NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS
Document
Security Systems, Inc. (the “Company of DSS”) 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
(“Premier Packaging”), (2) DSS Digital Inc., and its subsidiaries (“Digital Group”), and (3) DSS Technology
Management, Inc. (“IP Technology”). Premier Packaging operates in the paper board folding carton, smart packaging,
and document security printing markets. It markets, manufactures, and sells mailers, photo sleeves, sophisticated custom folding
cartons, and complex 3-dimensional direct mail solutions designed to provide functionality, marketability, and sustainability
to product packaging while providing counterfeit protection and consumer engagement platform. Digital Group researches, develops,
markets, and sells the Company’s digital products worldwide. As an industry leader in brand authentication services, our
solutions leverage functional anti-counterfeiting features and cutting-edge technologies to satisfy commercial and consumer product
needs for branding, intelligent packaging, and marketing. Digital’s 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. IP Technology Management Inc., manages, licenses, and acquires intellectual property assets for the
purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments
in the development and commercialization of patented technologies, licensing, strategic partnerships, and commercial litigation.
In 2020, under its (4) Decentralize Sharing Systems, Inc. subsidiary, created a fourth business segment, Direct Marketing/Online
Sales Group. This group provides services to assist companies in the emerging growth gig business model of peer-to-peer decentralized
sharing marketplaces. Direct specializes in marketing and distributing its products and services through its subsidiary and partner
network, using the popular gig economic marketing strategy as a form of direct marketing.
In
addition to the four subsidiaries listed above, in 2019 and early 2020, DSS has created four new, wholly owned subsidiaries. (5)
DSS Blockchain Security, Inc., a Nevada corporation, specializes in the development of blockchain security technologies for tracking
and tracing solutions for supply chain logistics and cyber securities across global markets. (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 bio-health 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, develops 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 7). 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. AMRE 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 December 31, 2020, AAMI has yet
to generate any revenue.
On
August 21, 2020, the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”), pursuant
to a Share Exchange Agreement by and among the Company, DSS BioHealth Security, Inc. (“DSS BioHealth”), Alset International
Limited (formally Singapore eDevelopment Ltd.), and Global Biomedical Pte Ltd. (“GBM”), which was previously approved
by the Company’s shareholders (the “Share Exchange”). Under the terms of the Share Exchange, the Company issued
483,334 shares of the Company’s common stock, par value $0.02 per share, nominally valued at $6.48 per share, and 46,868
newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). As a
result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly
owned subsidiary (see Note 7).
Impact
BioMedical strives to leverage its scientific know-how and intellectual property rights to provide solutions that have been plaguing
the biomedical field for decades. By tapping into the scientific expertise of its partners, Impact BioMedical has undertook a
concerted effort in the research and development (R&D), drug discovery and development for the prevention, inhibition, and
treatment of neurological, oncological and immune related diseases.
In
August 2020, the Company’s wholly owned subsidiary, DSS Securities, Inc. entered into a corporate venture to form and operate
a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”).
DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application
and permitting process.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation - The consolidated financial statements include the accounts of Document Security System and its wholly
owned and its majority owned or subsidiaries. All 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 and notes receivable, inventory, fair values
of investments, recoverability of long-lived assets and goodwill, useful lives of intangible assets and property and equipment,
contingencies fair values of options and warrants to purchase the Company’s common stock, deferred revenue and income taxes,
substantial doubt about ability to continue as a going concern 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.
Cash
Equivalents - All highly liquid investments with maturities of three months or less at the date of purchase are classified
as cash equivalents. Amounts included in cash equivalents in the accompanying consolidated balance sheets are money market funds
whose adjusted costs approximate fair value.
Accounts
Receivable - The Company extends credit to its customers in the normal course of business. The Company performs ongoing
credit evaluations and generally do 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.
As of December 31, 2020, the Company established a reserve for doubtful accounts of approximately $25,000 ($41,000 – 2019).
The Company does not accrue interest on past due accounts receivable.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, accounts payable and
accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. Marketable
securities classify as a Level 1 fair value financial instrument. 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 where the fair value is not considered readily determinable, are
carried at cost.
Inventory
- Inventories consist primarily of paper, pre-printed security paper, paperboard, fully prepared packaging, and health
and beauty products which and are stated at the lower of cost or net realizable value on the first-in, first-out (“FIFO”)
method. Packaging work-in-process and finished goods included the cost of materials, direct labor and overhead. At the closing
of each reporting period, the Company evaluates its inventory in order to adjust the inventory balance for obsolete and slow-moving
items. No reserve was recorded as of December 31, 2020 or 2019. Write-downs and write-offs are charged to cost of revenue.
Investments
– Investments in equity securities with a readily determinable fair value, not accounted for under the equity method,
are recorded at fair value with unrealized gains and losses included in earnings. For equity securities without a readily
determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable
transactions for the same or similar securities, with unrealized gains and losses included in earnings.
For
equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value
below book value. If there is a decline that is other-than-temporary, the investment is written down to fair value. See Note 6
for further discussion on investments.
Property,
Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives or lease period of the assets whichever is shorter. Expenditures for renewals and betterments
are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Any gain or loss
upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Depreciation
expense in 2020 was approximately $710,000 ($690,000 - 2019).
Goodwill
- Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and
liabilities assumed in a business combination. Goodwill is subject to impairment testing at least annually and will be tested
for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be
impaired. FASB ASC Topic 350 provides an entity with the option to first assess qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after completing the assessment, it is determined that it is more likely than not that
the fair value of a reporting unit is less than its carrying value, the Company will proceed to a quantitative test. The Company
may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units. The test compares
the fair value of an entity’s reporting units to the carrying value of those reporting units. This quantitative test requires
various judgments and estimates. The Company estimates the fair value of the reporting unit using a market approach in combination
with a discounted operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill
over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. The Company performed its annual
goodwill impairment test as of December 31, 2020, and no impairment was deemed necessary for the goodwill associated with Premier
Packaging Company of approximately $1,768,600. Consistent with this accounting impairment analysis, the Company determined that
due to many factors, including the impact of the COVID-19 outbreak and the related closing of the operations of the Plastic Group,
the Company has quantitatively tested the carrying value of its goodwill associated with the DSS Plastics Group and determined
that an impairment of the DSS Plastics’ goodwill had occurred and the Company recorded a full goodwill impairment of $685,000
during the twelve-months ended December 31, 2020. This impairment has been included in the calculation of the discontinued operations
of DSS Plastics group. There was no goodwill impairment recorded during the year ended December 31, 2019.
Intangible
Assets - The estimated fair values of acquired intangibles are generally determined based upon future economic benefits
such as earnings and cash flows. Acquired identifiable intangible assets are recorded at fair value and are amortized over their
estimated useful lives. Acquired intangible assets with an indefinite life are not amortized but are reviewed for impairment at
least annually or more frequently whenever events or changes in circumstances indicate that the carrying amounts of those assets
are below their estimated fair values. Impairment is tested under ASC 350.
Long-Lived
Assets - 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.
Related
Party Liabilities - The Company’s HWH World, Inc subsidiary has a service agreement with HWH Korea, a subsidiary
of Alset International Limited (“Alset Intl.”) (formally Singapore eDevelopment Limited). The Chairman of the Company,
Mr. Heng Fai Ambrose Chan, is the Executive Director and Chief Executive Officer of Alset Intl. Mr. Chan is also the majority
shareholder of Alset Intl as well as the largest shareholder of the Company. The Company also owns approximately 127,179,000 shares
of Alset International, a company publicly listed on the Singapore Exchange Limited. This service agreement will allow HWH Korea
to utilize the Company’s merchant account in connection with their direct marketing network with periodic remittance of
the cash collected to them for a fee of 2.5% of amounts collected. As of December 31, 2020, the Company has collected approximately
$1,100,000 on behalf of HWH Korea. This amount was remitted to HWH Korea, net of fees and other expenses, in the first quarter
of 2021. The related party liability is included in “Other current liabilities” on the accompanying consolidated balance
sheets. There were no amounts outstanding to this related party at December 31, 2019.
Reverse
Stock Split - On May 4, 2020, Document Security Systems, Inc. held a Special Meeting of Stockholders 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 with the effectiveness of such amendment to be determined by the Board of Directors of the
Company 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 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 reverse stock split has been retroactively applied to all financial
statements presented.
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. The Company generates revenue from its direct marketing line
of business primarily through internet sales and recognizes revenue as items are shipped.
As
of December 31, 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.
Costs
of revenue - Costs of revenue includes all direct cost of the Company’s packaging, commercial and security
printing sales, primarily, paper, inks, dies, and other consumables, and direct labor, transportation and manufacturing facility
costs. In addition, this category includes all direct costs associated with the manufacturing and procurement of the products
sold in the Company’s Direct Marketing line of business as well as with the Company’s technology sales, services and
licensing including hardware and software that is resold, third-party fees, and fees paid to inventors or others as a result of
technology licenses or settlements, if any. Amortization of patent costs and acquired technology are included in depreciation
and amortization on the consolidated statement of operations. Costs of revenue do not include expenses related to product development,
integration, and support. These costs are included in research and development, which is a component of selling, general and administrative
expenses on the consolidated statement of operations. Legal costs are included in selling, general and administrative.
Shipping
and Handling Costs - Costs incurred by the Company related to shipping and handling are included in cost of revenue.
Amounts charged to customers pertaining to these costs are reflected as revenue.
Share-Based
Payments - Compensation cost for stock awards are measured at fair value and the Company recognizes compensation expense
over the service period for which awards are expected to vest. The Company uses the Black-Scholes-Merton option pricing model
for determining the estimated fair value for stock-based awards. The Black-Scholes-Merton model requires the use of subjective
assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility
of the underlying stock. For equity instruments issued to consultants and vendors in exchange for goods and services the Company
determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance
is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over
the term of the consulting agreement.
Sales
Commissions - Sales commissions are expensed as incurred for contracts with an expected duration of one year or less.
A significant portion of the Company’s sales commissions expense is generated from its direct marketing line of business.
These commissions are based on current month shipments and are paid one month in arrears. There were no sales commissions
capitalized as of December 31, 2020.
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.
Research
and Development - Research and development costs are expensed as incurred. Research and development costs consist primarily
of third-party research costs and consulting costs. The Company recognized costs of approximately $210,000 in 2020, and a credit
in 2019 of approximately $12,000 primarily due to receipt of the anticipated $33,000 refund on development costs for the development
of proprietary blockchain solutions for the Company’s AuthentiGuard product line.
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.
Comprehensive
Income (Loss) - Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions
and other events and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting
stockholders’ equity that, under U.S. GAAP, are excluded from net income (loss). The change in fair value of interest rate
swaps was the only item impacting accumulated other comprehensive loss for the year ended December 31, 2019.
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 from outstanding warrants, stock options and preferred stock 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. Weighted average
shares outstanding used for diluted earnings per share includes the assumed conversion of the 47,000 preferred shares, convertible
into 7,233,000 common shares, for the period they were outstanding resulting in an additional 2,471,000 shares for the
year ended December 31, 2020.
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
2020, two customers accounted for 38% of our consolidated revenue. As of December 31, 2020, these two customers accounted
for 60% of our consolidated trade accounts receivable balance. As of December 31, 2019, these two customers accounted for 45%
of our consolidated revenue and 48% of our consolidated trade accounts receivable balance.
Business
Combinations - Business combinations and non-controlling interests are recorded in accordance with FASB ASC 805 Business
Combinations. Although Impact BioMedical historically, and to date has not generated any revenues, the acquisition of Impact
BioMedical meets the definition of a business with inputs, processes, and outputs, and therefore, the Company has concluded to
account for this transaction in accordance with the acquisition method of accounting under Topic 805. Under the guidance,
we determine the fair value of consideration paid and the assets and liabilities of the acquired business are recorded
at their fair values at the date of acquisition and all acquisition costs are expensed as incurred. 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. The application of business combination accounting requires
the use of significant estimates and assumptions. See Note 7 regarding the acquisitions in 2020.
Discontinued
Operations – On April 20, 2020, the Company executed a nonbinding letter of intent with a perspective buyer for
the sale of certain assets of its plastic printing business line, which it operated under Plastic Printing Professionals, Inc.
(“DSS Plastics”), a wholly-owned subsidiary of the Company. That sale was consummated and closed on August 14, 2020.
The remaining assets of DSS Plastics were either sold, separately disposed, or retained by other existing DSS businesses lines.
Accordingly, the operations of DSS Plastics have been discontinued. Based on the magnitude of DSS Plastics’ historical revenue
to the Company and because the Company has exited 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 205—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 16.
Newly
Adopted and Recent Accounting Pronouncements - In June 2016, the 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.
In
February 2016, the FASB issued ASU No. 2016-02 and its related amendments which introduced Leases (Topic 842, or “ASC 842”),
a new comprehensive lease accounting model that supersedes the current lease guidance under Leases (Topic 840). The new accounting
standard requires lessees to recognize right-of-use (“ROU”) assets and corresponding lease liabilities for all leases
with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements
of lease arrangements. In July 2018, the FASB added a transition option for implementation that allows companies to continue to
use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the
year of adoption. The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three
practical expedients permitted under the transition guidance and elected the optional transition method that allows for a cumulative-effect
adjustment in the period of adoption, without a restatement of prior periods. Further, the Company elected a short-term lease
exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e.
leases with terms of 12 months or less). As a result of the adoption, the Company adjusted its beginning balance as of January
1, 2019 by recording operating lease ROU asset and liabilities through a cumulative-effect adjustment. The adoption impacted the
accompanying consolidated balance sheet but did not have an impact on the consolidated statements of operations and comprehensive
income (loss).
At
the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether
there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange
for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding
ROU assets upon lease commencement using a discount rate based on a credit adjusted secured borrowing rate commensurate with the
term of the lease. The Company records lease liabilities within current or noncurrent liabilities based upon the length of time
associated with the lease payments. The operating lease ROU assets includes any lease payments made and excludes lease incentives
and initial direct costs incurred, if any, and are recorded as noncurrent assets. Lease terms may include options to extend or
terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12
months or less are not recorded on the accompanying consolidated balance sheet. Lease expense for minimum lease payments is recognized
on a straight-line basis over the lease term. The impact of the adoption of ASC 842 on the accompanying consolidated balance sheet
as of January 1, 2019 was a right-of-use asset and a lease liability of approximately $1,443,800.
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, had been, and would continue to be, more
severely impacted by the pandemic than our other divisions, and we did not believe this was a short-term phenomenon. We expected
that this business would 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 would 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, and to exit this business
line. The impact of this decision in our first quarter 2020 earnings and for as of December 31, 2020 was an impairment
of 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 $5.2 million in cash, and a positive working capital position of approximately
$3.6 million as of December 31, 2020, the Company has incurred operating losses as well as negative cash flows from operating
and investing activities over the past two years.
To
continue as a going concern, during the twelve months ended December 31, 2020, the Company through multiple underwriting agreements
with Aegis Capital Corp. (“Aegis”), acting as representative of the several underwriters, provided the issuance and
sale by the Company in an underwritten public offering shares of the Company’s common stock. The net offering proceeds to
the Company approximated $20.2 million. Also, through two separate public offerings underwritten by Aegis during the first
quarter of 2021, the Company received net proceeds of approximately $61.0 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 at all corporate and business line levels. During
the twelve months ended December 31, 2020, steps were taken to materially reduce or eliminate cash burns in the IP Monetization
program, the DSS Digital Group and the DSS Plastics group.
At
the Company’s current operating levels and capital usage, we believe that without any further acquisition or investments,
our $5.2 million in aggregate cash, and cash equivalents, as of December 31, 2020, along with the $61.0 million
raised during the first quarter of 2021, would allow us to fund our nine business lines current and planned operations
through March 2022. Based on this, the Company has concluded that substantial doubt of its ability to continue as a going
concern has been alleviated
NOTE
3 – INVENTORY
Inventory
consisted of the following as of December 31:
|
|
2020
|
|
|
2019
|
|
Finished
Goods
|
|
$
|
1,544,000
|
|
|
$
|
756,000
|
|
Work
in Process
|
|
|
280,000
|
|
|
|
246,000
|
|
Raw
Materials
|
|
|
131,000
|
|
|
|
364,000
|
|
|
|
$
|
1,955,000
|
|
|
$
|
1,366,000
|
|
NOTE
4 – 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 December 31,
2020, and 2019 this TBD Note had outstanding principal and interest of approximately $537,000 and $507,000, respectively. On December
30, 2020, the Company signed a binding letter of intent with West Park Capital, Inc (“West Park”). and TBD where the
parties agreed to prepare a note and stock exchange agreement whereby DSS will assign the TBD Note to West Park and West Park
shall issue to DSS a stock certificate reflecting 7.5% of the issued and outstanding shares of West Park. This note and stock
exchange agreement is expected to be finalized sometime during the second quarter of 2021.
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 which accrued at
a non-default interest rate of 6% with a scheduled maturity date of November 11, 2019 (“Note #1) This Note #1 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 a first lien on all of the assets of RBC and its
subsidiaries, and was guaranteed by its subsidiary, RBC Life Sciences USA, Inc. As of December 31, 2019, the Company had advanced
under the terms of Note #1 the sum of $200,000.
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 non-default interest rate
of 10% with a scheduled maturity date of November 11, 2024, payable to Decentralized Sharing Systems’ wholly owned subsidiary,
HWH World, Inc.. Accrued interest on the outstanding principal balance was scheduled to be paid monthly commencing on December
25, 2019. Further, any amount of principal repaid during the term of the note was allowed to be re-advanced at any time prior
to the earlier of the acceleration of note to maturity or its maturity date. This note also contains an “Optional Conversion”
feature 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 balance, 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’s direct and indirect subsidiaries. This Note #2 was also secured
by a second 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. As of December 31, 2019, this Note #2 had an
outstanding principal balance of approximately $82,000, and advances of approximately $518,000 were made during 2020.
On
January 24, 2020, as a result of the borrower’s default on Note #1, Decentralized Sharing Systems, Inc. made demand for
repayment of the outstanding balance of the Note #1. In partial resolution, Decentralized Sharing Systems, Inc and RBC agreed
to accept and tender, respectively, pursuant to the Uniform Commercial Code Article 9, collateral in partial satisfaction of debt
under the terms of Note#1. The Company chose to not exercise its option convert the outstanding principal and interest into equity,
but instead elected to accept this 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 which culminated with an Article 9 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. At that April Article 9 public
sale, HWH World, Inc a wholly-owned subsidiary of the Company was the high bidder, and the company received a Bill of Sale
for all of the remaining assets of RBC. As a result of this foreclosure sale and the Note #1, collateral accepted in lieu of partial
debt, the Company now owns and controls most of the 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 ASC 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 are being depreciated and amortized over their useful lives. The Company is currently a
defendant in a lawsuit brought against it for unjust enrichment and fraudulent transfer under Texas Uniform Fraudulent Transfer
Act. See Note 15 for further details on related litigation.
NOTE
5 – FINANCIAL INSTRUMENTS
Cash,
Cash Equivalents and Marketable Securities
The
following tables show the Company’s cash and marketable securities by significant investment category as of December 31,
2020 and December 31, 2019:
|
|
2020
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair
Value
|
|
|
Cash and
Cash
Equivalents
|
|
|
Current
Marketable
Securities
|
|
|
Investments
|
|
Cash and cash equivalents
|
|
$
|
1,733,000
|
|
|
$
|
-
|
|
|
$
|
1,733,000
|
|
|
$
|
1,733,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
3,493,000
|
|
|
|
-
|
|
|
|
3,493,000
|
|
|
|
3,493,000
|
|
|
|
-
|
|
|
|
-
|
|
Marketable Securities
|
|
|
5,641,000
|
|
|
|
3,495,000
|
|
|
|
9,136,000
|
|
|
|
-
|
|
|
|
9,136,000
|
|
|
|
-
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
700,000
|
|
|
|
356,000
|
|
|
|
1,056,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,056,000
|
|
Total
|
|
$
|
11,567,000
|
|
|
$
|
3,851,000
|
|
|
$
|
15,418,000
|
|
|
$
|
5,226,000
|
|
|
$
|
9,136,000
|
|
|
$
|
1,056,000
|
|
|
|
2019
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair
Value
|
|
|
Cash and
Cash
Equivalents
|
|
|
Current
Marketable
Securities
|
|
|
Investment
|
|
Cash and cash equivalents
|
|
$
|
1,096,000
|
|
|
$
|
-
|
|
|
$
|
1,096,000
|
|
|
$
|
1,096,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Marketable Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,096,000
|
|
|
$
|
-
|
|
|
$
|
1,096,000
|
|
|
$
|
1,096,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal
loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit
exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.
NOTE
6 - INVESTMENT
Alset
International Limited (formally Singapore eDevelopment Limited)
As
of December 31, 2018, the Company owned 21,196,552 ordinary shares of Alset International Limited (“Alset
Intl”), formerly named Singapore eDevelopment Limited (“SED”), a company incorporated in Singapore and
publicly listed on the Singapore Exchange Limited. and an existing three-year warrant to purchase up to 105,982,759 ordinary
shares at an exercise price of SGD$0.040 (US$0.0298) per share During the year ended December 31, 2019 the Company exercised 61,977,577 of the warrants for
total cost of $1,829,000 and at December 31, 2019 recorded the investment at cost, less impairment under the measurement
alternative in ASC 321 for a total value of $2,154,000. As of June 25, 2020, the Company exercised the remaining warrants for
total cost of $1,291,000 bringing its total ownership to 127,179,311 shares or approximately 7% of the outstanding shares of
Alset Intl as of December 31, 2020. Historically and through June 30, 2020, the Company carried its investment in Alset Intl
at cost, less impairments under the measurement alternative in ASC 321 in part due to the restriction on the sale of shares
which expired on September 17, 2019 as well as the lack of historical volume associated with the shares of Alset Intl. During
the third quarter 2020, the Company determined fair value
based on the volume of shares traded on the Singapore Exchange which has a breadth and scope comparable to United States
markets, as well as a consistent and observable market price. Accordingly, this investment is now classified as a
marketable security and is 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 Chairman of the Company, Mr. Heng Fai Ambrose
Chan, is the Executive Director and Chief Executive Officer of Alset Intl. Mr. Chan is also the majority shareholder of Alset
Intl as well as the largest shareholder of the Company. The fair value of the marketable security as of December 31, 2020 was
approximately $6,830,000 and during the year ended December 31, 2020 the Company recorded unrealized gains on this investment
of approximately $3,384,200.
Sharing
Services Global Corp. (“SHRG”)
The
Company had acquired in a series of open-market transactions, between March 2020 and December 2020 an aggregate of 13,957,378
of additional Class A common shares of Sharing Services Global Corp. (“SHRG”), a publicly traded company at an average
purchase price of $0.06 per share. The Company, during this same period, had also purchased 20,250,000 shares of SHRG in private
purchases at an average purchase price of $0.09 per share. The aggregate cost of these transactions approximated $2,572,000.
On
July 22, 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. As of the date of issuance the warrants the consideration paid allocated to the warrants amounted
to approximately $700,000. The warrants are considered an equity investment that is recorded at fair value with
gains and losses recorded through net income. These warrants have been recorded at the fair market value of $1,056,000 on the
Company’s consolidated balance sheet and are included in “other investments” with the increase representing
an unrealized gain of $356,000 as of 12/31/2020. 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.
As
of June 30, 2020, the Company, had acquired and owned approximately 17% of the issued and outstanding shares of SHRG, which was
recorded as a marketable security investment. In the 3rd quarter of 2020, the Company, through a series of Class
A common shares acquisitions in July 2020, with such acquisition history detailed below, the Company acquired in aggregate,
an ownership interest in SHRG of greater than 20%. At that time, it was determined that the Company had the ability to exercise
significant influence over SHRG. Accordingly, on July 22nd, the Company began prospectively utilizing the equity method
of accounting for its investment into SHRG in accordance with ASC Topic 323 and recognizing our share of SHRG’s earnings
and losses within our consolidated statement of operations and comprehensive income (loss). Due to the difference in fiscal year
ends between the two companies, DSS has elected to recognize its portion of SHRG’s earnings and losses on a quarter lag
basis and utilized SHRG’s three-month ended October 31, 2020 reported results in calculating its portion of SHRG’s
gain which approximated $604,000. As of July 22, 2020, the Company owned 62,417,593 Class A common shares of SHRG with
an adjusted basis of $11.3 million. As of December 31, 2020, the Company held 64,207,378 class A common shares equating
to a 32.6% ownership interest in SHRG and had recorded unrealized gains on marketable securities of approximately $6.8
million for the twelve-months then ended related to the period prior to the Company achieving significant influence and
recording the investment under the equity method. As of July 22, 2020, the carrying value of the Company’s equity method
investment exceeded our share of the book value of the investee’s underlying net assets by approximately $9.2 million,
which represents primarily intangible assets in the form of customer and distributor lists and goodwill arising from acquisitions.
The Company is still in the process of valuing the intangible assets as of December 31, 2020 and no amortization has been recorded
during the period ended December 31, 2020. The aggregate fair value of the Company’s investment in SHRG at December 31,
2020 was approximately $14,774,000. The following table represents SHRG operating results for the six-months ended October
31, 2020:
Net
sales
|
|
$
|
41,339,507
|
|
Gross
profit
|
|
$
|
30,390,874
|
|
Operating
earnings
|
|
$
|
1,265,192
|
|
Earnings
before income taxes
|
|
$
|
1,113,971
|
|
Income
tax provision
|
|
$
|
(355,991
|
)
|
Net
earnings
|
|
$
|
757,980
|
|
The
Company, via four (4) of the Company’s existing board
members, currently holds four (4) of the five (5) SHRG board of director seats. Mr. John “JT” Thatch, DSS’s
Lead Independent Director and as well the CEO of SHRG is on the SHRG Board, along with Mr. Chan, DSS’s Executive Chairman
of the board of directors (joined the SHRG Board effective May 4, 2020), Mr. Sassuan “Sam” Lee, DSS Independent Director
(joined the SHRG Board effective September 29, 2020) and Mr. Frank D. Heuszel, the CEO of the Company (joined the SHRG Board effective
September 29, 2020).
BMI
Capital International LLC
On
September 10, 2020, the Company’s wholly owned subsidiary DSS Securities, Inc. entered into membership interest purchase
agreement with BMI Financial Group, Inc. a Delaware corporation (“BMIF”) and BMI Capital International LLC, a Texas
limited liability company (“BMIC”) whereas DSS Securities, Inc. purchased 14.9% membership interests in BMIC for $100,000.
DSS Securities also had the option to purchase an additional 10% of the outstanding membership interest which it exercised in
January of 2021 and increased its ownership to 24.9%. This investment is valued at cost as it does not have a readily determined
fair value.
BMIC
is a broker-dealer registered with the Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority,
Inc. (“FINRA”), and is a member of the Securities Investor Protection Corporation (“SIPC”). The Company’s
chairman of the board and another independent board member of the Company also have ownership interest in this joint venture.
Alset
Title Company
On
or about August 28, 2020, the Company’s wholly owned subsidiary, DSS Securities, Inc. entered into a corporate venture to
form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”).
DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application
and permitting process. ATC have initiated or have pending applications to do business in a number of states, including Texas,
Tennessee, Connecticut, Florida, and Illinois. For the purpose of organization and the state application process, the Company’s
CEO, who is a licensed attorney, has a stated non-compensated 15% ownership interest in the venture. There was no activity for
the twelve-months ended December 31, 2020.
BioMed
Technologies Asia Pacific Holdings Limited
On
December 19, 2020, Impact BioMedical, a wholly-owned subsidiary of the Company, entered into a subscription agreement (the
“Subscription Agreement”) with BioMed Technologies Asia Pacific Holdings Limited (“BioMed”), a limited
liability company incorporated in the British Virgin Islands, pursuant to which the Company agreed to purchase 525 ordinary shares
or 4.99% of BioMed at a purchase price of approximately $630,000. The Subscription Agreement provides, among other things, the
Company the right to appoint a new director to the board of BioMed. With respect to an issuance of shares to a third party by
BioMed, the Company will have the right of first refusal to purchase such shares, as well as customary tag-along rights. In connection
with the Subscription Agreement, Impact entered into an exclusive distribution agreement (the “Distribution Agreement”)
with BioMed, to directly market, advertise, promote, distribute, and sell certain BioMed products, which focus on manufacturing
natural probiotics, to resellers. This investment is valued at cost as it does not have a readily determined fair value.
BioMed
focuses on manufacturing natural probiotics, pursuant to which the Company will directly market, advertise, promote, distribute
and sell certain BioMed products to resellers. The products to be distributed by the Company include BioMed’s PGut Premium
Probiotics®, PGut Allergy Probiotics®, PGut SupremeSlim Probiotics®, PGut Kids Probiotics®,
and PGut Baby Probiotics®.
Under
the terms of the Distribution Agreement, the Company will have exclusive rights to distribute the products within the United States,
Canada, Singapore, Malaysia, and South Korea and non-exclusive distribution rights in all other countries. In exchange, the Company
agreed to certain obligations, including mutual marketing obligations to promote sales of the products. This agreement is for
ten years with an one year auto-renewal feature.
NOTE
7 – BUSINESS COMBINATIONS
American
Medical REIT Inc.
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 final signed Stockholders’ Agreement, dated March 3, 2020, 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 3,500 shares to LVAM, and 1,250 shares to AMRE Tennessee, LLC, AAMI’s executive management’s holding
company. 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 Alset Intl. whose Chief Executive Officer 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 (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 December 31, 2020, this Note had outstanding principal and interest of approximately $844,000.
Upon consolidation this Note is eliminated. 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%. See Note 10 for further details.
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 December 31, 2020, AMRE had incurred $900,000 of cost of which $430,000
is attributable to the non-controlling interest. AAMI does not qualify for a separate reporting segment and is included
in Corporate (see Note 18).
Impact
BioMedical, Inc.
On
August 21, 2020, the Company, completed its acquisition of Impact BioMedical,, pursuant to a Share Exchange Agreement by and among
the Company, DSS BioHealth, and related parties Alset Intl (formally Singapore eDevelopment Limited), and Global Biomedical Pte
Ltd. (“GBM”) which was previously approved by the Company’s shareholders (the “Share Exchange”).Under
the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s common stock, par value $0.02 per share,
nominally valued at $6.48 per share, and 46,868 newly issued shares of the Company’s Series A Convertible Preferred Stock
(“Series A Preferred Stock”), with a stated value of $46,868,000, or $1,000 per share, for a total consideration of
$50 million (Note 12) to acquire 100% of the outstanding shares of Impact BioMedical. The acquisition was done to add assets
and a foundation of products with international market opportunities and demand, and which can be structured into long- term scalable,
reoccurring license revenue within the DSS BioHealth line of business. Due to several factors, including a discount for illiquidity,
the value of the Series A Preferred Stock was discounted from $46,868,000 to $35,187,000, thus reducing the final consideration
given to approximately $38,319,000. The Company incurred approximately $295,000 in cost associated with the acquisition of Impact
Biomedical which were recorded as general and administrative expenses. As a result of the Share Exchange, Impact BioMedical
is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary and operating results of the acquisition
will be included in the Company’s financial statements beginning August 21, 2020. Impact BioMedical has several subsidiaries
that are not wholly owned by Impact BioMedical, and have an ownership percentage ranging from 63.6% to 100%. Since acquisition,
approximately $440,000 of cost have been incurred, of which $51,000 of cost incurred is attributable to non-controlling
interest. Although Impact BioMedical historically, and to date has not generated any revenues, the acquisition of Impact BioMedical
meets the definition of a business with inputs, processes and outputs, and therefore, the Company has concluded to account for
this transaction in accordance with the acquisition method of accounting under Topic 805.
The
following summary, prepared on a proforma basis, combines the consolidated results of operations of the Company with those of
Impact Biomedical as if the acquisition took place on January 1, 2019. The pro forma consolidated results include the impact
of certain adjustments.
|
|
2020
Unaudited
|
|
|
2019
Unaudited
|
|
Sales
|
|
$
|
17,411,000
|
|
|
$
|
15,550,000
|
|
Net
income (loss) attributed to common stockholders
|
|
$
|
1,219,000
|
|
|
$
|
(3,343,000
|
)
|
Basic earnings
per share
|
|
$
|
0.30
|
|
|
$
|
(2.51
|
)
|
Diluted earnings
per share
|
|
$
|
0.11
|
|
|
$
|
(0.39
|
)
|
The
Company has completed its valuations of certain developed technology and pending patents assets acquired in the transaction as
well the fair value of the non-controlling interests. These have been valued at approximately $22,260,000 and $3,910,000 respectively.
Other assets acquired and liabilities assumed were not significant. The Company has also completed an initial valuation of goodwill
and deferred tax liabilities of Impact BioMedical, which are pending as of December 31, 2020 as several of the 2019 tax returns
have yet to be filed. For the purposes of these financial statements, the Company has recorded goodwill of approximately $25,093,000,
driven by other intangible assets that do not qualify for separate recognition, and a deferred tax liability of approximately
$5,234,000. The goodwill is not deductible for tax purposes, and has been allocated to Impact BioMedical in totality as a single
reporting unit. Impact BioMedical does not qualify for a separate reporting segment and is included in Corporate (see Note 18).
NOTE
8 - PROPERTY PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following as of December 31:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Life
|
|
2020
|
|
|
2019
|
|
Machinery
and equipment
|
|
5-10
years
|
|
$
|
6,944,000
|
|
|
$
|
6,507,000
|
|
Building
and improvements
|
|
39
years
|
|
|
1,976,000
|
|
|
|
1,962,000
|
|
Land
|
|
|
|
|
185,000
|
|
|
|
185,000
|
|
Furniture
and fixtures
|
|
7
years
|
|
|
130,000
|
|
|
|
102,000
|
|
Software
and websites
|
|
3
years
|
|
|
298,000
|
|
|
|
251,000
|
|
Total
Cost
|
|
|
|
|
9,533,000
|
|
|
|
9,007,000
|
|
Less
accumulated depreciation
|
|
|
|
|
5,387,000
|
|
|
|
4,679,000
|
|
Property,
plant and equipment, net
|
|
|
|
$
|
4,146,000
|
|
|
$
|
4,328,000
|
|
NOTE
9 - INTANGIBLE ASSETS
During
2020 and 2019, the Company spent approximately $0 and $10,000, respectively, on capitalized patent application costs.
On
March 5, 2019, the Company paid $350,000 and issued 130,435 shares of the Company’s common stock valued at $144,783 in conjunction
with the signing of a Master Distributor Agreement with Advanced Cyber Security Corp. (“ACS”) for the Company to distribute
ACS’s EndpointLockV™ cyber security software exclusively in thirteen countries in Asia and Australia, and non-exclusively,
in the U.S. and Middle East. The aggregate cost of $494,783 of the agreement was recorded as an intangible asset to be amortized
over the expected useful life of 36 months.
On
January 24, 2020 and April 8, 2020, the Company foreclosed on two separate note receivables with RBC Life Sciences, Inc. (see
Note 4) during which the Company acquired $637,000 of intangible assets as settlement of the amounts owed. These assets are being
amortized over their useful lives.
On
August 21, 2020, the Company completed its acquisition of Impact BioMedical, (see Note 7) during which the Company, based on valuations
performed, acquired $22,260,000 of developed technology assets. These assets are not yet placed in service and will
be amortized over a 20-year useful life when placed in service, which is expected to be during the year ended December 31,
2021.
Intangible
assets are comprised of the following:
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Useful
Life
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Developed
technology assets
|
|
20
years
|
|
|
$22,260,000
|
|
|
$
|
-
|
|
|
$
|
22,260,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Acquired
intangibles customer lists, licenses and non-compete agreements
|
|
2-10
years
|
|
|
1,259,000
|
|
|
|
330,000
|
|
|
|
929,000
|
|
|
|
1,789,000
|
|
|
|
1,203,000
|
|
|
|
586,000
|
|
Acquired
intangibles patents and patent rights
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
Patent
application costs
|
|
Varied
(1)
|
|
|
1,178,000
|
|
|
|
911,000
|
|
|
|
267,000
|
|
|
|
1,178,000
|
|
|
|
829,000
|
|
|
|
349,000
|
|
|
|
|
|
$
|
25,197,000
|
|
|
|
1,741,000
|
|
|
$
|
23,456,000
|
|
|
|
3,467,000
|
|
|
|
2,532,000
|
|
|
|
935,000
|
|
|
(1)
|
Patent
application costs are amortized over their expected useful life which is generally the remaining legal life of the patent.
As of December 31, 2020, the weighted average remaining useful life of these assets in service was approximately 8.2 years.
|
Amortization
expense for the year ended December 31, 2020 amounted to approximately $374,000 ($461,000 –2019).
Expected
amortization for each of the five succeeding fiscal years is as follows:
Year
|
|
Amount
|
|
2021
|
|
|
1,389,000
|
|
2022
|
|
|
1,243,000
|
|
2023
|
|
|
1,169,000
|
|
2024
|
|
|
1,147,000
|
|
2025
|
|
|
1,161,000
|
|
NOTE
10 – SHORT TERM AND LONG-TERM DEBT
Revolving
Credit Lines - The Company’s subsidiary 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% (2.1% as of December 31, 2020). This revolving line of credit
was renewed and has a maturity date of May 31, 2021 and is renewable annually. As of December 31, 2020 and December 31, 2019,
the revolving line had a balance of $0 and $500,000 respectively.
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 December 31, 2020 and December
31, 2019, the Term Note had a balance of $771,000 and $899,000 respectively. 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%. On
December 31, 2019 this note had a balance of $577,000. On July 20, 2020 the Company paid off this note.
Equipment
Line of Credit - 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. As of December
31, 2020, the loan had a balance of $0 and Premier Packaging still has available $900,000 for equipment borrowings.
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 December 31, 2020 and December 31, 2019, the new Promissory Note had a
balance of $1,100,000 and $1,141,000 respectively.
The
Citizens credit facilities to the Company’s subsidiary Premier Packaging, 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, 2020, Premier Packaging was in compliance with the annual covenants.
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 had a maturity date of October 24,
2020. This note was paid in full on October 9, 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%. As of December 31, 2020, accrued interest is included in the outstanding balance.
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 the
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. As of December
31, 2020, the new promissory note, inclusive of unpaid interest, had a balance of $214,000.
During
Q2 2020, the Company received loan proceeds for Premier Packaging, DSS Digital, and AAMI in the amount of approximately $1,078,000
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, pursuant to the terms of the SBA PPP program, the Company submitted applications for Premier
Packaging and DSS Digital for a requested 100% loan forgiveness. During the fourth quarter 2020, both these notes approximating
$969,000 were forgiven in full and recognized as a gain on the extinguishment of debt on the accompanying consolidated
financial statements as of December 31, 2020. AAMI, pursuant to the terms of the SBA PPP program, submitted its application
for 100% loan forgiveness in October 2020, and received confirmation of forgiveness in January 2021.
A
summary of scheduled principal payments of long-term debt, not including revolving lines of credit, subsequent to December 31,
2020 are as follows:
Year
|
|
Amount
|
|
2021
|
|
$
|
278,000
|
|
2022
|
|
|
439,000
|
|
2023
|
|
|
178,000
|
|
2024
|
|
|
185,000
|
|
2025
|
|
|
193,000
|
|
Thereafter
|
|
|
981,000
|
|
NOTE
11 – OTHER LIABILITIES
On
November 14, 2016, the Company entered into a Proceeds Investment Agreement (the “Agreement”) with Brickell Key Investments
LP (“BKI”). Pursuant to the Agreement, BKI financed an aggregate of $13,500,000 in a patent purchase and monetization
program to be implemented and managed by the Company (the “Financing”). Pursuant to the Agreement. $3,000,000 of the
Financing was used to cover the Company’s purchase of a portfolio of U.S. and foreign LED patents and a license from Intellectual
Discovery Co., Ltd., a Korean company (collectively, the “LED Patent Portfolio”), resulting in a basis in these assets
of $0. A total of $6,000,000 of the Financing was directed by BKI to attorneys to cover anticipated attorneys’ fees and
out-of-pocket expenses for legal proceedings that may transpire relating to enforcement of the LED Patent Portfolio. This amount
is not included in the Company’s financial statements as the Company has no control over these funds, which are segregated
and escrowed in the attorneys’ trust account.
In
addition, on November 14, 2016, the Company received $4,500,000 of the Financing, which was required to be used by the Company
to pay for the defense of Inter Partes Review or other similar proceedings that may be filed from time to time by defendants with
the U.S. Patent & Trademark Office relating to the LED Patent Portfolio, with excess amounts available for general working
capital needs. Of this amount, the Company allocated $2,500,000 which it subsequently adjusted to $1,500,000 for the payment of
estimated future Inter Partes Review costs. The Company will reduce this liability as it pays legal and other expenses related
to the Inter Partes Review matters involving the LED Patent Portfolio as incurred. As of December 31, 2020, an aggregate of
$780,988 is recorded as other liabilities by the Company, of which $390,494 is classified as current. For the remaining $3,000,000
the Company reduced the liability with an offset to selling, general and administrative costs by $47,500 per month from January
2017 through July 2017, $80,000 per month for the remainder of 2017 through March 2018, $86,500 per month for the remainder of
2018, and through November of 2019. As of December 31, 2019, the liability has been fully amortized. An aggregate of $955,000
was recorded as a reduction of the liability allocated to working capital in 2019.
NOTE
12 - 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 18, 2019, the Company had entered into a Convertible Promissory Note with LiquidValue Development Pte Ltd ., a company
owned and controlled by Mr. Heng Fai Ambrose Chan, DSS’s Chairman, in the principal sum of $500,000, of which up to $500,000
of the Principal Amount could be paid by the conversion of such amount into the Company’s common stock, par value $0.02
per share, up to a maximum of 14,881 shares of common stock (the “Maximum Conversion Amount”), at a conversion price
of $33.60 per share. Effective on March 25, 2019, LiquidValue Development Pte Ltd exercised its conversion option and converted
the Maximum Conversion Amount under the Note.
On
March 5, 2019, the Company issued 4,348 shares of its common stock at $34.50 per share as partial consideration for a licensing
and distribution agreement entered into with Advanced Cyber Security Corp.
On
June 5, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) 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”) and the purchase by the Underwriters of 373,333 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 Underwriters at a public offering price of $15.00 per share, less certain underwriting discounts and commissions.
As part of this transaction, 66,667 shares were purchased by Heng Fai Ambrose Chan, Chairman of the Board of directors. The Company
also granted the Underwriters a 45-day option to purchase up to 1,680,000 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 (17,306 shares
were exercised on July 18, 2019 at $15.00 per share, less underwriting discounts and expenses). The net offering proceeds to the
Company was approximately $5.0 million, inclusive of the July 18, 2019 transaction and after deducting underwriting discounts,
commissions and other offering expenses.
On
November 1, 2019, pursuant to a Subscription Agreement, LiquidValue Development Pte LTD, a company owned and controlled by Mr.
Heng Fai Ambrose Chan, DSS’s Chairman, purchased from the Company, in a private placement, and aggregate of 200,000 shares
of common stock, for an above market purchase price equal to $9.00 per share (at the time of LiquidValues’ commitment, the
closing stock price was $7.80 per share) for net proceeds to the Company of approximately $1.6 million after deducting underwriting
discounts, commissions and other offering expenses.
On
February 20, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement #1”) 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 “Feb. 2020 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 #1, 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 Feb. 2020 Offering which were exercised. The net
offering proceeds to the Company from the Feb. 2020 Offering were approximately $4 million, after deducting estimated underwriting
discounts and commissions and other estimated offering expenses. 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 Feb. 2020 Offering.
On
May 15, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement #2”) with 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 “May 2020 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 #2, 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 May 2020 Offering
which was exercised. The net offering proceeds to the Company from the May 2020 Offering were approximately $6.2
million, after deducting estimated underwriting discounts and commissions and other estimated offering expenses. The May 2020
Offering was closed on June 26, 2020.
On
July 7, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement #3”) with 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 “July 2020 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 #3, 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 July 2020
Offering which was exercised. The net offering proceeds to the Company from the July 2020 Offering were approximately
$6.7 million. The July 2020 Offering was closed on July 10, 2020.
On
July 28, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement #4”) with 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 “July 2020 Offering #2”), 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 #4,
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 July 2020
Offering #2. The net offering proceeds to the Company from the July 2020 Offering #2 were approximately
$3.3 million, after deducting estimated underwriting discounts and commissions and other estimated offering expenses. The initial
July 2020 Offering #2 was closed on July 31, 2020, and the overallotment was exercised on August 7, 2020.
On
August 21, 2020, the Company, completed its acquisition of Impact BioMedical, pursuant to a Share Exchange Agreement by and among
the Company, DSS BioHealth, and related parties Alset Intl, and GBM which was previously approved by the Company’s shareholders
(the “Share Exchange”). Under the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s
common stock, par value $0.02 per share, nominally valued at $6.48 per share, and 46,868 newly issued shares of the Company’s
Series A Convertible Preferred Stock.
In
connection with the Share Exchange for Impact BioMedical described in Note 7, on August 18, 2020, the Company filed a Certificate
of Amendment of its Certificate of Incorporation (the “Certificate of Amendment”) to increase the number of authorized
shares of the Company, including 47,000 shares of Preferred Stock, with a par value of $0.02, of which 47,000 shares were designated
Series A Preferred Stock. The Certificate of Amendment, the form of which was previously disclosed in a Schedule 14A Definitive
Proxy Statement filed with the Securities and Exchange Commission on July 14, 2020. As described in Note 7, this transaction
is a related party transaction.
Holders
of the Series A Preferred Stock have no voting rights, except as required by applicable law or regulation, and no dividends accrue
or are payable on the Series A Preferred Stock. The holders of Series A Preferred Stock are entitled to a liquidation preference
at a liquidation value of $1,000 per share aggregating to $46,868,000, and the Company has the right to redeem all or any portion
of the then outstanding shares of Series A Preferred Stock, pro rata among all holders, at a redemption price per share equal
to such liquidation value per share. The Series A Preferred Stock ranks senior to Common Stock and any other class of securities
that is specifically designated as junior to the Series A Preferred Stock with respect to rights on the distribution of assets
on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, in respect of a liquidation
preference equal to its par value of $1,000. A holder of Series A Preferred Stock has the option to convert each share of Series
A Preferred Stock into a number of common shares in the Company equal to the $1,000 liquidation preference divided by a conversion
price of $6.48 or 154.32 shares subject to a Beneficial Ownership Limitation of 19.99%, as defined in the Share Exchange Agreement.
Additionally, the Company has the option to require conversion of all outstanding Series A Preferred Stock into common stock at
any time, subject to the Beneficial Ownership Limitation discussed. In aggregate the Series A Preferred Shares are convertible
into 7,232,670 shares of the Company’s common stock at the date of issuance. The Company evaluated the classification
of the Series A Preferred Shares under the guidance enumerated in ASC 470, 480, and 815 and determined that based on the features
noted above the instruments are accounted for as permanent equity. On October 16, 2020, GBM converted 4,293 shares of the Series
A Convertible Preferred Stock into 662,500 shares of the Company’s common A shares.
Stock
Warrants –The following is a summary with respect to warrants outstanding and exercisable as of December 31, 2020
and 2019 and activity during the years then ended:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1:
|
|
|
40,677
|
|
|
$
|
33.52
|
|
|
|
47,671
|
|
|
$
|
120.00
|
|
Granted
during the year
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Lapsed/terminated
|
|
|
(4,163
|
)
|
|
|
30
|
|
|
|
(6,994
|
)
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31:
|
|
|
36,514
|
|
|
$
|
33.92
|
|
|
|
40,677
|
|
|
$
|
33.52
|
|
Exercisable
at December 31:
|
|
|
36,514
|
|
|
$
|
33.92
|
|
|
|
40,677
|
|
|
$
|
33.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average months remaining
|
|
|
|
|
|
|
9.9
|
|
|
|
|
|
|
|
8.7
|
|
The
Company did not issue any warrants in 2020 or 2019.
Stock
Options - On June 20, 2013, the Company’s shareholders adopted the 2013 Employee, Director and Consultant Equity
Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the issuance of up to a total of 50,000 shares of common
stock authorized to be issued for grants of options, restricted stock and other forms of equity to employees, directors and consultants.
Under the terms of the 2013 Plan, options granted thereunder may be designated as options which qualify for incentive stock option
treatment (“ISOs”) under Section 422A of the Internal Revenue Code, or options which do not qualify (“NQSOs”).
As of December 31, 2020, no shares remained available under this plan.
On
December 9, 2019, the Company’s shareholders adopted the 2020 Employee, Director and Consultant Equity Incentive Plan (the
“2020 Plan”). The 2020 Plan provides for the issuance of up to a total of 241,204 shares of common stock authorized
to be issued for grants of options, restricted stock and other forms of equity to employees, directors and consultants. Under
the terms of the 2020 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment
(“ISOs”) under Section 422A of the Internal Revenue Code, or options which do not qualify (“NQSOs”).
The
following is a summary with respect to options outstanding as of December 31, 2020 and 2019 and activity during the years then
ended:
|
|
2020
|
|
|
2019
|
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average life Remaining (Years)
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average life Remaining (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1,
|
|
|
19,264
|
|
|
$
|
150.30
|
|
|
|
|
|
|
|
26,089
|
|
|
$
|
199.80
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Lapsed/terminated
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(6,825
|
)
|
|
|
231.00
|
|
|
|
|
|
Outstanding
at December 31,
|
|
|
19,264
|
|
|
$
|
150.30
|
|
|
|
2.2
|
|
|
|
19,264
|
|
|
$
|
150.30
|
|
|
|
3.2
|
|
Exercisable
at December 31,
|
|
|
19,264
|
|
|
$
|
150.30
|
|
|
|
2.2
|
|
|
|
13,625
|
|
|
$
|
195.00
|
|
|
|
3.5
|
|
Expected
to vest at December 31,
|
|
|
-
|
|
|
$
|
150.30
|
|
|
|
2.2
|
|
|
|
5,639
|
|
|
$
|
42.90
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of outstanding options at December 31,
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of exercisable options at December 31,
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of options expected to vest at December 31,
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
fair value of each option award is estimated on the date of grant utilizing the Black-Scholes-Merton Option Pricing Model. The
Company estimates the expected volatility of the Company’s common stock at the grant date using the historical volatility
of the Company’s common stock over the most recent period equal to the expected stock option term.
The
aggregate grant date fair value of options that vested during 2020 and 2019 was approximately $100,000 and $104,000, respectively.
There were no options exercised during 2020 or 2019.
Restricted
Stock - Restricted common stock may be issued under the Company’s 2013 or 2020 Plan for services to be rendered
which may not be sold, transferred or pledged for such period as determined by our Compensation Committee and Management Resources.
Restricted stock compensation cost is measured as the stock’s fair value based on the quoted market price at the date of
grant. The restricted shares issued reduce the amount available under the employee stock option plans. Compensation cost is recognized
only on restricted shares that will ultimately vest. The Company estimates the number of shares that will ultimately vest at each
grant date based on historical experience and adjust compensation cost and the carrying amount of unearned compensation based
on changes in those estimates over time. Restricted stock compensation cost is recognized ratably over the requisite service period
which approximates the vesting period. An employee may not sell or otherwise transfer unvested shares and, if employment is terminated
prior to the end of the vesting period, any unvested shares are surrendered to us. The Company has no obligation to repurchase
any restricted stock.
On
September 6, 2019, the Company issued an aggregate of 7,477 shares of fully vested restricted stock to members of the Company’s
management team of with a two-year lock-up period and had an aggregated grant date fair value of approximately $94,000 which is
included in stock based compensation for the year ended December 31, 2019.
On
April 3, 2020, the Company issued an aggregate of 5,833 shares of fully vested restricted stock to members of the Company’s
management team of with a two-year lock-up period and had an aggregated grant date fair value of approximately $38,000 which is
included in stock based compensation for the year ended December 31, 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 twelve-months ended December 31, 2020, the Company had stock compensation expense of approximately $188,000 or approximately
$0.05 and $0.03 basic and diluted earnings per shares, respectively ($422,000, or $0.50 basic and diluted earnings
per share for the corresponding twelve months ended December 31, 2019).
In
July 2019, 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 2013 Employee, Director and Consultant Equity Incentive Plan, to
certain officers and directors in the amount of 15,291 shares, at $12.60 per share which were immediately vested and issued on
September 6, 2019. 7,477 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
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 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 as marketing expense as it is earned.
On
September 23, 2020, by written consent of the Chief Executive Officer and the Chairman of the board, 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 a consultant of the Company in the amount of 20,000 shares, at $4.48 per share which were immediately vested.
NOTE
13 - INCOME TAXES
The
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation
allowance for the amount of tax benefits which are not expected to be realized.
The
following is a summary of the components giving rise to the
income tax provision (benefit) for the years ended December 31:
The
provision (benefit) for income taxes consists of the following:
|
|
2020
|
|
|
2019
|
|
Currently
payable:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
5,000
|
|
|
|
-
|
|
Total
currently payable
|
|
|
5,000
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
582,000
|
|
|
|
(367,000
|
)
|
State
|
|
|
(22,000
|
)
|
|
|
(125,000
|
)
|
Foreign
|
|
|
(125,000
|
)
|
|
|
(117,000
|
)
|
Total
deferred
|
|
|
435,000
|
|
|
|
(609,000
|
)
|
Less:
(decrease) increase in allowance
|
|
|
(2,214,000
|
)
|
|
|
484,000
|
|
Net
deferred
|
|
|
(1,779,000
|
)
|
|
|
(125,000
|
)
|
Total
income tax benefit
|
|
$
|
(1,774,000
|
)
|
|
$
|
(125,000
|
)
|
Individual
components of deferred tax assets and liabilities are as follows:
|
|
2020
|
|
|
2019
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
13,852,000
|
|
|
$
|
11,189,000
|
|
Equity
issued for services
|
|
|
192,000
|
|
|
|
169,000
|
|
Goodwill
and other intangibles
|
|
|
0
|
|
|
|
676,000
|
|
Investment
in pass-through entity
|
|
|
12,000
|
|
|
|
12,000
|
|
Deferred
revenue
|
|
|
183,000
|
|
|
|
182,000
|
|
Operating
Lease Liability
|
|
|
47,000
|
|
|
|
284,000
|
|
Other
|
|
|
605,000
|
|
|
|
376,000
|
|
Gross
deferred tax assets
|
|
|
14,891,000
|
|
|
|
12,888,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
and other intangibles
|
|
|
4,668,000
|
|
|
|
29,000
|
|
Unrealized
gains
|
|
|
2,599,000
|
|
|
|
-
|
|
Right
-of-use asset
|
|
|
47,000
|
|
|
|
284,000
|
|
Gross
deferred tax liabilities
|
|
|
7,314,000
|
|
|
|
313,000
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(11,076,000
|
)
|
|
|
(12,619,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(3,499,000
|
)
|
|
$
|
(44,000
|
)
|
The
2017 Tax Cuts and Jobs Act repeals the corporate alternative minimum tax (AMT) and permits existing minimum tax credits carryovers
to offset the regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December
31, 2017 and before December 31, 2020 in an amount equal to 50 percent of the excess of the minimum tax credit over regular liability.
Any remaining credit will be fully refundable for the year ended December 31, 2021. As of December 31, 2020 and 2019, the
Company had $0 and $46,000 respectively of minimum tax credit included in prepaids and other current assets in the accompanying
consolidated balance sheet.
On
December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The legislation
significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax
system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduced the
U.S. corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018
Pretax
losses from the Company’s foreign subsidiaries amounted to $.4 million and $1.5 million for 2020 and 2019, respectively.
The balance of pretax earnings or loss for each of those years were domestic.
While
the Tax Cuts and Jobs Act provides for a territorial tax system, beginning in 2018, it includes the foreign-derived intangible
income (“FDII”) and global intangible low-taxed income (“GILTI”) provisions. The Company elected to account
for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax
return foreign subsidiary earnings from its Controlled Foreign Corporations (“CFCs”) in excess of an allowable return
on the foreign subsidiary’s tangible assets. The FDII provisions allow for a deduction equal to a percentage of the foreign-derived
intangible income of a domestic corporation. As a result of these provisions, the Company did not have any additional tax expense
or benefit from either GILTI or FDII.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the
economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including
temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017
(“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities
to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be
carried back five years, enhanced interest deductibility, and retroactively clarifying the immediate recovery of qualified improvement
property costs rather than over a 39-year recovery period. During the year ended December 31, 2020, the Company was not able to
benefit from these provisions. The Company will continue to monitor additional guidance issued and assess the impact that various
provisions will have on its business.
At
December 31, 2020 and 2019, the Company has approximately $56.7 million and $50.0 million in federal net operating loss carryforwards
(“NOLs”), respectively, available to reduce future taxable income. Under the provisions of the Internal Revenue Code,
the net operating losses are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities.
Certain tax attributes are subject to an annual limitation as a result of certain cumulative changes in ownership interest of
significant shareholders which could constitute a change of ownership as defined under Internal Revenue Code Section 382. The
Company has completed a full analysis of historical ownership changes and determined that a portion of the net operating losses
have a limitation on future deductibility. Approximately $43.8 million of net operating losses incurred prior to 2020 will
be unable to offset future taxable income and have been reserved via a valuation allowance to reduce the deferred tax asset to
the expected realizable amount, leaving $2.9M available for use which expire at various dates through 2038 and the residual which
never expire. Additionally, at December 31, 2020 and 2019, the Company had approximately $6.9 million and $5.5 million,
and $2.2 million and $1.4 million, of California and Illinois NOL carry-forwards, respectively, which expire through 2039. The
NOL carry-forwards may be limited in certain circumstances, including ownership change and have been fully reserved via a valuation
allowance.
The
valuation allowance for deferred tax assets decreased approximately $1,543,000 (net of $671,000 acquired with Impact BioMedical)
in the year ended December 31, 2020 and increased by approximately $484,000 in the year ended December 31, 2019. The decrease
in the current year valuation allowance and subsequent increase in the deferred tax liability is driven by several factors and
is represented in the below table:
Balance
at December 31, 2019
|
|
$
|
44,000
|
|
Add:
|
Acquisition
of Impact BioMedical
|
|
|
5,234,000
|
|
|
Current
year activity
|
|
|
435,000
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
Release
of valuation allowance
|
|
|
2,214,000
|
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
|
$
|
3,499,000
|
|
The
differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying
consolidated statements of operations are as follows:
|
|
2020
|
|
|
2019
|
|
Statutory United States federal rate
|
|
|
21.0
|
%
|
|
|
21.00
|
%
|
State income taxes net of federal benefit
|
|
|
(9.3
|
)%
|
|
|
3.3
|
%
|
Permanent differences
|
|
|
2.0
|
%
|
|
|
(1.6
|
)%
|
Other
|
|
|
(8.3
|
)%
|
|
|
(1.3
|
)%
|
Non-controlling interest
|
|
|
(70.5
|
)%
|
|
|
-
|
%
|
Foreign taxes
|
|
|
7.3
|
%
|
|
|
(1.1
|
)%
|
PPP loan forgiveness
|
|
|
(142.2
|
)%
|
|
|
-
|
%
|
Stock based compensation
|
|
|
22.4
|
%
|
|
|
-%
|
|
Executive compensation
|
|
|
485.2
|
%
|
|
|
|
|
Change in valuation allowance
|
|
|
(1547.5
|
)%
|
|
|
(16.3
|
)%
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
(1,239.9
|
)%
|
|
|
4.00
|
%
|
The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended
December 31, 2020 and 2019, the Company recognized no interest and penalties.
The
Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years 2017-2020 generally
remain open to examination by major taxing jurisdictions to which the Company is subject.
NOTE
14 - DEFINED CONTRIBUTION PENSION PLAN
The
Company maintains a qualified employee savings plans (the “401(k) Plan”) that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code and which covers all eligible employees. Employees generally become eligible
to participate in the 401(k) Plan two months following the employee’s hire date. Employees may contribute a percentage of
their earnings, subject to the limitations of the Internal Revenue Code. Commencing on January 1, 2018, the Company matched 100%
of the first 1% of employee contributions, then 50% of additional contributions up to an aggregate maximum match of 3.5%. The
total matching contributions for 2020 and 2019 were approximately $117,000 and $123,000, respectively.
NOTE
15 – COMMITMENTS AND CONTINGENCIES
The
Company has operating leases predominantly for operating facilities. As of December 31, 2020, the remaining lease terms
on our operating leases range from seven to sixteen months. DSS Plastics Group which finalized the sale of its assets on
August 14, 2020 is not included in the lease liability calculation (see Note 16). 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 December 31, 2020. Rent expense for the year ended December
31, 2020 and December 31, 2019 was approximately $217,000 and $255,000 respectively.
Future
minimum lease payments as of December 31,2020 are as follows:
|
|
Totals
|
|
2021
|
|
|
176,000
|
|
2022
|
|
|
13,000
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
Total
lease payments
|
|
|
189,000
|
|
Less:
Imputed Interest
|
|
|
(7,000
|
)
|
Present
value of remaining lease payments
|
|
$
|
182,000
|
|
|
|
|
|
|
Current
|
|
$
|
167,000
|
|
Noncurrent
|
|
$
|
15,000
|
|
|
|
|
|
|
Weighted-average
remaining lease term (years)
|
|
|
1.05
|
|
|
|
|
|
|
Weighted-average
discount rate
|
|
|
4.0
|
%
|
Employment
Agreements - The Company has employment or severance agreements with members of its management team. The employment or
severance agreements provide for severance payments in the event of termination for certain causes. As of December 31, 2020,
the Company accrued approximately $4,300,000 for Mr. Heng Fai Ambrose Chan, an executive of the Company’s DSS Cyber Security
Pte. Ltd subsidiary in accordance with the terms of his employment contract. Also, as of December 31, 2020, the minimum severance
payments under these employment agreements are, in aggregate, approximately $182,000.
Legal
Proceedings –
The
Apple Litigation
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. Briefing on the appeal has been completed. The parties are currently waiting for the Court of Appeals to
schedule a date for oral argument.
The
LED Litigation
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. That appeal is now fully briefed. The Court of Appeals has not yet set the matter for argument.
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. The IPR petition
was instituted on November 20, 2020 and remains pending.
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. On September 1, 2020, the PTAB instituted the
IPR proceeding. The District 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, which remains
pending.
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 17, 2020, the PTAB instituted the IPR proceeding,
which remains pending.
The
Intel, Apple Litigation
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.
The
Ronaldi Litigation
In
April 2019 DSS commenced an action in New York State Supreme Court, Monroe County, Index No. E2019003542, 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.
Mr. Ronaldi subsequently commenced an action against DSS 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 alleged that DSS terminated his employment in April 2019 in
order to avoid paying him certain employment-related amounts. DSS was successful in dismissing the California case and consolidating
it with the action pending in Monroe County, New York. Mr. Ronaldi asserted counterclaims in the Monroe County, New York action
similar to those he originally brought in California. Mr. Ronaldi claims that his termination violated an alleged employment agreement
or implied-in-fact employment agreement and that he should have remained employed through 2019. Mr. Ronaldi seeks to recover:
(i) $144,657.53 in wages from April 11, 2019 through December 31, 2019; (ii) $769.23 in alleged unpaid based salary for time worked
before April 11, 2019; (iii) $15,384.62 in alleged paid time off compensation; (iv) $3,076.93 in alleged unpaid sick time compensation;
(v) $26,076.93 in waiting-time penalties; (vi) -$91,000 in unspecified expense reimbursement; (vii) $300,000 in alleged cash bonuses
($100,000 per year) based on DSS’s performance in 2017, 2018 and 2019; and (viii) a $450,000 performance bonus based on
the result of certain alleged net proceeds from patent infringement litigation. He further claims an interest in any recovery
in DSS Technology Management v. Apple, Inc., Case No. 4:14-cf05330-HSG. The parties are now engaged in discovery.
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 filed a Notice
of Removal of this civil litigation to the United States District Court for the Western District of New York where it was assigned
Case No. 6:20-cv-06265-EAW. Mr. Ronaldi filed a motion seeking to compel DSS to advance his legal fees to defend the action, which
motion was fully briefed as of June 30, 2020 and remains pending and undecided. On March 16, 2021 the Western District of New
York granted Mr. Ronaldi’s motion to have his defense costs advanced to him during the pendency of the action as they are
incurred. On March 26, 2021 Mr. Ronaldi applied to the court for reimbursement of $160,896.25 in legal fees. The Company intends
to object to the size of that bill as it was based on out-of-town billing rates and the result of an excessive number of hours
spent on litigation. 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, however, due to discovery disputes the Court has signaled
its intent to extend those deadlines.
Maiden
Biosciences Litigation
On
February 15, 2021, Maiden Biosciences, Inc. (“Maiden”) commenced an action against Document Security Stems, Inc. (“DSS”),
Decentralized Sharing Systems, Inc. (“Decentralized”), HWH World, Inc. (“HWH”), RBC Life International,
Inc., RBC Life Sciences, Inc (“RBC”)., Frank D. Heuszel (“Heuszel”), Steven E. Brown, Clinton Howard,
and Andrew Howard (collectively, “Defendants”). The lawsuit is currently pending in the United States District Court
Northern District of Texas, Dallas Division, and is styled and numbered Maiden Biosciences, Inc. v. Document Security Stems, Inc.,
et al., Case No. 3:21-cv-00327.
This
lawsuit relates to two promissory notes executed by RBC in the 4th quarter of 2019 in favor of Decentralized and HWH,
totaling approximately $800,000. Maiden, a 2020 default judgment creditor of RBC, in the principal amount of $4,329,000,
now complains about those notes, the funding of those notes, the subsequent default of those notes by RBC, and HWH and Decentralize’s
subsequent Article 9 foreclosure or deed-in-lieu debt conveyances. In the instant lawsuit, Maiden asserts claims against Defendants
for unjust enrichment, fraudulent transfer under the Texas Uniform Fraudulent Transfer Act, and violation of the Racketeer Influenced
and Corrupt Organizations Act. Maiden also seeks a judgment from the court declaring: “(1) Defendants lacked a valid security
interest in RBC and RBC Subsidiaries’ assets and therefore lacked the authority to sell the assets during the public foreclosure
sale; (2) Defendant Heuszel’s low bid at the public foreclosure sale was invalid and void; (3) the public foreclosure sale
was conducted in a commercially unreasonable manner; and (4) Defendants do not have the legal authority to transfer RBC and RBC’s
Subsidiaries assets to Heuszel and HWH.” Maiden seeks to recover from Defendants: (1) treble damages or, alternatively,
damages in the amount of their underlying judgment plus the other creditors’ claims or the value of the assets transferred,
whichever is less, plus punitive or exemplary damages; (2) pre and post-judgment interest; and (3) attorneys’ fees and cost.
Pursuant
to an agreement with Maiden, the deadline for Defendants DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel to
answer or otherwise respond is March 30, 2021. The pretrial deadlines and tentative trial date will be set by the Court following
a customary status conference.
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 December 31, 2020, 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 December 31, 2020, there are no contingent payments due.
NOTE
16 – 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 buyer
for substantially all the assets of this business line. with an intent to exit this business line. As a result, management
has decided to fully impair its goodwill related to DSS Plastics. The impact to DSS’s first quarter earnings of this impairment
was approximately $685,000. On August 14, 2020, the Company entered into a final Asset Purchase Agreement and 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
consideration paid to the Company under the Asset Purchase Agreement for the sale of the assets included a one-time cash payment
of $683,000 and an additional contingent earn-out payment of an aggregate amount of up to $517,000 based on future quarterly gross
revenue of the business to be conducted by the buyer with the sold assets. Consistent with the Company’s policy for accounting
for gain contingencies, the earn out will be recorded when determined realizable which did not occur during the twelve-months
ended December 31, 2020. As of December 31, 2020, the Company has recognized $390,000 of this earn out in Loss from Discontinued
Operations. The net effect of all assets disposed of is a net loss of $111,000 These amounts are included in Loss from Discontinued
Operations. Included in its Right-of-use assets is the lease of the Company’s facility in Brisbane, Ca. The intent is to
sublease this property for a value equal to or in excess of the current payments and therefore, not impairment of this asset is
deemed necessary at December 31, 2020.
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 and Liabilities Held for Sale
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
-
|
|
|
$
|
342,000
|
|
Total
current assets
|
|
|
-
|
|
|
|
342,000
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
|
732,000
|
|
Right-of-use
assets
|
|
|
744,000
|
|
|
|
1,081,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of lease liability
|
|
|
240,000
|
|
|
|
274,000
|
|
Total
current liabilities
|
|
|
240,000
|
|
|
|
274,000
|
|
|
|
|
|
|
|
|
|
|
Long
term lease liability
|
|
|
505,000
|
|
|
|
807,000
|
|
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations - Discontinued Operations
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Printed
products
|
|
$
|
1,602,000
|
|
|
$
|
3,860,000
|
|
Total
revenue
|
|
|
1,602,000
|
|
|
|
3,860,000
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Cost
of revenue, exclusive of depreciation and amortization
|
|
|
1,636,000
|
|
|
|
2,260,000
|
|
Selling,
general and administrative (including stock based compensation)
|
|
|
1,054,000
|
|
|
|
1,609,000
|
|
Depreciation
and amortization
|
|
|
152,000
|
|
|
|
254,000
|
|
Impairment
of goodwill
|
|
|
685,000
|
|
|
|
-
|
|
Total
costs and expenses
|
|
|
3,527,000
|
|
|
|
4,123,000
|
|
Operating
loss
|
|
|
(1,925,000
|
)
|
|
|
(263,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(22,000
|
)
|
|
|
(32,000
|
)
|
|
|
|
|
|
|
|
|
|
Gain
on disposition of business
|
|
|
279,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(1,668,000
|
)
|
|
|
(295,000
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
Income
(loss) from discontinued operations
|
|
|
(1,668,000
|
)
|
|
|
(295,000
|
)
|
NOTE
17 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental
cash flow information for the years ended December 31:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
185,000
|
|
|
$
|
128,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Impact
of adoption of lease accounting standards
|
|
$
|
-
|
|
|
$
|
1,616,000
|
|
Gain
from change in fair value of interest rate swap derivatives
|
|
$
|
-
|
|
|
$
|
7,000
|
|
Common
stock issued upon conversion of convertible note
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Equity
issued to purchase intangible assets
|
|
$
|
-
|
|
|
$
|
145,000
|
|
Common
A Shares issued for prepaid marketing services
|
|
$
|
210,000
|
|
|
$
|
-
|
|
Common
A Shares issued for Impact BioMedical
|
|
$
|
3,132,000
|
|
|
$
|
-
|
|
Non-controlling
interest related to Impact BioMedical
|
|
$
|
3,910,000
|
|
|
$
|
-
|
|
Series
A Preferred Shares issued for Impact BioMedical
|
|
$
|
35,187,000
|
|
|
$
|
-
|
|
Notes
receivable settled for assets in lieu of cash
|
|
$
|
838,000
|
|
|
$
|
-
|
|
NOTE
18 - SEGMENT INFORMATION
The
Company’s eight businesses lines are organized, managed and internally reported as four reportable operating
segments. Premier Packaging operates in the paper board folding carton, smart packaging, and document security printing markets.
It markets, manufactures, and sells mailers, photo sleeves, sophisticated custom folding cartons, and complex 3-dimensional direct
mail solutions designed to provide functionality, marketability, and sustainability to product packaging while providing counterfeit
protection and consumer engagement platform. Digital Group researches, develops, markets, and sells the Company’s digital
products worldwide. As an industry leader in brand authentication services, our solutions leverage functional anti-counterfeiting
features and cutting-edge technologies to satisfy commercial and consumer product needs for branding, intelligent packaging, and
marketing. Digital’s 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. IP Technology Management
Inc., manages, licenses, and acquires intellectual property assets for the purpose of monetizing these assets through a variety
of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented
technologies, licensing, strategic partnerships, and commercial litigation. Direct Marketing/Online Sales Group provides services
to assist companies in the emerging growth gig business model of peer-to-peer decentralized sharing marketplaces. Direct specializes
in marketing and distributing its products and services through its subsidiary and partner network, using the popular gig economic
marketing strategy as a form of direct marketing.
Approximate
information concerning the Company’s operations by reportable segment for years ended December 31, 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:
Year Ended December 31, 2020
|
|
Premier Packaging
|
|
|
Digital Group
|
|
|
IP Technology
Management
|
|
|
Direct Marketing
/ Online Sales
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
13,300,000
|
|
|
$
|
2,085,000
|
|
|
$
|
-
|
|
|
$
|
2,326,000
|
|
|
$
|
-
|
|
|
$
|
17,411,000
|
|
Depreciation and amortization
|
|
|
736,000
|
|
|
|
38,000
|
|
|
|
69,000
|
|
|
|
28,000
|
|
|
|
213,000
|
|
|
|
1,084,000
|
|
Interest expense
|
|
|
102,000
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,000
|
|
|
|
185,000
|
|
Stock based compensation
|
|
|
12,000
|
|
|
|
45,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,000
|
|
|
|
188,000
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,774,000
|
|
|
|
1,774,000
|
|
Net income (loss) from continuing operations
|
|
|
1,329,000
|
|
|
|
838,000
|
|
|
|
(350,000
|
)
|
|
|
(2,495,000
|
)
|
|
|
3,764,000
|
|
|
|
3,086,000
|
|
Capital expenditures
|
|
|
260,000
|
|
|
|
11,000
|
|
|
|
-
|
|
|
|
49,000
|
|
|
|
5,000
|
|
|
|
325,000
|
|
Identifiable assets
|
|
|
10,715,000
|
|
|
|
817,000
|
|
|
|
-
|
|
|
|
2,775,000
|
|
|
|
77,612,000
|
|
|
|
91,919,000
|
|
Year Ended December 31, 2019
|
|
Premier Packaging
|
|
|
Digital Group
|
|
|
IP Technology
Management
|
|
|
Direct Marketing
/ Online Sales
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
13,230,000
|
|
|
$
|
2,148,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
172,000
|
|
|
$
|
15,550,000
|
|
Depreciation and amortization
|
|
|
904,000
|
|
|
|
33,000
|
|
|
|
82,000
|
|
|
|
-
|
|
|
|
132,000
|
|
|
|
1,151,000
|
|
Interest expense
|
|
|
96,000
|
|
|
|
7,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
125,000
|
|
Stock based compensation
|
|
|
17,000
|
|
|
|
81,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
324,000
|
|
|
|
422,000
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125,000
|
|
|
|
125,000
|
|
Net income (loss) from continuing operations
|
|
|
311,000
|
|
|
|
(579,000
|
)
|
|
|
(475,000
|
)
|
|
|
-
|
|
|
|
(1,852,000
|
)
|
|
|
(2,595,000
|
)
|
Capital expenditures
|
|
|
819,000
|
|
|
|
24,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,000
|
|
|
|
947,000
|
|
Identifiable assets
|
|
|
10,425,000
|
|
|
|
924,000
|
|
|
|
58,000
|
|
|
|
-
|
|
|
|
8,739,000
|
|
|
|
20,146,000
|
|
International
revenue, which consists of sales to customers with operations in Canada, Western Europe, Latin America, Africa, the Middle East
and Asia comprised 9.0% of total revenue for 2020 (2.0% - 2019). Revenue is allocated to individual countries by customer
based on where the product is shipped. The Company had no long-lived assets in any country other than the United States for any
period presented.
The
following tables disaggregate our business segment revenues by major source:
Printed
Products Revenue Information:
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2020
|
|
|
|
Packaging
Printing and Fabrication
|
|
$
|
11,782,000
|
|
Commercial
and Security Printing
|
|
|
1,218,000
|
|
Total
Printed Products
|
|
$
|
13,000,000
|
|
|
|
|
|
|
Twelve
months ended December 31, 2019
|
|
|
|
|
Packaging
Printing and Fabrication
|
|
$
|
12,071,000
|
|
Commercial
and Security Printing
|
|
|
1,159,000
|
|
Total
Printed Products
|
|
$
|
13,230,000
|
|
|
|
|
|
|
Technology
Sales, Services and Licensing Revenue Information:
|
|
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2020
|
|
|
|
|
Information
Technology Sales and Services
|
|
$
|
152,000
|
|
Digital
Authentication Products and Services
|
|
|
1,503,000
|
|
Royalties
from Licensees
|
|
|
430,000
|
|
Total
Printed Products
|
|
$
|
2,085,000
|
|
|
|
|
|
|
Twelve
months ended December 31, 2019
|
|
|
|
|
Information
Technology Sales and Services
|
|
$
|
189,000
|
|
Digital
Authentication Products and Services
|
|
|
1,414,000
|
|
Royalties
from Licensees
|
|
|
545,000
|
|
Total
Printed Products
|
|
$
|
2,148,000
|
|
|
|
|
|
|
Direct
Marketing
|
|
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2020
|
|
|
|
|
Direct
Marketing Internet Sales
|
|
$
|
2,326,000
|
|
Total
Direct Marketing
|
|
$
|
2,326,000
|
|
|
|
|
|
|
Twelve
months ended December 31, 2019
|
|
|
|
|
Direct
Marketing Internet Sales
|
|
$
|
172,000
|
|
Total
Direct Marketing
|
|
$
|
172,000
|
|
NOTE
19 – SUBSEQUENT EVENTS
On
March 22, 2021 Premier Packaging was awarded an incentive package from New York State and Empire State Development and its Excelsior
Jobs Program valued at up to $700,000 in connection with Premier’s proposed expansion plans within the state. This incentive
will take the form of tax credits to be utilized beginning in 2022 through 2031.
On
March 16, 2021, American Medical REIT, Inc. received loan proceeds in the amount of approximately $110,000 under the Paycheck
Protection Program (“PPP”) with a fixed rate of 1% and a 60-month maturity term. 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.
On
March 15, 2021, the Company, through one of its subsidiaries, entered into a Stock Purchase Agreement (the “Agreement”)
with Vivacitas Oncology Inc. (“Vivacitas”), to purchase 500,000 shares of its common stock at the per share price
of $1.00, with an option to purchase 1,500,000 additional shares a the per share price of $1.00. This option will terminate upon
one of the following events: (i) The Seller’s board of directors cancels this option because it is no longer in the best
interest of the Company; (ii) December 31, 2021; or (iii) the date on which the Seller receives more than $1.00 per share of the
Company’s common stock in a private placement with gross proceeds of $500,000. Under the terms of the Agreement, the Company
will be allocated two seats on the board of Vivacitas. On March 18, 2021, the Company entered into an agreement to with Alset
EHome International, Inc. (“Seller”) indirectly the Seller’s wholly owned subsidiary Impact Oncology PTE Ltd.
to purchase 2,480,000 shares of common stock of Vivacitas for a purchase price $2,480,000. This agreement includes an option to
purchase an additional 250,000 shares of common stock. As a result of these two transactions, the Company will have an approximate
10.2% equity position in Vivacitas. The Sellers largest shareholder is Mr. Chan Heng Fai Ambrose, the Chairman of the Company’s
board of directors and its largest shareholder.
On
March 12, 2021, the Company entered into a binder letter of intent with Sharing Services Global Corporation (“SHRG”)
whereas the Company will sell specific assets to SHRG. The purchase price is to be established by a third-party appraiser mutually
agreed up. Under the terms of this agreement, SHRG at its option, may pay the purchase price via (i) shares of SHRG Common A stock
at a conversion rate calculated at a 30-day VWAP, (if shares are available), (ii) a 1 yr. convertible note which at the Seller’s
option may be converted into Common A shares at a conversion rate calculated at a 30-day VWAP (if shares are available), or paid
in US$ or (iii) in US dollars at closing.
On
February 25, 2021, the Company entered into a binding letter of intent with Sharing Service Global Corporation (“SHRG),
where the Company is to loan $30 million to SHRG in the form of a Convertible Promissory Note (the “SHRG Note”).
This three-year SHRG Note accrues interest annual at 8% and contains a 10% origination fee. Both the first year’s
interest and the origination fee are payable at closing in the form of SHRG shares at a conversion rate of $0.20 per share. All
or a part of the outstanding SHRG Note balance can be converted at the sole discretion of DSS at a conversion rate of $0.20
per share. This Note also contains detachable warrants, exercisable at DSS’s option, of 150,000,000 shares of SHRG’s
Class A common stock with an exercise price of $0.22.
On
February 4, 2021, the Company entered into an underwriting agreement (the “Feb. 2021 Underwriting Agreement”)
with Aegis Capital Corp., as representative of the underwriters named therein, which provided for the issuance and sale by the
Company and the purchase by the underwriters, in a firm commitment underwritten public offering (the “Feb. 2021 Offering”),
of 12,319,346 shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained
in the Feb. 2021 Underwriting Agreement, the shares were sold at a public offering price of $2.80 per share, less certain
underwriting discounts and commissions. The Company also granted the underwriters a 45-day option to purchase up to 1,847,901
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 Feb. 2021 Offering, which over-allotment option was exercised in full on February 9, 2021. The net
offering proceeds to the Company from the Feb. 2021 Offering are approximately $36.14 million, including the exercise of
the underwriter’s over-allotment option, and after deducting estimated underwriting discounts and commissions and other
estimated offering expenses.
On
February 3, 2021, DSS Blockchain Security, Inc (“DSSB”). a wholly-owned subsidiary of the Company entered
into a binding joint venture term sheet with GSX Group Limited (“GSX”) and Coinstreet Holdings Limited (“Coinstreet”)
whereas the parties intend to own and operate a single or multiple vertical digital asset exchanges for securities, tokenized
assets, utility tokens, stable coins and cryptocurrency that will operate a primary and secondary market via a digital asset trading
platform using blockchain technology. With its initial contribution of $20,000, DSSB will receive a 40% equity position
in the joint venture. Upon the execution of related loan documents, in which DSSB will loan $800,000 to GSX, DSSB will obtain
a 70% share in the joint venture.
On
January 19, 2021, the Company entered into an underwriting agreement, as amended by Amendment No. 1 effective as of January
19, 2021 (the “Jan. 2021 Underwriting Agreement”), with Aegis Capital Corp., as representative of the underwriters,
which provided for the issuance and sale by the Company and the purchase by the underwriters, in a firm commitment underwritten
public offering (the “Jan. 2021 Offering”), of 6,666,666 shares of the Company’s common stock, $0.02
par value per share. Subject to the terms and conditions contained in the Jan. 2021 Underwriting Agreement, the shares were offered
in a public offering at a price of $3.60 per share, less certain underwriting discounts and commissions. The Company also granted
the underwriters a 45-day option to purchase up to 1,000,000 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 Jan. 2021 Offering. This overallotment
was exercised in full. The net offering proceeds to the Company from the Jan. 2021 Offering are approximately $24.9 million,
after deducting estimated underwriting discounts and commissions and other estimated offering expenses.
On
January 6, 2021, the Company Alset International Limited (“Alset Singapore”), a company formed under the laws
of Singapore, Health Wealth Happiness Pte. Ltd. (“HWH”), a Singaporean company and wholly-owned subsidiary of Alset
Singapore, and HWH World Inc. (“HWH World”), a company registered and formed under the laws of South Korea
and wholly-owned subsidiary of HWH, entered into a binding term sheet (the “HWH Term Sheet”), pursuant to which,
subject to the due diligence on HWH World, necessary approvals and consents, and the terms and conditions to be set forth in the
Definitive Agreement (as defined below), the Company will acquire and purchase all of the outstanding equity interest in HWH World
(the “HWH Transaction”) for a consideration of the lesser of $14.8 million or the value of HWH World assessed
by a third-party valuation company (the “Purchase Price”). The HWH Term Sheet provided that the Company shall
have the option to pay the Purchase Price in i) cash, or ii) shares of the Company’s common stock at the per share price
equivalent to the average closing price of the common stock for a period of five (5) trading days prior to January 6, 2021.
In accordance with the HWH Term Sheet, the parties thereto (the “Parties”) shall enter into a definitive share
exchange agreement (the “Definitive Agreement”) for the Transaction within three (3) months from the date of the HWH
Term Sheet or at a later date as mutually agreed by the Parties in writing and complete the Transaction within six (6) months
therefrom or at a later date as mutually agreed by the Parties in writing. The HWH Term Sheet is legally binding and shall
terminate upon the earlier of 1) six months from January 6, 2021, 2) mutual agreement by all the Parties on the termination, or
3) the execution of the Definitive Agreement for the Transaction.