000  
Stock based compensation     17,000       10,000       33,000       265,000       325,000  
Net income (loss) to common shareholders     41,000       87,000       (1,055,000 )     (720,000 )     (1,647,000 )
Identifiable assets     8,654,000       2,132,000       13,894,000       1,457,000       26,137,000  

 

XML 26 R14.htm IDEA: XBRL DOCUMENT v3.4.0.3
Basis of Presentation and Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2016
Accounting Policies [Abstract]  
Use of Estimates

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

Restricted Cash – As of March 31, 2016, cash of $282,889 ($293,043 – December 31, 2015) is restricted for payments of costs and expenses associated with one of the Company’s IP monetization programs.

Fair Value of Financial Instruments

Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

  Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
     
  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

  

The carrying amounts reported in the balance sheet of cash, accounts receivable, prepaids, notes 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, as discussed below, are recorded as assets and liabilities at estimated fair value based on available market information.

Derivative Instruments

Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap contracts to minimize significant fluctuations in cash flows that are caused by interest rate volatility. The Company has one interest rate swap that changes variable rates into fixed rates on one term loan. The swap qualifies as a Level 2 fair value financial instrument. The swap agreement is not held for trading purposes and the Company does not intend to sell the derivative swap financial instrument. The Company records interest swap agreements on the balance sheet at fair value because such agreements qualify as cash flow hedges under accounting principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive loss until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss (“AOCI”) to the consolidated statement of operations on the same line item as the underlying transaction. The valuations of the interest rate swap has been 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 interest rate swap agreements. However, the Company does not anticipate non-performance by the counter parties. The cumulative net loss attributable to the cash flow hedge is recorded in accumulated other comprehensive loss and other liabilities at March 31, 2016 was approximately $90,000 ($64,000 - December 31, 2015), which is included in other long-term liabilities on the accompanying balance sheets.

 

The Company has a notional amount of approximately $1,008,000 as of March 31, 2016 on its interest rate swap agreement for its debt with RBS Citizens, N.A. (“Citizens Bank”) (see Note 4) which changes a variable rate into a fixed rate on a term loan as follows:

 

Notional     Variable            
Amount     Rate     Fixed Cost     Maturity Date
$ 1,008,156       3.59 %     5.87 %   August 30, 2021
                         

 

Impairment of Long Lived Assets

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.

Contingent Legal Expenses

Contingent Legal Expenses - Contingent legal fees associated with our commercial litigation involving our IP are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any unamortized patent acquisition costs will be expensed in the period in which a conclusion is reached in an enforcement action that does not yield future royalties potential.

Earnings Per Common Share

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 March 31, 2016 and 2015, there were 10,576,908 and 11,468,047 respectively, of common stock share equivalents potentially issuable under convertible debt agreements, employment agreements, options, warrants, and restricted stock agreements, that could potentially dilute basic earnings per share in the future. These shares are excluded from the calculation of diluted earnings per share in periods in which the Company had a net loss because their inclusion would be anti-dilutive to the Company’s losses in the respective periods.

Concentration of Credit Risk

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 three months ended March 31, 2016 and 2015, one customer accounted for 27% and 14%, respectively, of the Company’s consolidated revenue and accounted for 24% and 8%, respectively, of the Company’s accounts receivable balance as of March 31, 2016 and March 31, 2015. In addition, during the three months ended March 31, 2016, an additional customer accounted for 12% of the Company’s consolidated revenue and accounted for 4% of the Company’s accounts receivable balance as of March 31, 2016. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers, the short duration of its payment terms for the significant majority of its customer contracts and by the diversification of its customer base.

Reclassifications

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

Continuing Operations

Continuing Operations - The Company has incurred significant net losses in previous years and in the first quarter of 2016. The Company’s ability to fund its current and future commitments out of its available cash and cash generated from its operations depends on a number of factors. Some of these factors include the Company’s ability to (i) increase sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s intellectual property monetization business; and (iii) continue to generate operating profits from the Company’s packaging and plastic printing operations. During 2015, the Company raised gross proceeds $1.1 million from the sale of its equity. As of March 31, 2016, the Company had approximately $1,050,000 in unrestricted cash and $283,000 in restricted cash and up to $800,000 available under a revolving credit line at its packaging subsidiary, which may not be sufficient to cover the Company’s future working capital requirements if these and other factors are not met. If the Company cannot generate sufficient cash from its operations in 2016, the Company will need to 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.

Recent Accounting Pronouncements

Recent Accounting PronouncementsIn May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. 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 its currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires all costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the debt. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the provisions of this ASU in the first quarter of 2016, and reclassified approximately $51,000 and $57,000 from “Other assets” as of March 31, 2016 and December 31, 2015, respectively, as a reduction to the carrying value of the respective debt instrument.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The guidance requires that certain inventory, including inventory measured using the first-in-first-out method, be measured at the lower of cost or 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. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases”, which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined the effect of the standard will have on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

XML 27 R15.htm IDEA: XBRL DOCUMENT v3.4.0.3
Basis of Presentation and Significant Accounting Policies (Tables)
3 Months Ended
Mar. 31, 2016
Accounting Policies [Abstract]  
Schedule of Derivative Instruments

The Company has a notional amount of approximately $1,008,000 as of March 31, 2016 on its interest rate swap agreement for its debt with RBS Citizens, N.A. (“Citizens Bank”) (see Note 4) which changes a variable rate into a fixed rate on a term loan as follows:

 

Notional     Variable            
Amount     Rate     Fixed Cost     Maturity Date
$ 1,008,156       3.59 %     5.87 %   August 30, 2021
XML 28 R16.htm IDEA: XBRL DOCUMENT v3.4.0.3
Inventory (Tables)
3 Months Ended
Mar. 31, 2016
Inventory Disclosure [Abstract]  
Schedule of Inventory

Inventory consisted of the following:

 

    March 31, 2016     December 31, 2015  
Finished Goods   $ 696,462     $ 718,601  
Work in process     202,935       167,779  
Raw Materials     90,816       51,450  
    $ 990,213     $ 937,830  

 

XML 29 R17.htm IDEA: XBRL DOCUMENT v3.4.0.3
Intangible Assets (Tables)
3 Months Ended
Mar. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of Other Intangible Assets

Intangible assets are comprised of the following:

 

        March 31, 2016     December 31, 2015  
    Useful Life   Gross Carrying
Amount
    Accumulated
Amortization
    Net Carrying
Amount
    Gross Carrying
Amount
    Accumulated
Amortization
    Net Carrying
Amount
 
Acquired intangibles- customer lists and non-compete agreements   5 -10 years     1,997,300       1,656,782       340,518       1,997,300       1,635,257       362,043  
Acquired intangibles-patents and patent rights   Varied (1)   3,650,000       1,711,878       1,938,122       3,650,000       1,562,526       2,087,474  
Patent application costs   Varied (2)   1,130,750       514,431       616,319       1,062,958       494,931       568,027  
        $ 6,778,050     $ 3,883,091     $ 2,894,959     $ 6,710,258     $ 3,692,714     $ 3,017,544  
XML 30 R18.htm IDEA: XBRL DOCUMENT v3.4.0.3
Supplemental Cash Flow Information (Tables)
3 Months Ended
Mar. 31, 2016
Supplemental Cash Flow Information [Abstract]  
Schedule of Supplemental Cash Flow Information

 

Supplemental cash flow information for the three months ended March 31, 2016 and 2015 is approximately as follows:

 

    2016     2015  
Cash paid for interest   $ 58,000     $ 58,000  
Non-cash investing and financing activities:                
Loss from change in fair value of interest rate swap derivatives   $ (26,000 )   $ (16,000 )
XML 31 R19.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information (Tables)
3 Months Ended
Mar. 31, 2016
Segment Reporting [Abstract]  
Schedule of Operations by Reportable Segment

Approximate information concerning the Company’s operations by reportable segment for the three months ended March 31, 2016 and 2015 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:

 

Three Months Ended March 30, 2016   Packaging and
Printing
    Plastics     Technology     Corporate     Total  
Revenues from external customers   $ 2,927,000       1,048,000       364,000       -     $ 4,339,000  
Depreciation and amortization     153,000       29,000       178,000       1,000       361,000  
Stock based compensation     17,000       10,000       13,000       34,000       74,000  
Net income (loss) to common shareholders     244,000       111,000       (565,000 )     (414,000 )     (624,000 )
Identifiable assets     9,345,000       2,178,000       2,767,000       661,000       14,951,000  

 

Three Months Ended March 30, 2015   Packaging and
Printing
    Plastics     Technology     Corporate     Total  
Revenues from external customers   $ 2,082,000       938,000       410,000       -     $ 3,430,000  
Depreciation and amortization     128,000       34,000       216,000       2,000       380,000  
Stock based compensation     17,000       10,000       33,000       265,000       325,000  
Net income (loss) to common shareholders     41,000       87,000       (1,055,000 )     (720,000 )     (1,647,000 )
Identifiable assets     8,654,000       2,132,000       13,894,000       1,457,000       26,137,000  

 

XML 32 R20.htm IDEA: XBRL DOCUMENT v3.4.0.3
Basis of Presentation and Significant Accounting Policies (Details Narrative) - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Dec. 31, 2015
Significant Accounting Policies [Line Items]      
Restricted cash $ 282,889   $ 293,043
Net gain (loss) attributable to cash flow hedge 90,000   64,000
Notional amount $ 1,008,000    
Antidilutive securities 10,576,908 11,468,047  
Proceeds from sale of equity $ 1,100,000    
Unrestricted cash 1,050,000    
Maximum borrowing capacity 800,000    
Reclassified from other assets $ 51,000   $ 57,000
Sales Revenue, Goods, Net [Member]      
Significant Accounting Policies [Line Items]      
Concentration of credit risk, percentage 27.00% 14.00%  
Sales Revenue, Goods, Net [Member] | Customer [Member]      
Significant Accounting Policies [Line Items]      
Concentration of credit risk, percentage 12.00%    
Accounts Receivable [Member]      
Significant Accounting Policies [Line Items]      
Concentration of credit risk, percentage 24.00% 8.00%  
Accounts Receivable [Member] | Customer [Member]      
Significant Accounting Policies [Line Items]      
Concentration of credit risk, percentage 4.00%    
XML 33 R21.htm IDEA: XBRL DOCUMENT v3.4.0.3
Basis of Presentation and Significant Accounting Policies - Schedule of Derivative Instruments (Details)
3 Months Ended
Mar. 31, 2016
USD ($)
Accounting Policies [Abstract]  
Notional Amount $ 1,008,156
Variable Rate 3.59%
Fixed Cost 5.87%
Maturity Date Aug. 30, 2021
XML 34 R22.htm IDEA: XBRL DOCUMENT v3.4.0.3
Inventory - Schedule of Inventory (Details) - USD ($)
Mar. 31, 2016
Dec. 31, 2015
Inventory Disclosure [Abstract]    
Finished Goods $ 696,462 $ 718,601
Work in process 202,935 167,779
Raw Materials 90,816 51,450
Inventory $ 990,213 $ 937,830
XML 35 R23.htm IDEA: XBRL DOCUMENT v3.4.0.3
Intangible Assets (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Goodwill and Intangible Assets Disclosure [Abstract]    
Amortization of intangibles $ 190,377 $ 241,275
XML 36 R24.htm IDEA: XBRL DOCUMENT v3.4.0.3
Intangible Assets - Schedule of Other Intangible Assets (Details) - USD ($)
3 Months Ended
Mar. 31, 2016
Dec. 31, 2015
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Amount $ 6,778,050 $ 6,710,258
Accumulated Amortization 3,883,091 3,692,714
Net Carrying Amount 2,894,959 3,017,544
Customer Llists and Non-compete Agreements [Member]    
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Amount 1,997,300 1,997,300
Accumulated Amortization 1,656,782 1,635,257
Net Carrying Amount $ 340,518 362,043
Customer Llists and Non-compete Agreements [Member] | Minimum [Member]    
Finite-Lived Intangible Assets [Line Items]    
Useful Life 5 years  
Customer Llists and Non-compete Agreements [Member] | Maximum [Member]    
Finite-Lived Intangible Assets [Line Items]    
Useful Life 10 years  
Patents and Patent Rights [Member]    
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Amount [1] $ 3,650,000 3,650,000
Accumulated Amortization [1] 1,711,878 1,562,526
Net Carrying Amount [1] $ 1,938,122 2,087,474
Useful life, description [1] Varied  
Patent Application Costs [Member]    
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Amount [2] $ 1,130,750 1,062,958
Accumulated Amortization [2] 514,431 494,931
Net Carrying Amount [2] $ 616,319 $ 568,027
Useful life, description [2] Varied  
[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 March 31, 2016, the weighted average remaining useful life of these assets in service was approximately 4.1 years.
[2] Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31, 2016, the weighted average remaining useful life of these assets in service was approximately 9.0 years.
XML 37 R25.htm IDEA: XBRL DOCUMENT v3.4.0.3
Intangible Assets - Schedule of Other Intangible Assets (Details) (Parenthetical)
3 Months Ended
Mar. 31, 2016
Patents and Patent Rights [Member]  
Weighted average remaining useful life 4 years 1 month 6 days
Patent Application Costs [Member]  
Weighted average remaining useful life 9 years
XML 38 R26.htm IDEA: XBRL DOCUMENT v3.4.0.3
Short Term and Long Term Debt (Details Narrative) - USD ($)
1 Months Ended 3 Months Ended 12 Months Ended 15 Months Ended
Apr. 12, 2016
Apr. 28, 2015
Sep. 05, 2014
Feb. 13, 2014
Jul. 19, 2013
Aug. 30, 2011
Aug. 30, 2011
Sep. 30, 2015
Feb. 23, 2015
May. 31, 2014
Dec. 30, 2011
Oct. 31, 2011
Mar. 31, 2016
Mar. 31, 2015
Dec. 31, 2015
Mar. 31, 2016
Feb. 13, 2016
Mar. 27, 2014
Dec. 06, 2013
May. 24, 2013
Oct. 08, 2010
Debt Instrument [Line Items]                                          
Long-term debt, net                         $ 2,772,167   $ 2,240,596 $ 2,772,167          
Payments of long-term debt                         202,439 $ 195,084              
Short-term debt                         4,008,504   3,984,316 4,008,504          
Debt issuance costs                         34,000     34,000          
Collateral Agent [Member]                                          
Debt Instrument [Line Items]                                          
Debt interest rate                                 2.00%        
Convertible Notes Payable [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, face amount                     $ 575,000                    
Debt interest rate                     10.00%                    
Shares to be issued upon conversion of convertible note, shares                     260,180                    
Debt conversion, price per share                     $ 2.21                    
Principal payment amount per month                     $ 15,000                    
Debt instrument, final balloon payment                     $ 230,000                    
Debt instrument, carrying amount                         $ 365,000   410,000 365,000          
Convertible Notes Payable [Member] | April 12, 2016 [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, maturity date                         May 31, 2017                
Debt instrument, final balloon payment                         $ 155,000     155,000          
Promissory Notes [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, face amount                                       $ 850,000  
Debt instrument, maturity date May 31, 2017                                        
Debt interest rate                                       9.00%  
Principal payment amount per month                 $ 15,000                        
Debt instrument, final balloon payment $ 430,000               610,000                        
Debt instrument, carrying amount                         $ 640,000   685,000 640,000          
Periodic installments amount                 $ 15,000                        
Term Loan [Member]                                          
Debt Instrument [Line Items]                                          
Interest rate additional rate above LIBOR                         3.44%                
Debt instrument, carrying amount         $ 1,303,900               $ 6,212   8,874 6,212          
Credit facility agreement, monthly principal payment         $ 24,511                                
Interest rate on outstanding term loan         4.84%                                
Debt instrument, term         60 months                                
Rbs Citizens [Member]                                          
Debt Instrument [Line Items]                                          
Line of credit, maximum borrowing amount                         $ 800,000     800,000          
Interest rate additional rate above LIBOR                         4.19%                
Credit facility, amount outstanding                         $ 0   0 $ 0          
Rbs Citizens [Member] | Promissory Notes [Member]                                          
Debt Instrument [Line Items]                                          
Interest rate additional rate above LIBOR           3.15%             3.59%                
Debt interest rate                         5.87%     5.87%          
Debt instrument, carrying amount                         $ 1,008,156   1,021,926 $ 1,008,156          
Periodic installments amount           $ 7,658                              
Debt issuance costs                         17,000   18,000 $ 17,000          
Rbs Citizens [Member] | Term Loan [Member]                                          
Debt Instrument [Line Items]                                          
Line of credit, maximum borrowing amount                                         $ 450,000
Interest rate additional rate above LIBOR                       3.00%                  
Debt instrument, carrying amount                       $ 42,594                  
Periodic installments amount                       $ 887                  
Debt instrument, term                       60 months                  
Rbs Citizens [Member] | Permanent Loan [Member]                                          
Debt Instrument [Line Items]                                          
Interest rate additional rate above LIBOR                   3.15%           3.59%          
Debt instrument, maturity date                   Jul. 31, 2019                      
Debt instrument, final balloon payment                   $ 300,000                      
Debt instrument, carrying amount                         $ 397,747   405,247 $ 397,747     $ 450,000    
Periodic installments amount                   $ 450,000                      
Debt instrument, term                   5 years                      
Interest accrued in the period                   $ 2,500                      
Rbs Citizens [Member] | LIBOR [Member]                                          
Debt Instrument [Line Items]                                          
Interest rate additional rate above LIBOR                         3.75%                
Peoples Capital [Member] | Term Loan [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, carrying amount                         $ 755,812   819,681 755,812          
Citizens [Member] | Term Loan [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, carrying amount   $ 525,000                     435,810   460,448 $ 435,810          
Credit facility agreement, monthly principal payment   $ 9,591                                      
Interest rate on outstanding term loan   3.61%                                      
Debt instrument, term   60 months                                      
Bzdick Properties Limited Liability Company [Member] | Promissory Notes [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, maturity date             Aug. 31, 2021                            
Purchase price for Real Estate acquired             $ 1,500,000                            
Purchase price for Real Estate acquired, loan obtained           $ 1,200,000 $ 1,200,000                            
DSS Technology Management [Member] | Investment Agreement [Member]                                          
Debt Instrument [Line Items]                                          
Debt instrument, carrying amount                                   $ 1,000,000      
Interest accrued in the period                         $ 151,000   132,000            
Advances       $ 4,500,000                     4,350,000            
Fixed return equity interests     $ 150,000 199,000                     459,000     100,000      
Long-term debt, net     1,350,000 1,791,000                     $ 4,041,000     $ 900,000      
Fair value of contingent consideration       10,000                                  
Proceeds from return received     $ 1,500,000 $ 2,000,000                                  
Payments of long-term debt               $ 150,000                          
XML 39 R27.htm IDEA: XBRL DOCUMENT v3.4.0.3
Stockholders' Equity (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Number of options cancelled an aggreagete options to purchase shares 166,667  
Stock compensation expense $ 74,000 $ 325,000
Basic and diluted $ (0.01) $ (0.04)
Stock based compensation for stock options 536,000  
Senior Management [Member]    
Number of options cancelled an aggreagete options to purchase shares 1,200,000  
Exercise prices $ 3.00  
XML 40 R28.htm IDEA: XBRL DOCUMENT v3.4.0.3
Supplemental Cash Flow Information - Schedule of Supplemental Cash Flow Information (Details) - USD ($)
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Supplemental Cash Flow Information [Abstract]    
Cash paid for interest $ 58,000 $ 58,000
Non-cash investing and financing activities: Loss from change in fair value of interest rate swap derivative $ (26,000) $ (16,000)
XML 41 R29.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information (Details Narrative)
3 Months Ended
Mar. 31, 2016
Segment
Segment Reporting [Abstract]  
Number of operating segment 4
XML 42 R30.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information - Schedule of Operations by Reportable Segment (Details) - USD ($)
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Dec. 31, 2015
Segment Reporting Information [Line Items]      
Revenues from external customers $ 4,338,986 $ 3,429,531  
Depreciation and amortization 360,501 379,593  
Stock based compensation 73,724 324,598  
Net income (loss) to common stockholders (624,022) (1,646,693)  
Identifiable assets 14,951,490 26,137,000 $ 15,600,851
Document Security Systems Packaging Group [Member]      
Segment Reporting Information [Line Items]      
Revenues from external customers 2,927,000 2,082,000  
Depreciation and amortization 153,000 128,000  
Stock based compensation 17,000 17,000  
Net income (loss) to common stockholders 244,000 41,000  
Identifiable assets 9,345,000 8,654,000  
Document Security Systems Plastics Group [Member]      
Segment Reporting Information [Line Items]      
Revenues from external customers 1,048,000 938,000  
Depreciation and amortization 29,000 34,000  
Stock based compensation 10,000 10,000  
Net income (loss) to common stockholders 111,000 87,000  
Identifiable assets 2,178,000 2,132,000  
Document Security Systems Technology Management [Member]      
Segment Reporting Information [Line Items]      
Revenues from external customers 364,000 410,000  
Depreciation and amortization 178,000 216,000  
Stock based compensation 13,000 33,000  
Net income (loss) to common stockholders (565,000) (1,055,000)  
Identifiable assets $ 2,767,000 $ 13,894,000  
Corporate [Member]      
Segment Reporting Information [Line Items]      
Revenues from external customers  
Depreciation and amortization $ 1,000 $ 2,000  
Stock based compensation 34,000 265,000  
Net income (loss) to common stockholders (414,000) (720,000)  
Identifiable assets $ 661,000 $ 1,457,000  
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