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INTANGIBLE ASSETS AND GOODWILL | 12 Months Ended
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Dec. 31, 2014
INTANGIBLE ASSETS AND GOODWILL [Abstract] |
INTANGIBLE ASSETS AND GOODWILL | NOTE 6 - INTANGIBLE ASSETS AND GOODWILL During 2014 and 2013, the Company spent approximately $94,000 and $78,000 on patent application costs, and $1,150,000 and $2,500,000 on patent and patent rights acquisition costs, respectively. In addition, in 2013, the Company acquired patents as a result of its acquisition of DSS Technology Management which were valued in conjunction with the Company's purchase accounting at approximately $27,856,000 (see Note 9). The patents and patent rights acquired have estimated economic useful lives of approximately 2.5 to 7.5 years. On July 8, 2013, the Company's subsidiary, DSS Technology Management, purchased two patents for $500,000 covering certain methods and processes related to Bluetooth devices. In conjunction with the patent purchases, DSS Technology Management entered into a Proceed Right Agreement with certain investors pursuant to which DSS Technology Management initially received $250,000 of a total of $750,000 which it will ultimately receive thereunder, subject to certain payment milestones, in exchange for 40% of the proceeds which it receives, if any, from the use, sale or licensing of the two patents. As of December 31, 2014, the Company had received an aggregate of $650,000 ($500,000 in 2013) from the investors pursuant to the agreement, of which approximately $603,000 was in accrued expenses in the consolidated balance sheet ($500,000 as December 31, 2014). In September 2013, DSS Technology Management purchased 10 patents covering certain methods and processes in the semiconductor industry for $2,000,000. On May 23, 2014, the Company's subsidiary, DSS Technology Management, purchased 115 patents covering certain methods and processes in the semiconductor industry for $1,150,000. On January 5, 2015, the United States District Court for the Northern District of California issued a decision granting summary judgment to defendant Facebook, Inc. in connection with a lawsuit filed on October 3, 2012 by Plaintiff Bascom Research, LLC (a subsidiary of the Company) alleging patent infringement. As a result of the Court's decision, the Company evaluated the valuation of the patents that were the basis of the case for impairment as of December 31, 2014. The Company determined that since the patents had been invalidated the probability of future cash flows derived from the patents that would support the value of the assets had decreased so that the assets had been impaired. As a result, the Company recorded an impairment charge for the underlying patent assets of the net book value of the patents as of December 31, 2014 of approximately $22,285,000. Intangible assets are comprised of the following:
|  |  |  | December 31, 2014 |  |  | December 31, 2013 |
|  | Useful Life |  | Gross Carrying Amount |  |  | Accumulated Amortizaton |  |  | Net Carrying Amount |  |  | Gross Carrying Amount |  |  | Accumulated Amortizaton |  |  | Net Carrying Amount |
Acquired intangibles- customer lists and non-compete agreements |  | 5 -10 years |  |  | 1,997,300 |  |  |  | 1,532,123 |  |  |  | 465,177 |  |  |  | 1,997,300 |  |  |  | 1,343,819 |  |  |  | 653,481 |
Acquired intangibles-patents and patent rights |  | Varied (1) |  |  | 3,650,000 |  |  |  | 852,343 |  |  |  | 2,797,657 |  |  |  | 30,356,164 |  |  |  | 2,042,083 |  |  |  | 28,314,081 |
Patent application costs |  | Varied (2) |  |  | 1,058,833 |  |  |  | 413,268 |  |  |  | 645,565 |  |  |  | 965,523 |  |  |  | 330,494 |  |  |  | 635,029 |
|  |  |  | $ | 6,706,133 |  |  | $ | 2,797,734 |  |  | $ | 3,908,399 |  |  | $ | 33,318,987 |  |  | $ | 3,716,396 |  |  | $ | 29,602,591 |
| (1) | Acquired patents and patent rights are amortized over their expected useful life which is generally the remaining legal life of the patent. As of December 31, 2014, the weighted average remaining useful life of these assets in service was approximately 5.4 years.
| (2) | Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of December 31, 2014, the weighted average remaining useful life of these assets in service was approximately 10.0 years.
Amortization expense for the year ended December 31, 2014 amounted to approximately $4,653,000 ($2,406,000 –2013). Approximate expected amortization for each of the five succeeding fiscal years is as follows:
Year |  | Amount |
2015 |  | $ | 894,000 |
2016 |  | $ | 692,000 |
2017 |  | $ | 673,000 |
2018 |  | $ | 537,000 |
2019 |  | $ | 265,000 |
The Company recorded goodwill of approximately $12.0 million in connection with its acquisition of DSS Technology Management in July 2013. The goodwill was recorded due to the establishment of a deferred tax liability which resulted from the increase in basis of the DSS Technology Management tangible and intangible assets, excluding goodwill, for book purposes but not for tax purposes. Under the acquisition method of accounting, the impact on the acquiring company's deferred tax assets is recorded outside of acquisition accounting. Accordingly, the valuation allowance on the Company's deferred tax assets was partially released to offset part of the increase in deferred tax liability and resulted in an estimated deferred tax benefit of approximately $11.0 million, which was recorded in the statement of operations in 2013. The goodwill is not deductible for income tax purposes. During 2014, as a result of the Company's net loss and the impairments of certain of its assets and other intangible assets, the Company performed an evaluation of its goodwill for impairment. When performing the evaluation of goodwill for impairment, if the Company concludes qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is not required. If unable to reach this conclusion, then the Company would perform the two-step impairment test. Initially, the fair value of the reporting unit is compared to its carrying amount. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit; then a second step is required, as this is an indication that the reporting unit goodwill may be impaired. In this step, the implied fair value of the reporting unit goodwill is compared with the carrying amount of the reporting unit goodwill and a charge for impairment is recognized to the extent the carrying value exceeds the implied fair value. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Due to the large losses incurred by the Company during 2014, of which a significant portion was the result of impairments of certain of the Company's investments and patent assets, the Company determined that it could not qualitatively conclude that impairment of goodwill had not occurred. As a result, the Company compared the fair value of its reporting units to the carrying values of the reporting units to determine if goodwill for each of the reporting units had been impaired. For its packaging and plastics reporting units, the Company uses a discounted cash flow model to estimate the fair value of the each reporting units respectively. This model uses revenue, expense, and capital expenditure forecasts which are based on managements' experience with each business, along with cost of capital and residual value estimates based on standard valuation methodologies. For the Company's technology reporting unit for which a significant amount of future value is based on the value of patents and patent rights, the Company uses a valuation methodology that assess the potential value of claims against parties the Company believes have infringed on the patents and therefore, the Company has the rights to receive royalties for those infringers. The Company uses its best estimates to determine the amount and timing of royalties that would be due from each potential infringing party based on the estimated scope of usage of the patented technology by each potential infringing party. Furthermore, the Company uses discount factors to take into account the potential of settlements at various stages of a typical patent infringement court case depending on the stage of each of the Company's infringement proceedings. During the Company's annual assessment of goodwill in 2014, the Company assessed that the negative trends in patent litigation that have recently reduced the success of patent owners in protecting their patents in the federal court system had impaired the Company's goodwill assigned to its DSS Technology Management division and accordingly, the Company recorded a $3,000,000 goodwill impairment charge to the goodwill assigned to its DSS Technology Management division. There are inherent assumptions and estimates used in developing future cash flows requiring management's judgment in applying these assumptions and estimates to the analysis of identifiable intangibles and asset impairment including projecting revenues, timing and amount of claim or settlements related to patent infringement cases, royalty rates, interest rates, and the cost of capital. Many of the factors used in assessing fair value are outside the Company's control and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments. Refer to Note 9 to these consolidated financial statements for additions to patents and goodwill in connection with the Company's acquisition of DSS Technology Management and the related application of the acquisition method of accounting. During the year ended December 31, 2013, the Company determined that the intangible assets the Company recorded as a result of its acquisition of ExtraDev, Inc. in May 2011 were impaired as a result of a decline of customers for its historical IT hosting and custom programming and services businesses due to increased competition, including competition from Microsoft, and the digital group's focus on new products such as the Company's AuthentiGuard Suite, which has reduced resources directed to supporting its IT hosting and custom programming businesses. As a result of this decline, the Company performed a present value analysis of the expected future cash flows of the revenues and expenses associated with ExtraDev's historical business and determined that the intangible assets that the Company had recorded as a result of the acquisition of ExtraDev were impaired. As a result, the Company wrote-off approximately $239,000 of goodwill, customer lists with a gross value of $258,000 and a net book value $198,000, and non-compete agreements with a gross value of $150,000 and a net book value of $80,000 associated with ExtraDev, Inc. in the third quarter of 2013. The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 are as follows:
|  | Packaging Segment |  |  | Plastics Segment |  |  | Technology Segment |  |  | Total |
Balance as of January 1, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill |  | $ | 1,768,400 |  |  | $ | 684,949 |  |  | $ | 869,450 |  |  | $ | 3,322,799 |
Accumulated impairment losses |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
|  |  | 1,768,400 |  |  |  | 684,949 |  |  |  | 869,450 |  |  |  | 3,322,799 |
Goodwill acquired during the year |  |  | - |  |  |  | - |  |  |  | 11,962,324 |  |  |  | 11,962,324 |
Impairment losses |  |  | - |  |  |  | - |  |  |  | (238,926 | ) |  |  | (238,926 | )
Balance as of December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill |  |  | 1,768,400 |  |  |  | 684,949 |  |  |  | 12,831,774 |  |  |  | 15,285,123 |
Accumulated impairment losses |  |  | - |  |  |  | - |  |  |  | (238,926 | ) |  |  | (238,926 | )
|  |  | 1,768,400 |  |  |  | 684,949 |  |  |  | 12,592,848 |  |  |  | 15,046,197 |
Goodwill acquired during the year |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Impairment losses |  |  | - |  |  |  | - |  |  |  | (3,000,000 | ) |  |  | (3,000,000 | )
Balance as of December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill |  |  | 1,768,400 |  |  |  | 684,949 |  |  |  | 12,831,774 |  |  |  | 15,285,123 |
Accumulated impairment losses |  |  | - |  |  |  | - |  |  |  | (3,238,926 | ) |  |  | (3,238,926 | )
|  | $ | 1,768,400 |  |  | $ | 684,949 |  |  | $ | 9,592,848 |  |  | $ | 12,046,197 |

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