NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
Document
Security Systems, Inc. (the “Company”), through two of its subsidiaries, Premier Packaging Corporation, which
operates under the assumed name of DSS Packaging Group, and Plastic Printing Professionals, Inc., which operates under the
name of DSS Plastics Group, operates in the security and commercial printing, packaging and plastic ID markets. The Company
develops, markets, manufactures and sells paper and plastic products designed to protect valuable information from
unauthorized scanning, copying, and digital imaging. The Company’s subsidiary, DSS Digital Inc., which also operates
under the name of DSS Digital Group, develops, markets and sells digital information services, including data hosting,
disaster recovery and data back-up and security services. The Company’s subsidiary, DSS Technology Management
(“DSSTM”), Inc., manages, licenses and acquires intellectual property (“IP”) assets for the purpose
of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in
the development and commercialization of patented technologies, licensing, strategic partnerships and commercial litigation.
In 2018, the Company commenced operations in the Asia Pacific market through its subsidiary DSS Asia Limited, which was
formed in 2017. In 2019 DSS created four new, wholly-owned subsidiaries all of which currently have no employees and
are in the exploratory stage and looking for opportunities. DSS Blockchain Security, Inc., that intends to specialize in the
development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber
securities across global markets. Decentralize Sharing Systems, Inc., that amongst other things, intends to provide services
to assist companies utilizing blockchain technologies for sharing system solutions in the new economics of the peer-to-peer
decentralized sharing marketplaces. DSS Securities, Inc., anticipates establishing or acquiring 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. DSS BioHealth Security, Inc., to invest in companies that include, but not limited to, hold bio-medical
intellectual property and/or which have, or are securing, strategic alliances, partnerships and distributing rights for
biomedical and security products, technologies or enterprises. This new division will focus on open-air defense initiatives,
which curb transmission of air-borne infectious diseases such as tuberculosis, influenza, among others, in open
areas.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q
and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all the information
and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance
sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments considered necessary
for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim
results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s
accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s
Form 10-K for the fiscal year ended December 31, 2018.
Principles
of Consolidation - The consolidated financial statements include the accounts of Document Security Systems and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed
in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing
basis, the Company evaluates its estimates, including those related to the accounts receivable, inventory, fair values of investments,
intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants
to purchase the Company’s common stock, deferred revenue and income taxes, among others. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and liabilities.
Reclassification
- Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 2018 have been reclassified
to conform to current year presentation.
Investment
– In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment Limited
at cost as the fair market value of the investment is not readily determinable. The Company evaluates investment for indications
of impairment at least annually.
Fair
Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement
Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
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●
|
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, accounts receivable, prepaids, accounts payable and accrued expenses approximate
fair value because of the immediate or short-term maturity of these financial instruments. The fair value of revolving credit
lines notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect
recent market conditions. Derivative instruments, as discussed below, are recorded as assets and liabilities at estimated fair
value based on available market information. The fair value of investments carried at cost, less impairment however, the fair
value is not considered readily determinable based on the lack of liquidity for the shares owned.
Derivative
Instruments - The Company maintains an overall interest rate risk management strategy that may incorporate the use of
interest rate swap contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The
Company had an interest rate swap that changes variable rates into fixed rates on one Citizens Bank term loan relating to the
Company’s subsidiary, Premier Packaging. This swap qualified as a Level 2 fair value financial instrument. This swap
agreement was not held for trading purposes and the Company did not intend to sell this derivative swap financial instrument.
The Company recorded the interest swap agreement on the balance sheet at fair value because the agreement qualifies as a cash
flow hedge under accounting principles generally accepted in the United States of America. Gains and losses on these instruments
are recorded in other comprehensive loss until the underlying transaction is recorded in earnings. When the hedged item was realized,
gains or losses are reclassified from accumulated other comprehensive loss (“AOCI”) to the consolidated statement
of operations. The valuations of the interest rate swaps have been derived from proprietary models of Citizens Bank, N.A (Citizens),
based upon recognized financial principles and reasonable estimates about relevant future market conditions and may reflect certain
other financial factors such as anticipated profit or hedging, transactional, and other costs. The notional amounts of the swaps
decreased over the life of the agreements. The Company would be exposed to a credit loss in the event of nonperformance by the
counter parties to the interest rate swap agreements. The Company did not anticipate non-performance by the counter
parties. The swap was settled in September 2019 with the effect of the settlement of a loss of $22,483 recorded in interest expense
in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
Impairment
of Long-Lived Assets and Goodwill - The Company monitors the carrying value of long-lived assets for potential impairment
and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying
value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently
identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the
Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows,
the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value.
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.
Earnings
Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual
weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number
of additional shares that would have been outstanding if dilutive potential shares had been issued and is calculated utilizing
the treasury stock method. In a loss period, the calculation for basic and diluted earnings per share is the same, as the impact
of potential common shares is anti-dilutive.
For
the three and nine months ended September 30, 2019, common stock equivalents were excluded from the calculation of diluted earnings
per share as the Company had a net loss, since their inclusion would have been anti-dilutive. For the nine-months ended September
30, 2018, based on the average market price of the Company’s common stock during that period of $1.37, 267,905 common stock
equivalents were added to the basic shares outstanding to calculate dilutive earnings per share. For the three-months ended September
30, 2018, common stock equivalents were excluded from the calculation of diluted earnings per share as the company had a net loss,
since their inclusion would have been anti-dilutive.
Concentration
of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial
institutions.
During
the nine months ended September 30, 2019, two customers accounted for approximately 31% and 13%, respectively, of the Company’s
consolidated revenue and accounted for 29% and 5%, respectively, of the Company’s accounts receivable balance as of September
30, 2019. During the nine months ended September 30, 2018, these two customers accounted for 24.8% and 14.7%, respectively, of
the Company’s consolidated revenue and accounted for 22% and 6.6%, respectively, of the Company’s accounts receivable
balance as of September 30, 2018. The risk with respect to accounts receivables is mitigated by credit evaluations the Company
performs on its customers, the short duration of its payment terms for most of its customer contracts and by the diversification
of its customer base.
Income
Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year
and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income
items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available
tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in
income tax expense.
Recently
Adopted Accounting Pronouncements – 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) and an accounting policy to account for lease
and non-lease components as a single component for certain classes of assets. 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 $1,489,156.
Continuing
Operations and Going Concern – The accompanying consolidated financial statements have been prepared assuming that
we 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 $ 3.9 million in cash, and a positive working capital position of approximately $4.3 million
as of September 30, 2019, the Company has incurred negative cash flows from operating and investing activities over the past two
years and has projected that the Company will likely incur negative cash flows from operations in 2019. To continue as a going
concern, on June 5, 2019, the Company entered into an underwriting agreement with Aegis Capital Corp., acting as a representative
of several underwriters, which provided for the issuance and sale by the Company in an underwritten public offering (the “Offering”)
of 11,200,000 shares of the Company’s common stock. 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 (519,186 shares were exercised on July 18, 2019.) 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. Also, 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 6,000,000 shares of common stock, for an above
market purchase price equal to $0.3037 per share (at the time of LiquidValues’ commitment, the closing stock price was $0.26
per share) for net proceeds to the Company of approximately $1.5 million after deducting underwriting discounts, commissions
and other offering expenses (see Note 14).
The
expected use of cash for operations in 2019 will be primarily for funding operating losses, working capital, legal expenses associated
with its intellectual property related litigation, and the costs associated with the global roll-out of the Company’s AuthentiGuard
product line. The Company will also use these funds to make capital improvements at its two manufacturing facilities to increase
production capacity and create efficiencies, as well as to diversify its revenue streams and take advantage of profit opportunities.
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 including international expansion of
our AuthentiGuard product, and tightly controlling operating costs and reducing spending growth rates wherever possible to return
to profitability.
We
believe that our $3.9 million in aggregate cash and equivalents as of September 30, 2019 will allow us to fund our four
operating segments current and planned operations through 2020. However, we may seek additional capital through the sale of debt
or equity securities, if necessary, especially in conjunction with opportunistic acquisitions or licensing arrangements. Based
on this, we have concluded that substantial doubt of our ability to continue as a going concern has been alleviated.
Recent
Accounting Pronouncements – 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. The Company is currently
assessing the impact that adopting this new accounting standard will have on its Consolidated Financial Statements and plans to
adopt ASU 2017-04 in the first quarter of 2020.
2.
Revenue
Effective
January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach and applied the guidance to those contracts
which were not completed as of January 1, 2018. Adoption of Topic 606 did not impact the timing of revenue recognition in the
Company’s Consolidated Financial Statements for the current or prior interim or annual periods. Accordingly, no adjustments
have been made to opening retained earnings or prior period amounts.
Revenue
Recognition
The
Company sells printed products including packaging printing and fabrication, commercial and security printing and plastic cards
and badges, including cards and badges integrated with technology such as RFID and smart chips. The Company also provides information
technology services and digital authentication products and services to its customers. 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. Customers, including distributors, do not
have a general right of return. The Company also derives revenue from royalties from third parties which are typically based on
licensees’ net sales of products that utilize the Company’s technology, or on a per item usage of the technology on
the customers’ printed products. The Company recognizes license revenue at the time it is reported by the licensee. From
time to time, the Company generates license revenues through litigation settlements. For these, the Company recognizes revenue
upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum upfront fee for
term agreement renewals, and when all other revenue recognition criteria have been met.
As
of September 30, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration
of greater than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of
the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations.
The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce
on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission
as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year
or less.
Accounts
Receivable
The
Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and
generally does not require collateral. Payment terms are generally 30 days but up to net 60 for certain customers. The Company
carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company
evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management’s estimates that
include a review of the history of past write-offs and collections and an analysis of current credit conditions. At September
30, 2019, the Company established a reserve for doubtful accounts of $50,000 ($50,000 – December 31, 2018). The Company
does not accrue interest on past due accounts receivable.
Sales
Commissions
Sales
commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions
capitalized as of September 30, 2019.
Shipping
and Handling Costs
Costs
incurred by the Company related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining
to these costs are reflected as revenue.
See
Note 13 for disaggregated revenue information.
3.
Inventory
Inventory
consisted of the following:
|
|
Inventory
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
$
|
1,106,803
|
|
|
$
|
1,144,695
|
|
WIP
|
|
|
251,807
|
|
|
|
339,091
|
|
Raw Materials
|
|
|
293,274
|
|
|
|
79,807
|
|
|
|
$
|
1,651,884
|
|
|
$
|
1,563,593
|
|
4.
Investment
The
Company owns 21,196,552 ordinary shares 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 of Singapore eDevelopment Limited (“SED”), a company incorporated
in Singapore and publicly-listed on the Singapore Exchange Limited. The restriction on the sale of shares, and execution of the
warrants expired on September 17, 2019 . At the time of the investment, the cost of the investment was determined to be the fair
value of the Company’s common stock issued in the transaction, which was determined to have the most readily determinable
fair value. In 2018, the Company adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial
Liabilities.” has and carries its investment in SED at costs. During the 4th quarter of 2018, the Company determined that
its investment in Singapore eDevelopment (“SED”) was impaired due to the decline in the share price of SED, especially
since November of 2018, which the Company believes was influenced by a general decline in equity markets in Asia caused by the
tariff dispute between the United States and China. As such, in response to the decline in the trading value of the SED shares
in the fourth quarter of 2018, the Company performed an impairment test and determined an impairment of approximately $160,000
was warranted. Similar analysis was performed at September 30, 2019 and no further impairment is deemed necessary as the stock
price has rebounded in excess of 15%. The carrying value of the investment as of September 30, 2019 was $324,930.
5.
Intangible Assets
Intangible
assets are comprised of the following:
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|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Useful Life
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangibles - customer lists, licenses and non-compete agreements
|
|
3-10 years
|
|
|
1,778,848
|
|
|
|
1,097,787
|
|
|
|
681,061
|
|
|
|
1,284,065
|
|
|
|
823,884
|
|
|
|
460,181
|
|
Acquired intangibles - patents and patent rights
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
Patent application costs
|
|
Varied (1)
|
|
|
1,175,971
|
|
|
|
808,529
|
|
|
|
367,442
|
|
|
|
1,168,155
|
|
|
|
746,925
|
|
|
|
421,230
|
|
|
|
|
|
$
|
3,454,819
|
|
|
$
|
2,406,316
|
|
|
$
|
1,048,503
|
|
|
$
|
2,952,220
|
|
|
$
|
2,070,809
|
|
|
$
|
881,411
|
|
(1)
Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent.
As of September 30, 2019, the weighted average remaining useful life of these assets in service was approximately 7 years.
Amortization
expense for the nine months ended September 30, 2019 amounted to $335,507($407,034 – September 30, 2018).
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”) to 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.
6.
Short-Term and Long-Term Debt
Revolving
Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving
credit line with Citizens Bank (“Citizens”) of up to $800,000 that bears interest at 1 Month LIBOR plus 2.0% (4.1%
as of June 30, 2019). This revolving line of credit was renewed and has a maturity date of May 31, 2020. As of September 30, 2019,
and December 31, 2018, the revolving line had a balance of $0.
On
July 26, 2017, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement
with Citizens pursuant to which Citizens agreed to lend up to $1,200,000 to permit Premier Packaging to purchase equipment from
time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition
Line of Credit shall bear interest thereon at a per annum rate of 2% above the LIBOR Advantage Rate until the Conversion Date
(as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to
a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens. Current maturities of long-term debt
are based on an estimated 48-month amortization which will be adjusted upon conversion. As of September 30, 2019, the line had
not yet converted into a credit facility and had a balance of $917,884 ($339,000 at December 31, 2018).
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 pursuant to which Citizens agreed to lend up to $800,000 to enable
Plastic Printing Professionals to purchase equipment from time to time that it may need for use in its business. Advances may
be made under this Equipment Acquisition Line of Credit, from time to time, from December 1, 2017 until December 1, 2018. The
aggregate principal balance outstanding under the Equipment Acquisition Line of Credit bears interest at 2% above the LIBOR Advantage
Rate (as defined in the agreement) (4.1% at September 30, 2019) until converted. Effective on conversion, the interest rate payable
on the aggregate principal balance outstanding shall be adjusted to a fixed rate equal to 2% above Citizens’ cost of funds
as determined by Citizens. Prior to conversion, interest on the outstanding principal is payable in arrears monthly. After conversion,
the aggregate principal balance may be repaid in (i) up to 84 installments comprised of principal and interest for new equipment
or (ii) up to 60 installments comprised of principal and interest for used equipment. Commencing March 30, 2019, the line was
converted into two term notes under which the Company will make monthly payments of $13,657 until November 30, 2023. Interest
under the term notes is payable monthly at 5.37%. As of September 30, 2019, the combined balance of the term notes was $610,401
($684,554 at December 31, 2018).
Term
Loan Debt - On April 28, 2015, Premier Packaging entered into a term note with Citizens for $525,000, repayable over a
60-month period. The loan bears interest at 3.62% and is payable in equal monthly installments of $9,591 until April 28, 2020.
Premier Packaging used the proceeds of the term note to acquire a HP Indigo 7800 Digital press. The loan is secured by the printing
press. As of September 30, 2019, the loan had a balance of $66,322 ($149,542 at December 31, 2018).
Promissory
Notes - On August 30, 2011, Premier Packaging purchased the packaging plant it occupies in Victor, New York, for $1,500,000,
which was partially financed with a $1,200,000 promissory note obtained from Citizens Bank (“Promissory Note”). The
Promissory Note called for monthly payments of principal and interest in the amount of $7,658, with interest calculated as 1 Month
LIBOR plus 3.15%. This note, in conjunction with the Construction to Permanent Loan described below, was refinanced as of June
27, 2019.
On
December 6, 2013, Premier Packaging entered into a Construction to Permanent Loan with Citizens Bank for up to $450,000 that was
converted into a promissory note upon the completion and acceptance of building improvements to the Company’s packaging
plant in Victor, New York. In May 2014, the Company converted the loan into a $450,000 note payable in monthly installments over
a 5-year period of $2,500 plus interest calculated at a variable rate of 1 Month LIBOR plus 3.15%. The note was set to mature
in July 2019 at which time a balloon payment of the remaining principal balance of $300,000 was due. On June 27, 2019 the balloon
payment, in conjunction with the remaining balance on promissory note identified above, was refinanced.
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 $1,156,742 with Citizens Bank. The new Promissory Note calls for monthly
payments of $7,181, with interest fixed at 4.22%. The new Promissory Note matures on June 27, 2029, at which time a balloon payment
of $707,689 is due. As of September 30, 2019, the new, consolidated Promissory Note had a balance of $1,150,766.
The
Citizens credit facilities to each of the Company’s subsidiaries, Premier Packaging and Plastic Printing Professionals,
contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested
annually at December 31. For the year ended December 31, 2018, both Premier Packaging and Plastic Printing Professionals were
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 is payable in full on October 24,
2020.
Effective
on February 18, 2019, Document Security Systems, Inc. (the “Company” or “Borrower”) entered into a Convertible
Promissory Note (the “Note”) with LiquidValue Development Pte Ltd (the “Holder”) in the principal sum
of $500,000 (the “Principal Amount”), of which up to $500,000 of the Principal Amount can 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 446,428 shares of common stock
(the “Common Stock”), at a conversion price of $1.12 per share. The Note carried a fixed interest rate of 8% per annum
and had a term of 12-months. Accrued interest was payable in cash in arrears on the last day of each calendar quarter, with the
first interest payment due on June 30, 2019, and remains payable until the Principal Amount is paid in full. The Holder is a related
party, owned by one of the Company’s directors. Effective on March 25, 2019, the Holder exercised its conversion option
and converted the Maximum Conversion Amount under the Note. As a result of Holder’s election to exercise its full conversion
rights under the Note, the Note was cancelled effective on March 25, 2019.
7.
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. As of September 30, 2019, an aggregate of $955,388 is recorded as other liabilities by the Company, of which $759,966
is classified as short-term. 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. The remaining $173,700 in other liabilities
is allocated to working capital, which the Company is amortizing on a pro-rata basis over the expected remaining life of the monetization
period of the LED Patent Portfolio through November 30, 2019. For this amount, 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 $86,850 per month through November 30,
2019. During the nine months ended September 30, 2019, there was approximately $317,350 of Inter Partes Review costs and an aggregate
of $781,650 was recorded as a reduction of the liability allocated to working capital.
On
July 8, 2013, the Company’s subsidiary, DSSTM, purchased two patents for $500,000 covering certain methods and processes
related to Bluetooth devices. In conjunction with the patent purchases, DSSTM entered into a Proceed Right Agreement with certain
investors pursuant to which DSSTM initially received $250,000 of a total of $750,000 which it will ultimately receive thereunder,
subject to certain payment milestones, in exchange for 40% of the proceeds which it receives, if any, from the use, sale or licensing
of the two patents. As of September 30, 2019, the Company had received an aggregate of $750,000 ($750,000 in 2018) from the investors
pursuant to the agreement of which approximately $175,000 was in current liabilities in the consolidated balance sheets ($476,000
as of December 31, 2018). The Company reduces the liability as it pays legal and other expenses related to its litigation involving
the Bluetooth patents, for which the amount is available to be used for 50% of all such expenses.
8.
Related Party Transactions
Effective
on May 31, 2019, Document Security Systems, Inc. (the “Company” or “Borrower”) entered into a Promissory
Note (the “Note”) with LiquidValue Development Pte Ltd (the “Holder”) in the principal sum of $650,000
(the “Principal Amount”). The Note was not interest bearing with a maturity date of July 31, 2019. The Holder is a
related party, owned by one of the Company’s directors. This Note was paid in full on June 12, 2019.
Pursuant to Mr. Heng
Fai Ambrose Chan’s employment agreement with a subsidiary of DSS, date September 23, 2019, effective July 15, 2019, Mr.
Chan shall receive an annual base salary of $250,000 payable in common stock or cash. Mr. Chan is also eligible to receive and
annual performance bonus in an amount up to 100% of his base salary, upon the Company’s achievement of certain net income
and gross revenue milestones.
9.
Lease Liability
The
Company has operating leases predominantly for operating facilities. As of September 30, 2019, the remaining lease terms on our
operating leases range from less than one year to approximately five years. 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 September 30, 2019.
Future
minimum lease payments as of September 30, 2019 are as follows:
2019
|
|
$
|
106,821
|
|
2020
|
|
|
424,129
|
|
2021
|
|
|
335,097
|
|
2022
|
|
|
315,271
|
|
2023
|
|
|
306,070
|
|
Thereafter
|
|
|
24,208
|
|
Total lease payments
|
|
|
1,511,596
|
|
Less: Imputed Interest
|
|
|
(142,632
|
)
|
Present value of remaining lease payments
|
|
$
|
1,368,964
|
|
|
|
|
|
|
Current
|
|
$
|
361,713
|
|
Noncurrent
|
|
$
|
1,007,251
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
4.0
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
5.4
|
%
|
10.
Commitments and Contingencies
On
November 26, 2013, DSSTM filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern
District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of
DSSTM’s patents that relate to systems and methods of using low power wireless peripheral devices. DSSTM is seeking a judgment
for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District
Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November
7, 2014, Apple’s motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple
filed two Inter Partes Review (“IPR”) petitions with the Patent Trial and Appeal Board (“PTAB”) for review
of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. The California District Court then stayed
the case pending the outcome of those IPR proceedings. Oral arguments of the IPRs took place on March 15, 2016, and on June 17,
2016, PTAB ruled in favor of Apple on both IPR petitions. DSSTM then filed an appeal with the U.S. Court of Appeals for the Federal
Circuit (the “Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on
August 9, 2017. On March 23, 2018, the Federal Circuit reversed the PTAB, finding that the PTAB erred when it found the claims
of U.S. Patent No. 6,128,290 to be unpatentable. The Federal Circuit affirmed its decision on July 12, 2018, when it denied Apple’s
petition for panel rehearing of the Federal Circuit’s Opinion and Judgment issued on March 23, 2018. On July 27, 2018, the
District Court judge lifted the Stay resuming the litigation, which has a trial date set for the week of February 24, 2020.
On
February 16, 2015, DSSTM filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation,
Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart
Stores Texas, LLC, and AT&T, Inc. The complaint alleged patent infringement and sought judgment for infringement of two of
DSSTM’s patents, injunctive relief and money damages. On December 9, 2015, Intel filed IPR petitions with PTAB for review
of the patents at issue in the case. Intel’s IPRs were instituted by PTAB on June 8, 2016. On June 1, 2017, the PTAB ruled
in favor of Intel for all the challenged claims. On July 28, 2017, DSSTM filed a notice of appeal of the PTAB’s decision
relating to U.S. Patent 6,784,552 with the Federal Circuit. On January 8, 2019, DSSTM entered into a confidential settlement agreement
with Intel Corporation, Dell Inc., GameStop Corp, Conn’s Inc., Conn Appliances, Inc., Wal-Mart Stores, Inc., Wal-Mart Stores
Texas, LLC and AT&T Mobility LLC (collectively, the “Defendants”). The Federal Circuit Appeal involving DSSTM
and Intel was dismissed on January 16, 2019, and the District Court case against the Defendants was dismissed, as to all the Defendants,
on February 5, 2019.
On
July 16, 2015, DSSTM filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging
infringement of certain of its semiconductor patents. The defendants were SK Hynix et al., Samsung Electronics et al., and Qualcomm
Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and
money damages. On November 12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at issue in their case.
SK Hynix’s IPR was instituted by the PTAB on May 11, 2016. On August 16, 2016, DSSTM and SK Hynix entered into a confidential
settlement agreement ending the litigation between them. The pending SK Hynix IPR was then terminated by mutual agreement of the
parties on August 31, 2016. On March 18, 2016, Samsung also filed an IPR petition, which was instituted by the PTAB. On September
20, 2017, PTAB ruled in favor of Samsung for all the challenged claims relating to U.S. Patent 6,784,552. DSSTM then appealed
this PTAB ruling to the Federal Circuit on November 17, 2017. The Federal Circuit joined this appeal with the Intel appeal effective
on December 7, 2017. Qualcomm filed its IPR proceeding on July 1, 2016, which was then later joined with Intel’s IPRs in
August 2016 by PTAB. On June 1, 2017, the PTAB ruled in favor of Intel/Qualcomm for all the challenged claims. On July 28, 2017,
DSSTM filed a notice of appeal of the PTAB’s decision relating to U.S. Patent 6,784,552 with the Federal Circuit. A confidential
patent license agreement was executed by DSSTM on November 14, 2018, covering Samsung and Qualcomm. On December 12, 2018, DSSTM
and Samsung entered into a confidential release. On December 27, 2018, DSSTM and Qualcomm entered into a confidential settlement
agreement. The DSSTM - Samsung District Court case was dismissed on December 17, 2018. The DSSTM - Samsung Federal Circuit Appeal
was dismissed on January 2, 2019. The Federal Circuit Appeal involving DSSTM and Qualcomm was dismissed on January 16, 2019. The
DSSTM - Qualcomm District Court case was dismissed on January 16, 2019. As a result, all of DSSTM’s litigation matters originally
filed in the District Court for the Eastern District of Texas have been resolved and are now dismissed.
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. 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. 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. 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 Everlight Electronics Co., Ltd. and Everlight Americas,
Inc. (collectively, “Everlight”) 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 Everlight in the United States District Court for the Central District of California. On June 8,
2018, Everlight filed IPR petitions challenging the validity of claims under U.S. Patent Nos. 7,256,486 and 7,524,087. On June
12, 2018, Everlight filed an IPR petition challenging the validity of claims under U.S. Patent No. 6,949,771, and on June 15,
2018, filed an IPR petition challenging the validity of claims under U.S. Patent No 7,919,787. These challenged patents are the
patents that are the subject matter of the infringement lawsuit. On January 18, 2019, the Company and Everlight entered into a
confidential settlement agreement resolving the litigation.
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. On October
30, 2019, the PTAB issued a written decision determining claims 1-17 of the ‘297 patent unpatentable.
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.
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
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.
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 September 30, 2019, and December 31, 2018, 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 September 30, 2019, and December 31, 2018, there are no contingent
payments due.
11.
Stockholders’ Equity
Sales
of Equity - On March 5, 2019, the Company issued 130,435 shares of its common stock at $1.15 per share as partial
consideration for a licensing and distribution agreement entered into with Advanced Cyber Security Corp.
On
February 18, 2019, the Company had entered into a Convertible Promissory Note with LiquidValue Development Pte Ltd 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 446,428 shares of common stock (the “Maximum Conversion Amount”),
at a conversion price of $1.12 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
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 11,200,000 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 $0.50 per share, less certain underwriting discounts and commissions.
As part of this transaction, 2,000,000 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
(519,186 shares were exercised on July 18, 2019 at $0.50 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. The Company intends to use the net proceeds from the Offering
for research, product and brand development, strategic initiatives and general corporate and working capital purposes.
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 nine months
ended September 30, 2019, the Company had stock compensation expense of approximately $331,000 or less than $0.01 basic and diluted
earnings per share ($107,000, or less than $0.01 basic and diluted earnings per share for the corresponding nine months ended
September 30, 2018). Of the $331,000, $52,000 was accrued for the CEO of a subsidiary of the Company.
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 458,719 shares, at $0.42 per share which were immediately
vested and issued on September 6, 2019.
12.
Supplemental Cash Flow Information
The
following table summarizes supplemental cash flows for the nine-month periods ended September 30, 2019 and 2018:
Supplemental Cash Information
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
128,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Impact of adoption of lease accounting standards
|
|
$
|
1,616,000
|
|
|
$
|
-
|
|
(Loss) gain from change in fair value of interest rate swap derivatives
|
|
$
|
7,000
|
|
|
$
|
17,000
|
|
Common stock issued upon conversion of convertible note
|
|
$
|
500,000
|
|
|
$
|
-
|
|
Equity issued to purchase intangible assets
|
|
$
|
145,000
|
|
|
$
|
-
|
|
Elimination of contingent liabilities through agreement
|
|
$
|
-
|
|
|
$
|
459,000
|
|
Purchase of intangible assets to be paid in installments
|
|
$
|
-
|
|
|
$
|
304,000
|
|
13.
Segment Information
The
Company’s businesses are organized, managed and internally reported as five operating segments. Two of these operating segments,
Packaging and Printing, and Plastics are engaged in the printing and production of paper, cardboard and plastic documents with
a wide range of features, including the Company’s patented technologies and trade secrets designed for the protection of
documents against unauthorized duplication and altering. The three other operating segments, DSS Digital Group, DSS Technology
Management, and DSS International, are engaged in various aspects of developing, acquiring, selling and licensing technology assets
and are grouped into one reportable segment called Technology.
Approximate
information concerning the Company’s operations by reportable segment for the three and nine months ended September 30,
2019 and 2018 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments,
if operated independently, would report the results contained herein.
Three Months Ended September 30, 2019
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
2,119,000
|
|
|
|
916,000
|
|
|
|
498,000
|
|
|
|
-
|
|
|
$
|
3,533,000
|
|
Depreciation and amortization
|
|
|
228,000
|
|
|
|
122,000
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
420,000
|
|
Interest expense
|
|
|
(24,000
|
)
|
|
|
(9,000
|
)
|
|
|
(3,000
|
)
|
|
|
(22,000
|
)
|
|
|
(58,000
|
)
|
Stock based compensation
|
|
|
4,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
249,000
|
|
|
|
273,000
|
|
Net loss
|
|
|
(322,000
|
)
|
|
|
(29,000
|
)
|
|
|
(64,000
|
)
|
|
|
(836,000
|
)
|
|
|
(1,251,000
|
)
|
Three Months Ended September 30, 2018
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
2,736,000
|
|
|
$
|
1,048,000
|
|
|
$
|
310,000
|
|
|
$
|
-
|
|
|
$
|
4,094,000
|
|
Depreciation and amortization
|
|
|
227,000
|
|
|
|
60,000
|
|
|
|
22,000
|
|
|
|
1,000
|
|
|
|
310,000
|
|
Interest expense
|
|
|
(20,000
|
)
|
|
|
(6,000
|
)
|
|
|
-
|
|
|
|
(4,000
|
)
|
|
|
(30,000
|
)
|
Stock based compensation
|
|
|
1,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
4,000
|
|
|
|
20,000
|
|
Net Income (loss)
|
|
|
96,000
|
|
|
|
72,000
|
|
|
|
(427,000
|
)
|
|
|
(153,000
|
)
|
|
|
(412,000
|
)
|
Nine Months Ended September 30, 2019
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
8,434,000
|
|
|
|
2,591,000
|
|
|
|
1,424,000
|
|
|
|
-
|
|
|
$
|
12,449,000
|
|
Depreciation and amortization
|
|
|
675,000
|
|
|
|
208,000
|
|
|
|
168,000
|
|
|
|
-
|
|
|
|
1,051,000
|
|
Interest expense
|
|
|
(76,000
|
)
|
|
|
(24,000
|
)
|
|
|
(6,000
|
)
|
|
|
(22,000
|
)
|
|
|
(128,000
|
)
|
Stock based compensation
|
|
|
13,000
|
|
|
|
-
|
|
|
|
62,000
|
|
|
|
256,000
|
|
|
|
331,000
|
|
Net Loss
|
|
|
(254,000
|
)
|
|
|
(346,000
|
)
|
|
|
(642,000
|
)
|
|
|
(1,490,000
|
)
|
|
|
(2,732,000
|
)
|
Identifiable assets
|
|
|
9,156,000
|
|
|
|
3,884,000
|
|
|
|
899,000
|
|
|
|
4,611,000
|
|
|
|
18,550,000
|
|
Nine Months Ended September 30, 2018
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
8,483,000
|
|
|
$
|
2,949,000
|
|
|
$
|
1,127,000
|
|
|
$
|
-
|
|
|
$
|
12,559,000
|
|
Depreciation and amortization
|
|
|
561,000
|
|
|
|
119,000
|
|
|
|
322,000
|
|
|
|
1,000
|
|
|
|
1,003,000
|
|
Interest Expense
|
|
|
(66,000
|
)
|
|
|
(17,000
|
)
|
|
|
(12,000
|
)
|
|
|
(17,000
|
)
|
|
|
(112,000
|
)
|
Stock based compensation
|
|
|
2,000
|
|
|
|
-
|
|
|
|
82,000
|
|
|
|
23,000
|
|
|
|
107,000
|
|
Net Income (loss)
|
|
|
378,000
|
|
|
|
63,000
|
|
|
|
2,092,000
|
|
|
|
(674,000
|
)
|
|
|
1,859,000
|
|
Identifiable assets
|
|
|
9,381,000
|
|
|
|
3,141,000
|
|
|
|
830,000
|
|
|
|
1,483,000
|
|
|
|
14,835,000
|
|
The
following tables disaggregate our business segment revenues by major source.
Printed
Products Revenue Information:
|
|
Total
|
|
Three months ended September 30, 2019
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
1,883,000
|
|
Commercial and Security Printing
|
|
|
251,000
|
|
Technology Integrated Plastic Cards and Badges
|
|
|
306,000
|
|
Plastic Cards, Badges and Accessories
|
|
|
595,000
|
|
Total Printed Products
|
|
$
|
3,035,000
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
2,482,000
|
|
Commercial and Security Printing
|
|
|
253,000
|
|
Technology Integrated Plastic Cards and Badges
|
|
|
409,000
|
|
Plastic Cards, Badges and Accessories
|
|
|
640,000
|
|
Total Printed Products
|
|
$
|
3,784,000
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
7,619,000
|
|
Commercial and Security Printing
|
|
|
828,000
|
|
Technology Integrated Plastic Cards and Badges
|
|
|
968,000
|
|
Plastic Cards, Badges and Accessories
|
|
|
1,610,000
|
|
Total Printed Products
|
|
$
|
11,025,000
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
Packaging Printing and Fabrication
|
|
$
|
7,592,000
|
|
Commercial and Security Printing
|
|
|
891,000
|
|
Technology Integrated Plastic Cards and Badges
|
|
|
915,000
|
|
Plastic Cards, Badges and Accessories
|
|
|
2,034,000
|
|
Total Printed Products
|
|
$
|
11,432,000
|
|
Technology
Sales, Services and Licensing Revenue Information:
|
|
Total
|
|
Three months ended September 30, 2019
|
|
|
|
Information Technology Sales and Services
|
|
$
|
46,000
|
|
Digital Authentication Products and Services
|
|
|
307,000
|
|
Royalties from Licensees
|
|
|
145,000
|
|
Total Technology Sales, Services and Licensing
|
|
$
|
498,000
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
|
Information Technology Sales and Services
|
|
$
|
61,000
|
|
Digital Authentication Products and Services
|
|
|
143,000
|
|
Royalties from Licensees
|
|
|
107,000
|
|
Total Technology Sales, Services and Licensing
|
|
$
|
311,000
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
|
|
|
Information Technology Sales and Services
|
|
$
|
151,000
|
|
Digital Authentication Products and Services
|
|
|
857,000
|
|
Royalties from Licensees
|
|
|
416,000
|
|
Total Technology Sales, Services and Licensing
|
|
$
|
1,424,000
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
Information Technology Sales and Services
|
|
$
|
269,000
|
|
Digital Authentication Products and Services
|
|
|
494,000
|
|
Royalties from Licensees
|
|
|
364,000
|
|
Total Technology Sales, Services and Licensing
|
|
$
|
1,127,000
|
|
14.
SUBSEQUENT EVENTS
In
October 2019, the Company entered into two separate convertible preferred promissory notes (“Note” or “Notes”)
with unaffiliated companies, where the Company loaned a total principal sum of $700,000. The first Note has interest charged at
the rate of six percent (6%) and is payable upon demand. The second Note is to be repaid on or before the twenty-four (24) month
anniversary of the closing date of the Note, together with interest therein at the rate of six percent (6%) per annum. The Company
has the right to convert both Notes to equity, in its sole discretion, upon written notice.
On
October 29, 2019 and subsequently October 30, 2019, the Audit Committee and the Board of Directors of the Company approved the
issuance of common stock, not to exceed 6,000,000 shares, via private placement with a related party. 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 6,000,000 shares of common stock, for an above market purchase
price equal to $0.3037 per share for gross proceeds to the Company of $1,822,200 (before deductions for placement agent fees and
other expenses). This transaction was executed on November 1, 2019.