NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
Document
Security Systems, Inc. (the “Company”) operates eight (8) business lines through eight (8) DSS subsidiaries located
around the globe.
Of
the eight subsidiaries, three of those have historically been the core subsidiaries of the Company: (1) Premier Packaging Corporation
(DSS Packaging and Printing Group), (2) DSS Digital Inc., and its subsidiaries (DSS Digital Group), and (3) DSS Technology Management,
Inc. (DSS Technology Management). Premier Packaging
Corporation operates in the paper board folding carton, smart packaging and document security printing markets. It markets, manufactures
and sells paper products designed to protect valuable information from unauthorized scanning, copying, and digital imaging. DSS
Digital Inc., researches, develops, markets and sells the Company’s digital products worldwide. The primary product is AuthentiGuard®,
which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary
digital data security-based solutions. DSS Technology Management Inc., manages, licenses and acquires intellectual property (“IP”)
assets for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited
to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial
litigation. In 2020, under its Decentralize Sharing Systems, Inc. subsidiary, created a fourth business segment, Direct
Marketing. Direct marketing or network marketing is designed to sell products or services directly to the public through independent
distributors, rather than selling through the traditional retail market.
In
addition to the four subsidiaries listed above, in 2019 and early 2020, DSS has created five new, wholly owned subsidiaries. (4)
DSS Blockchain Security, Inc., a Nevada corporation, that intends to specialize in the development of blockchain security technologies
for tracking and tracing solutions for supply chain logistics and cyber securities across global markets. (5) Decentralize Sharing
Systems, Inc., a Nevada corporation, seeks to provide services to assist companies in the new business model of the peer-to-peer
decentralized sharing marketplaces. (6) DSS Securities, Inc., a Nevada corporation, has been established to develop or to acquire
assets in the securities trading or management arena, and to pursue two parallel streams of digital asset exchanges in multiple
jurisdictions: (i) securitized token exchanges, focusing on digitized assets from different vertical industries and (ii) utilities
token exchanges, focusing on “blue-chip” utility tokens from solid businesses. (7) DSS BioHealth Security, Inc., a
Nevada corporation, is our business line which we will intend to invest in or to acquire companies related to the biohealth and
biomedical field, including businesses focused on the research to advance drug discovery and development for the prevention, inhibition,
and treatment of neurological, oncology and immuno-related diseases. This new division will place special focus on open-air defense
initiatives, which curb transmission of air-borne infectious diseases such as tuberculosis and influenza, among others. (8) DSS
Secure Living, Inc., a Nevada Corporation, intends to develop top of the line advanced technology, energy efficiency, quality
of life living environments and home security for everyone for new construction and renovations of residential single and multifamily
living facilities. Aside from Decentralized Sharing Systems, Inc. the activity in the these newly created subsidiaries have been
minimal or in various start-up or organizational phases.
On
March 3, 2020, the Company, via its subsidiary DSS Securities, entered into a share subscription agreement and loan arrangement
with LiquidValue Asset Management Pte Ltd., AMRE Asset Management, Inc. and American Medical REIT Inc. under which it acquired
a 52.5% controlling ownership interest in AMRE Asset Management Inc. (“AAMI”) which currently has a 93% equity interest
in American Medical REIT Inc. (“AMRE”) (see Note 4).
AAMI
is a real estate investment trust (“REIT”) management company that sets the strategic vision and formulate investment
strategy for AMRE. It manages the REIT’s assets and liabilities and provides recommendations to AMRE on acquisition and
divestments in accordance with the investment strategies. American Medical REIT, Inc is a Maryland corporation, organized for
the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market
share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. AMRE was formed
to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. AMRE is planned to qualify as a Real
Estate Investment Trust for federal income tax purposes, which will provide. AMRE’s investors the opportunity for direct
ownership of Class A licensed medical real estate. As of June 30, 2020 there have been no portfolio of licensed medical real estate
originated or acquired.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q
and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all the information
and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance
sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments considered necessary
for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim
results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s
accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s
Form 10-K for the fiscal year ended December 31, 2019.
Principles
of Consolidation - The consolidated financial statements include the accounts of Document Security Systems and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed
in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing
basis, the Company evaluates its estimates, including those related to the accounts receivable, inventory, fair values of investments,
intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants
to purchase the Company’s common stock, deferred revenue and income taxes, among others. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and liabilities.
Reclassifications
- Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 2019 have been reclassified
to conform to current year presentation.
Investment
– In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment Limited
at cost as the fair market value of the investment is not readily determinable. The Company evaluates investment for indications
of impairment at least annually.
Marketable
Securities – The Company’s investments in marketable equity securities are classified based on the nature
of the securities. Marketable securities are classified as long-term assets on the consolidated balance sheets as the Company
has the intent and ability to hold the investments for a period of at least one year. The Company’s marketable equity securities
are measured at fair value with gains and losses recognized in other income (expense). The majority of our marketable securities
consist of our common stock investment in Sharing Services Global Corp. (SHRG), a publicly traded corporation. The CEO of
SHRG is also on the Company’s board of directors and the Chairman of the board of directors of the Company is also
on the board of directors of SHRG. At June 30, 2020, the Company owns approximately 17% of SHRG and has continued to acquire common
stock subsequent to quarter end (Note 13). The following table indicates the original cost, unrealized gains, and fair market
value of the Company’s marketable securities:
|
|
June 30, 2020
|
|
Original costs
|
|
$
|
1,392,000
|
|
Unrealized gains
|
|
|
584,000
|
|
|
|
|
|
|
Fair market value
|
|
$
|
1,976,000
|
|
Fair
Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement
Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
|
|
|
●
|
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
|
The
carrying amounts reported in the balance sheet of cash and cash equivalents, accounts receivable, prepaids, marketable securities,
accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial
instruments. The fair value of notes receivable approximates their carrying value as the stated or discounted rates of the notes
do not reflect recent market conditions. 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. The fair value of investments
carried at cost less impairment; however, the fair value is not considered readily determinable based on the lack of liquidity
for the shares owned.
Impairment
of Long-Lived Assets and Goodwill - The Company monitors the carrying value of long-lived assets for potential impairment
and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying
value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently
identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the
Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows,
the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value. Due to factors
identified during the six months ended June 30, 2020, including the impact of the COVID-19 outbreak, the Company has quantitatively
tested the carrying value of its goodwill associated with the DSS Plastics Group and has determined circumstances exist that indicate
that it is more likely than not that a goodwill impairment exists and has recorded an impairment of $685,000 during the six months
ended June 30, 2020. This impairment has been included in the calculation of the discontinued operations of DSS Plastics group.
Contingent
Legal Expenses - Contingent legal fees are expensed in the consolidated statements of operations in the period
that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent
legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying
legal services agreement that will be paid out from the proceeds from settlements or licenses that arise pursuant to an enforcement
action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any unamortized patent
acquisition costs will be expensed in the period a conclusion is reached in an enforcement action that does not yield future royalties
potential.
Business
Combinations - Business combinations and non-controlling interests are recorded in accordance with FASB ASC Business Combinations.
Under the guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition.
The excess of the purchase price over the estimated fair values is recorded as goodwill. If the fair value of the assets acquired
exceeds the purchase price and the liabilities assumed, then a gain on acquisition is recorded. Under the guidance, all acquisition
costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived
intangible asset. The application of business combination accounting requires the use of significant estimates and assumptions.
Discontinued
Operations – On April 20, 2020, the Company executed a nonbinding letter of intent with a perspective buyer for
certain assets of its plastic printing business line, which it operates under Plastic Printing Professionals, Inc.
(“DSS Plastics”), a wholly-owned subsidiary of the Company. Remaining assets of DSS Plastics are being either
sold separately or retained by our existing businesses and the operations of DSS Plastics are being discontinued. Based
on its magnitude of revenue to the Company (approximately 18% for the six months ended June 30, 2020) and because the
Company was exiting the production of laminated and surface printed cards, this sale represented a significant strategic
shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has
applied discontinued operations treatment for this sale as required by Accounting Standards Codification
210-05—Discontinued Operations. The major classes of assets and liabilities of DSS Plastics are classified as Held For
Sale – Discontinued Operations on the Consolidated Balance Sheets and the operating results of the discontinued
operations is reflected on the Consolidated Statements of Operations and Comprehensive Income (Loss) as Loss from
Discontinued Operations. See Note 10.
Reverse
Stock Split - On May 4, 2020, Document Security Systems, Inc. (the “Company”) held a Special Meeting of Stockholders
(the “Special Meeting”) at which the Company’s stockholders approved amendment to the Company’s certificate
of incorporation to effect a reverse split of common stock of the Company by a ratio of 1-for-30 (the “Reverse Split”)
with the effectiveness of such amendment to be determined by the Board of Directors of the Company (the “Board”).
The form of the certificate of amendment to effect the Reverse Split was subsequently approved by the Board on May 4, 2020. On
May 7, 2020, the Company filed a Certificate of Amendment of Certificate of Incorporation (the “Amendment”) with the
Secretary of State of the State of New York to effect a 1-for-30 reverse stock split of the Company’s outstanding common
stock. The Amendment was effective at 5:01 p.m. Eastern Time on May 7, 2020 (the “Effective Time”). The reverse stock
split has been retroactively applied to all financial statements presented.
Earnings
Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual
weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number
of additional shares that would have been outstanding if dilutive potential shares had been issued and is calculated utilizing
the treasury stock method. In a loss period, the calculation for basic and diluted earnings per share is the same, as the impact
of potential common shares is anti-dilutive.
For
the three and six months ended June 30, 2020 and 2019, common stock equivalents were excluded from the calculation of diluted
earnings per share as the Company had a net loss, since their inclusion would have been anti-dilutive.
Concentration
of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial
institutions.
During
the six months ended June 30, 2020, two customers accounted for approximately 23% and 17%, respectively, of the
Company’s consolidated revenue and accounted for 34% and 13%, respectively, of the Company’s accounts receivable balance
as of June 30, 2020. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on
its customers, the short duration of its payment terms for most of its customer contracts and by the diversification of its customer
base.
Income
Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year
and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income
items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available
tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in
income tax expense.
Recent
Accounting Pronouncements - In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which requires entities
to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the
measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the
impact that adopting this new accounting standard will have on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test
for Goodwill Impairment”, which eliminates the two-step process that required identification of potential impairment and
a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference
between the carrying amount and the fair value of the reporting unit. The standards update is effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019 and has been adopted by the Company effective January 1, 2020.
Impact
of COVID-19 Outbreak - The COVID-19 pandemic has created global economic turmoil and has potentially permanently impacted
how many businesses operate and how individuals will socialize and shop in the future. We continue to feel the effect of the COVID-19
business shutdowns and consumer stay-at-home protections. But the effect of the economic shutdown has impacted our business lines
differently; some more severely than others. In most cases, we believe the negative economic trends and reduced sales will recover
over time. However, management determined that one of its business lines, DSS Plastics, has been, and will continue to be, more
severely impacted by the pandemic than our other divisions. We do not believe this is a short-term phenomenon. We expect that
this business may be permanently impacted because we believe that both consumer and corporate future travel habits will be negatively
impacted and, as a result, use of hotel access cards will be diminished. We believe that conventions and sporting events will
be fewer and smaller in attendance, and therefore demand for our card identification products will be reduced. Further, we believe
that physical security cards and individual IDs will be replaced by more digital and optical technologies. As a result, management
decided to fully impair its goodwill related to DSS Plastics during the first quarter 2020. The impact to our first quarter 2020
earnings of this impairment was approximately $685,000.
Additionally,
it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted
in the near term as a result of these conditions, including losses on inventory; impairment losses related to goodwill and other
long-lived assets and current obligations
Continuing
Operations and Going Concern – The accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction
of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the
specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a
going concern. While the Company has approximately $7.2 million in cash, and a positive working capital position of approximately
$9.3 million as of June 30, 2020, the Company has incurred negative cash flows from operating and investing activities
over the past two years.
To
continue as a going concern, during Q1 and Q2 2020 and subsequently in Q3 2020, the Company entered into underwriting agreements
with Aegis Capital Corp., acting as representative of the several underwriters, which provided for the issuance and sale by the
Company in an underwritten public offering (the “Offering”) shares of the Company’s common stock. The net offering
proceeds (inclusive of offerings that concluded after June 30, 2020) to the Company approximated $20.1 million.
The
Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning
these matters includes, among other things, continued growth among our operating segments, and tightly controlling operating costs
and reducing spending growth rates wherever possible to return to profitability. In addition, the Company has taken steps, and
will continue to take measures, to materially reduce the expenses and cash burn of its IP Monetization program.
At
the Company’s current operating levels and capital usage, we believe that without any further acquisition or investments,
our $7.2 million in aggregate cash and equivalents as of June 30, 2020, as well as the $9.9 million raised subsequent to June
30, 2020, would allow us to fund our eight business lines current and planned operations through August 2021. Based
on this, the Company has concluded that substantial doubt of its ability to continue as a going concern has been alleviated.
2.
Revenue
The
Company recognizes its products and services revenue based on when the title passes to the customer or when the service is completed
and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for
shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. The
Company also derives revenue from royalties from third parties which are typically based on licensees’ net sales of products
that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products.
The Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license
revenues through litigation settlements. For these, the Company recognizes revenue upon the execution of the agreement, when collectability
is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition
criteria have been met.
As
of June 30, 2020, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater
than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral
and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. The Company
elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the
sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense
when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less.
Accounts
Receivable
The
Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and
generally does not require collateral. Payment terms are generally 30 days but up to net 105 for certain customers. The Company
carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company
evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management’s estimates that
include a review of the history of past write-offs and collections and an analysis of current credit conditions. At June 30, 2020,
the Company established a reserve for doubtful accounts of approximately $9,000 ($41,000 – December 31, 2019). The Company
does not accrue interest on past due accounts receivable.
Sales
Commissions
Sales
commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions
capitalized as of June 30, 2020.
Shipping
and Handling Costs
Costs
incurred by the Company related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining
to these costs are reflected as revenue.
See
Note 12 for disaggregated revenue information.
3.
Notes Receivable
On
October 10, 2019, the Company entered into a convertible promissory note (“TBD Note”) with Century TBD Holdings, LLC
(“TBD”), a Florida limited liability company. The Company loaned the principal sum of $500,000, of which up to $500,000
and all accrued interest can be paid by an “Optional Conversion” of such amount up to 19.8% (non-dilutable) of all
outstanding membership interest in TBD. This TBD Note accrues interest at 6% and matures on October 9, 2021. As of June 30, 2020
and December 31, 2019 this TBD Note had outstanding principal and interest of approximately $522,000 and $507,000, respectively.
On
October 9, 2019 and November 11, 2019 the Company’s subsidiary Decentralized Sharing Systems, Inc. entered into two, separate
on demand, secured, convertible notes with RBC Life Sciences, Inc. (RBC), a Nevada corporation. The first Note, dated October
9th, lent the principal sum of $200,000 and accrues interest at 6% with a maturity date of November 11, 2019 (“Note #1)
This note also contains an “Optional Conversion” clause that allows the Company at any time, before or after the occurrence
of an Event of Default, at its option, to convert the outstanding principal amount, plus accrued interest into a number of newly
issued shares of its common stock equal to 75% of the total shares common stock that will be outstanding upon such conversion
at a fully-diluted basis. Note #1 was also secured by and among other things all of the assets of RBC and its subsidiaries, and
was guaranteed by its subsidiary, RBC Life Sciences USA, Inc. The Company had advanced $209,000 in principal Note #1 as
of June 30, 2020 and December 31, 2019. The balance was allocated between other intangible assets and property,
plant and equipment at June 30, 2020 as part of the foreclosure accounting described below.
The
second Note (Note #2) dated November 11, 2019, established a secured, convertible, revolving line of credit to RBC up to an aggregate
principal sum of $800,000, funded at the sole discretion of lender, and accruing at annual interest rate of 10% with a scheduled
maturity date of November 11, 2024. Accrued interest on any outstanding principal balance was scheduled to be payable monthly
commencing on December 25, 2019. Further, any amount of principal repaid during the term of the note is allowed to be re-advanced
at any time prior to the earlier of the termination of this note or the maturity date. This note also contains an “Optional
Conversion” clause that allows the Company at any time, before or after the occurrence of an Event of Default, at its option,
to convert the outstanding principal amount, plus accrued interest into a number of newly issued shares of its common stock equal
to 100% of the outstanding shares of common stock of RBC direct and indirect subsidiaries. This Note #2 was also secured by a
2nd lien on all of the assets of RBC, behind the first lien securing Note #1, and a first lien on all of the assets of RBC’s
multiple subsidiaries and the full guarantee of these subsidiaries. The amount advanced and outstanding interest of Note
#2 as of June 30, 2020 and December 31, 2019, was approximately $629,000 and $83,000 respectively. The balance was allocated between other intangible assets and property, plant and equipment at June 30, 2020 as part of the foreclosure
accounting described below.
On
January 24, 2020, the Company exercised its rights under the terms of the promissory note, security agreements and the guarantee
agreements, and declared Note #1 in default and sought to exercise its Uniform Commercial Code Article 9 rights to accept collateral
in partial satisfaction of debt. The Company chose to not exercise its option convert the outstanding principal and interest into
equity, but instead elected to accept specific collateral. On February 7, 2020, RBC agreed to the deed-in-lieu of specific assets
in satisfaction of part of the amount owing under Note #1.
On
April 8, 2020, the Company initiated Uniform Commercial Code Article 9 foreclosure proceedings against the remaining assets of
RBC and its subsidiaries at a public sale on April 23, 2020. Again, the Company chose to forego the optional conversion of the
outstanding principal and interest into 100% ownership, as was allowed in the terms of the note. Instead it elected to pursue
through a public foreclosure sale collateral that secured Note #2. As a result of the Company being the high bidder at that foreclosure
sale, the Company now owns and controls certain former assets of RBC and its subsidiaries.
During the second quarter of 2020, the Company completed its evaluation
of the assets acquired through foreclosure of Note 1 and 2 above and determined the value received supported the recoverability
of the carrying value of the two notes. In accordance with Financial Accounting Standards Board Codification 310 Receivables Goodwill
and Other, the assets value will be recorded at the carrying value of the debt, allocated based on the value identified. The carrying
values of Note 1 and Note 2 were reclassed as property, plant, and equipment and other intangible assets in the amounts of $201,000
and $637,000 respectively within the accompanying financial statements. These amounts will be depreciated and amortized over their
useful lives.
4.
Business Combination
On
March 3, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with LiquidValue Asset Management
Pte Ltd (“LVAM”), AMRE Asset Management Inc. (“AAMI”) and American Medical REIT Inc. (“AMRE”),
regarding a share subscription and loan arrangement. The Term Sheet set forth the terms of a proposed transaction to establish
a medical real estate investment trust in the United States and AAMI providing certain services related to the financial and capital
structure of AMRE. Pursuant to the Term Sheet, the Company has subscribed 5,250 ordinary shares of AAMI at a purchase price of
$0.01 per share for total consideration of $52.50. Concurrently, AAMI will issue 2,500 shares to LVAM, and 1,250 shares to AMRE
Tennessee, LLC, AAMI’s executive management’s holding company (collectively, the “Subscription Shares”).
As a result, the Company now holds 52.5% of the outstanding shares of AAMI, with LVAM and AMRE Tennessee, LLC, holding 35% and
12.5% of the remaining outstanding shares of AAMI, respectively. At the completion of the share subscription, AAMI has a 93% equity
interest in AMRE. Also at the completion of the transaction, AAMI had no assets or liabilities. LVAM is an 82% owned subsidiary
of Singapore eDevelopment Limited whose Chief Executive Office and largest shareholder is Heng Fai Ambrose Chan, the Chairman
of the Board and largest shareholder of the Company.
Further,
pursuant to and in connection with the Term Sheet, effective on March 3, 2020, the Company entered into a Promissory Note with
AMRE, pursuant to which AMRE has issued the Company a promissory note for the principal amount of $800,000.00 (the “Note”).
The Note matures on March 3, 2022 and accrues interest at the rate of 8.0% per annum and shall be payable in accordance with the
terms set forth in the Note. Under the Note, AMRE may prepay or repay all or any portion of the Note at any time, without a premium
or penalty. If not sooner prepaid, the entire unpaid principal balance of the Note including accrued interest will be due and
payable in full on March 3, 2022. AMRE’s failure to pay any amount due on the Note within five days of when payment is due
constitutes an event of default under the Note, pursuant to which the Company can declare the Note due and payable. The Note also
provides the Company an option to provide AMRE an additional $800,000 on the same terms and conditions as the Note, including
the issuance of warrants as described below. As further incentive to enter into the Note, AMRE issued the Company warrants to
purchase 160,000 shares of AMRE common stock (the “Warrants”). The Warrants have an exercise price of $5.00 per share,
subject to adjustment as set forth in the Warrants, and expire on March 3, 2024. Pursuant to the Warrants, if AMRE files a registration
statement with the Securities and Exchange Commission for an initial public offering (“IPO”) of AMRE’s common
stock and the IPO price per share offered to the public is less than $10.00 per share, the exercise price of the Warrants shall
be adjusted downward to 50% of the IPO price. The Warrants also grants piggyback registration rights to the Company as set forth
in the Warrants. As of June 30, 2020, this Note had outstanding principal and interest of approximately $818,000. Upon consolidation
this Note is eliminated.
U.S.
GAAP requires that for each business combination, one of the combining entities shall be identified as the acquirer, and the existence
of a controlling financial interest shall be used to identify the acquirer in a business combination. The Company has determined
that its aforementioned 52.5% equity interest in AAMI provides existence of a controlling financial interest and has concluded
to account for this transaction in accordance with the acquisition method of accounting under FASB ASC Topic 805, “Business
Combinations” (“Topic 805”). As of June 30, 2020, AMRE had incurred $364,000 of cost of which $181,000
is attributable to the non-controlling interest.
5.
Investment
As of March 31,
2020, the Company owned 88,174,129 ordinary shares of Singapore eDevelopment Limited (“SED”) a company
incorporated in Singapore and publicly listed on the Singapore Exchange Limited, at an exercise price of SGD$0.04 (US$0.029)
per share and warrants to purchase an additional 44,005,182 ordinary shares at an exercise price of SGD$0.04 (US$0.029)
per share. On June 25, 2020, the Company exercised those warrants bringing its total ownership to 127,179,311 shares or
approximately 10% of the outstanding shares of SED at June 30, 2020. Under ASU No. 2016-01, “Recognition and
Measurement of Financial Assets and Financial Liabilities” and the Company carries its investment in SED at costs,
less impairments. The Chairman of the Company, Mr. Heng Fai Ambrose Chan, is the Executive Director and Chief Executive
Officer of SED. The carrying value of the investment as of June 30, 2020 was approximately $3,445,000. As of June 30, 2020
the share price of SED was approximately US$0.09 per share.
6.
Short-Term and Long-Term Debt
Revolving
Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving
credit line with Citizens Bank (“Citizens”) of up to $800,000 that bears interest at 1 Month LIBOR plus 2.0% (2.2%
as of June 30, 2020). This revolving line of credit was renewed and has a maturity date of May 31, 2021 and is renewable annually.
As of June 30, 2020 the revolving line had a balance of $0.
On
July 26, 2017, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement
with Citizens pursuant to which Citizens agreed to lend up to $1,200,000 to permit Premier Packaging to purchase equipment from
time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition
Line of Credit shall bear interest thereon at a per annum rate of 2% above the LIBOR Advantage Rate until the Conversion Date
(as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to
a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens. Current maturities of long-term debt
are based on an estimated 48-month amortization which will be adjusted upon conversion. As of June 30, 2020, the Term Note had
a balance of $831,000. The Company pays a monthly amount of $13,000 in principal and interest.
On
December 1, 2017, the Company’s subsidiary Plastic Printing Professionals entered into a Loan Agreement and accompanying
Term Note Non-Revolving Line of Credit Agreement with Citizens which was converted into two term notes under which the Company
will make monthly payments of $14,000 until November 30, 2023. Interest under the term notes is payable monthly at 5.37%. As of
June 30, 2020, the combined balance of the term notes was $510,000. On July 20, 2020 a payoff payment was processed, and this
loan was paid in full.
Term
Loan Debt - On April 28, 2015, Premier Packaging entered into a term note with Citizens for $525,000, repayable over a
60-month period. The loan bears interest at 3.62% and is payable in equal monthly installments of $10,000 until April 28, 2020.
Premier Packaging used the proceeds of the term note to acquire a HP Indigo 7800 Digital press. The loan is secured by the printing
press. As of June 30, 2020, the loan had a balance of $0.
Promissory
Notes - On June 27, 2019 Premier Packaging refinanced and consolidated the outstanding principal associated with the two
promissory notes for its packaging plant located in Victor, New York, for $1,200,000 with Citizens Bank. The new Promissory Note
calls for monthly payments of $7,000, with interest fixed at 4.22%. The new Promissory Note matures on June 27, 2029, at which
time a balloon payment of $708,000 is due. As of June 30, 2020, the new, consolidated Promissory Note had a balance of $1,119,000.
The
Citizens credit facilities to each of the Company’s subsidiaries, Premier Packaging and Plastic Printing Professionals,
contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested
annually at December 31. For the year ended December 31, 2019, Premier Packaging was in compliance with the annual covenants,
however Plastic Printing Professionals was not. Plastic Printing Professionals has sought and received a one-time waiver from
compliance from Citizens for this violation during the six months ended June 30, 2020.
On
October 24, 2018, the Company’s subsidiary, DSS Asia Limited entered into a $100,000 unsecured promissory note with HotApps
International Pte Ltd in conjunction with the acquisition of Guangzhou HotApps Technology Ltd., a Chinese subsidiary of HotApps
International Pte Ltd, by DSS Asia Limited. The promissory note does not accrue interest and is payable in full on October 24,
2020.
On
March 2, 2020, AMRE entered into a $200,000 unsecured promissory note with LVAM. The Note calls for interest to be paid annually
on March 2 with interest fixed at 8.0%. If not paid sooner, the entire unpaid principal balance is due in full on March 2, 2022.
As further incentive to enter into this Note, AMRE granted LVAM warrants to purchase shares of common stock of AMRE (the “Warrants”).
The amount of warrants granted is the equivalent of the Note Principal divided by the Exercise Price. The Warrants are exercisable
for four years, and are exercisable at $5.00 per share (the “Exercise” Price). The value of the warrants is not considered
to be material. The holder is a related party owned by the Chairman of the Company’s board of directors.
During Q2 2020, the Company
received loan proceeds for Premier Packaging, DSS Digital, and AAMI in the amount of approximately $1,072,000 under the Paycheck
Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll
expenses of the qualifying business. These funds were used for payroll, benefits, rent, mortgage interest, and utilities. As of
August 4, 2020 applications for Premier Packaging and DSS Digital were submitted for 100% loan forgiveness and are currently
pending. Based on the uncertainty surrounding the forgiveness, the amounts are recorded as long-term debt on the accompanying
consolidated balance sheets at June 30, 2020. If not forgiven, these loans calculate interest at 1% and have a two year repayment
period.
7.
Lease Liability
The
Company has operating leases predominantly for operating facilities. As of June 30, 2020, the remaining lease terms on our operating
leases range from less than one to two years. DSS Plastics Group which entered into an asset purchase agreement is not
included in the lease liability calculation (see Note 10). Renewal options to extend our leases have not been exercised
due to uncertainty. Termination options are not reasonably certain of exercise by the Company. There is no transfer of title or
option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants.
There are no significant finance leases as of June 30, 2020.
Future
minimum lease payments as of June 30, 2020 are as follows:
Maturity of Lease Liability
|
|
|
|
|
|
Totals
|
|
2020
|
|
$
|
31,000
|
|
2021
|
|
|
6,000
|
|
2022
|
|
|
5,000
|
|
Total lease payments
|
|
|
42,000
|
|
Less: Imputed Interest
|
|
|
(4,000
|
)
|
Total lease liability
|
|
$
|
38,000
|
|
|
|
|
|
|
Current
|
|
$
|
35,000
|
|
Noncurrent
|
|
$
|
3,000
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
.8
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
5.4
|
%
|
8.
Commitments and Contingencies
On
November 26, 2013, DSSTM filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern
District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of
DSSTM’s patents that relate to systems and methods of using low power wireless peripheral devices. DSSTM is seeking a judgment
for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District
Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November
7, 2014, Apple’s motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple
filed two Inter Partes Review (“IPR”) petitions with the Patent Trial and Appeal Board (“PTAB”) for review
of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. The California District Court then stayed
the case pending the outcome of those IPR proceedings. Oral arguments of the IPRs took place on March 15, 2016, and on June 17,
2016, PTAB ruled in favor of Apple on both IPR petitions. DSSTM then filed an appeal with the U.S. Court of Appeals for the Federal
Circuit (the “Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on
August 9, 2017. On March 23, 2018, the Federal Circuit reversed the PTAB, finding that the PTAB erred when it found the claims
of U.S. Patent No. 6,128,290 to be unpatentable. The Federal Circuit affirmed its decision on July 12, 2018, when it denied Apple’s
petition for panel rehearing of the Federal Circuit’s Opinion and Judgment issued on March 23, 2018. On July 27, 2018, the
District Court judge lifted the Stay resuming the litigation, which had a trial date set for the week of February 24, 2020. On
January 14, 2020, the Court in the case DSS Technology Management, Inc. v. Apple, Inc., 4:14-cv-05330-HSG pending in the Northern
District of California issued an order that denied DSS’ motion to amend its infringement contentions. In the same Order,
the Court granted Apple’s motion to strike DSS’ infringement expert report. DSS filed a motion for leave to file a
motion for reconsideration of the Court’s order denying DSS the right to amend its infringement contentions and motion to
strike DSS infringement expert report. On February 18, 2020, the Court denied DSS’s motion for leave to file a motion for
reconsideration. On February 24, 2020, the Court signed a Final Judgment stipulating that Apple was “entitled to a judgment
of non-infringement of U.S. Patent No. 6,128,290 as a matter of law.” On March 10, 2020 DSS filed an appeal of this Final
Judgment to the United States Court of Appeals for the Federal Circuit under DSS Technology Management v. Apple, Federal Circuit
Docket no. 2020-1570. DSSTM has filed its Plaintiff-Appellate brief and Apple has filed an unopposed motion for extension of time
to file its responsive brief.
On
April 13, 2017, the Company filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor,
Inc. (collectively, “Seoul Semiconductor”) in the United States District Court for the Eastern District of Texas,
alleging infringement of certain of the Company’s Light-Emitting Diode (“LED”) patents. The Company is seeking
a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements.
On June 7, 2017, the Company refiled its patent infringement complaint against Seoul Semiconductor in the United States District
Court for the Central District of California, Southern Division. On December 3, 2017, Seoul Semiconductor filed an IPR challenging
the validity of certain claims of U.S. Patent No. 6,949,771. This IPR was instituted by the PTAB on June 7, 2018. On April 18,
2019, the PTAB issued a written decision determining claims 1-9 of the ‘771 patent unpatentable. The Company did not appeal
that determination. On December 21, 2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S.
Patent No. 7,256,486. This IPR was instituted by the PTAB on June 21, 2018. On June 10, 2019, the PTAB issued a written decision
determining claims 1-3 of the ‘486 patent unpatentable. On August 12, 2019, the Company filed a Notice of Appeal with the
Federal Circuit Court of Appeals challenging the PTAB’s decisions. The Company subsequently filed a motion to vacate and
remand the PTAB’s decision in light of intervening precedent under the Appointments Clause. That motion was granted on January
23, 2020. On January 25, 2018, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No.
7,524,087. This IPR was instituted by the PTAB on July 27, 2018. On July 22, 2019, the PTAB issued a written decision determining
claims 1, 6-8, 15, and 17 of the ‘087 patent unpatentable. On September 23, 2019, the Company filed a Notice of Appeal with
the Federal Circuit Court of Appeals challenging the PTAB’s decisions. The Company subsequently filed a motion to vacate
and remand the PTAB’s decision in light of intervening precedent under the Appointments Clause. That motion was granted
on February 3, 2020. These challenged patents are the patents that are the subject matter of the infringement lawsuit, which is
pending but stayed pending the outcome of the IPR proceedings.
On
April 13, 2017, the Company filed a patent infringement lawsuit against Cree, Inc. (“Cree”) in the United States District
Court for the Eastern District of Texas, alleging infringement of certain of the Company’s LED patents. The Company is seeking
a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements.
On June 8, 2017, the Company refiled its patent infringement complaint against Cree in the United States District Court for the
Central District of California, and thereafter filed a first amended complaint for patent infringement against Cree in that same
court on July 14, 2017. The case is currently pending as of the date of this Report. On June 6, 2018, Cree filed an IPR petition
challenging the validity of claims under U.S. Patent No. 7,256,486. This IPR was instituted and joined with the Seoul Semiconductor
IPR. On June 7, 2018, Cree filed IPR petitions challenging the validity of certain claims U.S. Patent Nos. 7,524,087 and 6,949,771.
Both IPRs were denied by the PTAB on November 14, 2018 as time barred. The challenged patent is the patent that is the subject
matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR.
On
August 15, 2017, the Company filed a patent infringement lawsuit against Lite-On, Inc., and Lite-On Technology Corporation (collectively,
“Lite-On”) in the United States District Court for the Central District of California, alleging infringement of certain
of the Company’s LED patents. The Company is seeking a judgment for infringement of the patents along with other relief
including, but not limited to, money damages, costs and disbursements. The case is currently pending but is stayed pending the
outcome of IPR proceedings filed by other parties.
On December 7, 2017, DSS
filed a patent infringement lawsuit against Nichia Corporation and Nichia America Corporation in the United States District Court
for the Central District of California, alleging infringement of certain of DSS’s LED patents. The Company is seeking a
judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements.
The case is currently pending as of the date of this Report. On May 10, 2018, Nichia filed an IPR petition challenging the validity
of claims under U.S. Patent No. 7,919,787. On May 11, 2018, Nichia filed an IPR petition challenging the validity of claims under
U.S. Patent No. 7,652,297. On May 25, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent
No. 7,524,087. On May 29, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 6,949,771.
On May 30, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,256,486. The 6,949,771
IPR was denied institution, but the remaining IPRs were instituted by the PTAB. On December 10, 2018, Nichia refiled IPRs relating
to 6,949,771, which was denied by the PTAB on April 15, 2019. These challenged patents are the patents that are the subject matter
of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR proceedings. On September 17, 2019, the
PTAB issued a written decision determining claims 1-14 of the ‘787 patent unpatentable. The Company did not appeal that
determination. On October 30, 2019, the PTAB issued a written decision determining claims 1-17 of the ‘297 patent unpatentable.
The Company did not appeal that determination. On November 19, 2019, the PTAB issued a written decision determining claims 1-5
of the ‘486 patent unpatentable. The Company has appealed that determination to the U.S. Court of Appeals for the Federal
Circuit. The Company’s opening brief on this appeal is currently due September 10, 2020.
In
April 2019 DSS commenced an action in New York State Supreme Court, Monroe County against Jeffrey Ronaldi, our former Chief Executive
Officer. This New York action seeks a declaratory judgment that, contrary to informal claims made by him, Mr. Ronaldi’s
employment agreement with us expired by its terms and that he is not entitled to any cash bonuses or other unpaid amounts. The
lawsuit also seeks an injunction against Mr. Ronaldi from interfering with any of DSS’ IP litigation. The defendant has
been granted an extension to respond pending settlement negotiations. Mr. Ronaldi subsequently commenced an action against us
in the Superior Court of California, County of San Diego, on November 8, 2019, under case number 37-2019-00059664-CU-CO-CTL, in
which he alleges that we terminated his employment in April 2019 in order to avoid paying him certain employment-related amounts.
Mr. Ronaldi contends that he is owed a $100,000 performance bonus for 2017 under this employment agreement with us as well as
$91,000 in documented and unreimbursed expenses, and that DSS purported to terminate him for cause under the terms of his employment
agreement in order to avoid paying such amounts. Mr. Ronaldi also contends that he is entitled to receive additional amounts,
either under the terms of the employment agreement, or under theories of implied-in-fact contract or promissory estoppel, including,
but not limited to, (i) additional performance bonuses of up to 15% of net litigation proceeds received by us from pending patent
infringement litigations, of net licensing proceeds received by us other than from our internally developed IP, or of the net
sales proceeds received by us in connection with the sale of any of our patent assets, (ii) earned but unpaid base salary, (iii)
an equity grant of shares of our common stock, and (iv) payments for unused personal time and sick days. He seeks actual, compensatory,
restitutionary and/or incidental damages in an amount to be determined at trial; prejudgment interest in an amount to be determined
at trial; attorneys’ fees and costs; other costs of the suit; and such other and further relief as the court deems proper.
We filed a motion to have the case dismissed and consolidated with the Monroe Co., New York, litigation. In response to DSS’s
Motion to Dismiss, the Superior Court of California, County of San Diego, Central, in case number 37-2019-00059664-CU-CO-CTL,
after considering the matter under submission on July 17, 2020, granted DSS’s motion and did dismiss the entire action without
prejudice. As a result of that ruling, DSS filed a motion in the New York Monroe County court litigation to have that court’s
stay lifted and to allow that case to move forward.
Additionally,
on March 2, 2020 DSS and DSSTM filed a second litigation action against Jeffrey Ronaldi in the State of New York, Supreme Court,
County of Monroe, Document Security Systems, Inc. and DSS Technology Management, Inc. vs. Jeffrey Ronaldi, Index No.: 2020002300,
alleging acts of self-dealing and conflicts of interest while he served as CEO of both DSS and DSS TM. Mr. Ronaldi has been served
and on April 24, 2020 Mr. Ronaldi filed a Notice of Removal of this civil litigation to the United States District Court for the
Western District of New York. The parties are awaiting the court’s scheduling of the status conference for the management
of all pretrial activities and set a tentative date for trial.
On
September 18, 2019, DSS filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor Inc.
in the United States District Court for the Central District of California alleging infringement of U.S. Patent No. 7,315,119.
The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money
damages, costs and disbursements. The Court has conducted an initial scheduling conference and has set a procedural schedule for
the case. On May 18, 2020, Seoul Semiconductor filed an IPR petition challenging the validity of claims 1-7 of the patent. The
District Court has entered a stay of the District Court proceedings pending the outcome of the IPR petition.
On
September 19, 2019, DSS filed a patent infringement lawsuit against Cree, Inc. in the United States District Court for the Central
District of California alleging infringement of U.S. Patent No. 6,784,460. The Company is seeking a judgment for infringement
of the patents along with other relief including, but not limited to, money damages, costs and disbursements. On February 11,
2020, Cree filed an IPR petition challenging the validity of the patent claims. The Court has conducted an initial scheduling
conference and has set a procedural schedule for the case. The District Court has entered a stay of the District Court proceedings
pending the outcome of the IPR petition.
On
September 20, 2019, DSS filed a patent infringement lawsuit against Nichia Corp. and Nichia America Corp. in the United States
District Court for the Central District of California alleging infringement of U.S. Patent No. 6,879,040. The Company is seeking
a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements.
The Court has conducted an initial scheduling conference and has set a procedural schedule for the case. On May 18, 2020, Nichia
filed an IPR petition challenging the validity of claims 1-4, 8, and 11 of the patent. The District Court has entered a stay of
the District Court proceedings pending the outcome of the IPR petition.
On
November 20, 2019, DSS Technology Management was sued in the United States District Court, Northern District of California, by
Intel Corporation (“Intel”) and Apple Inc. (“Apple”). The other defendants in the litigation are Fortress
Investment Group LLC, Fortress Credit Co. LLC, Uniloc 2017 LLC, Uniloc USA, INC., Uniloc Luxembourg S.A.R.L., VLSI Technology
LLC, INVT SPE LLC, Inventergy Global, INC., IXI IP, LLC, and Seven Networks, LLC. The complaint includes allegations regarding
a February 13, 2014 Investment Agreement between DSS Technology Management and Fortress Credit Co. LLC as well as two subsequent
agreements. The complaint also contains allegations regarding DSS Technology Management’s lawsuit against Intel that was
filed in February 2015 in the United States District Court, Eastern District of Texas (referred to below). In the complaint, Intel
and Apple allege violations of Section 1 of the Sherman Act and unfair competition under Cal. Bus. & Prof. Code § 17200
against DSS Technology Management. Additional claims are alleged against other defendants. Intel and Apple seek relief from the
court including that defendants’ conduct be declared a violation of Section 1 of the Sherman Act, Section 7 of the Clayton
Act, and Cal. Bus. & Prof. Code § 17200, et seq.; that Intel and Apple recover damages against defendants in an amount
to be determined and multiplied to the extent provided by law, including under Section 4 of the Clayton Act; that all contracts
or agreements defendants entered into in violation of the Sherman Act, Clayton Act, or Cal. Bus. & Prof. Code § 17200,
et seq. be declared void and the patents covered by those transfer agreements be transferred back to the transferors; that all
patents transferred to defendants in violation of the Sherman Act, Clayton Act, or Cal. Bus. & Prof. Code § 17200, et
seq. be declared unenforceable; and that Intel and Apple recover their costs and expenses associated with this case, together
with interest. DSS Technology Management responded to the complaint on February 4, 2020 by filing a motion to dismiss and strike
the complaint as well as a motion to stay discovery. The court granted the motion to stay discovery on March 25, 2020. A hearing
on the motion to dismiss and to strike the complaint was reset for July 8, 2020. On July 8, 2020 the court granted DSS’s
motion to dismiss, and while the order allowed the Plaintiffs leave to amend their complaint, it did dismiss with prejudice claims
against DSS based on the patents asserted by DSS that were part of the complaint. On August 4, 2020, Apple and Intel filed a first
amended complaint, in which DSS is no longer named as a defendant and upon which we believe the case is closed as to DSS.
In
addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and
have not been finally adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results
of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss is probable
and estimable.
Contingent
Litigation Payments - The Company retains the services of professional service providers, including law firms that specialize
in intellectual property licensing, enforcement and patent law. These service providers are often retained on an hourly, monthly,
project, contingent or a blended fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined
milestones or the Company’s actual collection of funds. The Company accrues contingent fees when it is probable that the
milestones will be achieved, and the fees can be reasonably estimated. As of June 30, 2020, and December 31, 2019, the Company
had not accrued any contingent legal fees pursuant to these arrangements.
Contingent
Payments - The Company is party to certain agreements with funding partners who have rights to portions of intellectual
property monetization proceeds that the Company receives. As of June 30, 2020, there are no contingent payments due.
9.
Stockholders’ Equity
Sales
of Equity – On February 18, 2020, in accordance with the Chairman of the Company’s Board of Directors
compensation plan as CEO of one of the Company’s subsidiaries,11,664 shares of the Company’s common stock were remitted
in lieu of cash as settlement of his Q3 and Q4 2019 salary of $114,000 that was accrued as of December 31, 2019.
On February 20, 2020,
the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”),
which provided for the issuance and sale by the Company and the purchase by the Underwriter, in a firm commitment underwritten
public offering (the “Offering”), of 740,741 shares of the Company’s common stock, $0.02 par value per share.
Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public
offering price of $5.40 ($0.18 per shares pre-reverse stock split) per share, less certain underwriting discounts and commissions.
The Company also granted the Underwriters a 45-day option to purchase up to 111,111 additional shares of the Company’s common
stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Offering. The net
offering proceeds to the Company from the Offering were approximately $4 million, after deducting estimated underwriting discounts
and commissions and other estimated offering expenses, and assuming no exercise of the Underwriter’s over-allotment option.
The offering was closed on February 25, 2020. Heng Fai Ambrose Chan, the Chairman of the Company’s Board of Directors, purchased
$2 million of shares in the Offering.
On May 15, 2020, the Company entered into an underwriting agreement (the “Underwriting
Agreement”) with Aegis Capital Corp. (the “Underwriter”), which provided for the issuance and sale by the Company
and the purchase by the Underwriter, in a firm commitment underwritten public offering (the “Offering”), of 769,230
shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained in the Underwriting
Agreement, the shares were sold to the Underwriter at a public offering price of $7.80 per share, less certain underwriting discounts
and commissions. The Company also granted the Underwriters a 45-day option to purchase up to 115,384 additional shares of the
Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with
the Offering. The net offering proceeds to the Company from the Offering were approximately $6.2 million, after deducting estimated
underwriting discounts and commissions and other estimated offering expenses, and assuming no exercise of the Underwriter’s
over-allotment option. The offering was closed on June 26, 2020.
Stock-Based
Compensation - The Company records stock-based payment expense related to options and warrants based on the grant date
fair value in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based awards to employees,
directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the six months
ended June 30, 2020, the Company had stock compensation expense of approximately $84,000 or $0.04 basic and diluted
loss per share ($59,000, or $0.08 basic and diluted loss per share for the corresponding six months ended June 30, 2019).
On April 3, 2020, by
unanimous written consent, the Board of Directors authorized the Company to issue individual stock grants of the Company’s
common stock, pursuant to the Company’s 2020 Employee, Director and Consultant Equity Incentive Plan, to certain managers
and directors in the amount of 8,900 shares, at $6.60 per share which were immediately vested and issued. 5,800 of these shares
where were fully vested restricted stock to members of the Company’s management team of with a two-year lock-up period.
On June 4, 2020, the
Company entered into an agreement with an investor relations firm to provide services over a 14 month period in exchange for 21,000
shares of common stock. The shares were issued on the date of the agreement and were valued by the Company at $210,000. The value
assigned to the shares is included in other assets on the accompanying consolidated balance sheets and will be expensed into stock-based
compensation as it is earned.
10. Discontinued Operations
As a result of the
insufficient cash flows from the operations of Plastic Printing Professionals, Inc. as well as the disruption of our
business from the COVID-19 pandemic, on April 20, 2020, the Company executed a nonbinding letter of intent with a perspective
buyer for substantially all the assets of this business line. As a result of insufficient cash flows, the disruption of our business
from the Covid-19 pandemic, and with the intent to exit this business line, the Company terminated its production and office personnel
and maintained only a few employees to assist in and facilitate the sale of its assets. The financial results for these subsidiaries
have been presented as discontinued operations in the accompanying consolidated financial statements.
The following tables
show the major classes of assets and liabilities held for sale and results of operations of the discontinued operation.
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets - Assets Held For Sale
|
|
June 30, 2020
|
|
|
December 31,
|
|
|
|
unaudited
|
|
|
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
236,000
|
|
|
$
|
342,000
|
|
Total current assets
|
|
|
236,000
|
|
|
|
342,000
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
656,000
|
|
|
|
732,000
|
|
Right-of-use assets
|
|
|
952,000
|
|
|
|
1,081,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of lease liability
|
|
|
274,000
|
|
|
|
274,000
|
|
Total current liabilities
|
|
|
274,000
|
|
|
|
274,000
|
|
|
|
|
|
|
|
|
|
|
Long term lease liability
|
|
|
678,000
|
|
|
|
807,000
|
|
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations and Comprehensive Loss - Discontinued Operations
(unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printed products
|
|
$
|
603,000
|
|
|
$
|
623,000
|
|
|
$
|
1,383,000
|
|
|
$
|
1,675,000
|
|
Total revenue
|
|
|
603,000
|
|
|
|
623,000
|
|
|
|
1,383,000
|
|
|
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, exclusive of depreciation and amortization
|
|
|
484,000
|
|
|
|
514,000
|
|
|
|
1,113,000
|
|
|
|
1,140,000
|
|
Selling, general and administrative (including stock based compensation)
|
|
|
286,000
|
|
|
|
355,000
|
|
|
|
733,000
|
|
|
|
751,000
|
|
Depreciation and amortization
|
|
|
58,000
|
|
|
|
44,000
|
|
|
|
115,000
|
|
|
|
85,000
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
685,000
|
|
|
|
-
|
|
Total costs and expenses
|
|
|
828,000
|
|
|
|
913,000
|
|
|
|
2,646,000
|
|
|
|
1,976,000
|
|
Operating loss
|
|
|
(225,000
|
)
|
|
|
(290,000
|
)
|
|
|
(1,263,000
|
)
|
|
|
(301,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,000
|
)
|
|
|
(9,000
|
)
|
|
|
(15,000
|
)
|
|
|
(15,000
|
)
|
Income (loss) before income taxes
|
|
|
(232,000
|
)
|
|
|
(299,000
|
)
|
|
|
(1,278,000
|
)
|
|
|
(316,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income (loss) from discontinued operations
|
|
|
(232,000
|
)
|
|
|
(299,000
|
)
|
|
|
(1,278,000
|
)
|
|
|
(316,000
|
)
|
11.
Supplemental Cash Flow Information
The
following table summarizes supplemental cash flows for the six months ended June 30, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
73,000
|
|
|
$
|
70,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Impact of adoption of lease accounting standards
|
|
$
|
-
|
|
|
$
|
1,498,000
|
|
Loss from change in fair value of interest rate swap derivatives
|
|
$
|
-
|
|
|
$
|
(15,000
|
)
|
Common stock issued upon conversion of convertible note
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Equity issued to purchase intangible assets
|
|
$
|
-
|
|
|
$
|
145,000
|
|
Long -lived assets acquired through settlement of notes receivable
|
|
$
|
838,000
|
|
|
|
|
|
Shares issued for marketing services
|
|
$
|
210,000
|
|
|
$
|
-
|
|
12.
Segment Information
The
Company’s eight businesses lines are organized,
managed and internally reported as four operating segments. Packaging and Printing is engaged in the printing and production of
paper, and cardboard documents with a wide range of features, including the Company’s patented technologies and trade secrets
designed for the protection of documents against unauthorized duplication and altering. A second operating segment, Digital, is
comprised of DSS Digital Group, and DSS International, and is engaged in research, development, marketing and selling worldwide
the Company’s digital products, including and primarily our AuthentiGuard® product, which is a brand authentication
application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based
solutions. The third operating segment, Technology Management, primary mission has been to monetize its various patent portfolios
through commercial litigation and licensing. Except for investment in its social networking related patents, we have historically
partnered with various third-party funding groups in connection with patent monetization programs. The fourth segment, Direct
Marketing, direct marketing or network marketing is the business of selling products or services directly to the public, e.g.,
by online or telephone selling, rather than through retailers. We believe this business has significant growth potential in the
blossoming “gig economy” with comparisons to the growth that is being realized in parallel businesses such as ride
sharing.
Approximate
information concerning the Company’s operations by reportable segment for the three and six months ended June 30, 2020 and
2019 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated
independently, would report the results contained herein:
Three Months Ended June 30,
2020
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Digital
|
|
|
Technology
Management
|
|
|
Direct
Marketing
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
2,264,000
|
|
|
$
|
-
|
|
|
$
|
359,000
|
|
|
$
|
-
|
|
|
$
|
506,000
|
|
|
$
|
-
|
|
|
$
|
3,129,000
|
|
Depreciation and amortization
|
|
|
195,000
|
|
|
|
-
|
|
|
|
9,000
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
57,000
|
|
|
|
275,000
|
|
Interest expense
|
|
|
28,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
42,000
|
|
Stock based compensation
|
|
|
4,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,000
|
)
|
|
|
(7,000
|
)
|
Net Income (loss) from continuous operations
|
|
|
64,000
|
|
|
|
-
|
|
|
|
(155,000
|
)
|
|
|
(49,000
|
)
|
|
|
(25,000
|
)
|
|
|
(507,000
|
)
|
|
|
(672,000
|
)
|
Capital expenditures
|
|
|
31,000
|
|
|
|
(22,000
|
)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
15,000
|
|
Identifiable assets
|
|
|
9,715,000
|
|
|
|
2,579,000
|
|
|
|
686,000
|
|
|
|
-
|
|
|
|
1,411,000
|
|
|
|
13,022,000
|
|
|
|
27,413,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, 2019
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Digital
|
|
|
Technology
Management
|
|
|
Direct
Marketing
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
3,000,000
|
|
|
$
|
-
|
|
|
$
|
484,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,484,000
|
|
Depreciation and amortization
|
|
|
223,000
|
|
|
|
-
|
|
|
|
8,000
|
|
|
|
21,000
|
|
|
|
-
|
|
|
|
41,000
|
|
|
$
|
293,000
|
|
Interest expense
|
|
|
(29,000
|
)
|
|
|
-
|
|
|
|
(2,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(31,000
|
)
|
Stock based compensation
|
|
|
4,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
$
|
28,000
|
|
Net Income (loss) from continuous operations
|
|
|
(21,000
|
)
|
|
|
-
|
|
|
|
(258,000
|
)
|
|
|
(160,000
|
)
|
|
|
-
|
|
|
|
(293,000
|
)
|
|
$
|
(732,000
|
)
|
Capital expenditures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Identifiable assets
|
|
|
9,381,000
|
|
|
|
4,129,000
|
|
|
|
198,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,960,000
|
|
|
|
19,668,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30, 2020
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Digital
|
|
|
Technology
Management
|
|
|
Direct
Marketing
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
5,422,000
|
|
|
$
|
-
|
|
|
$
|
848,000
|
|
|
$
|
-
|
|
|
$
|
1,078,000
|
|
|
$
|
-
|
|
|
$
|
7,348,000
|
|
Depreciation and amortization
|
|
|
418,000
|
|
|
|
-
|
|
|
|
19,000
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
114,000
|
|
|
|
578,000
|
|
Interest expense
|
|
|
55,000
|
|
|
|
-
|
|
|
|
7,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,000
|
|
|
|
73,000
|
|
Stock based compensation
|
|
|
8,000
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,000
|
|
|
|
84,000
|
|
Net Income (loss) from continuous operations
|
|
|
86,000
|
|
|
|
-
|
|
|
|
(202,000
|
)
|
|
|
(290,000
|
)
|
|
|
179,000
|
|
|
|
(1,368,000
|
)
|
|
|
(1,595,000
|
)
|
Capital expenditures
|
|
|
94,000
|
|
|
|
14,000
|
|
|
|
8,000
|
|
|
|
-
|
|
|
|
|
|
|
|
4,000
|
|
|
|
120,000
|
|
Identifiable assets
|
|
|
9,715,000
|
|
|
|
2,579,000
|
|
|
|
686,000
|
|
|
|
-
|
|
|
|
1,411,000
|
|
|
|
13,022,000
|
|
|
|
27,413,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30, 2019
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Digital
|
|
|
Technology
Management
|
|
|
Direct
Marketing
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
6,314,000
|
|
|
$
|
-
|
|
|
$
|
927,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,241,000
|
|
Depreciation and amortization
|
|
|
448,000
|
|
|
|
-
|
|
|
|
16,000
|
|
|
|
41,000
|
|
|
|
-
|
|
|
|
41,000
|
|
|
$
|
546,000
|
|
Interest expense
|
|
|
50,000
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
55,000
|
|
Stock based compensation
|
|
|
9,000
|
|
|
|
-
|
|
|
|
42,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,000
|
|
|
$
|
59,000
|
|
Net Income (loss) from continuous operations
|
|
|
68,000
|
|
|
|
-
|
|
|
|
(579,000
|
)
|
|
|
(216,000
|
)
|
|
|
-
|
|
|
|
(437,000
|
)
|
|
$
|
(1,164,000
|
)
|
Capital expenditures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Identifiable assets
|
|
|
9,381,000
|
|
|
|
4,129,000
|
|
|
|
198,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,960,000
|
|
|
|
19,668,000
|
|
The
following tables disaggregate our business segment revenues by major source.
Printed
Products Revenue Information:
Three months ended June 30, 2020
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
2,098,000
|
|
Commercial and Security Printing
|
|
|
168,000
|
|
Total Printed Products
|
|
$
|
2,266,000
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
2,775,000
|
|
Commercial and Security Printing
|
|
|
225,000
|
|
Total Printed Products
|
|
$
|
3,000,000
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
5,063,000
|
|
Commercial and Security Printing
|
|
|
371,000
|
|
Total Printed Products
|
|
$
|
5,434,000
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
5,737,000
|
|
Commercial and Security Printing
|
|
|
577,000
|
|
Total Printed Products
|
|
$
|
6,314,000
|
|
Technology
Sales, Services and Licensing Revenue Information:
Three months ended June 30, 2020
|
|
|
|
Information Technology Sales and Services
|
|
$
|
30,000
|
|
Digital Authentication Products and Services
|
|
|
258,000
|
|
Royalties from Licensees
|
|
|
70,000
|
|
Total Printed Products
|
|
$
|
358,000
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
Information Technology Sales and Services
|
|
$
|
32,000
|
|
Digital Authentication Products and Services
|
|
|
319,000
|
|
Royalties from Licensees
|
|
|
133,000
|
|
Total Printed Products
|
|
$
|
484,000
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
Information Technology Sales and Services
|
|
$
|
41,000
|
|
Digital Authentication Products and Services
|
|
|
589,000
|
|
Royalties from Licensees
|
|
|
207,000
|
|
Total Printed Products
|
|
$
|
837,000
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
Information Technology Sales and Services
|
|
$
|
105,000
|
|
Digital Authentication Products and Services
|
|
|
550,000
|
|
Royalties from Licensees
|
|
|
272,000
|
|
Total Printed Products
|
|
$
|
927,000
|
|
Direct
Marketing
Three months ended June 30, 2020
|
|
|
|
Direct Marketing Internet Sales
|
|
$
|
506,000
|
|
Total Direct Marketing
|
|
$
|
506,000
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
Direct Marketing Internet Sales
|
|
$
|
-
|
|
Total Direct Marketing
|
|
$
|
-
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
Direct Marketing Internet Sales
|
|
$
|
1,078,000
|
|
Total Direct Marketing
|
|
$
|
1,078,000
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
Direct Marketing Internet Sales
|
|
$
|
-
|
|
Total Direct Marketing
|
|
$
|
-
|
|
13.
SUBSEQUENT EVENTS
On July 7, 2020,
the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”),
which provided for the issuance and sale by the Company and the purchase by the Underwriter, in a firm commitment underwritten
public offering (the “Offering”), of 1,028,800 shares of the Company’s common stock, $0.02 par value per share.
Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public
offering price of $6.25 per share, less certain underwriting discounts and commissions. The Company also granted the Underwriters
a 45-day option to purchase up to 154,320 additional shares of the Company’s common stock on the same terms and conditions
for the purpose of covering any over-allotments in connection with the Offering. The net offering proceeds to the Company from
the Offering were approximately $6.7 million. The offering was closed on July 10, 2020.
On July 21, 2020, the
Company purchased an aggregate of 11,000,000 shares of Class A common Stock of Sharing Services Global Corp. (SHRG)
in two private purchases from third parties at a purchase price of for $0.08 per share or $880,000. The Chief Executive
Officer of SHRG serves as a director on the Company’s board of directors and the Chairman of the board of directors
of the Company is also on the board of directors of SHRG.
On July 23, 2020, Chan
Heng Fai Ambrose, the Chairman of the Company’s board of directors, assigned a Stock Purchase and Share Subscription Agreement
by and between Mr. Chan and SHRG, pursuant to which the Company purchased 30,000,000 shares of Class A Common Stock and 10,000,000
warrants to purchase Class A Common Stock for $3 million. The warrants have an average exercise price of $0.20, immediately vested
and may be exercised at any time commencing on the date of issuance and ending three year from such date. These shares and warrants
are also subject to a one year trading restriction pursuant to the terms of a Lock-Up Agreement entered into between Mr. Chan
and the Company and assigned to the Company.
The
Company previously acquired in a series of purchases of SHRG’s Class A Common Stock between March 31, 2020 and July 21,
2020 an aggregate of 13,917,593 shares via open-market transactions at an average purchase price of $0.05 per share and 7,500,000
shares in private purchases at an average purchase price of $0.08 per share. As of July 30, 2020, the Company beneficially
owned an aggregate of 62,417,593 shares of Class A Common Stock of SHRG, representing approximately 37.6% of Class A Common Stock
issued and outstanding, based on 166,072,386 shares of Class A Common Stock issued and outstanding as of July 30, 2020, as reported
on SHRG’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange on August 12, 2020.
If we were to exercise the 10,000,000 warrants owned, we would own approximately 41.1% of
SHRG.
On
July 31, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis
Capital Corp. (the “Underwriter”), which provided for the issuance and sale by the Company and the purchase by the
Underwriter, in a firm commitment underwritten public offering (the “Offering”), of 453,333 shares of the Company’s
common stock, $0.02 par value per share. Subject to the terms and conditions contained in the Underwriting Agreement, the shares
were sold to the Underwriter at a public offering price of $7.50 per share, less certain underwriting discounts and commissions.
The Company also granted the Underwriters a 45-day option to purchase up to 38,533 additional shares of the Company’s common
stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Offering. The net
offering proceeds to the Company from the Offering were approximately $3.3 million, after deducting estimated underwriting
discounts and commissions and other estimated offering expenses. The offering was closed on July 31, 2020.
On
July 31, 2020, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit
Agreement with Citizens pursuant to which Citizens agreed to lend up to $900,000 to permit Premier Packaging to purchase equipment
from time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition
Line of Credit shall bear interest thereon at a per annum rate of 2% above the LIBOR Advantage Rate until the Conversion Date
(as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to
a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens.
On August 10, 2020,
the Document Security Systems, Inc., (the “Company” or “DSS”) held a special meeting of stockholders (the
“Special Meeting”) in Magnolia, Texas. A total of 1,581,855 shares of common stock representing 74.94% of the aggregate
shares outstanding and eligible to vote and constituting a quorum were represented in person or by valid proxies at the Special
Meeting. Stockholders approved the issuance of shares of DSS common stock and Series A Preferred Stock in connection with the
acquisition of Impact BioMedical Inc., pursuant to the Share Exchange Agreement (“Share Exchange”). Stockholder approval
was a condition to be completed in order for the Company to move forward with the Share Exchange. Stockholders authorized an adjournment
of the Special Meeting, if necessary, if a quorum was present, to solicit additional proxies if there were not sufficient votes
in favor of Proposal 1. An adjournment was not necessary as there were sufficient votes in favor of Proposal 1. Stockholders ratified
the approval by our Board of Directors of an amendment to the Company’s bylaws to allow for participation in stockholder
meetings by means of virtual meeting technology. With shareholder approval, this transaction is expect to close during Q3 2020.