DOCUMENT SECURITY SYSTEMS INC
10-Ks and 10-Qs
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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
March 31,
2010
1-32146
Commission
file number
DOCUMENT
SECURITY SYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
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New York
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16-1229730
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|||
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(State
of incorporation)
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(IRS
Employer Identification Number)
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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 May
14, 2010 (the most recent practicable date), there were 17,763,324 shares of the
issuer's Common Stock, $0.02 par value per share, issued.
DOCUMENT
SECURITY SYSTEMS, INC.
FORM
10-Q
TABLE
OF CONTENTS
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PART
I
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FINANCIAL
INFORMATION
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|||
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Item
1
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Financial
Statements
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Consolidated
Balance Sheets
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3
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|||
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Consolidated
Statements of Operations
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4
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|||
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Consolidated
Statements of Cash Flows
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5
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|||
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Notes
to Interim Consolidated Financial Statements
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6
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|||
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Item
2
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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||
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Item
4T
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Controls
and Procedures
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21
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||
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PART
II
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OTHER
INFORMATION
|
|||
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Item
1
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Legal
Proceedings
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22
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||
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Item
1A
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Risk
Factors
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23
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||
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Item
2
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Unregistered Sales
of Equity Securities and Use of Proceeds
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29
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||
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Item
3
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Defaults
upon Senior Securities
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29
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||
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Item
4
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Submission
of Matters to a Vote of Security Holders
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29
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||
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Item
5
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Other
Information
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29
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||
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Item
6
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Exhibits
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30
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||
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SIGNATURES
|
||||
2
FINANCIAL
INFORMATION
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
As
of
|
March 31,
2010
|
December 31,
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
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Cash
and cash equivalents
|
$ | 246,288 | $ | 448,895 | ||||
|
Accounts
receivable, net of allowance of $66,000 ($66,000-
2009)
|
1,974,607 | 1,143,939 | ||||||
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Inventory
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638,845 | 184,174 | ||||||
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Prepaid
expenses and other current assets
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233,081 | 91,310 | ||||||
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Total
current assets
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3,092,821 | 1,868,318 | ||||||
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Fixed
assets, net
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2,798,482 | 1,286,226 | ||||||
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Other
assets
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325,953 | 305,507 | ||||||
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Investment
|
298,321 | 350,000 | ||||||
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Goodwill
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1,943,081 | 1,315,721 | ||||||
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Other
intangible assets, net
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2,731,604 | 1,588,969 | ||||||
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Total
assets
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$ | 11,190,262 | $ | 6,714,741 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable
|
$ | 1,436,414 | $ | 1,673,901 | ||||
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Accrued
expenses & other current liabilities
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1,358,845 | 934,595 | ||||||
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Revolving
credit lines
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73,573 | - | ||||||
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Current
portion of long-term debt
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300,000 | - | ||||||
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Current
portion of capital lease obligations
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80,692 | 78,167 | ||||||
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Total
current liabilities
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3,249,524 | 2,686,663 | ||||||
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Revolving
note from related party
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583,000 | 583,000 | ||||||
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Long
term debt, net of unamortized discount of $380,000 ($420,000
-2009)
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2,170,348 | 954,616 | ||||||
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Capital
lease obligations
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158,139 | 182,424 | ||||||
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Deferred
tax liability
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75,568 | 70,830 | ||||||
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Commitments
and contingencies (see Note 8)
|
||||||||
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Stockholders'
equity
|
||||||||
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Common
stock, $.02 par value; 200,000,000 shares authorized,
17,675,324 shares issued and outstanding (16,397,887 in
2009)
|
353,505 | 327,957 | ||||||
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Additional
paid-in capital
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42,226,948 | 38,399,033 | ||||||
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Accumulated
other comprehensive loss
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(16,275 | ) | - | |||||
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Accumulated
deficit
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(37,610,495 | ) | (36,489,782 | ) | ||||
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Total
stockholders' equity
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4,953,683 | 2,237,208 | ||||||
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Total
liabilities and stockholders' equity
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$ | 11,190,262 | $ | 6,714,741 | ||||
See
accompanying notes
3
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
For The
Three Months Ended March 31,
(Unaudited)
|
2010
|
2009
|
|||||||
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Revenue
|
||||||||
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Security
and commercial printing
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$ | 1,858,775 | $ | 2,416,691 | ||||
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Packaging
|
740,625 | - | ||||||
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Technology
license royalties and digital solutions
|
175,330 | 223,240 | ||||||
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Legal
products
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- | 138,625 | ||||||
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Total
Revenue
|
2,774,730 | 2,778,556 | ||||||
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Costs
of revenue
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||||||||
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Security
and commercial printing
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1,364,122 | 1,534,068 | ||||||
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Packaging
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559,109 | - | ||||||
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Technology
license royalties and digital solutions
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5,476 | 3,507 | ||||||
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Legal
products
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- | 63,062 | ||||||
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Total
costs of revenue
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1,928,707 | 1,600,637 | ||||||
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Gross
profit
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846,023 | 1,177,919 | ||||||
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Operating
expenses:
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||||||||
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Selling,
general and administrative
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1,635,481 | 1,563,387 | ||||||
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Research
and development
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65,667 | 87,416 | ||||||
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Amortization
of intangibles
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246,399 | 323,457 | ||||||
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Operating
expenses
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1,947,547 | 1,974,260 | ||||||
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Operating
loss
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(1,101,524 | ) | (796,341 | ) | ||||
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Other
income (expense):
|
||||||||
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Loss
in equity investment
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(51,679 | ) | - | |||||
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Interest
expense
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(65,103 | ) | (80,754 | ) | ||||
|
Amortizaton
of note discount
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(40,732 | ) | (61,699 | ) | ||||
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Other
income
|
143,063 | - | ||||||
|
Loss
before income taxes
|
(1,115,975 | ) | (938,794 | ) | ||||
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Income
tax expense
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4,738 | 4,738 | ||||||
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Net
loss
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(1,120,713 | ) | (943,532 | ) | ||||
|
Other
comprehensive loss:
|
||||||||
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Interest
rate swap loss
|
(16,275 | ) | - | |||||
|
Comprehensive
Loss
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$ | (1,136,988 | ) | $ | (943,532 | ) | ||
|
Net
loss per share -basic and diluted:
|
$ | (0.07 | ) | $ | (0.07 | ) | ||
|
Weighted
average common shares outstanding, basic and diluted
|
17,094,916 | 14,378,609 | ||||||
See
accompanying notes
4
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
For
the Three Months Ended March 31,
(Unaudited)
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,120,713 | ) | $ | (943,532 | ) | ||
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
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Depreciation
and amortization
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331,643 | 409,515 | ||||||
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Stock
based compensation
|
140,127 | (144,759 | ) | |||||
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Amortization
of note discount
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40,732 | 61,699 | ||||||
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Loss
in equity investment
|
51,679 | - | ||||||
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(Increase)
decrease in assets:
|
||||||||
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Accounts
receivable
|
453,567 | (251,417 | ) | |||||
|
Inventory
|
49,491 | 17,714 | ||||||
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Prepaid
expenses and other assets
|
(162,218 | ) | 15,655 | |||||
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Increase
(decrease) in liabilities:
|
||||||||
|
Accounts
payable
|
(547,230 | ) | 99,526 | |||||
|
Accrued
expenses and other liabilities
|
314,333 | 77,055 | ||||||
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Net
cash used by operating activities
|
(448,589 | ) | (658,544 | ) | ||||
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Cash
flows from investing activities:
|
||||||||
|
Purchase
of fixed assets
|
(40,000 | ) | (18,059 | ) | ||||
|
Purchase
of other intangible assets
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(80,736 | ) | (20,722 | ) | ||||
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Acquisition
of business
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(2,272,405 | ) | - | |||||
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Net
cash used by investing activities
|
(2,393,141 | ) | (38,781 | ) | ||||
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Cash
flows from financing activities:
|
||||||||
|
Borrowing
on revolving note- related parties
|
- | 800,000 | ||||||
|
Net
borrowings on revolving line of credit
|
73,573 | - | ||||||
|
Borrowings
on long-term debt
|
1,500,000 | - | ||||||
|
Payments
of long-term debt
|
(25,000 | ) | - | |||||
|
Payments
of capital lease obligations
|
(21,760 | ) | (21,209 | ) | ||||
|
Issuance
of common stock, net
|
1,112,310 | - | ||||||
|
Net
cash provided by financing activities
|
2,639,123 | 778,791 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(202,607 | ) | 81,466 | |||||
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Cash
and cash equivalents beginning of period
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448,895 | 87,820 | ||||||
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Cash
and cash equivalents end of period
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$ | 246,288 | $ | 169,286 | ||||
See
accompanying notes.
5
DOCUMENT
SECURITY SYSTEMS, INC.
NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(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, 2009.
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.
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 deferred revenue and customer deposits into accrued
expenses.
Fair Value of
Financial Instruments
-
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of March 31,
2010. The carrying amounts reported in the balance sheet as of March 31, 2010 of
cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the immediate or short-term maturity
of these financial instruments. The fair value of revolving credit lines, notes
payable and long-term debt approximates their carrying value as the stated or
discounted rates of the debt reflect recent market conditions.
Derivative
instruments are recorded as assets and liabilities at estimated fair value based
on available market information. The Company's derivative instrument is an
interest rate swap that changes a variable rate into a fixed rate on the term
loan and qualifies as a cash flow hedge and is included in accrued expenses on
the accompanying balance sheet as of March 31, 2010. Gains and
losses on these instruments are recorded in other comprehensive income (loss)
until the underlying transaction is recorded in earnings. When the hedged item
is realized, gains or losses are reclassified from accumulated other
comprehensive income (loss) (AOCI) to the Consolidated Statement of Operations
on the same line item as the underlying transaction. The
cumulative net loss attributable to this cash flow hedge recorded in AOCl at
March 31, 2010, was approximately $16,000, net of tax.
6
Investment
- On October 8, 2009,
the Company entered into an Asset Purchase Agreement with Internet Media
Services, Inc. (“IMS”) whereby the Company sold the assets and liabilities of
Legalstore.com, a division of the Company, in exchange for 7,500,000 shares of
common stock of the Internet Media Services, Inc. The Company recorded its
investment in Internet Media Services as an equity method investment at the fair
market value of the business sold. Management determined that the transaction
qualified as a derecoginition of a subsidiary under ASC 810-10-40. Therefore,
the Company accounted for the deconsolidation of a subsidiary (“the business”)
by recording the consideration received at fair market value and recognizing a
gain in net loss during the year ending December 31, 2009 measured as the
difference between: the fair value of the consideration received (7,500,000
shares of common stock of Internet Media Services, Inc. or a 37% interest) and
the carrying value of the assets and liabilities sold. Given that the
consideration received was not readily measurable because of the lack of
activity in Internet Media Services, Inc. prior to the transaction, the Company
determined that the value of the “business transferred” was more readily
measurable. The Company determined the fair market value of the business
transferred based on a discounted cash flow model. Under the equity method
investment the Company is required to account for the difference between the
cost of an investment and the amount of the underlying equity in net assets of
an investee as if the investee were a consolidated subsidiary. If the investor
is unable to relate the difference to specific accounts of the investee (
e.g.
, property and
equipment), the difference should be considered to be the same as goodwill.
Investors shall not amortize goodwill associated with equity method investments
after the date ASC 350/Statement No. 142,
Goodwill and Other Intangible
Assets
, is initially applied by the entity in its entirety. The Company
determined that given the lack of activity in Internet Media Services, Inc.
prior to the transaction, the difference between the cost of the investment
(fair market value) and the underlying equity interest is attributable to
goodwill which difference amounted to approximately $243,000 at December 31,
2009.
During
the three months ended March 31, 2010, the Company recognized a loss on its
investment in IMS of approximately $52,000 using the equity method of accounting
for the investment.
Earnings Per
Common Share
-
The
Company presents basic and diluted earnings per share. Basic earnings
per share reflects the actual weighted average of shares issued and outstanding
during the period. Diluted earnings per share are computed including the number
of additional shares that would have been outstanding if dilutive potential
shares had been issued. In a loss year, the calculation for basic and diluted
earnings per share is considered to be the same, as the impact of potential
common shares is anti-dilutive.
For the
three months ended March 31, 2010 and 2009, there were up to 2,623,886 and
1,953,282, respectively, of shares potentially issuable under convertible debt
agreements, options, warrants and restricted stock agreements that could
potentially dilute basic earnings per share in the future were excluded from the
calculation of diluted earnings per share because their inclusion would have
been anti-dilutive to the Company’s losses in the respective
periods.
Concentration
of Credit Risk -
The
Company acquired Premier Packaging Corporation in February
2010.
During the year
ended December 31, 2009, 72% of Premier Packaging’s sales were to two customers
and which comprised 81% of Premier Packaging’s accounts receivable balance as of
December 31, 2009. During the three month period ended March 31,
2010, these two customers accounted for 19% of the Company’s consolidated
revenue. One of the customers, which accounted for 15% of
sales, has a contract with the Company that is currently set to expire in July
2010.
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; (ii) increase sales of
the Company’s digital products; and (iii) integrate its new acquisition
of Premier Packaging with its existing product lines. As of March 31, 2010,
the Company has approximately $250,000 in cash and $417,000 available to it
under one credit facility, along with approximately $900,000 available under a
credit line at its Premier Packaging subsidiary. If the Company
cannot generate sufficient cash from its operations, the Company may need to
raise additional funds in the future in order to fund its working capital needs
and pursue its growth strategy, which although there can be no assurances,
management feels that sources for these additional funds will be available
through either current or future investors.
7
Recent Accounting
Pronouncements
In
January 2010, the FASB issued ASU 2010-6, “
Improving Disclosures About Fair
Value Measurements”
(“ASU 2010-6”), which requires reporting entities to
make new disclosures about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair- value measurements. ASU
2010-6 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation disclosures which are
effective for interim and annual periods beginning after December 15, 2010.
The Company adopted the requirements within ASU 2010-6 as of January 1,
2010. The adoption did not have an impact on our financial
statements.
2.
Inventory
Inventory
approximately consisted of the following:
|
March 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Finished
Goods
|
$
|
325,464
|
$
|
38,093
|
||||
|
Work
in process
|
182,189
|
58,493
|
||||||
|
Raw
Materials
|
131,192
|
87,588
|
||||||
|
$
|
638,845
|
$
|
184,174
|
|||||
3.
Other Intangible Assets
Other
intangible assets are comprised of the following:
|
March
31,
2010
|
December
31,
2009
|
|||||||||||||||||||||||||
|
Useful
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortizaton
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortizaton
|
Net
Carrying
Amount
|
||||||||||||||||||||
|
Acquired
intangibles
|
5
years
|
$ | 2,038,300 | $ | 579,678 | $ | 1,458,622 | $ | 756,300 | $ | 622,285 | $ | 134,015 | |||||||||||||
|
Patent
acquisition and defense costs
|
Varied
|
(1)
|
4,729,889 | 4,067,685 | 662,204 | 4,729,889 | 3,879,341 | 850,548 | ||||||||||||||||||
|
Patent
application costs
|
Varied
|
(2)
|
793,195 | 182,417 | 610,778 | 776,159 | 171,753 | 604,406 | ||||||||||||||||||
| $ | 7,561,384 | $ | 4,829,780 | $ | 2,731,604 | $ | 6,262,348 | $ | 4,673,379 | $ | 1,588,969 | |||||||||||||||
(1)-
patent rights are amortized over their expected useful life which is
generally the legal life of the patent. As of March 31, 2010 the
weighted average remaining useful life of these assets in service was 1.75
years.
(2)-
patent rights are amortized over their expected useful life which is
generally the legal life of the patent. As of March 31, 2010 the
weighted average remaining useful life of these assets in service was 15
years.
4.
Debt
Revolving Note -
Related Party-
On January 4, 2008, the Company entered into a Credit
Facility Agreement with Fagenson and Co., Inc., as agent, a related party to
Robert B. Fagenson, the Chairman of the Company's Board of Directors. Under the
Fagenson Credit Agreement, the Company could borrow up to a maximum of
$3,000,000 from time to time up to and until January 4, 2010. Any
amount borrowed by the Company pursuant to the Fagenson Credit Agreement has
annual interest rate of 2% above LIBOR and is 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. On December 11, 2009, the Company entered into a Letter
Agreement with the lenders for the conversion of $2,000,000 of debt owed under
the Credit Facility into 1,250,000 shares of Document Security Systems Common
Stock. In addition, the parties amended the Credit Facility to
allow for a maximum borrowing of up to $1,000,000 and extended the due date to
January 4, 2012. As of March 31, 2010, the Company had
outstanding $583,000 under the Fagenson Credit
Agreement. Under the terms of the agreement the Company
is required to comply with various covenants. As of March 31, 2010,
the Company was in default of the agreement due to a failure to pay interest
when due. Fagenson and Co. has waived the defaults through January 1,
2012.
8
Interest
expense for revolving notes from related parties for the three months ended
March 31, 2010 was approximately $4,500 ($27,000 – 2009) of which approximately
$157,000 is included in accrued expenses as of March 31, 2010 ($152,000
–December 31, 2009).
Notes
Payable -
On December 9, 2009, the Company used the proceeds
from a $350,000 Convertible Note and a $575,000 Promissory Note, respectively,
to pay in full a $900,000 Term Note. The $350,000 Convertible
Note matures November 24, 2012, accrues interest at 10%, payable quarterly, and
is convertible into up to 218,750 shares of Document Security Systems Common
Stock. The $575,000 Promissory Note matures November 24, 2012 and
accrues interest at 10%, payable quarterly. Both Notes are
secured with equal rights by the assets of the Company’s wholly owned
subsidiary, DPI Secuprint. In conjunction with the convertible
note, the Company determined a beneficial conversion feature existed amounting
to approximately $94,000 which was recorded as discount on debt and is being
amortized over the term of the Note. Under the terms of the
agreements the Company is required to comply with various
covenants. As of March 31, 2010, the Company was in default of both
agreements due to a failure to pay interest when due however, the holders have
waived the defaults through January 1, 2012.
On
December 30, 2009, the Company used the proceeds from a $450,000 Convertible
Note to pay in full $450,000 due under a Credit Facility. The
$450,000 Convertible Note matures June 23, 2012, accrues interest at 8%, payable
quarterly, is convertible into up to 260,116 shares of Document Security Systems
Common Stock, and is secured by the accounts receivable of the Company,
excluding the accounts receivable of the Company’s wholly owned subsidiaries,
Plastic Printing Professionals and DPI Secuprint. In
conjunction with the Note, the Company issued to the holders of the Note
warrants to purchase up to 65,000 shares of the Company’s common stock within
five years at $2.00 per share. The estimated fair market value of
these warrants was determined using the Black Scholes option pricing model at
approximately $72,000, which was recorded as discount on debt and is being
amortized over the term of the Note. Furthermore, in conjunction with
this convertible note, the Company determined a beneficial conversion feature
existed amounting to approximately $257,000, which was recorded as discount on
debt and is being amortized over the term of the Note. In
addition, the Company recorded expense of approximately $110,000 for the fair
value of 40,000 warrants to purchase the shares of the Company’s common stock at
$2.00 issuable to the holder of the Convertible Note as a result of the
Company’s failure to file a registration statement under the terms of the
Note. Under the terms of the agreement the Company is required to
comply with various covenants. As of March 31, 2010, the Company was
in default of the agreement due to a failure to pay interest when due however,
the holder. has waived the defaults through January 1, 2012.
On
February 12, 2010, the Company acquired all of the outstanding common stock of
Premier Packaging Corporation (“Premier”) from Robert B. and Joan T. Bzdick
for $2,000,000 in cash and 735,437 shares of the Company's common
stock. In connection with the transaction, the Company incurred
secured bank debt in the principal amount of $1,500,000 which was used to
partially satisfy the purchase price of the Premier common stock. In
conjunction with the transaction, the Company entered into a Credit Facility
Agreement with RBS Citizens, N.A. (“Citizens Bank”) pursuant to which Citizens
Bank provided Premier Packaging Corporation with a term loan of $1,500,000,
and a revolving credit line of up to $1,000,000. The Credit Facility
Agreement contains customary representations and warranties, affirmative and
negative covenants, including financial covenants (minimum coverage
ratio, debt to EBITDA ratio, and current ratio requirements) and events of
default and is secured by all of the assets of Premier Packaging
Corporation. The credit facilities are also secured by cross
guarantees by Document Security Systems, Inc., and its other wholly owned
subsidiaries, Plastic Printing Professionals, Inc. and Secuprint, Inc (“DPI
Seceprint”). The $1,500,000 term loan matures March 1, 2013 and is
payable in 35 monthly payments of $25,000 plus interest commencing March 1, 2010
and a payment of $625,000 on the 36 month. Interest accrues at 1
Month LIBOR plus 3.75%. The proceeds of the term loan were used
as partial payment of the purchase of all of the outstanding common stock of
Premier Packaging Corporation. The revolving line of
credit up to $1,000,000 is accessible by the Premier Packaging division
subject to certain terms matures on February 12, 2011 and is payable in monthly
installments of interest only beginning on March 1, 2010. Interest accrues at 1
Month LIBOR plus 3.75%. The Company subsequently entered into an
interest rate swap agreement to lock into a 5.6% effective interest over the
life of the term loan.
9
5.
Stockholders’ Equity
Restricted Stock
–
As of March 31, 2010, there are 40,000 unvested restricted shares
granted to an employee that vests proratably through December
2013. The unvested shares are valued at $84,000. 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 March 31, 2010, vesting is
not considered probable and no compensation expense has been recognized related
to the performance grants.
On
February 12, 2010, the Company acquired all of the outstanding common stock of
Premier Packaging Corporation from Robert B. and Joan T. Bzdick for
$2,000,000 in cash and 735,437 shares of the Company's common stock which was
valued at $2,547,675.
On
February 17, 2010, the Company completed the sale of 20 investment units in a
private placement pursuant to subscription agreements with six accredited
investors. Each investment unit was comprised of 5,000 shares of the
Company’s common stock and five year warrants to purchase 1,000 shares of common
stock at an exercise price of $3.50 per share. In the transaction, the Company
sold 20 investment units for $15,000 per unit for gross cash proceeds of
$300,000, consisting of 100,000 shares of common stock and warrants to purchase
an aggregate of 20,000 shares of common stock. In connection with
these sales EKN Financial Services Inc., a registered broker-dealer, acted as
non-exclusive placement agent. EKN Financial Services, Inc. received
a cash fee in the aggregate of $30,000 as commission for these sales. On
February 17, 2010, the Company also sold 20 investment units for gross cash
proceeds of $270,000, consisting of 100,000 shares of common stock and warrants
to purchase an aggregate of 20,000 shares of common stock. No
placement agent fees were paid on these sales. On February 23, 2010, the Company
issued 304,000 shares of common stock pursuant to the exercise of warrants in
which the Company received proceeds of $608,000.
Stock
Options
– During the three months ended March 31, 2010, the Company
issued options to purchase 40,000 of its common shares at an exercise price of
$2.45 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 $38,000 determined by utilizing the Black Scholes
option pricing model. In addition, the Company issued options to
purchase 150,000 of its common shares at an exercise prices between $3.29 and
$4.00 per share under the Company’s 2004 Employees’ Stock Option Plan to certain
employees. The fair value of these options amounted to approximately
$191,000 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 ASC
718.
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 three months ended
March 31, 2010, the Company had stock compensation expense of approximately
$140,000 ($0.01 per share) (negative stock compensation expense of $145,000-
2009; $0.01 per share).
As of
March 31, 2010, there was approximately $767,000 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.
Business Combination
On
February 12, 2010, the Company acquired all of the outstanding common stock of
Premier Packaging Corporation (“Premier”) from Robert B. and Joan T. Bzdick
for $2,000,000 in cash and 735,437 shares of the Company's common stock with a
value of $2,566,675 at February 12, 2010. The cash payment was subject to
a working capital adjustment which was not required as the working capital was
within the target range. In addition, the purchase price is
subject to increase if the capital gains tax rate that was in effect as of
February 12, 2010 is retroactively increased by legislation or otherwise whereas
the seller’s tax on its gain increases. Any increase in taxes
will be payable by the Company in either cash or stock. The Company
believes this contingent payment is remote. In addition, the seller
has registration rights for its shares to which the Company is subject to
registration penalties of up to $5,000 per month after 120 days.
The
acquisition has been accounted for as a business combination, whereby the
Company measured the identifiable assets acquired and liabilities assumed based
on the acquisition date fair value. The Company incurred
approximately $30,000 of acquisition related legal and professional fees that
were expensed in the period in which they were incurred. The
Company is required to recognize and measure any related goodwill acquired in
the business combination or a gain from a bargain purchase. Based on
management’s preliminary assumptions, the fair value of the assets acquired and
liabilities assumed was less than the purchase price resulting in the recording
of goodwill. The goodwill recorded with the transaction is not
deductible for income taxes.
10
The
Company has engaged a valuation expert, The Financial Valuation Group, to assist
management in determining the fair value of the assets acquired. The
preliminary allocation of the purchase price and the estimated useful lives
associated with the acquired assets and liabilities is as follows:
|
|
Estimated Useful
Lives
|
||||
|
Fair
value of the consideration transferred
|
$ | 4,566,675 | |||
|
Fair
value of assets acquired and liabilities assumed:
|
|||||
|
Cash
|
$ | 5,290 | |||
|
Accounts
receivable
|
1,284,227 | ||||
|
Inventories
|
504,162 | ||||
|
Machinery
and equipment
|
1,557,500 |
3
to 7 years
|
|||
|
Other
intangible assets
|
1,372,000 |
5
to 10 years
|
|||
|
Goodwill
|
627,360 | ||||
|
Total
Assets
|
$ | 5,350,539 | |||
|
Liabilities
assumed:
|
|||||
|
Accounts
payable
|
$ | 448,128 | |||
|
Revolving
credit lines
|
277,645 | ||||
|
Accrued
Liabilities
|
58,091 | ||||
|
Total
Liabilities
|
$ | 783,864 | |||
|
Total
prelimary purchase price
|
$ | 4,566,675 |
Set forth
below is the unaudited proforma revenue, operating loss, net loss and loss per
share of the Company as if Premier Packaging Corporation had been acquired by
the Company as of January 1, 2009.
|
Three Months Ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 3,659,098 | $ | 4,341,640 | ||||
|
Operating
Loss
|
(1,167,350 | ) | (772,070 | ) | ||||
|
Net
Loss
|
(1,188,350 | ) | (920,070 | ) | ||||
|
Basic
and diluted loss per share
|
(0.07 | ) | (0.06 | ) | ||||
7.
Other Income
In March,
2010, the Company received notification that it was due approximately $143,000
for New York State Qualified Emerging Technology Company (“QETC”) refundable tax
credits for the tax year ended 2008 which the Company received in April,
2010.
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 which, unless the amount is settled will
be subject to an assessment procedure that will not likely be concluded until
late 2010, which the Company will accrue as soon as the assessed amount, if any,
is reasonably estimatable.
11
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, of which the Company has paid ₤332,000 through March 31,
2010 and owes approximately ₤61,000 (approximately $90,000 as of March 31,
2010), which includes approximately ₤22,000 of interest on unpaid fees, which
amount is included in accrued expenses as of March 31, 2010. In
April 2010, the Company was notified that a suit was filed by the ECB in the
State of New York seeking summary judgment for the unpaid fees reimbursement of
₤39,000 and interest of ₤22,000 which is scheduled to be heard on June 10,
2010.
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 ($60,000 at March 31, 2010), 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 July
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. The French appeal was heard
on December 7, 2009. On March 20, 2010, the Company was
informed that the decision was upheld in the French appeal. 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. The Dutch
appeal will be heard in the Hague on June 2010. On November 3, 2009, the Belgium
Court held that the Patent was invalid in Belgium for the same reasons given by
the English and French courts as were similarly informed by the Austrian court
on November 17, 2009. Costs reimbursements, if any, associated with
the Belgium and Austrian validity case are covered under the Trebuchet Agreement
as described below. 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. On March 24, 2010 the Spanish Court ruled that the Patent was
valid. In Italy the validity case is to be heard again by a newly
appointed judge during 2010 and a hearing in Luxembourg is expected in
2010.
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.
The
Patent has thus been confirmed to be valid and enforceable in three
jurisdictions (Germany, the Netherlands and Spain) 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. On February 18, 2010, Trebuchet, on behalf of
Document Security Systems, filed an infringement suit in the Netherlands.
The suit is being lodged against the ECB and two security printing entities with
manufacturing operations in the Netherlands, Joh. Enschede Banknotes B.V.; and
Koninklijke Joh. Enschede B.V. The ECB's and the security
printers have been notified and the court hearing date is tentatively scheduled
for January 21, 2011.
12
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 March 31, 2010, there has been no settlement
amounts related to these agreements.
Contingent
Purchase Price
-In December, 2008, the Company acquired substantially all
of the assets of DPI of Rochester, LLC (“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 March 31, 2010,
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
agreed to issue up to 30,000 shares of stock to pay the remaining amount due of
$113,000. As of March 31, 2010, approximately $40,000 remains
due under the agreement and is recorded in accrued expenses. Any
remaining amounts due under the agreement after the shares are issued, if any,
can be paid in cash or additional shares.
Operating
L
ease
with a related party
- In conjunction
with it acquisition of Premier Packaging in February 2010, the Company entered
into a ten-year lease for a production facility in Victor, NY with Robert
Bzdick, the former owner of Premier Packaging, and the Company’s Chief Operating
Officer and President. The minimum future lease payments under
this lease are as follows:
|
2010
|
133,333 | |||
|
2011
|
160,000 | |||
|
2012
|
160,000 | |||
|
2013
|
160,000 | |||
|
2014
|
160,000 | |||
|
2015
|
178,333 | |||
|
Thereafter
|
750,000 |
9.
Supplemental Cash Flow Information
During the three months ended March 31,
2010, the Company issued 735,437 shares valued at $2,566,675 as a partial
payment of an acquisition. In addition, the company satisfied
approximately $34,000 of accrued expenses by issuing common stock of the Company
and had a non-cash other comprehensive loss item for interest rate swap loss of
approximately $16,000. Cash paid for interest during the three months
ended March 31, 2010, was approximately $36,000 ($45,000 -
2009)
.
13
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,
along with traditional commercial printing on paper and
plastic. For the purposes of providing segment
information, these three operating segments have been aggregated into one
reportable segment in accordance with ASC 280. The fourth business is
engaged in the production of packaging products and is classified as a separate
segment. A summary of the three segments
follows:
|
Security
and 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.
|
|
|
Packaging
|
The
Company acquired Premier Packaging in February 12, 2010 which produces
packaging for various end-users.
|
|
|
Legal
Supplies
|
Sale
of specialty legal supplies, primarily to lawyers and law firms located
throughout the United States as Legalstore.com. During the fourth
quarter of 2009, the Company sold its legal products
business.
|
Approximate
information concerning the Company’s operations by reportable segment for the
three months ended March 31, 2010 and 2009 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:
|
Legal
Supplies
|
Packaging
|
Security and
Commercial
Printing
|
Corporate
|
Total | ||||||||||||||||
|
3 months ended March 31, 2010
|
||||||||||||||||||||
|
Revenues
from external customers
|
$ | - | $ | 741,000 | $ | 2,034,000 | $ | - | $ | 2,775,000 | ||||||||||
|
Depreciation
and amortization
|
- | 27,000 | 304,000 | 1,000 | 332,000 | |||||||||||||||
|
Net
income (loss)
|
- | 17,000 | (734,000 | ) | (404,000 | ) | (1,121,000 | ) | ||||||||||||
|
3 months ended March 31,
2009
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Revenues
from external customers
|
$ | 139,000 | $ | - | $ | 2,640,000 | $ | - | $ | 2,779,000 | ||||||||||
|
Depreciation
and amortization
|
5,000 | - | 404,000 | 1,000 | 410,000 | |||||||||||||||
|
Net
income (loss)
|
17,000 | - | (336,000 | ) | (625,000 | ) | (944,000 | ) | ||||||||||||
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, 2009, 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
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,”
“DSS,” “we,” “us,” “our” or “Company”) develops, markets,
manufactures and sells paper and plastic products designed to protect valuable
information from unauthorized scanning, copying, and digital
imaging. We have developed security technologies that are applied
during the normal printing process and by all printing methods including
traditional offset, gravure, flexo, digital or via the internet on paper,
plastic, or packaging. In addition, our technologies can be applied
to product packaging. Our technologies and products are used by
federal, state and local governments, law enforcement agencies and are also
applied to a broad variety of industries as well, 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 protecting 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
record 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 February 2010, we acquired Premier Packaging , a
privately held commercial packaging company located in Victor, NY with
approximately $7.3 million in sales in 2009. As a result of
this acquisition, we have entered the packaging market with the intent to
introduce our security technologies to a new audience geared toward the
protection of brand counterfeiting. We believe that the use of our
technologies on product packaging presents a significant
opportunity. In addition, this acquisition will allow us to
strengthen our competitive position in the traditional commercial printing and
packaging markets as we will be able to offer a very price effective combination
of services.
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
Security and
C
ommercial
P
rinting
: Our
technology portfolio allows us to create unique custom secure paper, plastic,
packaging and Internet-based and software enterprise solutions. We
market and sell under the name Document Security Systems 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.
Our
primary product for the retail end-user market is AuthentiGuard® Security
Paper. AuthentiGuard® Security Paper is blank paper that contains our
Pantograph 4000™ 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.
We
produce secure and non-secure printing at our 20,000 square foot printing
facility in Rochester, NY. Our printing division has a
high speed 6 color press along with two digital presses along with a full range
of die cutting, packing, and folding capabilities.
We
produce our secure and non-secure plastic printed documents such as ID cards,
event badges, and driver licenses at our 25,000 square foot facility in
Brisbane, California under the name Plastic Printing
Professionals. Our plastic division has the capabilities for high
speed data encoding and production of high-volume precision RFID
cards.
Packaging:
We produce our
secure and non-secure packaging products such as boxes, mailers, point of sale
displays, utilizing a CAD/CAM design system that allows for early stage
prototyping at our manufacturing facility in Victor, New York. Our
packaging division offers automated die cutting, high speed folding, gluing,
window and paper patching, automated in-line inserting, pick and place and
tip-on systems.
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 Document Security Systems, Inc. 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.
The
company has developed an internet delivered technology called AuthentiGuard® –
On Demand™ where information is hidden and then verified utilizing an
inexpensive viewing glass. This technology is currently being
utilized by a Central American country for travel visas.
16
The
company has also developed digital versions of its AuthentiGuard® –
Prism™ and AuthentiGuard® – Pantograph 4000™ technologies
which are produced on HP Indigo Presses, Canon Color Copiers, Ricoh Color
Copiers and Konica Desktop Printers. The company sells the digital
products directly through its internal sales force and it has also entered a
contract to sell its digital solutions through a third party who specializes in
hardware software engineering solutions.
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
|
|
|
·
|
Pay
Per Finished Piece
|
Legal Products
: We
also owned and operated 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 October 8, 2009 we sold the assets and liabilities
associated with our Legalstore.com business in exchange for 7,500,000 shares of
common stock of Internet Media Services, Inc., representing approximately 37% of
the outstanding shares of the newly formed company.
Results of
Operations for the Three Months Ended
March 31, 2010
Compared to the Three Months ended March 31, 2009
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 third quarter of
2009, the Company’s Board of Directors finalized an agreement to sell its legal
products business. In accordance with ASC 205-20-45, the
Company reported the results of Legalstore.com as continued operations because
the operations and cash flow of the component have not been
eliminated and given the Company’s continued involvement after the
sale.
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, 2009.
Revenue
|
Three Months
Ended March 31,
2010
|
Three Months
Ended March 31,
2009
|
% change
|
||||||||||
|
Revenue
|
||||||||||||
|
Security
and commercial printing
|
$ | 1,859,000 | $ | 2,417,000 | -23 | % | ||||||
|
Packaging
|
741,000 | - | ||||||||||
|
Technology
license royalties and digital solutions
|
175,000 | 223,000 | -22 | % | ||||||||
|
Legal
products
|
- | 139,000 | -100 | % | ||||||||
|
Total
Revenue
|
2,775,000 | 2,779,000 | 0 | % | ||||||||
For the
three months ended March 31, 2010, revenue was $2.8 million which was the same
as revenue for the three months ended March 31, 2009. In
February 2010, the Company acquired Premier Packaging Corp, which had standalone
sales for the period from February 12, 2010 through March 31, 2010, of
$741,000. The addition of Premier Packaging sales offset a 23%
decline in commercial print sales experienced by the Company due to the lack of
a certain large orders in the 2009 quarter that the Company did not receive in
the 2010 quarter. Licensing revenue decreased 22% in the
first quarter of 2010 as compared to the 2009 quarter as the Company’s largest
licensee had lower technology usage during quarter. Finally,
the Company did not have any legal products revenue in 2010 as the division was
sold in the fourth quarter of 2009.
17
Cost
of Sales and Gross Profit
|
Three Months
Ended March 31,
2010
|
Three Months
Ended March 31,
2009
|
% change
|
||||||||||
|
Costs
of revenue
|
||||||||||||
|
Security
and commercial printing
|
$ | 1,364,000 | $ | 1,534,000 | -11 | % | ||||||
|
Packaging
|
559,000 | - | ||||||||||
|
Technology
license royalties and digital solutions
|
5,000 | 4,000 | 25 | % | ||||||||
|
Legal
products
|
- | 63,000 | -100 | % | ||||||||
|
Total
cost of revenue
|
1,928,000 | 1,601,000 | 20 | % | ||||||||
|
Gross
profit
|
||||||||||||
|
Security
and commercial printing
|
495,000 | 883,000 | -44 | % | ||||||||
|
Packaging
|
182,000 | - | ||||||||||
|
Technology
license royalties and digital solutions
|
170,000 | 219,000 | -22 | % | ||||||||
|
Legal
products
|
- | 76,000 | -100 | % | ||||||||
|
Total
gross profit
|
847,000 | 1,178,000 | -28 | % | ||||||||
|
Three Months
Ended March 31,
2010
|
Three Months
Ended March 31,
2009
|
% change
|
||||||||||
|
Gross
profit percentage:
|
31 | % | 42 | % | -27 | % | ||||||
Gross
profit decreased 28% to $847,000 in the first quarter of 2010 as compared to the
first quarter of 2009. The decrease was primarily due to the decrease
in sales of commercial printing, which was offset by sales of packaging, that
carry a lower profit margin. The Company expects that the impact of
the Company’s acquisition of Premier Packaging in February 2010 will be to
decrease overall gross profit margins, especially as the number of non-security
packaging projects out-number the security packaging projects, which the Company
expect will be a higher profit margins. In addition, the
Company did not have any gross profits from legal product sales as the division
was sold in the fourth quarter of 2009.
Operating
Expenses
|
Three Months
Ended March 31,
2010
|
Three Months
Ended March 31,
2009
|
% change
|
||||||||||
|
Operating
Expenses
|
||||||||||||
|
Sales,
general and administrative compensation
|
$ | 832,000 | $ | 1,023,000 | -19 | % | ||||||
|
Professional
Fees
|
212,000 | 247,000 | -14 | % | ||||||||
|
Sales
and marketing
|
69,000 | 60,000 | 15 | % | ||||||||
|
Research
and development
|
66,000 | 87,000 | -24 | % | ||||||||
|
Rent
and utilities
|
142,000 | 128,000 | 11 | % | ||||||||
|
Other
|
209,000 | 211,000 | -1 | % | ||||||||
| $ | 1,530,000 | $ | 1,756,000 | -13 | % | |||||||
|
Other
Operating Expenses
|
||||||||||||
|
Depreciation
and amortization
|
31,000 | 40,000 | -23 | % | ||||||||
|
Stock
based compensation
|
140,000 | (145,000 | ) | |||||||||
|
Amortization
of intangibles
|
246,000 | 323,000 | -24 | % | ||||||||
| 417,000 | 218,000 | 91 | % | |||||||||
|
Total
Operating Expenses
|
1,947,000 | 1,974,000 | -1 | % | ||||||||
18
Selling, General and
Administrative
Sales, general and
administrative compensation
costs were 19% lower in the three months
ending March, 31, 2010 as compared to the three months ended March 31, 2009,
despite the addition of approximately $85,000 of sg&a compensation expense
from the packaging division the Company acquired in February
2010. Otherwise, SG&A compensation costs would have decreased 25%
during the three months ended March 31, 2010, as compared to the three months
ended March 31, 2009 as the result of staff reductions that the
Company made throughout 2009.
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 in the first quarter of 2010 was $140,000 as compared to a
negative $145,000 stock based compensation expense recorded in the first quarter
of 2009 which reflected the effect of 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 quarter
of 2009.
Professional fees
in
the first quarter of each year are typically high as the Company incurs its
annual audit fees. In addition, during the first quarter of
2010, the Company incurred approximately $30,000 of legal and financial fees
associated with its acquisition of Premier Packaging in February
2010. Otherwise, legal fees decreased approximately $40,000 as the
Company has been able to significantly reduce legal compliance
costs.
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 due to
a reduction in compensation cost.
Rent and utilities
increased as a result of the acquisition of Premier Packaging in
February 2010.
Other operating
expenses are primarily equipment maintenance and repairs, office supplies, IT
support, bad debt expense and insurance costs. On a consolidated
basis, these costs were generally consistent between the first quarters of 2010
and 2009, respectively.
Amortization of
intangibles
expense decreased 24% in the three months ended March 31,
2010, as compared to the three months ended March 31, 2009 as a result of the
reduction in the Company’s net capitalized patent acquisition and defense costs
asset.
Other
Income and expenses
|
Three Months
Ended March 31,
2010
|
Three Months
Ended March 31,
2009
|
% change
|
||||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
expense
|
(65,000 | ) | (81,000 | ) | -20 | % | ||||||
|
Amortizaton
of note discount
|
(41,000 | ) | (62,000 | ) | -34 | % | ||||||
|
Loss
in equity investment
|
(52,000 | ) | - | |||||||||
|
Other
income
|
143,000 | - | ||||||||||
|
Other
income (expense), net
|
(15,000 | ) | (143,000 | ) | -90 | % | ||||||
Loss in equity investment:
During the three months ended March 31, 2010, the Company recognized a
loss on its investment in Internet Media Services, the entity that purchased
Legalstore.com business in October 2009 from the Company, of approximately
$52,000 using the equity method of accounting for the
investment.
19
Other income:
In March, 2010,
the Company received notification that it was due approximately $143,000 for New
York State Qualified Emerging Technology Company (“QETC”) refundable tax credits
for the tax year ended 2008which the Company received in April,
2010.
Net
Loss and Loss Per Share
|
Three Months
Ended March 31,
2010
|
Three Months
Ended March 31,
2009
|
% change
|
||||||||||
|
Net
loss
|
$ | (1,121,000 | ) | $ | (944,000 | ) | 19 | % | ||||
|
Net
loss per share, basic and diluted
|
$ | (0.07 | ) | $ | (0.07 | ) | 0 | % | ||||
|
Weighted
average common shares outstanding, basic and diluted
|
17,094,916 | 14,378,609 | 19 | % | ||||||||
During
the first quarter of 2010, the Company experienced a net loss of $1,121,000, a
19% increase from the net loss of the first quarter of 2009. The
increase in net loss during the quarter was primarily the result of the decrease
in gross profit and other operating costs during the first quarter of
2010 which more than offset declines in operating expenses as compared to the
first quarter 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:
|
||||||||||||
|
March 31,
2010
|
March 31,
2009
|
% change vs.
2009
|
||||||||||
|
Cash
flows from:
|
||||||||||||
|
Operating
activities
|
$ | (449,000 | ) | $ | (659,000 | ) | 32 | % | ||||
|
Investing
activities
|
(2,393,000 | ) | (39,000 | ) | -6036 | % | ||||||
|
Financing
activities
|
2,639,000 | 779,000 | -239 | % | ||||||||
|
Working
capital
|
(157,000 | ) | (4,505,000 | ) | -97 | % | ||||||
|
Current
ratio
|
0.95 | x | 0.34 | x | 180 | % | ||||||
|
Cash
and cash equivalents
|
$ | 246,000 | $ | 169,000 | 46 | % | ||||||
|
Funds
Available from Open Credit Facilities
|
$ | 1,343,000 | $ | 517,000 | 160 | % | ||||||
|
Debt
(excluding unamortized debt discount)
|
$ | 3,507,000 | $ | 3,983,000 | 42 | % | ||||||
As of
March 31, 2010, our cash balance was approximately $246,000, down from $449,000
at December 31, 2009. During the first three months of 2010, the
Company used $449,000 of cash for operations, a 32% improvement over the use of
cash for the first quarter of 2009, which reflects the positive effect of cost
cuts at every division that allows the Company to use less cash to support its
operations. On February 12, 2010, the Company acquired
Premier Packaging Corp for $2,000,000 in cash, which was funded by proceeds from
a $1,500,000 Term Note and the proceeds from the exercise of warrants by certain
warrant holders that the Company received during the quarter.
20
Future Capital
Needs
While
the Company’s working capital position has significantly improved since December
31, 2009, the Company will likely need to raise additional funds in the future
in order to fund its working capital needs and pursue its growth
strategy, As of March 31, 2010, our cash balance
was approximately $246,000, and we had a negative working capital of
$157,000. However, approximately $730,000 in positive working
capital resides at the Company’s packaging subsidiary and is restricted from
general corporate use due to bank covenants. As a result, our
remaining divisions will not have access to this working
capital. Therefore, in order to meet our operating needs and our
current obligations in these divisions, we will need to generate additional
income from operations or obtain additional financing, including without
limitation, fund-raising through additional sales of
equity. The Company believes it will be able to sell its common
stock in order to meet its future capital needs, but there is no guarantee that
the Company will be able to do so.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have, or are reasonably likely to
have, an effect on our financial condition, financial statements, revenues or
expenses.
Critical
Accounting Policies and Estimates
As of
March 31, 2010, 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, 2009.
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, 2009 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 three months of 2010, the Company added the accounting staff from its
acquisition of a packaging company in February 2010, and will incorporate these
individuals into its 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, 2010.
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.
21
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 March 31,
2010. 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 three months of 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
OTHER
INFORMATION
Information
concerning pending legal proceedings is incorporated herein by reference to Note
8 to the Consolidated Financial Statements (Unaudited) in Part I of this Form
10-Q.
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 which, unless the amount is settled will be subject to an assessment
procedure that will not likely be concluded until late 2010, 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, of which the Company
has paid ₤332,000 through March 31, 2010 and owes approximately
₤61,000 (approximately $90,000 as of March 31, 2010), which includes
approximately ₤22,000 of interest on unpaid fees, which amount is included in
accrued expenses of March 31, 2010. In April 2010, the Company was
notified that a suit was filed by the ECB in the State of New York seeking
summary judgment for the unpaid fees reimbursement of ₤39,000 and interest of
₤22,000 which is scheduled to be heard on June 10, 2010.
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 ($60,000 at March 31, 2010), 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 July 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. The French
appeal was heard on December 7, 2009. On March 20, 2010, the
Company was informed that the decision was upheld in the French appeal. 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. The Dutch
appeal will be heard in the Hague on June 2010. On November 3, 2009, the Belgium
Court held that the Patent was invalid in Belgium for the same reasons given by
the English and French courts as were similarly informed by the Austrian court
on November 17, 2009. Costs reimbursements, if any, associated with the
Belgium and Austrian validity case are covered under the Trebuchet Agreement as
described below. 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.
On March 24, 2010 the Spanish Court ruled that the Patent was valid. In
Italy the validity case is to be heard again by a newly appointed judge during
2010 and a hearing in Luxembourg is expected in 2010.
22
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.
The
Patent has thus been confirmed to be valid and enforceable in three
jurisdictions (Germany, the Netherlands and Spain) 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. On February 18, 2010, Trebuchet, on behalf of Document
Security Systems, filed an infringement suit in the Netherlands. The suit
is being lodged against the ECB and two security printing entities with
manufacturing operations in the Netherlands, Joh. Enschede Banknotes B.V.; and
Koninklijke Joh. Enschede B.V. The ECB's and the security printers
have been notified and the court hearing date is tentatively scheduled for
January 21, 2011.
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.
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, 2009, which we filed with the Securities and Exchange
Commission on March 25, 2010. The following discussion is of material
changes to risk factors disclosed in that report.
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.
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; (ii) increase sales of the Company’s digital
products; and (iii) integrate its new acquisition of Premier Packaging with
its existing product lines. As of March 31, 2010, the Company has approximately
$250,000 in cash and $417,000 available to it under one credit facility,
along with approximately $926,000 available under a credit line at its Premier
Packaging subsidiary. If the Company cannot generate sufficient cash from
its operations, the Company may need to raise additional funds in the
future in order to fund its working capital needs and pursue its growth
strategy, which although there can be no assurances, management feels that
sources for these additional funds will be available through either current or
future investors. 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.
23
We
have a significant amount of indebtedness and may be unable to satisfy our
obligations to pay interest and principal thereon when due.
As of
March 31, 2010, we have the following approximate amounts of outstanding
indebtedness:
|
(i)
|
$450,000
Convertible Note bearing interest at 8% per annum due June 23, 2012,
convertible into up to 260,116 shares of Document Security Systems Common
Stock, and is secured by the accounts receivable of the Company, excluding
the accounts receivable of the Company’s wholly owned subsidiaries,
Plastic Printing Professionals and DPI Secuprint,
respectively.
|
|
(ii)
|
$350,000 Convertible Note bearing
interest at 10% per annum due November 24, 2012, convertible into up to
218,750 shares of Document Security Systems Common Stock and is secured by
the assets of the Company’s wholly owned subsidiary DPI
Secuprint.
|
|
(iii)
|
$575,000 Promissory Note bearing
interest at 10% per annum due November 24, 2012 and is secured by the
assets of the Company’s wholly owned subsidiary DPI
Secuprint.
|
|
(iv)
|
$
583,000
due under a Credit Facility
to a related party
under which the
Company can borrow up to $1,000,000 bearing interest at LIBOR plus 2% per
annum due January 4, 2012.
|
Furthermore,
in February 2010, the Company entered into new debt agreements in conjunction
with its acquisition of Premier Packaging Corp as follows:
|
(v)
|
A $1,500,000 Term Loan which
matures March 1, 2013 and is payable in 35 monthly payments of $25,000
plus interest commencing March 1, 2010 and a payment of $625,000 on the 36
month. Interest accrues at 1 Month LIBOR plus 3.75% and is secured
by all of the assets of the Company’s subsidiary, Premier Packaging
Corporation, which the Company acquired on February 12, 2010.
The Company subsequently entered
into a
interest
rate
swap agreement
to lock into a 5.6% effective interest over the life of the term
loan.
The Loan has also been guaranteed
by Document Security Systems, and its subsidiaries Plastic Printing
Professionals and DPI
Secuprint.
|
|
(vi)
|
Up to $1,000,000
in a revolving line of credit
available for use by Premier Packaging, subject to certain limitations
which matures on February 12, 2011 and is payable in monthly installments
of interest only beginning on March 1, 2010. Interest accrues at 1 Month
LIBOR plus 3.75%. As of March
31
, 2010, approximately
$
74
,000 is outstanding on the
line.
|
We have not made interest payments on
the Credit Facility to a related party and have had to obtain default waivers
from
the
holder
in the
past
, including one as of
March 31, 2010.
In
addition, the Company made late interest payments on its $450,000 Convertible
Note, its $350,000 Convertible Note,
and
its $575,000 Promissory Note and needed
to obtain default waivers from the holders of those notes as of March 31,
2010.
Absent a new
financing or series of financings, our current operations may not generate
sufficient cash to pay the interest and principal on these obligations when they
become due. Accordingly, we may default in these obligations in the
future
and there is
no guarantee that we will be able to obtain default waivers from the holders in
the future.
If
we lose our current litigation, we may lose certain of our technology rights,
which may affect our business plan.
We are
subject to litigation and threatened litigation, including without limitation
our litigation with the European Central Bank, in which parties allege, among
other things, that certain of our patents are invalid. If the ECB or other
parties are successful in invalidating any or all of our patents, it may
materially affect us, our financial condition, and our ability to market and
sell certain of our products based on any patent that is invalidated.
Furthermore, we have granted nearly all control over our ECB Litigation to
a third party, Trebuchet Capital Partners, LLC., who may or may not have the
resources or capabilities to successfully defend our patent
rights.
24
If
we are unable to adequately protect our intellectual property, our competitive
advantage may disappear.
Our
success will be determined in part by our ability to obtain United States and
foreign patent protection for our technology and to preserve our trade secrets.
Because of the substantial length of time and expense associated with developing
new document security technology, we place considerable importance on patent and
trade secret protection. We intend to continue to rely primarily on a
combination of patent protection, trade secrets, technical measures, copyright
protection and nondisclosure agreements with our employees and customers to
establish and protect the ideas, concepts and documentation of software and
trade secrets developed by us. Our ability to compete and the ability of
our business to grow could suffer if these intellectual property rights are not
adequately protected. There can be no assurance that our patent
applications will result in patents being issued or that current or additional
patents will afford protection against competitors. We rely on a
combination of patents, copyrights, trademarks and trade secret protection and
contractual rights to establish and protect our intellectual property.
Failure of our patents, copyrights, trademarks and trade secret protection,
non-disclosure agreements and other measures to provide protection of our
technology and our intellectual property rights could enable our competitors to
more effectively compete with us and have an adverse effect on our business,
financial condition and results of operations. In addition, our trade
secrets and proprietary know-how may otherwise become known or be independently
discovered by others. No guarantee can be given that others will not
independently develop substantially equivalent proprietary information or
techniques, or otherwise gain access to our proprietary technology.
In
addition, we may be required to litigate in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Any such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, financial condition or results of operations, and there
can be no assurances of the success of any such litigation.
We
may face 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.
Although we have received patents with
respect to certain technologies of ours, there can be no assurance that these
patents will afford us any meaningful protection. Although we believe that
our use of the technology and products we developed and other trade secrets used
in our operations do not infringe upon the rights of others, our use of the
technology and trade secrets we developed may infringe upon the patents or
intellectual property rights of others. In the event of infringement, we could,
under certain circumstances, be required to obtain a license or modify aspects
of the technology and trade secrets we developed or refrain from using
same. We may not have the necessary financial resources to defend an
infringement claim made against us or be able to successfully terminate any
infringement in a timely manner, upon acceptable terms and conditions or at all.
Failure to do any of the foregoing could have a material adverse effect on us
and our financial condition. Moreover, if the patents, technology or trade
secrets we developed or use in our business are deemed to infringe upon the
rights of others, we could, under certain circumstances, become liable for
damages, which could have a material adverse effect on us and our financial
condition. As we continue to market our products, we could encounter
patent barriers that are not known today. A patent search will not disclose
applications that are currently pending in the United States Patent Office, and
there may be one or more such pending applications that would take precedence
over any or all of our applications.
Furthermore,
third parties may assert that our intellectual property rights are invalid,
which could result in significant expenditures by us to refute such
assertions. If we become involved in litigation, we could lose our
proprietary rights, be subject to damages and incur substantial unexpected
operating expenses. Intellectual property litigation is expensive and
time-consuming, even if the claims are subsequently proven unfounded, and could
divert management’s attention from our business. If there is a successful claim
of infringement, we may not be able to develop non-infringing technology or
enter into royalty or license agreements on acceptable terms, if at all.
If we are unsuccessful in defending claims that our intellectual property rights
are invalid, we may not be able to enter into royalty or license agreements on
acceptable terms, if at all. This could prohibit us from providing our
products and services to customers, which could have a material adverse effect
on us and our financial condition.
25
Certain
of our recently developed products are not yet commercially accepted and there
can be no assurance that those products will be accepted, which would adversely
affect our financial results.
Over the
past several years, we have spent significant funds and time to create new
products by applying our technologies onto media other than paper, including
plastic and cardboard packaging, and delivered our technologies digitally.
We have had limited success in selling our products that are on cardboard
packaging and those that are delivered digitally. Our business plan for
2010 and beyond includes plans to incur significant marketing and sales costs
for these newer products, particularly the digitally delivered products.
If we are not able to sell these new products, our financial results will be
adversely affected.
The
results of our research and development efforts are uncertain and there can be
no assurance of the commercial success of our products.
We
believe that we will need to continue to incur research and development
expenditures to remain competitive. The products we currently are developing or
may develop in the future may not be technologically successful. In addition,
the length of our product development cycle may be greater than we originally
expect and we may experience delays in future product development. If our
resulting products are not technologically successful, they may not achieve
market acceptance or compete effectively with our competitors’
products.
Changes
in document security technology and standards could render our applications and
services obsolete.
The
market for document security products, applications, and services is fast moving
and evolving. Identification and authentication technology is constantly
changing as we and our competitors introduce new products, applications, and
services, and retire old ones as customer requirements quickly develop and
change. In addition, the standards for document security are continuing to
evolve. If any segments of our market adopt technologies or standards that are
inconsistent with our applications and technology, sales to those market
segments could decline, which could have a material adverse effect on us and our
financial condition.
The
market in which we operate is highly competitive, and we may not be able to
compete effectively, especially against established industry competitors with
greater market presence and financial resources.
Our
market is highly competitive and characterized by rapid technological change and
product innovations. Our competitors may have advantages over us because of
their longer operating histories, more established products, greater name
recognition, larger customer bases, and greater financial, technical and
marketing resources. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements, and devote
greater resources to the promotion and sale of their products. Competition may
also force us to decrease the price of our products and services. We cannot
assure you that we will be successful in developing and introducing new
technology on a timely basis, new products with enhanced features, or that these
products, if introduced, will enable us to establish selling prices and gross
margins at profitable levels.
Our
growth strategy depends, in part, on our acquiring complementary businesses and
assets and expanding our existing operations to include manufacturing
capabilities, which we may be unable to do.
Our
growth strategy is based, in part, on our ability to acquire businesses and
assets that are complementary to our existing operations and expanding our
operations to include manufacturing capabilities. We may also seek to acquire
other businesses. The success of this acquisition strategy will depend, in part,
on our ability to accomplish the following:
|
|
·
|
identify
suitable businesses or assets to
buy;
|
|
|
·
|
complete
the purchase of those businesses on terms acceptable to
us;
|
|
|
·
|
complete
the acquisition in the time frame we expect;
and
|
|
|
·
|
improve
the results of operations of the businesses that we buy and successfully
integrate their operations into our
own.
|
Although
we were able to acquire our Plastic Printing Professionals, Inc. subsidiary in
February 2006 and our DPI Secuprint subsidiary in December 2008, and Premier
Packaging in February 2010, there can be no assurance that we will be successful
in pursuing any or all of these steps on future transactions. Our failure to
implement our acquisition strategy could have an adverse effect on other aspects
of our business strategy and our business in general. We may not be able to find
appropriate acquisition candidates, acquire those candidates that we find or
integrate acquired businesses effectively or profitably.
26
Our
acquisition program and strategy may lead us to contemplate acquisitions of
companies in bankruptcy, which entail additional risks and uncertainties. Such
risks and uncertainties include, without limitation, that, before assets may be
acquired, customers may leave in search of more stable providers and vendors may
terminate key relationships. Also, assets are generally acquired on an “as is”
basis, with no recourse to the seller if the assets are not as valuable as may
be represented. Finally, while bankrupt companies may be acquired for
comparatively little money, the cost of continuing the operations may
significantly exceed expectations.
We have
in the past used, and may continue to use, our Common Stock as payment for all
or a portion of the purchase price for acquisitions. If we issue significant
amounts of our Common Stock for such acquisitions, this could result in
substantial dilution of the equity interests of our stockholders.
We
may not realize the anticipated benefits of our recent
acquisitions.
Our expectations regarding the
earnings, operating cash flow, capital expenditures and liabilities resulting
from our recent acquisition Premier Packaging Corp in February 2010 are based on
information currently available to us and may prove to be incorrect. We may not
realize any anticipated benefits of either of this acquisition and may not be
successful in integrating the acquired assets into our existing business.
In particular, 72% of Premier Packaging’s sales for the year ended December 31,
2009 were to two customers and which comprised 81% of Premier Packaging’s
accounts receivable balance as of December 31, 2009. During the three
month period ended March 31, 2010, these two customers accounted for 19% of the
Company’s consolidated revenue. One of the customers, which
accounted for 15% of sales, has a contract with the Company that is currently
set to expire in July 2010.
If
we fail to retain our key personnel and attract and retain additional qualified
personnel, we might not be able to pursue our growth strategy.
Our
future success depends upon the continued service of our executive officers and
other key sales and research
personnel
who possess longstanding industry relationships and technical knowledge of our
products and operations. The loss of any of our key employees could
negatively impact our ability to pursue our growth strategy and conduct
operations. Although we believe that our relationship with these
individuals is positive, there can be no assurance that the services of these
individuals will continue to be available to us in the future. There can
be no assurance that these persons will continue to agree to be employed by us
after such dates.
If
we do not successfully expand our sales force, we may be unable to increase our
revenues.
We must
expand the size of our marketing activities and sales force to increase
revenues. We continue to evaluate various methods of expanding our marketing
activities, including the use of outside marketing consultants and
representatives and expanding our in-house marketing capabilities.
If we are unable to hire or retain qualified sales personnel, if newly
hired personnel fail to develop the necessary skills to be productive, or if
they reach productivity more slowly than anticipated, our ability to increase
our revenues and grow could be compromised. The challenge of attracting,
training and retaining qualified candidates may make it difficult to meet our
sales growth targets. Further, we may not generate sufficient sales to offset
the increased expense resulting from expanding our sales force or we may be
unable to manage a larger sales force.
Future
growth in our business could make it difficult to manage our
resources.
Our
anticipated business expansion could place a significant strain on our
management, administrative and financial resources. Significant growth in our
business may require us to implement additional operating, product development
and financial controls, improve coordination among marketing, product
development and finance functions, increase capital expenditures and hire
additional personnel. There can be no assurance that we will be able to
successfully manage any substantial expansion of our business, including
attracting and retaining qualified personnel. Any failure to properly manage our
future growth could negatively impact our business and operating
results.
27
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. 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.
Provisions
of our certificate of incorporation and agreements could delay or prevent a
change in control of our company.
Certain
provisions of our certificate of incorporation may discourage, delay, or prevent
a merger or acquisition that a stockholder may consider favorable. These
provisions include:
|
|
·
|
the
authority of the Board of Directors to issue preferred stock;
and
|
|
|
·
|
a prohibition on cumulative
voting in the election of
directors
.
|
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 March 31, 2010, there were
approximately 182 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. If our Board of Directors 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.
The
exercise of our outstanding options and warrants and vesting of restricted stock
awards may depress our stock price.
As of
March 31, 2010, we had (i) outstanding stock options and warrants to purchase an
aggregate of 2,020,020 shares of our Common Stock at exercise prices ranging
from $1.60 to $12.65 per share; (ii). 85,000 unvested restricted shares of
our common stock that are subject to various vesting terms, and (iii)
convertible notes that convert to up to 478,866 shares of our common
stock. To the extent that these securities are converted into common
stock, dilution to our stockholders will occur. Moreover, the terms
upon which we will be able to obtain additional equity capital may be adversely
affected, since the holders of these securities can be expected to exercise or
convert them at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable to us than the exercise and conversion
terms provided by those securities.
Sales of
these shares in the public market, or the perception that future sales of these
shares could occur, could have the effect of lowering the market price of our
common stock below current levels and make it more difficult for us and our
stockholders to sell our equity securities in the future.
Sale or
the availability for sale of shares of common stock by stockholders could cause
the market price of our common stock to decline and could impair our ability to
raise capital through an offering of additional equity securities.
We
do not intend to pay cash dividends.
We do not
intend to declare or pay cash dividends on our common stock in the foreseeable
future. We anticipate that we will retain any earnings and other cash resources
for investment in our business. The payment of dividends on our common stock is
subject to the discretion of our Board of Directors and will depend on our
operations, financial position, financial requirements, general business
conditions, restrictions imposed by financing arrangements, if any, legal
restrictions on the payment of dividends and other factors that our Board of
Directors deems relevant.
28
We
may not meet the continued listing standards of the NYSE AMEX
In
December 2008, we received a letter from the NYSE Amex stating that, based on
the NYSE Amex’s review of publicly available information, we were considered to
be below the NYSE Amex’s continued listing standards. After submitting a
plan of compliance to the NYSE Amex and additional evaluation by the Exchange,
we were informed in March 2010 that we had resolved the continued listing
deficiencies. We cannot assure you that we will not receive additional
deficiency letters in the future, or that we will continue to satisfy the
continued listing standards in order to remain listed on the
Exchange.
None.
The
Company has 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 Credit Agreement,as amended, the Company can borrow up to a
maximum of $1,000,000 from time to time up to and until January 4, 2012.
As of March 31, 2010, the Company was in default of the agreement due to a
failure to pay interest when due. The holder. has waived the default
through January 1, 2012.
The
Company has a $450,000 Convertible Note bearing interest at 8% per annum due
June 23, 2012, convertible into up to 260,116 shares of Document Security
Systems Common Stock, and is secured by the accounts receivable of the Company,
excluding the accounts receivable of the Company’s wholly owned subsidiaries,
Plastic Printing Professionals and DPI Secuprint, respectively.
As of March 31, 2010, the Company was in default of the
agreement due to a failure to pay interest when due. The holder waived the
default through January 1, 2012.
The Company has a $350,000 Convertible
Note bearing interest at 10% per annum due November 24, 2012, convertible into
up to 218,750 shares of Document Security Systems Common Stock and is secured by
the assets of the Company’s wholly owned subsidiary DPI Secuprint.
As of March 31, 2010, the
Company was in default of the agreement due to a failure to pay interest when
due. The holder waived the default through January 1,
2012.
The
Company has a $575,000 Promissory Note bearing interest at 10% per annum due
November 24, 2012 and is secured by the assets of the Company’s wholly owned
subsidiary DPI Secuprint. As of March 31, 2010, the Company was in default
of the agreement due to a failure to pay interest when due. The holder
waived the default through January 1, 2012.
None
None
29
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.
Exhibits
|
|
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
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.
|
SIGNATURES
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.
|
DOCUMENT
SECURITY SYSTEMS, INC.
|
|||
|
May
17, 2010
|
By:
|
/s/ Patrick White
|
|
|
Patrick
White
|
|||
|
Chief
Executive Officer
|
|||
|
May
17, 2010
|
By:
|
/s/ Philip Jones
|
|
|
Philip
Jones
|
|||
|
Chief
Financial Officer
|
|||
30
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
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.
31
TABLE OF CONTENTS
Part IItem 1 - Financial StatementsItem 2 - Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 4T - Controls and ProceduresPart IIItem 1 - Legal ProceedingsItem 1A Risk FactorsItem 2 - Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3 - Defaults Upon Senior SecuritiesItem 4 - Submission Of Matters To A Vote Of Security HoldersItem 5 - Other InformationItem 6 - Exhibits