DSS, INC. - Quarter Report: 2009 June (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30,
2009
1-32146
Commission
file number
DOCUMENT
SECURITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
New
York
|
16-1229730
|
|
|
(State
of incorporation)
|
(IRS
Employer Identification
Number)
|
28
Main Street East, Suite 1525
Rochester, NY 14614
(Address
of principal executive office)
(585)
325-3610
(Registrant's
telephone number)
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 1934during 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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files)*
Yes ¨ No ¨
* The
issuer has not yet been phased into the interactive data
requirements
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 definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ 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
Applicable
only to corporate issuers
As of
August 10, 2009 (the most recent practicable date), there were 14,690,056 shares
of the issuer's Common Stock, $0.02 par value per share,
issued.
FORM
10-Q
TABLE
OF CONTENTS
|
PART
I
|
FINANCIAL
INFORMATION
|
||
|
Item
1
|
Financial
Statements
|
||
|
Consolidated
Balance Sheets
|
3
|
||
|
Consolidated
Statements of Operations
|
4
|
||
|
Consolidated
Statements of Cash Flows
|
5
|
||
|
Notes
to Interim Consolidated Financial Statements
|
6
|
||
|
Item
2
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
Item
4T
|
Controls
and Procedures
|
22
|
|
|
PART
II
|
OTHER
INFORMATION
|
||
| Item 1 | Legal Proceedings | 23 | |
|
Item
1A
|
Risk
Factors
|
24
|
|
|
Item
2
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
26
|
|
|
Item
3
|
Defaults
upon Senior Securities
|
26
|
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
27
|
|
|
Item
5
|
Other
Information
|
27
|
|
|
Item
6
|
Exhibits
|
27
|
|
|
SIGNATURES
|
2
ITEM 1 - FINANCIAL
STATEMENTS
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
As
of
|
June
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 717,822 | $ | 87,820 | ||||
|
Restricted
cash
|
37,978 | 131,004 | ||||||
|
Accounts
receivable, net of allowance of $36,000 ($50,000-
2008)
|
1,180,391 | 1,284,208 | ||||||
|
Inventory
|
326,714 | 359,034 | ||||||
|
Loans
to employees
|
57,781 | 67,781 | ||||||
|
Prepaid
expenses and other current assets
|
109,010 | 75,066 | ||||||
|
Total
current assets
|
2,429,696 | 2,004,913 | ||||||
|
Fixed
assets, net
|
1,458,553 | 1,517,357 | ||||||
|
Other
assets
|
278,624 | 264,529 | ||||||
|
Goodwill
|
1,396,734 | 1,396,734 | ||||||
|
Other
intangible assets, net
|
2,263,937 | 2,873,789 | ||||||
|
Total
assets
|
$ | 7,827,544 | $ | 8,057,322 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,617,722 | $ | 1,411,942 | ||||
|
Accrued
expenses & other current liabilities
|
1,262,847 | 1,312,745 | ||||||
|
Deferred
revenue & customer deposits
|
32,696 | 30,193 | ||||||
|
Revolving
notes from related parties
|
3,213,000 | - | ||||||
|
Short-term
debt, net of discount of $122,000 ($247,000 -2008)
|
777,966 | 652,511 | ||||||
|
Current
portion of capital lease obligations
|
78,828 | 78,367 | ||||||
|
Total
current liabilities
|
6,983,059 | 3,485,758 | ||||||
|
Revolving
notes from related parties
|
- | 2,283,000 | ||||||
|
Capital
lease obligations
|
259,543 | 210,365 | ||||||
|
Deferred
tax liability
|
61,354 | 51,878 | ||||||
|
Commitments
and contingencies (see Note 8)
|
||||||||
|
Stockholders'
equity
|
||||||||
|
Common
stock, $.02 par value; 200,000,000 shares
authorized, 14,465,062 shares issued and outstanding
(14,369,764 in 2008) (325,000 subscribed in 2008)
|
289,301
|
287,395
|
||||||
|
Additional
paid-in capital
|
34,652,399 | 35,538,695 | ||||||
|
Common
stock subscriptions receivable
|
- | (1,300,000 | ) | |||||
|
Accumulated
deficit
|
(34,418,112 | ) | (32,499,769 | ) | ||||
|
Total
stockholders' equity
|
523,588 | 2,026,321 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 7,827,544 | $ | 8,057,322 | ||||
See
accompanying notes
3
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(unaudited)
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Security
and commercial printing
|
$ | 1,941,818 | $ | 1,155,032 | $ | 4,358,509 | $ | 2,087,253 | ||||||||
|
Technology
license royalties and digital solutions
|
191,334 | 900,154 | 414,574 | 1,236,915 | ||||||||||||
|
Legal
products
|
114,871 | 159,299 | 253,496 | 332,432 | ||||||||||||
|
Total
Revenue
|
2,248,023 | 2,214,485 | 5,026,579 | 3,656,600 | ||||||||||||
|
Costs
of revenue
|
||||||||||||||||
|
Security
and commercial printing
|
1,496,256 | 796,069 | 3,030,324 | 1,391,702 | ||||||||||||
|
Technology
license royalties and digital solutions
|
3,507 | 3,507 | 7,014 | 7,014 | ||||||||||||
|
Legal
products
|
59,757 | 74,320 | 122,819 | 171,416 | ||||||||||||
|
Total
costs of revenue
|
1,559,520 | 873,896 | 3,160,157 | 1,570,132 | ||||||||||||
|
Gross
profit
|
688,503 | 1,340,589 | 1,866,422 | 2,086,468 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling,
general and administrative
|
1,139,831 | 1,962,230 | 2,703,218 | 4,038,346 | ||||||||||||
|
Research
and development
|
74,676 | 134,451 | 162,092 | 249,230 | ||||||||||||
|
Impairment
of patent defense costs
|
- | - | - | 291,581 | ||||||||||||
|
Amortization
of intangibles
|
323,675 | 537,429 | 647,132 | 1,064,170 | ||||||||||||
|
Operating
expenses
|
1,538,182 | 2,634,110 | 3,512,442 | 5,643,327 | ||||||||||||
|
Operating
loss
|
(849,679 | ) | (1,293,521 | ) | (1,646,020 | ) | (3,556,859 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
- | 5 | - | 85 | ||||||||||||
|
Gain
(loss) on foreign currency transactions
|
11,782 | (12,557 | ) | 11,782 | (24,186 | ) | ||||||||||
|
Interest
expense
|
(68,420 | ) | (33,041 | ) | (149,174 | ) | (53,890 | ) | ||||||||
|
Amortizaton
of note discount
|
(63,756 | ) | - | (125,455 | ) | - | ||||||||||
|
Other
income
|
- | 125,795 | - | 125,795 | ||||||||||||
|
Loss
before income taxes
|
(970,073 | ) | (1,213,319 | ) | (1,908,867 | ) | (3,509,055 | ) | ||||||||
|
Income
tax expense
|
4,738 | 4,784 | 9,476 | 9,522 | ||||||||||||
|
Net
loss
|
$ | (974,811 | ) | $ | (1,218,103 | ) | $ | (1,918,343 | ) | $ | (3,518,577 | ) | ||||
|
Net
loss per share -basic and diluted:
|
$ | (0.07 | ) | $ | (0.09 | ) | $ | (0.13 | ) | $ | (0.26 | ) | ||||
|
Weighted
average common shares outstanding, basic and diluted
|
14,417,699 | 13,690,545 | 14,397,942 | 13,672,555 | ||||||||||||
See
accompanying notes
4
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the Six Months Ended June 30,
(unaudited)
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,918,343 | ) | $ | (3,518,577 | ) | ||
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
819,852 | 1,222,084 | ||||||
|
Stock
based compensation
|
(116,756 | ) | 1,056,018 | |||||
|
Impairment
of patent defense costs
|
- | 291,581 | ||||||
|
Amortization
of note discount
|
125,455 | - | ||||||
|
Decrease
in restricted cash
|
- | 3,561 | ||||||
|
(Increase)
decrease in assets:
|
||||||||
|
Accounts
receivable
|
103,817 | (349,422 | ) | |||||
|
Inventory
|
32,320 | 15,497 | ||||||
|
Prepaid
expenses and other assets
|
(38,039 | ) | (164,027 | ) | ||||
|
Increase
(decrease) in liabilities:
|
||||||||
|
Accounts
payable
|
205,781 | 164,342 | ||||||
|
Accrued
expenses and other liabilities
|
(24,056 | ) | 186,802 | |||||
|
Deferred
revenue
|
2,503 | (544,934 | ) | |||||
|
Net
cash used by operating activities
|
(807,466 | ) | (1,637,075 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Decrease
in restricted cash
|
93,026 | - | ||||||
|
Purchase
of fixed assets
|
(18,255 | ) | (189,802 | ) | ||||
|
Purchase
of other intangible assets
|
(37,280 | ) | (756,626 | ) | ||||
|
Net
cash used by investing activities
|
37,491 | (946,428 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Borrowing
on revolving notes- related parties
|
930,000 | 1,558,000 | ||||||
|
Borrowings
on short-term credit facility
|
- | 500,000 | ||||||
|
Payments
of capital lease obligations
|
(46,023 | ) | (56,067 | ) | ||||
|
Issuance
of common stock, net
|
516,000 | 800,000 | ||||||
|
Net
cash provided by financing activities
|
1,399,977 | 2,801,933 | ||||||
|
Net
increase in cash and cash equivalents
|
630,002 | 218,430 | ||||||
|
Cash
and cash equivalents beginning of period
|
87,820 | 742,468 | ||||||
|
Cash
and cash equivalents end of period
|
$ | 717,822 | $ | 960,898 | ||||
See
accompanying notes.
5
NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2009
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
8.03 of Regulation S-X for smaller reporting companies. Accordingly, these
statements do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements. In
the opinion of management, the accompanying balance sheets and related interim
statements of operations and cash flows include all adjustments, consisting only
of normal recurring items, necessary for their fair presentation in accordance
with U.S. generally accepted accounting principles. All significant intercompany
transactions have been eliminated.
Interim
results are not necessarily indicative of results expected for a full year. For
further information regarding Document Security Systems, Inc (the “Company”)
accounting policies, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the fiscal year ended
December 31, 2008.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. These financial statements have not been updated for
subsequent events occurring after August 14, 2009.
Reclassifications
-Certain prior period amounts in the accompanying consolidated financial
statements and notes thereto have been reclassified to current period
presentation. These classifications had no effect on the results of
operations for the period presented. These reclassifications include
the combination of technology license royalties and digital solutions revenue
items into a single revenue item and cost of sale item.
Restricted Cash
- In July
2007, the Company established a restricted cash balance of 87,500 British
pounds, as collateral for a deed of guarantee that was required by the English
Court of Appeals in order for the Company to pursue an appeal in that court. On
March 19, 2008, the Company was notified that its appeal was denied and that the
Company owed the European Central Bank, the successful party in the appeal,
87,500 British pounds. On May 14, 2008, the Company made a payment of
87,500 British pounds to the European Central Bank as an interim payment of the
appeal costs pending final assessment by the Court which was made on July 31,
2009. On June 21, 2009, the Company received 64,483 pounds
(approximately $107,000) as a partial release of the restricted
funds. As of June 30, 2009, approximately 23,000 pounds
(approximately $38,000 as of June 30, 2009) remained as restricted
cash.
Fair
Value of Financial Instruments - Statements of Financial Accounting
Standards No. 107, “Disclosures about Fair Value of Financial Instruments,”
requires disclosure of fair value information about financial instruments. These
financial instruments include cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, revolving note payable and capital
leases. Fair values were assumed to approximate carrying values for these
financial instruments since they are short-term in nature and their carrying
amounts approximate fair values or they are receivable or payable on demand. The
fair value of the Company’s capitalized lease obligations and revolving note
payable is estimated based upon the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities. The carrying value approximates the fair value of these
debt instruments as of June 30, 2009.
6
Continuing
Operations - The Company has incurred
significant net losses in previous years. The Company’s ability to
fund its capital requirements 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 commercial and security printing and plastic
card sales and (ii) increase sales of the Company’s digital
products. While the Company has approximately $718,000 in cash and
approximately $387,000 of funds available to it under various credit facilities
as of June 30, 2009, the Company may still need to raise additional
funds in the future in order to fund its working capital needs. In
December 2008, the Company borrowed $900,000 of short term debt in conjunction
with its acquisition of substantially all of the assets of DPI, a commercial
printer. The Company expects that existing working capital at DPI
will be sufficient to satisfy the payment of the $900,000 when due, in December
2009 or that the Company can refinance this debt prior to its maturity.
Furthermore, the Company has two credit facilities with related parties that
will be due in January 2010. The total amount due may be up to $3,600,000
if the Company cannot generate sufficient cash from operations to pay these
credit facilities prior to their due dates. In the event that the Company
cannot pay these credit facilities when due, the Company believes that it will
be able to extend the terms of these notes, or negotiate with the lenders other
means of satisfying these credit facilities, including the payment of amounts
due in the form of the Company’s equity. Otherwise, the Company will look
to raise capital to satisfy these obligations. The
Company believes that it has access to capital based on demand for its common
stock. Thru July 2009 the Company has raised $805,000 during 2009
from the sale of its common stock and believes that it will continue to be able
to utilize this source of funds in the future. There can be no assurance
that such additional financing, will be available on terms acceptable to the
Company or at all. Failure to raise the funds necessary to finance future
cash requirements would adversely affect the Company’s ability to pursue its
strategy and could negatively affect operations in future periods. The
accompanying financial statements do not reflect any adjustments that may be
necessary in the event the Company is unsuccessful in its fundraising
efforts.
Recent Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS 141(r), Business
Combinations, which addresses the accounting and disclosure for
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in a business combination. In April 2009, the FASB issued FASB Staff
Position No. FAS 141(r)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies (FSP FAS 141(r)-1), which amended certain provisions of
SFAS 141(r) related to the recognition, measurement, and disclosure of assets
acquired and liabilities assumed in a business combination that arise from
contingencies. SFAS 141(r) and FSP FAS 141(r)-1 became effective in the first
quarter of 2009, and did not have a material impact on the consolidated
financial statements.
In
June 2008, the EITF reached a consensus in Issue No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock” (“EITF 07-5”). This Issue addresses the determination of
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock, which is the first part of the scope exception in paragraph 11(a) of SFAS
133. EITF 07-5 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early application is not
permitted. The adoption of EITF 07-5 during the first quarter of 2009 did not
have a material impact on the consolidated financial statements.
In
April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4),
which provides additional guidance for estimating fair value when the volume and
level of activity for the asset or liability have significantly decreased. FSP
157-4 also provides additional guidance on circumstances that may indicate that
a transaction is not orderly. This guidance is effective for interim reporting
periods ending after June 15, 2009. The adoption of FSP 157-4
during the second quarter of 2009 did not have a material impact on the
consolidated financial statements.
In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures About Fair Value
of Financial Instruments (FSP 107-1 and APB 28-1), which require
disclosures about fair value of financial instruments for interim reporting
periods. This guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of FSP No. 107-1 and APB 28-1 during
the second quarter of 2009 did not have a material impact on the consolidated
financial statements.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), to
incorporate accounting guidance that originated as auditing standards into the
body of authoritative literature issued by the FASB. SFAS No. 165
requires the evaluation of subsequent events through the date the financial
statements are issued or are available for issue and the disclosure of the date
through which subsequent events were evaluated and the basis for that
date. This statement is effective for interim and annual financial
periods ending after June 15, 2009. The Company adopted the
requirements of SFAS No. 165 for the period ending June 30, 2009. The
adoption of SFAS No. 165 did not have a significant impact on our consolidated
financial position, results of operations or cash flows. See Note 1 –
Organization and Operations of the Company.
FASB
Codification. In July 2009, the FASB issued SFAS No. 168, “The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (“GAAP”) (as amended)” (“SFAS No. 168”), making the FASB
Accounting Standards Codification the single source of authoritative
nongovernmental U.S. GAAP. The Codification is not intended to change
GAAP, however, it will represent a significant change in researching issues and
referencing U.S. GAAP in financial statements and accounting
policies. This statement is effective for financial statements issued
for interim and annual periods ending after September 15, 2009.
7
2. Inventory
Inventory
approximately consisted of the following:
|
June
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
|
|||||||
|
Finished
Goods
|
$ | 149,000 | $ | 138,000 | ||||
|
Work
in process
|
43,000 | 121,000 | ||||||
|
Raw
Materials
|
135,000 | 100,000 | ||||||
| $ | 327,000 | $ | 359,000 | |||||
3. Other
Intangible
Assets
Other
intangible assets are comprised of the following:
|
June 30, 2009 (unaudited)
|
December 31, 2008
|
|||||||||||||||||||||||||
|
Useful Life
|
Gross Carrying
Amount
|
Accumulated
Amortizaton
|
Net Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortizaton
|
Net Carrying
Amount
|
||||||||||||||||||||
|
Royalty
rights
|
5
years
|
$ | 90,000 | $ | 90,000 | $ | - | $ | 90,000 | $ | 90,000 | $ | - | |||||||||||||
|
Other
intangibles
|
5
years
|
666,300 | 468,847 | 197,453 | 666,300 | 405,424 | 260,876 | |||||||||||||||||||
|
Patent
acquisition and defense costs
|
Varied
(1)
|
4,729,892 | 3,300,334 | 1,429,558 | 4,729,889 | 2,732,422 | 1,997,467 | |||||||||||||||||||
|
Patent
application costs
|
Varied
(2)
|
756,153 | 119,227 | 636,926 | 718,875 | 103,429 | 615,446 | |||||||||||||||||||
| $ | 6,242,345 | $ | 3,978,408 | $ | 2,263,937 | $ | 6,205,064 | $ | 3,331,275 | $ | 2,873,789 | |||||||||||||||
(1)-
patent rights are amortized over their expected useful life which is
generally the legal life of the patent. As of June 30, 2009 the
weighted average remaining useful life of these assets in service was 1.5
years.
(2)-
patent rights are amortized over their expected useful life which is
generally the legal life of the patent. As of June 30, 2009 the
weighted average remaining useful life of these assets in service was 14.4
years.
4.
Short Term and Long Term Debt
Long Term Revolving Notes- Related
Parties- On
January 4, 2008, the Company entered into a Credit Facility Agreement with
Fagenson & Co., Inc., as agent, a related party to Robert B. Fagenson, the
Chairman of the Company's Board of Directors. Under the Fagenson Credit
Agreement, the Company can borrow up to a maximum of $3,000,000 from time to
time up to and until January 4, 2010. The advances are generally
limited to $400,000 unless otherwise mutually agreed upon by both parties per
fiscal quarter, with the exception of $600,000 that can be advanced at any time
for patent litigation related bills. Any amount borrowed by the
Company pursuant to the Fagenson Credit Agreement will have an annual interest
rate of 2% above LIBOR and will be secured by the Common Stock of Plastic
Printing Professionals, Inc., (“P3”) the Company's wholly owned
subsidiary. Interest is payable quarterly in arrears and the
principal is payable in full at the end of the term under the Fagenson Credit
Agreement. In addition, on January 4, 2008, the Company also entered
into a Credit Facility Agreement with Patrick White, the Company's Chief
Executive Officer and a member of the Board of Directors. Under the
White Credit Agreement, the Company can borrow up to $600,000 from time to time
up to and until January 4, 2010. Any amount borrowed by the Company
pursuant to the White Credit Agreement will have an annual interest rate of 2%
above LIBOR and is secured by the accounts receivable of the Company, excluding
the accounts receivable of P3. Interest is payable quarterly in
arrears and the principal is payable in full at the end of the term under the
White Credit Agreement. Mr. White can accept common stock as
repayment of the loan upon a default. Under the terms of the
agreements the Company is required to comply with various
covenants. As of June 30, 2009, the Company was in default of both
agreements due to a failure to pay interest when due. Both Fagenson
& Co., Inc. and Patrick White have waived the defaults through January 1,
2010.
8
As of
June 30, 2009, the Company had outstanding $450,000 under the White Credit
Agreement, and $2,763,000 under the Fagenson Credit
Agreement. Interest expense for the first six months of 2009 amounted
to approximately $58,000 for these agreements. As of June 30, 2009,
approximately $112,000 of interest expense is included in accrued
expenses.
Short-Term Debt- On December
18, 2008, the Company’s wholly owned subsidiary, Secuprint, Inc. (dba DPI
Secuprint, Inc.) entered a Secured Promissory Note with Baum Capital
Investments Inc. (“Baum”) in the principal amount of up to $900,000 to pay for
most of the cash portion of the purchase price of the Company’s acquisition of
substantially all of the assets of DPI of Rochester, LLC. The Secured
Promissory Note has a one-year term, is secured by all of the assets of DPI
Secuprint and has an annual interest rate of 15%, with a reduction to 12%,
depending on whether certain conditions which the Company met after
three months. The note is subject to pre-payment provisions if,
among other provisions, DPI Secuprint’s cash receipts do not exceed its cash
expenditures for any two consecutive months during the term. As of
June 30, 2009, the Company believes that it is in compliance with all of the
covenants of the Note. Interest expense for the first six
months of 2009 amounted to approximately $58,000 for this agreement, of which
approximately $9,000 is included in accrued expenses as of June 30,
2009.
In
conjunction with the Baum Note, the Company issued warrants to purchase up to a
total of 250,000 shares of the Company’s common stock at an average price of
$2.00 per share. The warrants are exercisable as of February 16, 2009
and expire on December 17, 2013. The fair value of the warrants of
approximately $256,000 was determined using the Black Scholes option pricing
model, and was recorded as discount on debt and will be amortized over the term
of the Note. Amortization of approximately $125,000 was
recorded in the first six months of 2009.
5.
Shareholders’ Equity
Restricted Stock
– As of June 30, 2009, there are 50,000 unvested restricted shares
granted to an employee that vests through December 2013. In addition,
there are 45,000 restricted shares that will vest only upon the occurrence of
certain events prior to May 3, 2012, which include, among other things a change
of control of the Company or other merger or acquisition of the Company, the
achievement of certain financial goals, including among other things a
successful result of the Company’s patent infringement lawsuit against the
European Central Bank. These 45,000 shares, if vested, would
result in the recording of stock based compensation expense of approximately
$563,000, the grant date fair value, over the period beginning when any of the
contingent vesting events is deemed to be probable over the expected requisite
service period. As of June 30, 2009, vesting is not considered
probable and no compensation expense has been recognized related to the
performance grants. During the first six months of 2009,
the Company retired 212,500 of unvested restricted stock as the result of the
resignations of two employees.
Stock
Subscription Agreement - On June 3, 2009, the Company and Walton Invesco,
Inc. executed a letter agreement terminating the parties' Share Purchase
Agreement dated June 25, 2008 and any obligations outstanding thereunder. Under
the Share Purchase Agreement, Walton had agreed to purchase 350,000 shares of
the Company's Common Stock for $1,400,000, or $4.00 per share, payable in five
installments over a two-year period. The first installment of
$100,000 was paid. A second payment installment in the amount of
$300,000 was due on December 25, 2008, but was not paid. As a result,
the parties agreed to terminate the Share Purchase Agreement which resulted in
the cancellation of 325,000 shares related to the subscription amounting to
$1,300,000 as of June 3, 2009.
Stock Issued in
Private Placements - In June, 2008 the Company entered into two Share
Purchase Agreements pursuant to which the Company agreed to sell a total of
500,000 shares of the Company’s common stock for an aggregate purchase price of
$2,000,000. Pursuant to the terms of the first Agreement, the Company sold
150,000 shares of Common Stock to the Purchaser for $600,000 payable on June 25,
2008. Pursuant to the terms of the first Agreement, the Purchaser could not sell
the 150,000 shares of Common Stock purchased thereunder earlier than June 25,
2009. Pursuant to the terms of the second Agreement, the Company sold
350,000 shares of Common Stock for $1,400,000, with $100,000 payable on June 25,
2008 and the remaining $1,300,000 payable in six-month installments over a
two-year period which was cancelled on June 3,2009 as per
above.
9
Between
May 29, 2009 and June 22, 2009, the Company sold 56 investment units in a
private placement at a price of $10,000 per unit for aggregate proceeds of
$560,000 less $44,000 in expenses consisting of 399,952 shares of common stock
and warrants to purchase an aggregate of 79,990 shares of common
stock. Each investment unit consisted of 7,142 shares of its common
stock and five-year warrants to purchase up to an aggregate of 1,427 shares of
its common stock at an exercise price of $2.00 per share. The
estimated fair market value of these warrants was determined using the Black
Scholes option pricing model at approximately $80,000. On July 15,
2009, the Company sold 24.5 investment units for $10,000 per unit for gross cash
proceeds of $245,000, consisting of 174,988 shares of Common Stock and Warrants
to purchase an aggregate of 34,998 shares of Common Stock.
Stock
Options – During the six months ended June 30, 2009, the Company issued
options to purchase 40,000 of its common shares at an exercise price of $1.86
per share to non-employee directors pursuant to the 2004 Non-Employee Officer
Director Stock Option Plan that vest at the end of one year of service on the
Company’s Board of Directors. The fair value of these options
amounted to approximately $28,000 determined by utilizing the Black Scholes
option pricing model. In addition, the Company issued options to
purchase 120,000 of its common shares at an exercise price of $4.00 per share
under the Company’s 2004 Employees’ Stock Option Plan to certain employees,
including 50,000 options to its acting chief financial officer and 50,000
options to its vice president of operations who is also a board
member. The fair value of these options amounted to approximately
$47,000 determined by utilizing the Black Scholes option pricing model. The
Company records stock-based payment expense related to these options based on
the grant date fair value in accordance with FASB 123R. During the
six months ended June 30, 2009, the Company cancelled approximately 168,000
unvested options during the first six months of 2009 due to employee
terminations.
Stock
Warrants – During the six
months ended June 30, 2008, the Company received $100,000 in proceeds from the
exercise of warrants to purchase 50,000 shares of our common
stock.
Stock-Based
Compensation - Stock-based
compensation includes expense charges for all stock-based awards to employees,
directors and consultants. Such awards include option grants, warrant grants,
and restricted stock awards. During the six months ended June
30, 2009, the Company had a negative stock compensation expense of approximately
$117,000 (positive stock-based compensation expense $1,056,000- 2008) as
current-period stock based compensation expense was more than offset by
reversals of previously recorded stock-based compensation expense for stock
options and restricted shares issued to the Company’s employees which terminated
unvested due to employee terminations that occurred during the first six months
of 2009.
As of
June 30, 2009, there was approximately $256,000 of total unrecognized
compensation costs (excluding the $563,000 that vest upon the occurrence of
certain events) related to non-vested options and restricted stock granted under
the Company’s stock option plans which the Company expects to vest over a period
of not to exceed five years.
6. Impairment
of Patent Defense Costs and Other Income
On March
19, 2008, the Company received notification that its appeal of the invalidation
of its European Patent 455750B1 in the UK was not successful. As
result of the adverse court decision, the Company recognized an impairment loss
of $292,000 associated with the U.K appeal as of March 31, 2008. The
impairment loss includes a judgment for reimbursement of estimated counterpart
legal fees. On July 31, 2009, the UK court made the final assessment
of costs for the UK patent validity case due from the Company to the ECB of
356,490 pounds, of which the Company owed 178,989 pounds (approximately $296,000
as of June 30, 2009), which amount was included in accrued expenses as of June
30, 2009. On July 1, the Company paid the 64,483 pounds to ECB as a
interim payment towards the fees due.
On May
31, 2008, the Company was awarded a judgment of approximately $126,000 pursuant
to a positive judgment for the Company in its counterclaim in the matter “Frank
LaLoggia v. Document Security Systems, Inc”, which the Company won in June
2006. The Company expects to collect the full amount of the
judgment.
7.
Earnings Per Share
Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted earnings
per share is computed by including the number of additional shares that would
have been outstanding if dilutive potential shares had been issued. In periods
of losses, diluted loss per share is computed on the same basis as basic loss
per share as the inclusion of any other potential shares outstanding would be
anti-dilutive. If the Company had generated earnings during the
six month period ended June 30, 2009, 233,165 (478,829- 2008) common
equivalent shares would have been added to the weighted average shares
outstanding to compute the diluted weighted average shares outstanding. Options
to purchase 1,612,272 shares (1,324,343- 2008) of common stock for the six month
period ended June 30, 2009 that could potentially dilute basic earnings per
share in the future were excluded from the calculation of diluted net loss per
share because their inclusion would have been
anti-dilutive.
10
8.
Commitments and Contingencies
Legal
Matters -On
August 1, 2005, the Company commenced a suit against the European Central Bank
(“ECB”) alleging patent infringement by the ECB and claimed unspecified damages.
We brought the suit in the European Court of First Instance in
Luxembourg. We alleged that all Euro banknotes in circulation
infringe the Company European Patent 0 455 750B1 (the “Patent”), which covers a
method of incorporating an anti-counterfeiting feature into banknotes or similar
security documents to protect against forgeries by digital scanning and copying
devices. The Court of First Instance ruled on September 5, 2007 that
it does not have jurisdiction to rule on the patent infringement claim, and also
ruled that we will be required to pay attorneys and court fees of the
ECB. The ECB formally requested the Company to pay attorneys and
court fees in the amount of Euro 93,752 ($131,000 as of June 30, 2009), which,
unless the amount is settled will be subject to an assessment procedure that
will not likely be concluded until approximately the latter half of 2009, which
the Company will accrue as soon as the assessed amount, if any, is reasonably
estimatable.
On
March 24, 2006, the Company received notice that the ECB had filed a separate
claim in the United Kingdom and Luxembourg courts seeking the invalidation
of the Patent. Proceedings were commenced before the national courts
seeking revocation and declarations of invalidity of the Patent in each of the
Netherlands, Belgium, Italy, France, Spain, Germany and Austria. On
March 26, 2007, the High Court of Justice, Chancery Division, Patents Court in
London, England (the “English Court”) ruled that the Patent was deemed invalid
in the United Kingdom, and on March 19, 2008 this decision was upheld on
appeal. The English Court rejected the ECB’s allegations of
invalidity based on lack of novelty, lack of inventive step and insufficiency,
but held that the patent was invalid for added subject matter. The English
Court’s decision does not affect the validity of the Patent in other European
countries. As a result of these decisions, the Company was notified
of the final assessment of the reimbursable ECB costs for both court cases was
356,490 pounds, of which the Company had previously paid 177,500 pounds and owes
178,990 pounds (approximately $296,000 as of June 30, 2009), which amount was in
accrued expenses as of June 30, 2009.
On March
27, 2007 the Bundespatentgericht of the Federal Republic of Germany ruled that
the German part of the Patent was valid, having considered the English Court’s
decision. As a result of this ruling, the Company expects to be
awarded reimbursements for its costs associated with the German validity case,
which is Euro 44,692 ($63,000 at June 30, 2009), which the Company will
record when the amount, if any, is received. The ECB has filed an
appeal against that decision, which is not expected to be decided before
2010. On January 9, 2008 the French Court held that the Patent was
invalid in France for the same reasons given by the English
Court. The Company is required to pay de minimus attorneys’ fees of
the ECB as a result of the French decision. The Company filed an
appeal against the French decision on May 7, 2008. On March 12, 2008
the Dutch Court, having considered the English, German and French decisions,
ruled that the Patent is valid in the Netherlands. The ECB filed an
appeal against the Dutch decision on March 27, 2008. A trial was also held in
Madrid, Spain on June 3 and 5, 2008 and oral and written closing submissions
were made on July 19, 2008. A judgment is expected in the second half of
2009.
The
Patent has thus been confirmed to be valid and enforceable in two jurisdictions
(Germany and the Netherlands) that use the Euro as its national currency
allowing the Company or Trebuchet Capital Partners, on the Company’s behalf, to
proceed with infringement cases in these countries if we choose to do
so. Additional trials on the validity of the Patent are expected in
other European jurisdictions during 2009.
On August
20, 2008, the Company entered into an agreement with Trebuchet Capital Partners,
LLC (“Trebuchet”) under which Trebuchet has agreed to pay substantially all
of the litigation costs associated with pending validity proceedings initiated
by the European Central Bank (“ECB”) in eight European countries relating to the
Company’s European Patent 0 455 750B1 that the Company has claimed
the ECB infringed in printing of the Euro currency (the “Patent”). Trebuchet
also agreed to pay substantially all of the litigation costs associated with
future validity challenges filed by the ECB or other parties, provided that
Trebuchet elects to assume the defense of any such challenges, in its sole
discretion, and patent infringement suits filed against the ECB and certain
other alleged infringers of the Patent, all of which suits may be brought at the
sole discretion of Trebuchet and may be in the name of the Company, Trebuchet or
both. The Company provided Trebuchet with the sole and exclusive right to manage
infringement litigation relating to the Patent in Europe, including the right to
initiate litigation in the name of the Company, Trebuchet or both and to choose
whom and where to sue, subject to certain limitations set forth in the agreement
under the terms of the Agreement, and in consideration for Trebuchet's funding
obligations, the Company assigned and transferred a 49% interest of the
Company's rights, title and interest in the Patent to Trebuchet which allows
Trebuchet to have a separate and distinct interest in and share of the Patent,
along with the right to sue and recover in litigation, settlement or otherwise
to collect royalties or other payments under or on account of the Patent. In
addition, the Company and Trebuchet have agreed to equally share all proceeds
generated from litigation relating to the Patent, including judgments and
licenses or other arrangements entered into in settlement of any such
litigation. Trebuchet is also entitled to recoup any litigation expenses
specifically awarded to the Company in such actions.
11
On
January 31, 2003, the Company commenced an action, unrelated to the above ECB
litigation, entitled New Sky Communications, Inc., As Successor-In-Interest To
Thomas M. Wicker, Thomas M.Wicker Enterprises, Inc. and Document Security
Consultants V. Adler Technologies, Inc. N/K/A Adlertech International, Inc. and
Andrew McTaggert (United States District Court, Western District Of New York
Case No.03-Cv-6044t(F)) regarding certain intellectual property in which the
Company has an interest. The Company commenced this action alleging various
causes of action against Adler Technologies, Inc. and Andrew McTaggert for
breach of contract, breach of the duty of good faith and fair dealing, various
business torts, including unfair competition and declaratory relief. Adler
distributes and supplies anti-counterfeit document products and Mr. McTaggert is
a principal of Adler. Adler had entered into several purported agreements with
Thomas M. Wicker Enterprises and Document Security Consultants, both of which
the Company acquired in 2002. These alleged agreements, generally, would have
authorized Adler to manufacture in Canada the Company’s “Checkmate®” patented
system for verifying the authenticity of currency and documents. Other purported
agreements were signed between these parties and Thomas Wicker regarding other
technology claimed to have been owned by Wicker and assigned to the
Company. Among other things, the Company contends that certain of the
purported agreements are not binding and/or enforceable. To the
extent any of them are binding and enforceable, the Company claims that Adler
has breached these purported agreements, failed to make an appropriate
accounting and payments under them, and may have exceeded the scope of its
license. Adler has denied the material allegations of the complaint and has
counterclaimed against the Company, claiming Adler owns or co-owns or has a
license to use certain of the Company’s technologies. In May 2005,
the Company filed a first amended and supplemental complaint adding Blanks/USA
and Raymond Maxon as additional defendants. In February 2007, the
Company filed a second amended and supplemental complaint adding Judith Wu
(McTaggert’s wife) and Arcis Digital Security, Inc. (a company in which Ms. Wu
is involved) as additional defendants. Maxon has asserted a
counterclaim against the Company contending that the Company’s purported
acquisition of a certain patent from Thomas Wicker in 2002 gave rise to an
alleged right on the part of Maxon to receive a portion of Thomas Wicker’s
proceeds from such acquisition. The Company has denied the material
allegations of all of the counterclaims. If Adler or Maxon is
successful, it may materially affect the Company, the Company’s financial
condition, and the Company’s ability to market and sell certain of the Company
technology and related products. This case is in discovery phase, and
it is too soon to determine how the various issues raised by the lawsuit will be
determined.
In
addition to the foregoing, we are subject to other legal proceedings that have
arisen in the ordinary course of business and have not been finally adjudicated.
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 our results of operations,
cash flows or our financial condition.
Contingent
Litigation Payment – In May 2005, the Company made an agreement with its
legal counsel in charge of the Company’s litigation with the European Central
Bank which capped the fees for all matters associated with that litigation at
$500,000 plus expenses, and a $150,000 contingent payment upon a successful
ruling or settlement on the Company’s behalf in that litigation. The
Company will record the $150,000 in the period in which the Company has
determined that a successful ruling or settlement is probable.
In
addition, pursuant to an agreement made in December 2004, the Company is
required to share the economic benefit derived from settlements, licenses or
subsequent business arrangements that the Company obtains from any infringer of
patents formerly owned by the Wicker Family. For infringement matters
involving certain U.S. patents, the Company will be required to disburse 30% of
the settlement proceeds. For infringement matters involving certain
foreign patents, the Company will be required to disburse 14% of the settlement
proceeds. These payments do not apply to licenses or royalties to
patents that the Company has developed or obtained from persons other than the
Wicker Family. As of June 30, 2009, there have been no settlement
amounts related to these agreements.
Contingent
Purchase Price -In December, 2008, the Company acquired substantially all
of the assets of DPI of Rochester, LLC (“DPI”) in which the Company guaranteed
up to $50,000 to certain parties depending on whether certain conditions
occurred within five years of the acquisition. As of June 30, 2009,
the Company considers the likelihood that the payment will be required as
remote.
Employment
agreements - In May 2008, the Company entered into a Separation Agreement
with its former President that, among other things, accelerated the vesting of
33,333 shares of restricted common stock of the Company that were previously
awarded to the former President pursuant to the Company’s 2004 Employee Stock
Option Plan so that such shares vested in equal monthly installments during the
immediately following ten months. The Separation Agreement further
provided that if the former President did not realize at least $212,000 in gross
proceeds from the sale of such 33,333 shares of restricted stock upon their
vesting, then the Company would pay the former President the amount that such
proceeds is less than $212,000 in cash or additional shares of common stock of
the Company. As of June 30, 2009, all 33,333 shares had vested
generating gross proceeds of approximately $99,000. The Company has
not finalized the terms of the settlement of the remaining amount due of
$113,000, which is recorded in accrued expenses as of June 30,
2009.
12
Operating Leases
- In March 2009, the Company, through its wholly-owned subsidiary DPI
Secuprint, entered into two operating lease agreements for production equipment
with Baum Capital Investments. The leases contain end of lease
residual values that aggregate a total of $800,000. Pursuant to
these lease agreements, the Company is subject to certain conditions that place
restrictions on the ability of DPI Secuprint to transfer cash or other assets to
its parent, Document Security Systems, or other subsidiaries, during the lives
of the leases. Total lease commitments associated with these leases
as of June 30, 2009 are as follows:
|
2009
|
165,522 | |||
|
2010
|
422,131 | |||
|
2011
|
440,348 | |||
|
2012
|
394,419 | |||
|
2013
|
274,175 | |||
|
Thereafter
|
545,921 | |||
|
Total
|
$ | 2,242,516 |
Other: On June 22, 2009, the Company's
Board of Directors approved a plan to sell and the Company entered into a
non-binding letter of intent to sell the assets of the
Company's wholly owned web property subsidiary commonly known as
“Legalstore.com”, to Internet Media Services, Inc. (“IMS”). Under the terms of
the Letter of Intent, IMS will acquire the Web property and related assets
commonly referred to as the LegalStore.com from the Company and as
payment will issue to the Company common stock of IMS equal to 30% of the
outstanding shares of IMS on the Closing Date. Within 180 days after the Closing
Date, or as soon as practicable, IMS intends to file a Registration Statement on
Form S-1 with the Securities and Exchange Commission ("SEC") registering certain
shares of IMS common stock, including the agreed number of shares of IMS common
stock to be issued to the Company under the Agreement. At which time, the
Company intends to declare the Record Date for the issuance of a shareholder
dividend of shares of IMS Common Stock, the number of which has yet to be
determined, to the beneficial share owners of Document Security Systems, Inc.
Common Stock on such Record Date. Completion of the transaction is subject to
entering into a definitive purchase agreement for the sale of the assets and the
satisfaction of any conditions and covenants contained therein. At this time the
parties have not entered into a definitive agreement for the transaction and
there can be no assurance that we will enter into such an agreement or complete
the transaction on acceptable terms or at all. In
accordance with FASB 144 guidance for long-lived assets to be exchanged for
nonmonetary assets, the Company accounts for the revenue and expenses of this
operation as a being held and used until such time that the sale takes
place.
9. Supplemental
Cash Flow Information
During the six months ended June 30,
2009, the Company entered into capitalized leases of
approximately $96,000 for production equipment at its commercial print
facility.
10.
Segment Information
The
Company's businesses are organized, managed and internally reported as four
operating segments. Three of these operating segments, Document
Security Systems, Plastic Printing Professionals, and DPI Secuprint, are engaged
in various aspects of developing and applying printing technologies and
procedures to produce, or allow others to produce, documents with a wide range
of features, including the Company’s patented technologies and trade
secrets. For the purposes of providing segment
information, these three operating segments have been aggregated into one
reportable segment in accordance with Financial Accounting Standards Board
(“FASB”) Statement No. 131- “Disclosures about Segments of an Enterprise and
Related Information”. A summary of the two segments
follows:
|
Commercial
Printing
|
License,
manufacture and sale of patented document security technologies, including
digital security print solutions, and general commercial printing,
primarily on paper and plastic. Comprises the operations of
Document Security Systems, Plastic Printing Professionals, and DPI
Secuprint, which the Company acquired on December 18,
2008.
|
|
|
Legal
Supplies
|
Sale
of specialty legal supplies, primarily to lawyers and law firms located
throughout the United States as
Legalstore.com.
|
Approximate
information concerning the Company’s operations by reportable segment for the
three and six months ended June 30, 2009 and 2008 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:
13
|
3 months ended June 30,
2009:
|
Legal
Supplies
|
Security and
Commercial
Printing
|
Corporate
|
Total
|
||||||||||||
|
Revenues
from external customers
|
$ | 115,000 | $ | 2,133,000 | $ | - | $ | 2,248,000 | ||||||||
|
Depreciation
and amortization
|
5,000 | 404,000 | 1,000 | 410,000 | ||||||||||||
|
Segment
profit (loss)
|
9,000 | (769,000 | ) | (215,000 | ) | (975,000 | ) | |||||||||
|
3 months ended June 30,
2008:
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 159,000 | $ | 2,055,000 | $ | - | $ | 2,214,000 | ||||||||
|
Depreciation
and amortization
|
4,000 | 611,000 | 1,000 | 616,000 | ||||||||||||
|
Segment
profit (loss)
|
27,000 | (536,000 | ) | (709,000 | ) | (1,218,000 | ) | |||||||||
|
6 months ended June 30,
2009:
|
Legal
Supplies
|
Security and
Commercial
Printing
|
Corporate
|
Total
|
||||||||||||
|
Revenues
from external customers
|
$ | 253,000 | $ | 4,774,000 | $ | - | $ | 5,027,000 | ||||||||
|
Depreciation
and amortization
|
10,000 | 808,000 | 2,000 | 820,000 | ||||||||||||
|
Segment
profit (loss)
|
27,000 | (1,105,000 | ) | (840,000 | ) | (1,918,000 | ) | |||||||||
|
6 months ended June 30,
2008:
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 332,000 | $ | 3,325,000 | $ | - | $ | 3,657,000 | ||||||||
|
Depreciation
and amortization
|
8,000 | 1,212,000 | 2,000 | 1,222,000 | ||||||||||||
|
Segment
profit (loss)
|
35,000 | (2,246,000 | ) | (1,308,000 | ) | (3,519,000 | ) | |||||||||
14
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 that could cause actual results to differ
materially from the results anticipated in the forward-looking statements,
including, without limitation, those contained in our Form 10-K for the year
ended December 31, 2008, and those described herein that could cause actual
results to differ materially from the results anticipated in the forward-looking
statements, and the following:
|
|
·
|
Our
limited operating history with our business
model
|
|
|
·
|
Our
ability to pay or renegotiate three secured credit facilities that have
large principal payments due in December 2009 and January
2010
|
|
|
·
|
Our
low cash balance and limited financing currently available to us, we may
in the near future have a number of obligations that we will be unable to
meet without generating additional income or raising additional
capital.
|
|
|
·
|
The
risk of insolvency or bankruptcy if we cannot generate additional income
or raise additional capital in the near
future
|
|
|
·
|
Further
cost reductions or curtailment in future operations due to our low cash
balance and negative cash flow
|
|
|
·
|
Our
ability to effect a financing transaction to fund our operations could
adversely affect the value of your
stock.
|
|
|
·
|
Our
limited cash resources may not be sufficient to fund continuing losses
from operations and the expenses of the current patent validity and patent
infringement litigations.
|
|
|
·
|
The
loss in current litigation in which we may lose certain of our technology
rights, which may affect our business
plan.
|
|
|
·
|
The
inability to adequately protect our intellectual
property
|
|
|
·
|
Intellectual
property infringement or other claims against us, our customers or our
intellectual property that could be costly to defend and result in our
loss of significant rights.
|
|
|
·
|
The
failure of our products and services to achieve market
acceptance
|
|
|
·
|
Changes
in document security technology and standards could render our
applications and services obsolete.
|
|
|
·
|
The
inability to compete in our market, especially against established
industry competitors with greater market presence and financial
resources.
|
|
|
·
|
The
inability to meet our growth strategy of acquiring complementary
businesses and assets and expanding our existing operations to include
manufacturing capabilities.
|
Overview
Document
Security Systems, Inc. (referred to in this report as “Document Security,” “we,”
“us,” “our” or “Company”) markets and sells products designed to protect
valuable information from unauthorized scanning, copying, and digital
imaging. We develop sophisticated security technologies that are
applied during the normal printing process and by virtually all printing methods
including traditional offset, gravure, flexo, digital or via the Internet on
paper, plastic, or packaging. We believe we are a leader of customized document
protection solutions for companies and governments worldwide. We hold
eight patents that protect our technology and have over a dozen patents in
process or pending. Our technologies and products are used by
federal, state and local governments, law enforcement agencies and are also
applied by a broad variety of industries, including financial institutions, high
technology and consumer goods, entertainment and gaming,
healthcare/pharmaceutical, defense and genuine parts industries. Our customers use our
technologies where there is a need for enhanced security for protection and
verification of critical financial instruments and vital records, or where there
are concerns of counterfeiting, fraud, identity theft, brand protection and
liability.
15
Our core
business is counterfeit prevention, brand protection and validation of authentic
print media, including government-issued documents, currency, private corporate
records and, securities. We believe we are a world leader in the
research and development of optical deterrent technologies and have
commercialized these technologies with a broad suite of products that offer our
customers a wide array of document security solutions to satisfy their specific
anti-counterfeiting requirements. Our technology can be used in
securing sensitive and critical documents such as currency, automobile titles,
spare parts forms for the aerospace industry, gift certificates, permits,
checks, licenses, receipts, prescription and medical forms, engineering
schematics, ID cards, labels, original music, coupons, homeland security
manuals, consumer product and pharmaceutical packaging, tickets, and school
transcripts. In addition, we have developed a digital product to
implement our technologies in Internet-based environments utilizing standard
desktop printers. We believe that our digital technology greatly
expands the reach and potential market for our technologies and solutions. In
December 2008, we acquired substantially all of the assets of DPI of Rochester,
LLC, a privately held commercial printer located in Rochester, NY with
approximately $7.6 million in sales in 2007. We formed a new
subsidiary called DPI Secuprint to house this new company. As a
result of this acquisition, we have significantly improved our ability to meet
our current and expected future demand of our security paper products as well as
improving our competitiveness in the market for custom security printing,
especially in the areas of vital records, coupons, transcripts, and prescription
paper. In addition, as a result of the acquisition, we believe
we can offer our customers a wider range of commercial printing
offerings.
Technologies
We have developed or acquired over 30
technologies that provide our customers a wide spectrum of
solutions. Our primary anti-counterfeiting products and technologies
are marketed under the AuthentiGuard trade names.
Products
and Services
Generic Security
Paper: Our primary product for the retail end-user market is
AuthentiGuard® Security Paper. AuthentiGuard® Security Paper is blank
paper that contains our Pantograph 4000TM technology. The paper
reveals hidden warning words, logos or images using The Authenticator- our
proprietary viewing lens –when the paper is faxed, copied or
scanned. The hidden words appear on the duplicate or the computer
digital file and essentially prevent documents, including forms, coupons and
tickets, from being counterfeited. We market and sell our
AuthentiGuard® Security Paper primarily through one major paper distributor:
Boise. Since 2005, Boise has marketed our AuthentiGuard® Security
Paper under its Boise Beware brand name in North America, primarily through its
commercial paper sales group. We retain the rights to sell the AuthentiGuard®
Security Paper directly to end-users anywhere in the world.
Security and Commercial Printing: Our
technology portfolio allows us to create unique custom secure paper, plastic,
packaging and Internet-based and software enterprise solutions. We
market and sell to end-users that require anti-counterfeiting and authentication
features in a wide range of printed materials such as documents, vital records,
prescription paper, driver’s licenses, birth certificates, receipts, manuals,
identification materials, entertainment tickets, coupons, parts tracking forms,
as well as product packaging including pharmaceutical and a wide range of
consumer goods. In addition, we provide a full range of digital and
large offset commercial printing capabilities to our customers.
Since our
inception, we have primarily outsourced the production of the majority of our
custom security print orders to strategic printing vendors. In
December 2008, we acquired a commercial printer with long-run offset and short
run digital printing capabilities that will allow us to produce the majority of
our security print orders in-house. As a result of this acquisition,
we have significantly improved our ability to meet our current and expected
future demand of our security paper products as well as improving our
competitiveness in the market for custom security printing, especially in the
areas of vital records, coupons, transcripts, and prescription
paper. We produce our plastic printed documents such as ID
cards, event badges, and driver licenses at our manufacturing facility in
Brisbane, California under the name Plastic Printing Professionals. In late
2007, we moved our P3 manufacturing facility to a 25,000 square foot facility in
order to increase our plastic manufacturing capacity, and during 2008, we
upgraded their production capabilities by adding equipment that will improve its
productivity, along with equipment for high speed data encoding and equipment
for production of high-volume precision RFID cards.
Digital Security Solutions:
Using software that we have developed, we can electronically render several of
our technologies digitally to extend the use of optical security to the end-user
of sensitive information. With our AuthentiGuard™
DX we market a networked appliance that allows the author of any
Microsoft Office document (Outlook, Word, Excel, or PowerPoint) to secure nearly
any of its alphanumeric content when it is printed or digitally stored.
AuthentiGuard® DX prints selected content using DMC’S patented technology so
that it cannot be read by the naked eye. Reading the hidden content,
or authenticating the document is performed with a proprietary viewing device or
software.
16
Technology
Licensing: We license our anti-counterfeiting technology and
trade secrets to security printers through licensing arrangements. We
seek licensees that have a broad customer base that can benefit from our
technologies or have unique and strategic capabilities that expand the
capabilities that we can offer our potential customers. Licenses can
be for a single technology or for a package of technologies. We offer
licensees a variety of pricing models, including:
|
|
·
|
Pay
us one price per year;
|
|
|
·
|
Pay
us a percentage of gross sales price of the product containing the
technology during the term; or
|
|
|
·
|
Joint
venture or profit sharing
arrangement.
|
Legal Products: We
also own and operate Legalstore.com, an Internet company which sells legal
supplies and documents, including security paper and products for the users of
legal documents and supplies in the legal, medical and educational fields. On
June 22, 2009, we signed a non-binding letter of intent to sell the assets of
our wholly owned web property subsidiary commonly known as “Legalstore.com”, to
Internet Media Services, Inc. (“IMS”). Under the terms of the Letter
of Intent, IMS will acquire the Web property and related assets commonly
referred to as the LegalStore.com from us and as payment will issue to the
Company common stock of IMS equal to 30% of the outstanding shares of IMS on the
Closing Date. Within 180 days after the Closing Date, or as soon as practicable,
IMS intends to file a Registration Statement on Form S-1 with the Securities and
Exchange Commission ("SEC") registering certain shares of IMS common stock,
including the agreed number of shares of IMS common stock to be issued to the
Company under the Agreement. At which time, the Company intends to declare the
Record Date for the issuance of a shareholder dividend of shares of IMS Common
Stock, the number of which has yet to be determined, to the beneficial share
owners of Document Security Systems, Inc. Common Stock on such Record
Date. Completion of the transaction is subject to entering into a
definitive purchase agreement for the sale of the assets and the satisfaction of
any conditions and covenants contained therein. At this time the
parties have not entered into a definitive agreement for the transaction and
there can be no assurance that we will enter into such an agreement or complete
the transaction on acceptable terms or at all.
Results of
Operations for the Three and Six Months Ended June 30, 2009
Compared to the Three and Six Months ended June 30, 2008
The following discussion and analysis provides information that our management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. During the second quarter
of 2009, the Board of Directors approved a plan to sell and the Company entered
into a non-binding letter of intent to sell its legal products
business. In accordance with FASB 144 guidance for long-lived assets
to be exchanged for nonmonetary assets, the Company accounts for the revenue and
expenses of this operation as a being held and used until such time that the
sale takes place.
The
discussion should be read in conjunction with the financial statements and
footnotes in this quarterly report and in our annual report on Form 10-K for the
year ended December 31, 2008.
Revenue
|
Three Months
Ended June 30,
2009
|
Three Months
Ended June 30,
2008
|
% change
|
Six Months
Ended June 30,
2009
|
Six Months
Ended June 30,
2008
|
% change
|
|||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Security
and commercial printing
|
$ | 1,942,000 | $ | 1,155,000 | 68 | % | $ | 4,359,000 | $ | 2,087,000 | 109 | % | ||||||||||||
|
Technology
license royalties and digital solutions
|
191,000 | 900,000 | -79 | % | 415,000 | 1,237,000 | -66 | % | ||||||||||||||||
|
Legal
products
|
115,000 | 159,000 | -28 | % | 253,000 | 332,000 | -24 | % | ||||||||||||||||
|
Total
Revenue
|
2,248,000 | 2,214,000 | 2 | % | 5,027,000 | 3,656,000 | 38 | % | ||||||||||||||||
For the
three months ended June 30, 2009, revenue increased 2% from the same period in
2008. Security and commercial print sales increased
68% during the quarter which reflects the impact of the Company’s acquisition of
DPI Secuprint, a commercial printer, in December, 2008. This increase
was primarily offset by a decrease in royalty revenue of 79% which reflects the
impact of a non-recurring royalty of $542,000 recorded in the second quarter of
2008 that affected the comparison. Excluding this item, revenue for
the second quarter of 2009 would have increased 34% from the second quarter of
2008.
17
For the
six months ended June 30, 2009, revenue increased 38% from the first six months
of 2008, due to the Company’s acquisition of its commercial printing business in
December 2008, which more than offset the 66% decline in technology license
royalties and digital solutions revenue as a result of the aforementioned
non-recurring royalty revenue recorded in 2008. During 2009,
all of the Company’s divisions were adversely affected by significant delays or
reductions in orders by core customers that reflected the rapid decline in the
U.S. and global economies during the latter half of 2008 and the first half of
2009. The Company expects that demand in each of its
divisions, including its newly acquired commercial printing division will return
to historical levels during the latter half of 2009 as the U.S. and global
economies stabilize.
Cost
of Sales and Gross Profit
|
Three Months
|
Three Months
|
Six Months
|
Six Months
|
|||||||||||||||||||||
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
|||||||||||||||||||||
|
2009
|
2008
|
% Change
|
2009
|
2008
|
% change
|
|||||||||||||||||||
|
Costs
of revenue
|
||||||||||||||||||||||||
|
Security
and commercial printing
|
$ | 1,496,000 | $ | 796,000 | 88 | % | $ | 3,031,000 | $ | 1,392,000 | 118 | % | ||||||||||||
|
Technology
license royalties and digital solutions
|
4,000 | 4,000 | 0 | % | 7,000 | 7,000 | 0 | % | ||||||||||||||||
|
Legal
products
|
60,000 | 74,000 | -19 | % | 123,000 | 171,000 | -28 | % | ||||||||||||||||
|
Total
cost of revenue
|
1,560,000 | 874,000 | 78 | % | 3,161,000 | 1,570,000 | 101 | % | ||||||||||||||||
|
Gross
profit
|
||||||||||||||||||||||||
|
Security
and commercial printing
|
446,000 | 359,000 | 24 | % | 1,328,000 | 695,000 | 91 | % | ||||||||||||||||
|
Technology
license royalties and digital solutions
|
187,000 | 896,000 | -79 | % | 408,000 | 1,230,000 | -67 | % | ||||||||||||||||
|
Legal
products
|
55,000 | 85,000 | -35 | % | 130,000 | 161,000 | -19 | % | ||||||||||||||||
|
Total
gross profit
|
688,000 | 1,340,000 | -49 | % | 1,866,000 | 2,086,000 | -11 | % | ||||||||||||||||
|
Three Months
|
Three Months
|
Six Months
|
Six Months
|
|||||||||||||||||||||
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
|||||||||||||||||||||
|
2009
|
2008
|
% change
|
2009
|
2008
|
% change
|
|||||||||||||||||||
|
Gross
profit percentage:
|
31 | % | 61 | % | -49 | % | 37 | % | 57 | % | -35 | % | ||||||||||||
Gross
profit decreased 49% to $688,000 in the second quarter of 2009 as compared to
the second quarter of 2008. The decrease was primarily impacted by
the lack of $542,000 of gross profit which the Company gained in 2008 as the
result of a non-recurring royalty revenue the Company recorded in the second
quarter of 2008. Without the impact of this item, gross profit
in the second quarter of 2008 would have been $798,000, which would have been
only 14% higher than 2009. Gross profits were also
negatively impacted by increases in production equipment lease and depreciation
costs associated with new equipment put into production at the Company’s plastic
printing facility. As a result of these issues, and due to a
significant change in the Company’s business model as a result of the Company’s
acquisition of its commercial printing business in December of 2008, the
Company’s gross profit percentage decreased significantly to 31% during the
second quarter of 2009. For the six months ended June 30, 2009,
gross profit percentage was 37% which is slightly below the Company’s
expectations. The Company believes that its gross margin percentage
should improve slightly over the last half of the year based on its current
structure and the expected sales mix.
18
Operating
Expenses
|
Three Months
|
Three Months
|
|
Six Months
|
Six Months
|
||||||||||||||||||||
|
Ended June 30,
|
Ended June 30,
|
|
Ended June 30,
|
Ended June 30,
|
||||||||||||||||||||
|
2009
|
2008
|
% change
|
2009
|
2008
|
% change
|
|||||||||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||||||
|
Sales,
general and administrative compensation
|
$ | 835,000 | $ | 676,000 | 24 | % | $ | 1,858,000 | $ | 1,457,000 | 28 | % | ||||||||||||
|
Professional
Fees
|
40,000 | 207,000 | -81 | % | 287,000 | 574,000 | -50 | % | ||||||||||||||||
|
Sales
and marketing
|
11,000 | 131,000 | -92 | % | 71,000 | 314,000 | -77 | % | ||||||||||||||||
|
Research
and development
|
75,000 | 134,000 | -44 | % | 162,000 | 249,000 | -35 | % | ||||||||||||||||
|
Rent
and utilities
|
115,000 | 122,000 | -6 | % | 270,000 | 263,000 | 3 | % | ||||||||||||||||
|
Other
|
70,000 | 166,000 | -58 | % | 255,000 | 320,000 | -20 | % | ||||||||||||||||
| $ | 1,146,000 | $ | 1,436,000 | -20 | % | $ | 2,903,000 | $ | 3,177,000 | -9 | % | |||||||||||||
|
Other
Operating Expenses
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
40,000 | 42,000 | -5 | % | 80,000 | 84,000 | -5 | % | ||||||||||||||||
|
Stock
based payments
|
28,000 | 619,000 | -95 | % | (117,000 | ) | 1,026,000 | -111 | % | |||||||||||||||
|
Impairment
of patent defense costs
|
- | - | - | 292,000 | ||||||||||||||||||||
|
Amortization
of intangibles
|
324,000 | 537,000 | -40 | % | 647,000 | 1,064,000 | -39 | % | ||||||||||||||||
| 392,000 | 1,198,000 | -67 | % | 610,000 | 2,466,000 | -75 | % | |||||||||||||||||
|
Total
Operating Expenses
|
1,538,000 | 2,634,000 | -42 | % | 3,513,000 | 5,643,000 | -38 | % | ||||||||||||||||
Selling, General and
Administrative
Sales, general and
administrative compensation costs were 24% and 28% higher in the three
and six months ending June, 30, 2009, respectively, as compared to the
comparable 2008 periods, due to the inclusion of sales and administrative staff
additions as the result of the Company’s acquisition of its commercial printing
business in December 2008. Otherwise, SG&A compensation
costs would have decreased 25% and 11% during the three and six months ended
June 30, 2009, respectively, as compared to the comparable 2008 periods, as the
result of staff reductions that the Company initiated in the middle of 2008 and
during the first quarter of 2009.
Professional fees
have decreased in 2009 from the second quarter of 2008 as a result of
significant decreases in non-patent related legal fees and accounting fees as
the Company had reduced Sarbanes –Oxley related compliance costs as the result
of the Company’s change in classification to a smaller reporting company for its
2008 end of year audit. In addition, the Company had lower consulting
and investor relations costs as it significantly limited certain activities
associated with these costs in response to the lower sales volumes the Company
experienced during the first six months of 2009. In addition,
during the second quarter of 2009, the Company reversed approximately $60,000 of
a previously accrued consulting expense that did not materialize.
Sales and marketing
expenses have decreased significantly in 2009 as compared to 2008 as the Company
has changed its primary sales strategies in response to the Company’s
significant reduction in its non-direct marketing costs, its international sales
cost, and an overall reduction in sales related travel. The Company has
recently focused its efforts on direct sales techniques that utilize telephone
and web-conferencing communication with current and prospective
customers. In addition, the Company experienced a reduction in
internet based advertising during 2009. In addition, during the
second quarter of 2009, the Company reversed approximately $15,000 of previously
accrued expenses for certain potential sales related expense that did not
materialize. The Company expects to increase its sales and marketing
expenses in the second half of 2009 as economic conditions improve.
Research and development
costs consist primarily of compensation costs for research personnel and
direct costs for the use of third-party printers’ facilities to test our
technologies on equipment that we do not have access to
internally. Research and development costs decreased during the
2009 periods as compared to the comparable 2008 periods as the result of lower
external research costs and reduction in compensation cost as the Company
reduced the department by 2 persons.
Rent and utilities
costs have increased in 2009 over 2008 as a result of the Company’s acquisition
of its commercial printing business in December 2008, which operates a 20,000
square foot facility in Rochester, NY.
Other operating
expenses are primarily equipment maintenance and repairs, office supplies, IT
support, bad debt expense and insurance costs. Decreases in the second
quarter of 2009 as compared to the second quarter of 2008 reflect significant
reductions in office expenses, and a reversal of $29,000 of bad debt expense due
to collections of previously written off accounts receivables associated with
the Company’s commercial print operation.
19
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 decreased during the three and
six month periods ended June 30, 2009 as compared to the comparable 2008
periods, as current-period stock based compensation expense was more than offset
by reversals of previously recorded stock-based compensation expense for stock
options and restricted shares issued to the Company’s employees which terminated
unvested due to employee terminations that occurred during the three and six
months ended June 30, 2009.
Impairment of Patent Defense
Costs On March 19, 2008, the Company received notification
that its appeal of the invalidation of its European Patent 455750B1 in the UK
was not successful. As result of the adverse court decision, the
Company recognized an impairment loss of $292,000 associated with the U.K appeal
as of March 31, 2008. The impairment loss includes a judgment for
reimbursement of estimated counterpart legal fees. No such
expense was incurred in 2009.
Amortization of
intangibles expense decreased 40% and 39% in the second quarter and first
six months of 2009 as compared to the 2008 periods as a result of the reduction
in the Company’s net capitalized patent acquisition and defense costs asset from
$4.3 million as of June 30, 2008 to $1.4 million as of June 30,
2009. The reduction in the Company’s patent acquisition and
defense costs was primarily due to the Company’s transfer and assignment of 49%
of its interest in the patent to a third-party in August 2008, which resulted in
a reduction in the asset of approximately $1.7 million.
Other
Income and expenses
|
Three Months
|
Three Months
|
Six Months
|
Six Months
|
|||||||||||||||||||||
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
|||||||||||||||||||||
|
2009
|
2008
|
% change
|
2009
|
2008
|
% change
|
|||||||||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||||||
|
Gain/(Loss)
on foreign currency adjustments
|
12,000 | (13,000 | ) | -192 | % | 12,000 | (24,000 | ) | -150 | % | ||||||||||||||
|
Interest
expense
|
(68,000 | ) | (33,000 | ) | 106 | % | (149,000 | ) | (54,000 | ) | 176 | % | ||||||||||||
|
Amortizaton
of note discount
|
(64,000 | ) | - | (125,000 | ) | - | ||||||||||||||||||
|
Other
income
|
- | 126,000 | - | 126,000 | ||||||||||||||||||||
|
Other
income (expense), net
|
(120,000 | ) | 80,000 | -250 | % | (262,000 | ) | 48,000 | -646 | % | ||||||||||||||
During the first six months of 2009,
the Company had significant increases in interest expense over the comparable
period in 2008 as a result of the Company’s borrowings it made during 2008
against its various credit facilities and for interest associated with a
$900,000 Secured Promissory Note which the Company used to acquire its
commercial printing business in December of 2008. As of June 30,
2009, the Company had $3.2 million outstanding under its revolving notes at an
interest rate of LIBOR plus 2%, which was approximately 3.68% as of June 30,
2009, and $900,000 was outstanding under the Secured Promissory Note which had
an annual interest rate of 12%.
During
the first six months of 2009, the Company also recognized amortization of note
discount expense of approximately $125,000 for warrants that were issued in
conjunction with the secured promissory note which had a fair value of
approximately $256,000 and will be amortized over the term of the
note.
Net
Loss and Loss Per Share
|
Three Months
|
Three Months
|
Six Months
|
Six Months
|
|||||||||||||||||||||
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
Ended June 30,
|
|||||||||||||||||||||
|
2009
|
2008
|
% change
|
2009
|
2008
|
% change
|
|||||||||||||||||||
|
Net
loss
|
$ | (975,000 | ) | $ | (1,218,000 | ) | -20 | % | $ | (1,918,000 | ) | $ | (3,519,000 | ) | -45 | % | ||||||||
|
Net
loss per share, basic and diluted
|
$ | (0.07 | ) | $ | (0.09 | ) | -22 | % | $ | (0.13 | ) | $ | (0.26 | ) | -50 | % | ||||||||
|
Weighted
average common shares outstanding, basic and
diluted
|
14,417,699 | 13,690,545 | 5 | % | 14,397,942 | 13,672,555 | 5 | % | ||||||||||||||||
20
During
the second quarter of 2009, the Company experienced a net loss of $975,000, a
20% decrease from the net loss of the second quarter of 2008. The
decrease in net loss during the quarter was primarily the result of the
significant decrease in nearly every operating cost category which offset a
decrease in gross profit which was primarily due to the impact of a
non-recurring royalty revenue of $542,000 that was recognized in the second
quarter of 2008. For the first six months of 2009,
the Company’s net loss decreased 45% from the comparable period in 2008
primarily due to the significant decrease in the Company’s operating expenses in
2009, which more than offset increases in interest expense and amortization of
note discount associated with the increase in debt incurred by the Company in
the latter half of 2008 and during the first six months of 2009.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s cash flows and other key indicators of liquidity are summarized as
follows:
|
As Of And For The Period Ended:
|
||||||||||||
|
June 30, 2009
|
June 30, 2008
|
% change vs. 2008
|
||||||||||
|
Cash
flows from:
|
||||||||||||
|
Operating
activities
|
$ | (807,000 | ) | $ | (1,637,000 | ) | 56 | % | ||||
|
Investing
activities
|
37,000 | (946,000 | ) | 94 | % | |||||||
|
Financing
activities
|
1,400,000 | 2,802,000 | 50 | % | ||||||||
|
Working
capital
|
(4,553,000 | ) | (1,079,000 | ) | 322 | % | ||||||
|
Current
ratio
|
0.35 | x | 0.72 | x | -52 | % | ||||||
|
Cash
and cash equivalents
|
$ | 718,000 | $ | 961,000 | -25 | % | ||||||
|
Funds
Available from Open Credit
|
||||||||||||
|
Facilities
|
$ | 387,000 | $ | 1,742,000 | -78 | % | ||||||
As of
June 30, 2009, our cash and cash equivalents were approximately $718,000, up
from $88,000 at December 31, 2008. The increase in cash was due to
the receipt of funds from borrowings from Company’s credit facilities along with
cash proceeds from the sale of the Company’s equity. During the first
six months of 2009, the Company used $714,000 of cash for operations and $56,000
for investments in long-lived assets which were primarily funded by borrowings
from the Company’s credit facilities. These amounts were significantly
lower than comparable 2008 levels which reflects the improvement of the
Company’s operating results, including the positive impact on operating cash
flows from the Company’s acquisition of its commercial printing business in
December 2008. In addition, in 2009, the Company essentially
eliminated cash outflows associated with the Company’s patent litigation efforts
as a result of its litigation agreement in August 2008 with Trebuchet Capital
Partners.
Future Capital
Needs As of
June 30, 2009, the Company has an aggregate of $387,000 remaining available
under two revolving notes that terminate on January 4, 2010. During the second and
third quarter of 2009, we raised $805,000 through the private placement of our
common stock and warrants completed in July 2009. The Company has and
will use these funds to fund its operating cash flow requirements and the
Company believes that the funds available to it under its credit facility along
with the proceeds of the private placement will be sufficient to meet its
operating cash flow needs for the next twelve months.
In
December 2008, the Company borrowed $900,000 of short term debt in conjunction
with its acquisition of substantially all of the assets of DPI, a commercial
printer. The Company expects that existing working capital at DPI
will be sufficient to satisfy the payment of the $900,000 when due, in December
2009, or that the Company can refinance this debt prior to its maturity,
however, there is no guarantee that the Company will be able to do
so. Furthermore, the Company has two credit facilities with related
parties that will be due in January 2010. The total amount due may be
up to $3,600,000 if the Company cannot generate sufficient cash from operations
to pay these credit facilities prior to their due dates. In the
event that the Company cannot pay these credit facilities when due, the Company
believes that it will be able to extend the terms of these notes, or negotiate
with the lenders other means of satisfying these credit facilities, including
the payment of amounts due in the form of the Company’s equity. Otherwise,
the Company will look to raise capital to satisfy these
obligations. The Company believes that it has access to capital based
on demand for its common stock. Thru July 2009, the Company has raised
$805,000 during 2009 from the sale of its common stock and believes that it will
continue to be able to utilize this source of funds in the future.
However, there is no assurance that the Company will be able to do
so.
21
We do not
have any off-balance sheet arrangements that have, or are reasonably likely to
have, an effect on our financial condition, financial statements, revenues or
expenses.
Critical
Accounting Policies and Estimates
As of
June 30, 2009, 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, 2008.
ITEM
4T - CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Management is responsible for
establishing and maintaining effective disclosure controls and
procedures. Our Chief Executive Officer and Chief Financial Officer
participated with our management in evaluating the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as
of the end of the period covered by this report to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and that such information is
accumulated and communicated to management, including the CEO and the CFO, as
appropriate, to allow timely decisions regarding required
disclosure.
Based on this evaluation, and in light
of the material weaknesses in our internal control over financial reporting that
are discussed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 these officers have concluded that our disclosure controls and
procedures were not effective. The material weaknesses consist of an
insufficient complement of qualified accounting personnel and controls
associated with segregation of duties and ineffective controls associated with
identifying and accounting for complex and non-routine transactions in
accordance with U.S. generally accepted accounting principles. To
address the material weaknesses we performed additional analyses and other
post-closing procedures to ensure our consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP). Notwithstanding these material weaknesses,
management believes that the financial statements included in this Quarterly
Report on Form 10-Q fairly present, in all material respects, our financial
condition, result of operations and cash flows for the periods
presented.
There
can be no assurance, however, that our disclosure controls and procedures will
detect or uncover all failures of persons within the Company and its
consolidated subsidiaries to disclose material information otherwise required to
be set forth in our periodic reports. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable, not absolute, assurance of achieving their control
objectives.
Changes
in Internal Control Over Financial Reporting
During
the first six months of 2009, the Company began to incorporate the accounting
staff from its acquisition of a commercial printer in December 2008 into its
financial reporting process and will seek to use these new resources to improve
its areas of deficiency in the financial reporting process. The Company will evaluate
the effect of its changes in internal controls during its annual assessment of
its internal controls as of December 31, 2009. Additionally, as described
above under "Controls And Procedures - Evaluation of Disclosure Controls and
Procedures," we also began implementing additional procedures to address the
material weaknesses identified in our internal controls over financial
reporting.
An
evaluation was performed under the supervision of the Company’s management,
including the CEO and CFO, as required under Exchange Act Rule 13a-15(d) and
15d-15(d), of whether any change in the Company’s internal control over
financial reporting occurred during the fiscal quarter ended June 30,
2009. Based on that evaluation, the Company’s management, including
the CEO and CFO, concluded that, other than the changes discussed above, no
other changes in our internal control over financial reporting occurred during
the first six months of 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
22
OTHER
INFORMATION
Information
concerning pending legal proceedings is incorporated herein by reference to Note
10 to the Condensed Consolidated Financial Statements (Unaudited) in Part I of
this Form 10-Q.
On August
1, 2005, we commenced a suit against the European Central Bank (“ECB”) alleging
patent infringement by the ECB and claimed unspecified damages. We brought the
suit in the European Court of First Instance in Luxembourg. We
alleged that all Euro banknotes in circulation infringe the Company European
Patent 0 455 750B1 (the “Patent”), which covers a method of incorporating an
anti-counterfeiting feature into banknotes or similar security documents to
protect against forgeries by digital scanning and copying
devices. The Court of First Instance ruled on September 5, 2007 that
it does not have jurisdiction to rule on the patent infringement claim, and also
ruled that we will be required to pay attorneys and court fees of the
ECB. The ECB formally requested the Company to pay attorneys and
court fees in the amount of Euro 93,752 ($131,000 as of June 30, 2009), which,
unless the amount is settled will be subject to an assessment procedure that
will not likely be concluded until approximately the middle of 2009, which the
Company will accrue as soon as the assessed amount, if any, is reasonably
estimatable.
On March
24, 2006, the Company received notice that the ECB had filed a separate claim in
the United Kingdom and Luxembourg courts seeking the invalidation of the
Patent. Proceedings were commenced before the national courts seeking
revocation and declarations of invalidity of the Patent in each of the
Netherlands, Belgium, Italy, France, Spain, Germany and Austria. On
March 26, 2007, the High Court of Justice, Chancery Division, Patents Court in
London, England (the “English Court”) ruled that the Patent was deemed invalid
in the United Kingdom, and on March 19, 2008 this decision was upheld on
appeal. The English Court rejected the ECB’s allegations of
invalidity based on lack of novelty, lack of inventive step and insufficiency,
but held that the patent was invalid for added subject matter. The English
Court’s decision does not affect the validity of the Patent in other European
countries. As a result of these decisions, the Company was notified
of the final assessment of the reimbursable ECB costs for both court cases was
356,490 British pounds, of which the Company had previously paid 177,500 pounds
and owes 178,990 pounds (approximately $296,000 as of June 30, 2009), which
amount was included in accrued expenses as of June 30, 2009.
On March
27, 2007 the Bundespatentgericht of the Federal Republic of Germany ruled that
the German part of the Patent was valid, having considered the English Court’s
decision. As a result of this ruling, the Company expects to be
awarded reimbursements for its costs associated with the German validity case,
which is Euro 44,692 ($63,000 at June 30, 2009), which the Company will
record when the amount, if any, is received. The ECB has filed an
appeal against that decision, which is not expected to be decided before
2010. On January 9, 2008 the French Court held that the Patent was
invalid in France for the same reasons given by the English
Court. The Company is required to pay de minimus attorneys’ fees of
the ECB as a result of the French decision. The Company filed an
appeal against the French decision on May 7, 2008. On March 12, 2008
the Dutch Court, having considered the English, German and French decisions,
ruled that the Patent is valid in the Netherlands. The ECB filed an
appeal against the Dutch decision on March 27, 2008. A trial was also held in
Madrid, Spain on June 3 and 5, 2008 and oral and written closing submissions
were made on July 19, 2008. A judgment is expected in the latter half of
2009.
The
Patent has thus been confirmed to be valid and enforceable in two jurisdictions
(Germany and the Netherlands) that use the Euro as its national currency
allowing the Company or Trebuchet Capital Partners, on the Company’s
behalf, to proceed with infringement cases in these countries if we
choose to do so. Additional trials on the validity of the Patent are
expected in other European jurisdictions during 2009.
23
On August
20, 2008, the Company entered into an agreement with Trebuchet Capital Partners,
LLC (“Trebuchet”) under which Trebuchet has agreed to pay substantially all
of the litigation costs associated with pending validity proceedings initiated
by the European Central Bank (“ECB”) in eight European countries relating to the
Company’s European Patent 0 455 750B1 that the Company has claimed
the ECB infringed in printing of the Euro currency (the “Patent”). Trebuchet
also agreed to pay substantially all of the litigation costs associated with
future validity challenges filed by the ECB or other parties, provided that
Trebuchet elects to assume the defense of any such challenges, in its sole
discretion, and patent infringement suits filed against the ECB and certain
other alleged infringers of the Patent, all of which suits may be brought at the
sole discretion of Trebuchet and may be in the name of the Company, Trebuchet or
both. The Company provided Trebuchet with the sole and exclusive right to manage
infringement litigation relating to the Patent in Europe, including the right to
initiate litigation in the name of the Company, Trebuchet or both and to choose
whom and where to sue, subject to certain limitations set forth in the agreement
under the terms of the Agreement, and in consideration for the Trebuchet's
funding obligations, the Company assigned and transferred a 49% interest of the
Company's rights, title and interest in the Patent to Trebuchet which allows
Trebuchet to have a separate and distinct interest in and share of the Patent,
along with the right to sue and recover in litigation, settlement or otherwise
to collect royalties or other payments under or on account of the Patent. In
addition, the Company and Trebuchet have agreed to equally share all proceeds
generated from litigation relating to the Patent, including judgments and
licenses or other arrangements entered into in settlement of any such
litigation. Trebuchet is also entitled to recoup any litigation expenses
specifically awarded to the Company in such actions.
In
addition to the foregoing, we are subject to other legal proceedings that have
arisen in the ordinary course of business and have not been finally adjudicated.
Although there can be no assurance in this regard, in the opinion of management,
none of these legal proceedings to which we are a party will have a material
adverse effect on our results of operations, cash flows or our financial
condition.
ITEM
1A – RISK FACTORS
We face many significant risks in
our business, some of which are unknown to us and not presently foreseen. These
risks could have a material adverse impact on our business, financial condition
and results of operations in the future. We have disclosed a number of material
risks under Item 1A of our annual report on Form 10-K for the year ended
December 31, 2008, which we filed with the Securities and Exchange
Commission on March 31, 2009. The following discussion is of material
changes to risk factors disclosed in that report.
We
have two secured credit facilities that have large principal payments due in
January 2010 and a $900,000 secured loan due in December 2009, and if we are
unable to repay them with cash we may be forced to repay, in whole or in part,
with each credit facility's applicable collateral, which would have a material
adverse effect on our financial position.
On
January 4, 2008, we entered into two credit facilities with an aggregate
borrowing capacity of $3.6 million that is repayable in full on January 4, 2010.
One of these credit facilities has a borrowing limit of $3.0 million and is
secured by our stock in our Plastic Printing Professionals, Inc. subsidiary, and
the other credit facility has a borrowing limit of $600,000 and is secured by
our accounts receivable, excluding the accounts receivable of our subsidiary
Plastic Printing Professionals, Inc. As of June 30, 2009, we have borrowed
$3,213,000 under these credit facilities and are in default of both agreements
due to a failure to pay interest when due. Both Fagenson & Co.,
Inc. and Patrick White have waived the defaults through January 1,
2010. In the event that the Company cannot pay these credit
facilities, including the unpaid interest, when due, the Company believes that
it will be able to extend the terms of these notes, or negotiate with the
lenders other means of satisfying these credit facilities, including the payment
of amounts due in the form of the Company’s equity. There
can be no assurance that such additional financing will be available on terms
acceptable to the Company or at all. Failure to raise the funds necessary
to finance future cash requirements would adversely affect the Company’s ability
to pursue its strategy and could negatively affect operations in future periods.
The accompanying financial statements do not reflect any adjustments that
may be necessary in the event the Company is unsuccessful in its fundraising
efforts.
On
December 18, 2008, our wholly owned subsidiary, Secuprint, Inc. (dba DPI
Secuprint, Inc.), entered into a secured loan of $900,000 to pay for most of the
cash portion of the purchase price of our acquisition of the assets of DPI of
Rochester, LLC. The loan is due in December 2009 and is secured by
all of the assets of DPI Secuprint.
If we
cannot generate sufficient cash from operations or raise cash from other sources
including without limitation, fund-raising through additional sales of equity,
and if we cannot refinance the credit facilities or our secured loan, we may
have to repay, in whole or in part, one or all of the credit facilities or
secured loan with each credit facility's or note’s applicable collateral, which
would have a material adverse effect on our financial position.
24
Due
to our low cash balance and limited financing currently available to us, we may
in the near future have a number of obligations that we will be unable to meet
without generating additional income or raising additional
capital. If we cannot generate additional income or raise additional
capital in the near future, we may become insolvent, fail to obtain appropriate
relief from bankruptcy, be made bankrupt and/or our stock may become illiquid or
worthless.
As of
June 30, 2009, our cash balance was approximately $718,000, and our current
liabilities totaled approximately $6,983,000, which includes $3,213,000 of short
term debt under two credit facilities that are due on January 2, 2010, and a
$900,000 Secured Promissory Note due on December 19, 2009. In order
to meet our operating needs and these current obligations, we will need to
generate additional income from operations or obtain additional financing,
including without limitation, fund-raising through additional sales of
equity. We may also need to negotiate with our lenders to extend or
refinance our existing credit facilities. Additionally, our ability
to utilize cash generated by our DPI Secuprint subsidiary for corporate
obligations is restricted by the terms of certain of its third party equipment
operating leases, which could negatively affect our ability to raise cash from
other sources, or to satisfy our obligations.
If we do
not receive sufficient financing or sufficient funds from our operations we may
(i) liquidate assets, (ii) seek or be forced into bankruptcy and/or
obtain appropriate relief from bankruptcy and/or, (iii) continue operations, but
incur material harm to our business, operations or financial
condition. These measures could have a material adverse effect on our ability to
continue as a going concern. Additionally, because of our financial
condition, our Board of Directors has a duty to our creditors that may conflict
with the interests of our stockholders. Our Board of Directors may be
required to make decisions that favor the interests of creditors at the expense
of our stockholders to fulfill its fiduciary duty. For instance, we
may be required to preserve our assets to maximize the repayment of debts versus
employing the assets to further grow our business and increase shareholder
value. If we cannot generate enough income from our operations or are
unable to locate additional funds through financing, we may not have sufficient
resources to continue operations.
Due
to our low cash balance and negative cash flow, we may have to further reduce
our costs by curtailing future operations to continue as a
business.
We have
incurred significant net losses in previous years. Our ability to
fund our capital requirements out of our available cash and cash generated from
our operations depends on a number of factors. Some of these factors include our
ability to (i) increase security and commercial printing and plastic card sales
and (ii) increase sales of our digital products. While we have approximately
$387,000 of funds available to us under our various credit facilities as of June
30, 2009, we may seek to raise additional funds in the future in order to fund
our working capital needs including equity capital. If we are not
successful in generating needed funds from operations or in capital raising
transactions, we may need to reduce our costs which measures could include
selling or consolidating certain operations or assets, and delaying, canceling
or scaling back product development and marketing programs. These measures could
materially and adversely affect our ability to operate profitably.
We
cannot predict our future capital needs and we may not be able to secure
additional financing.
We may need to raise additional funds
in the future to fund our working capital needs, to fund more aggressive
expansion of our business, to complete development, testing and marketing of our
products, or to make strategic acquisitions or investments. We may require
additional equity or debt financings, collaborative arrangements with corporate
partners or funds from other sources for these purposes. No assurance can be
given that necessary funds will be available for us to finance our development
on acceptable terms, if at all. For instance, we recently completed the private
placement of our common stock and warrants after completing only $805,000 of a
planned $1.4 million. Also, in June 2009, an agreement with an
investor to purchase the remaining $1.3 million of a $1.4 million subscription
for our common stock from 2008 was cancelled prior to completion of the final
payment in June 2009. Furthermore, such additional financings may
involve substantial dilution of our stockholders or may require that we
relinquish rights to certain of our technologies or products. In addition, we
may experience operational difficulties and delays due to working capital
restrictions. If adequate funds are not available from operations or additional
sources of financing, we may have to delay or scale back our growth plans. While
we have approximately $387,000 remaining available under our various credit
facilities, we may need to raise additional funds in the future in order to fund
our working capital needs.
25
We
have a large number of authorized but unissued shares of common stock, which our
management may issue without further stockholder approval, thereby causing
dilution of your holdings of our common stock.
As of June 30, 2009, there were
approximately 185 million authorized but unissued
shares of our common stock. Our management continues to have broad discretion to
issue shares of our common stock in a range of transactions, including
capital-raising transactions, mergers, acquisitions, for anti-takeover purposes,
and in other transactions, without obtaining stockholder approval, unless
stockholder approval is required for a particular transaction under the rules of
the NYSE Amex, New York law, or other applicable laws. For instance,
during 2009 to date through August 14, 2009 we have issued 575,000 shares of
common stock and warrants to purchase an additional 115,000 shares of common
stock. If our management determines to issue additional shares of our
common stock from the large pool of authorized but unissued shares for any
purpose in the future without obtaining stockholder approval, your ownership
position would be diluted without your further ability to vote on such
transaction.
Reference is made to Item 1.01. “Entry
into a Material Definitive Agreement” and Item 3.02 “Unregistered Sales of
Equity Securities” of our Current Report on Form 8-K filed with the Securities
and Exchange Commission on June 3, 2009 for a description of our sales of
unregistered securities on May 29, 2009.
On June 22, 2009, the Company completed
the sale of $140,000 of investment units in a private placement pursuant to
subscription agreements with three accredited investors dated the same date.
Each investment unit is comprised of 7,142 shares of the Company’s common stock,
par value $.02 per share (the “Common Stock”) and five year warrants to purchase
1,427 shares of Common Stock at an exercise price of $2.00 per share (each a
“Warrant” and collectively, the “Warrants”). In the transaction, the Company
sold 14 investment units for $10,000 per unit for gross cash proceeds of
$140,000, consisting of 99,988 shares of Common Stock and Warrants to purchase
an aggregate of 19,978 shares of Common Stock.
On July 15, 2009, the Company completed
the sale of $245,000 of investment units in a private placement pursuant to
subscription agreements with three accredited investors dated the same date.
Each investment unit is comprised of 7,142 shares of the Company’s Common Stock
and five year Warrants to purchase 1,427 shares of Common Stock at an exercise
price of $2.00 per share. In the transaction, the Company sold 24.5 investment
units for $10,000 per unit for gross cash proceeds of $245,000, consisting of
174,988 shares of Common Stock and Warrants to purchase an aggregate of 34,998
shares of Common Stock.
The investment units, Common Stock,
Warrants and Common Stock issuable upon exercise of the Warrants (the
“Securities”) have not been registered under the Securities Act of 1933, as
amended (the “Securities Act”), and were issued and sold in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder. These securities may not be
offered or sold in the United States in the absence of an effective registration
statement or an applicable exemption from registration
requirements.
The Securities in the Transaction were
sold solely to accredited investors. The Securities are restricted from resale
and were acquired for investment purposes only. The sales did not involve any
form of general solicitation.
On
January 4, 2008, the Company entered into a Credit Facility Agreement with
Fagenson and Co., Inc., as agent, a related party to Robert B. Fagenson, the
Chairman of the Company's Board of Directors. Under the Fagenson Credit
Agreement, the Company can borrow up to a maximum of $3,000,000 from time to
time up to and until January 4, 2010. The advances are generally
limited to $400,000 unless otherwise mutually agreed upon by both parties per
fiscal quarter, with the exception of $600,000 that can be advanced at any time
for patent litigation related bills. Any amount borrowed by the
Company pursuant to the Fagenson Credit Agreement will have an annual interest
rate of 2% above LIBOR and will be secured by the Common Stock of Plastic
Printing Professionals, Inc., (“P3”) the Company's wholly owned
subsidiary. Interest is payable quarterly in arrears and the
principal is payable in full at the end of the term under the Fagenson Credit
Agreement. In addition, on January 4, 2008, the Company also entered
into a Credit Facility Agreement with Patrick White, the Company's Chief
Executive Officer and a member of the Board of Directors. Under the
White Credit Agreement, the Company can borrow up to $600,000 from time to time
up to and until January 4, 2010. Any amount borrowed by the Company
pursuant to the White Credit Agreement will have an annual interest rate of 2%
above LIBOR and will be secured by the accounts receivable of the Company,
excluding the accounts receivable of P3. Interest is payable
quarterly in arrears and the principal is payable in full at the end of the Term
under the White Credit Agreement. Mr. White can accept common stock
as repayment of the loan upon a default. Under the terms of the
agreement the Company is required to comply with various
covenants. As of June 30, 2009, the Company has borrowed $3,213,000
under the Fagenson & Co., Inc. and White credit facility agreements and was
in default of both agreements due to a failure to pay interest when
due. Both Fagenson & Co., Inc. and Patrick White have waived the
default through January 1, 2010. In the event that the Company cannot pay the
next interest payment on October 10, 2009, the Company plans to seek additional
waivers.
26
The
shareholders of the Company voted on four items at the Annual Meeting of
Shareholders held on May 28, 2009:
1. Election
of six Directors to serve for a term of one year until the 2010 Annual Meeting
of Stockholders, or until their successors are duly elected and
qualified.
2. Ratification
of the appointment of Freed Maxick & Battaglia, CPAs, PC, as the Company’s
independent registered public accounting firm for the fiscal year ending
December 31, 2009.
The
nominees for director were elected based on the following vote:
|
Nominee
|
Votes For
|
Votes Withheld
|
||||||
|
Patrick
White
|
9,727,722
|
90,058
|
||||||
|
David
Wicker
|
9,746,927
|
65,853
|
||||||
|
Timothy
Ashman
|
9,329,942
|
482,838
|
||||||
|
Alan
E. Harrison
|
9,328,947
|
483,833
|
||||||
|
Robert
B. Fagenson
|
9,730,054
|
82,726
|
||||||
|
Ira
A. Greenstein
|
9,329,844
|
482,936
|
||||||
The
proposal to ratify the appointment of Freed Maxick & Battaglia, CPAs, PC, as
the Company’s independent registered public accounting firm for the fiscal year
ending December 31, 2009 was adopted and received the following
votes:
9,728,837
Votes for approval
25,162
Votes against
58,779,181
Abstentions
0 Broker
non-votes
ITEM
5 - OTHER INFORMATION
None
The
Exhibits listed below designated by an * are incorporated by reference to the
filings by Document Security Systems, Inc. under the Securities Act of 1933 or
the Securities and Exchange Act of 1934, as indicated. All other exhibits are
filed herewith.
(a)
Exhibits
Item
3.1 Certificate of Incorporation of the Registrant,
as amended (incorporated by reference to Exhibit 3.1 to the Company's
Registration Statements No. 2-98684-NY on Form S-18).*
Item
3.2 By-laws of the Registrant, as amended
(incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement No. 2-98684-NY on Form S-18).*
27
Item
4.1 Form of Warrant to Purchase Common Stock of
Document Security Systems, Inc. dated May 29, 2009 (incorporated by reference to
Exhibit 4.1 of Form 8-K filed June 3, 2009)*.
Item
10.1 Form of Subscription Agreement dated as of May 29, 2009
between Document Security Systems, Inc. and the Subscribers (incorporated by
reference to Exhibit 10.1 of Form 8-K filed June 3, 2009)*.
Item
10.2 Form of Registration Rights Agreement dated as of May 29,
2009 executed and delivered by Document Security Systems, Inc. and the holders
listed therein (incorporated by reference to Exhibit 10.2 of Form 8-K filed June
3, 2009)*.
Item
31.1 Certifications of Chief Executive Officer as required by
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Item
31.2 Certifications of Chief Financial Officer as required by
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Item
32.1 Certification of Chief Executive Officer as required by 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley
Act of 2002.
Item
32.2 Certification of Chief Financial Officer as required by 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley
Act of 2002.
In accordance with the requirements of the Exchange Act, the registrant caused
this report on Form 10-Q to be signed on its behalf by the undersigned,
thereunto duly authorized.
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DOCUMENT
SECURITY SYSTEMS, INC.
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||
|
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|||
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August
14, 2009
|
By:
|
/s/
Patrick White
|
|
|
|
Patrick
White
Chief
Executive Officer
|
||
|
|
|||
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August
14, 2009
|
By:
|
/s/
Philip Jones
|
|
|
|
Philip
Jones
Chief
Financial Officer
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||
28
Exhibit
Index
Item
3.1 Certificate of Incorporation of the
Registrant, as amended (incorporated by reference to Exhibit 3.1 to the
Company’s Registration Statement No. 2-98684-NY on Form S-18).
Item
3.2 By-Laws of the Registrant, as
amended (incorporated by reference to Exhibit 3.2 to the Company’s Registration
Statement No. 2-98684-NY on Form S-18).
Item
4.1 Form of Warrant to Purchase Common
Stock of Document Security Systems, Inc. dated May 29, 2009 (incorporated by
reference to Exhibit 4.1 of Form 8-K filed June 3, 2009).
Item
10.1 Form of Subscription Agreement dated as of May
29, 2009 between Document Security Systems, Inc. and the Subscribers
(incorporated by reference to Exhibit 10.1 of Form 8-K filed June 3,
2009).
Item
10.2 Form of Registration Rights Agreement dated as
of May 29, 2009 executed and delivered by Document Security Systems, Inc. and
the holders listed therein (incorporated by reference to Exhibit 10.2 of Form
8-K filed June 3, 2009).
Item
31.1 Certification of Chief Executive Officer as
required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Item
31.2 Certification of Chief Financial Officer as
required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Item
32.1 Certification of Chief Executive Officer as
required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
Item
32.2 Certification of Chief Financial Officer as
required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
29