NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS
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,
researches, develops, markets and sells worldwide the Company’s digital products, including and primarily our AuthentiGuard®
product, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with
proprietary digital data security-based solutions. The 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, holding 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.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation - The consolidated financial statements include the accounts of Document Security System and its 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, 2018 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.
At December 31, 2019, the Company established a reserve for doubtful accounts of approximately $41,000 ($50,000 – 2018).
The Company does not accrue interest on past due accounts receivable.
Inventory - Inventories consist primarily of paper, plastic materials and cards, pre-printed security paper, paperboard and fully prepared packaging 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 at December 31, 2019 or 2018. Write-downs and write-offs are charged to cost of goods sold.
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 2019 was approximately $943,000 ($795,000 - 2018).
Investment
- – In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment
Limited at cost, less impairment as the fair market value of the investment is not readily determinable. The Company evaluates
investment for indications of impairment at least annually.
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. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 assessing the totality of events or circumstances, an entity determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step
impairment test is unnecessary. If the two-step impairment test is necessary, a fair-value-based test is applied at the
reporting unit level, which is generally one level below the operating segment level. The test compares the fair value of an
entity’s reporting units to the carrying value of those reporting units. This 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, 2019, and no impairment was deemed necessary. At December 31, 2019 and
2018 the Company’s goodwill consisted of approximately $685,000 and $1,768,600 for
Plastic Printing Professionals, and Premier Packaging Corp., respectively.
Other
Intangible Assets and Patent Application Costs - Other intangible assets consist of costs associated with the application
for patents, acquisition of patents and contractual rights to patents and trade secrets associated with the Company’s technologies.
The Company’s patents and trade secrets are generally for document anti-counterfeiting and anti-scanning technologies and
processes that form the basis of the Company’s document security business. Patent application costs are capitalized and
amortized over the estimated useful life of the patent, which generally approximates its legal life. In addition, intangible assets
include customer lists and non-compete agreements obtained because of acquisitions. Intangible asset amortization expense is classified
as an operating expense. The Company believes that the decision to incur patent costs is discretionary as the associated products
or services can be sold prior to or during the application process. The Company accounts for other intangible amortization as
an operating expense, unless the underlying asset is directly associated with the production or delivery of a product. Subsequent
to acquisition of patents and trade secrets, legal and associated costs incurred in prosecuting alleged infringements of the patents
will be recognized as expense when incurred. Costs incurred to renew or extend the term of recognized intangible assets, including
patent annuities and fees, and patent defense costs are expensed as incurred. To date, the amount of related amortization expense
for other intangible assets directly attributable to revenue recognized is not material.
Impairment
of 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.
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:
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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
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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.
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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. 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. 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 swap has 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 swap
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 an approximate loss of $22,000 recorded in other comprehensive
income in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
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.
Revenue
Recognition - 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.
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 December 31, 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.
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 December 31, 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.
Costs
of revenue - Costs of revenue includes all direct cost of the Company’s packaging, commercial and security
printing and plastic ID card sales, primarily, paper, plastic, inks, dies, and other consumables, and direct labor, transportation
and manufacturing facility costs. In addition, this category includes all direct costs associated 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. Costs of revenue recorded in the DSS Technology Management group
include contingent legal fees, inventor royalties, legal, consulting and other professional fees directly related to the Company’s
patent monetization, litigation and licensing activities. 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.
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.
Advertising
Costs – Generally consist of online, keyword advertising with Google with additional amounts spent on certain print
media in targeted industry publications. Advertising costs were approximately $81,000 in 2018 ($67,000 – 2018).
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 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. In comparison, the Company spent approximately $146,000 and on research and
development during 2018 primarily toward the development of 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.
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.
As
of December 31, 2019, and 2018, there were 1,798,221 and 2,212,773, respectively, of common stock share equivalents potentially
issuable under options, warrants, and restricted stock agreements that could potentially dilute basic earnings per share in the
future. For the twelve-months ended December 31, 2019, equivalents were excluded from the calculation of diluted earnings per
share since their inclusion would have been anti-dilutive. For the twelve-months ended December 31, 2018, based on the average
market price of the Company’s common stock during that period of $1.27, 206,429 common stock equivalents were added to the
basic shares outstanding to calculate dilutive earnings per share.
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 years ended December 31, 2019 and 2018.
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
2019, two customers accounted for 45% of our consolidated revenue. As of December 31, 2019, these two customers accounted for
49% of our consolidated trade accounts receivable balance. As of December 31, 2018, these two customers accounted for 44% of our
consolidated revenue and 38% of our consolidated trade accounts receivable balance.
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 $1.1 million in cash and cash equivalents, and a positive working capital position of approximately
$3.2 million as of December 31, 2019, the Company has incurred negative cash flows from operating and investing activities
over the past two years. To continue as a going concern, on June 5, 2019, the Company entered into an 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”) 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 February
25, 2020, Company entered into an 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”) of 25,555,556
shares (inclusive of 3,333,333 over-allotment that was exercised immediately) of the Company’s common stock. The net offering
proceeds (inclusive of the over-allotment exercise) to the Company approximated $4.0 million.
The
expected use of cash for operations in 2020 will be primarily for funding operating losses, working capital, legal expenses associated
with 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 $1.1 million in aggregate cash and equivalents as of December 31, 2019 as well as the $4.0 million raised on
February 25, 2020 will allow us to fund our four operating segments current and planned operations through March 2021.
Based on this, we have concluded that substantial doubt of our ability to continue as a going concern has been alleviated.
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). 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 $1,443,800.
Recent
Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on
financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this
new accounting standard will have on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test
for Goodwill Impairment”, which eliminates the two-step process that required identification of potential impairment and
a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference
between the carrying amount and the fair value of the reporting unit. The standards update is effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019. The Company is currently assessing the impact that adopting this new
accounting standard will have on its Consolidated Financial Statements and plans to adopt ASU 2017-04 in the first quarter of
2020.
NOTE
3 – INVENTORY
Inventory
consisted of the following at December 31:
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2019
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2018
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Finished Goods
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$
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1,097,616
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$
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1,144,695
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Work in Process
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246,159
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339,091
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Raw Materials
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363,915
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79,807
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$
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1,707,690
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$
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1,563,593
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NOTE
4 – NOTES RECEIVABLE
On
October 10, 2019, the Company entered into a convertible promissory note (“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 Note accrues interest at 6% and matures on October 9, 2021. As of December 31, 2019, this Note had outstanding
principle and interest of $506,756.
On
October 9, 2019 and November 11, 2019 the Company entered into two, separate on demand, convertible notes (“Note”
or “Notes”) with RBC Life Sciences, Inc. (RBC), a Nevada corporation. The first Note, dated October 9th,
lent the principal sum of $200,000 and accrues interest at 6% with a maturity date of November 11, 2019. This Note also contains
an “Optional Conversion” clause that allows the Company at any time, before or after the occurrence of an Event of
Default, at its option, to convert the outstanding principal amount, plus accrued interest into a number of newly issued shares
of its common stock equal to 75% of the total shares common stock that will be outstanding upon such conversion at a fully-diluted
basis. At December 31, 2019, this Noted had outstanding principle and interest of $203,988. The second Note, dated November 11th,
allowed for the borrow by RBC up to an aggregate principal sum of $800,000 and accrues interest at 10% with a maturity date of
November 11, 2024. Interest on any outstanding principal is payable monthly commencing on December 25, 2019. Any amount of principal
repaid during this time is allowed to be re-borrowed at any time prior to the earlier of the termination of this Note or the maturity
date. This Note also contains an “Optional Conversion” clause that allows the Company at any time, before or after
the occurrence of an Event of Default, at its option, to convert the outstanding principal amount, plus accrued interest into
a number of newly issued shares of its common stock equal to 100% of the outstanding shares of common stock of RBC direct and
indirect subsidiaries. The outstanding principle and interest at December 31, 2019 was $82,451. See Note 16 for information regarding
foreclosure on these Notes subsequent to December 31, 2019.
NOTE
5 - INVESTMENT
As
of December 31, 2018, the Company owned 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 December 31, 2019 and no further impairment is deemed necessary as the
stock price has rebounded in excess of 15%. The carrying value of the initial 21,196,552 ordinary shares investment as of December
31, 2019 was $324,930.
On
December 19, 2019, the Company exercised the warrant, in part, pursuant to which the Company acquired 61,977,577 ordinary shares
of SED. The total consideration paid by the Company for these ordinary shares was SGD$2,479,103.08, or approximately $1,833,000
USD, the investment value at December 31, 2019. After giving effect to the warrant exercise, the Company now owns 83,174,129 ordinary
shares of SED, representing approximately 7.1% of the outstanding shares of SED, and the remaining warrant to purchase 44,005,182
ordinary shares of SED. The Chairman of the Company, Mr. Heng Fai Ambrose Chan, is the Executive Director and Chief Executive
Officer of SED.
NOTE
6 - PROPERTY PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following at December 31:
|
|
Estimated
Useful Life
|
|
2019
|
|
|
2018
|
|
Machinery and equipment
|
|
5-10 years
|
|
|
8,567,911
|
|
|
|
7,723,763
|
|
Building and improvements
|
|
39 years
|
|
|
1,961,544
|
|
|
|
1,923,027
|
|
Land
|
|
|
|
|
185,000
|
|
|
|
185,000
|
|
Leasehold improvements
|
|
3-10 years
|
|
|
776,674
|
|
|
|
760,286
|
|
Furniture and fixtures
|
|
7 years
|
|
|
109,862
|
|
|
|
94,364
|
|
Software and
websites
|
|
3 years
|
|
|
298,797
|
|
|
|
187,511
|
|
Total Cost
|
|
|
|
|
11,899,788
|
|
|
|
10,873,951
|
|
Less accumulated
depreciation
|
|
|
|
|
6,839,090
|
|
|
|
5,859,457
|
|
Property,
plant and equipment, net
|
|
|
|
|
5,060,698
|
|
|
|
5,014,494
|
|
NOTE
7 - INTANGIBLE ASSETS
During
2019 and 2018, the Company spent approximately $10,000 and $20,000, respectively, on capitalized patent application costs.
On
June 26, 2018, the Company entered into an agreement with Fortress Credit Co LLC (“Fortress”), which among other things
transferred to Fortress all of the remaining economic rights to certain of the Company’s semi-conductor related patents
(See Note 8) . As a result, the Company wrote-off these patents which had an aggregated gross cost of $2,655,000 and a net
unamortized carrying amount of $295,470 on the agreement date.
On
July 31, 2018, the Company entered into a Non-Compete Letter Agreement (the “Agreement”) with its former President
and Chief Executive Officer of its wholly owned subsidiary, Premier Packaging Corporation. The Agreement called for payments of
$16,000 per month, for a period of 19 months, as consideration for the two-year non-competition and non-solicitation restrictive
covenants. The Company recorded the aggregate cost of the Agreement of $304,000 as an intangible asset to be amortized over the
24-month period commencing August 1, 2018.
On
October 24, 2018, the Company’s subsidiary, DSS Asia Limited acquired Guangzhou Hotapps Technology Ltd., (“Guangzhou
Hotapps”) a Chinese company, in exchange for a 2-year, $100,000 unsecured promissory note. In connection with this acquisition,
the Company acquired the license to do business in China to which the Company allocated a value of $85,734 as well as a related
deferred tax liability of $33,333 due to outside basis differences and recorded as an intangible asset that it will amortize over
a five-year period.
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.
Intangible
assets are comprised of the following:
|
|
|
|
2019
|
|
|
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
|
|
2-10 years
|
|
|
1,788,699
|
|
|
|
1,202,832
|
|
|
|
585,867
|
|
|
|
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)
|
|
|
1,178,176
|
|
|
|
829,278
|
|
|
|
348,898
|
|
|
|
1,168,155
|
|
|
|
746,925
|
|
|
|
421,230
|
|
|
|
|
|
|
3,466,875
|
|
|
|
2,532,110
|
|
|
|
934,765
|
|
|
|
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 December 31, 2019, the weighted average remaining useful life of these assets in service was approximately 6.9 years.
|
Amortization
expense for the year ended December 31, 2019 amounted to approximately $461,000 ($487,000 –2018).
Expected
amortization for each of the five succeeding fiscal years is
as follows:
Year
|
|
Amount
|
|
2020
|
|
|
383,276
|
|
2021
|
|
|
273,626
|
|
2022
|
|
|
127,408
|
|
2023
|
|
|
39,378
|
|
2024
|
|
|
19,112
|
|
NOTE
8 – 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% (4.5%
as of December 31, 2019). This revolving line of credit was renewed and has a maturity date of May 31, 2020, and is renewed annually.
As of December 31, 2019, and December 31, 2018, the revolving line had a balance of $500,000 and $0 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, 2019, the line had
not yet converted into a credit facility and had a balance of $898,762 ($339,000 at December 31, 2018). The Company pays a monthly
amount of $12,756 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 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 bore interest at 2% above the LIBOR Advantage
Rate (as defined in the agreement) until it was converted. 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 December 31, 2019, the combined balance of the term notes was $576,946 ($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 December 31, 2019, the loan had a balance of $39,294 ($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 December 31, 2019, the new, consolidated Promissory Note had a balance of $1,141,487. At December
31, 2018, the two refinanced notes had outstanding balances of $869,865 and $315,000.
The
Citizens credit facilities to each of the Company’s subsidiaries, Premier Packaging and Plastic Printing Professionals,
contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested
annually at December 31. For the year ended December 31, 2019, Premier Packaging was in compliance with the annual covenants,
however Plastic Printing Professionals was not. Plastic Printing Professionals has sought and received a one-time waiver from
compliance from Citizens for this violation.
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. 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 Holder is a related party, owned by one of the Company’s directors. 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 remained payable until the Principal Amount
was 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.
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.
A
summary of scheduled principal payments of long-term debt, not including revolving lines of credit and other debt which can be
settled with non-monetary assets, subsequent to December 31, 2019 are as follows:
Year
|
|
Amount
|
|
|
|
2020
|
|
$
|
440,699
|
|
2021
|
|
|
307,324
|
|
2022
|
|
|
322,160
|
|
2023
|
|
|
322,926
|
|
2024
|
|
|
185,218
|
|
Thereafter
|
|
$
|
1,186,387
|
|
Other
Debt - On February 13, 2014, the Company’s subsidiary, DSS Technology Management, Inc. (“DSSTM”), entered
into an Investment Agreement (the “Agreement”) dated February 13, 2014 (the “Effective Date”) with Fortress
Credit Co LLC, as collateral agent (the “Collateral Agent” or “Fortress”), and certain investors (the
“Investors”), pursuant to which DSSTM contracted to receive a series of advances up to $4,500,000 (collectively, the
“Advances”). On June 26, 2018, the parties agreed that the amounts due under the Agreement having an aggregate remaining
balance of $3,714,129 as of the Maturity Date, are discharged, without the assignment to the Investors of any of the collateral
that secured the repayment under the Agreement. In addition, the Company confirmed its obligation to pay the Investors $345,000
that remained from an aggregate of $600,000 that had been deposited and restricted to cover expenses related to the IP monetization
activities. Furthermore, the parties agreed that in the event there are any future recoveries by DSSTM with respect to monetization
activities relating to the collateralized patents or applicable proceed rights set forth in the Agreement, the contractual payment
provisions of the original Agreement will apply, and the Investors will be entitled to receive payment of such proceeds. As a
result of this agreement, the Company paid $345,000 from restricted cash and recorded a gain of extinguishment of liabilities
of $3,372,129 to reflect the discharge of the notes, wrote off contingent equity interests of $459,000 eliminated by the agreement,
and wrote-off the underlying patents which had an aggregated gross cost of $2,655,000 and an net unamortized carrying amount of
$295,470 on the agreement date, all of which resulted in the a net gain on the extinguishment of liabilities of $3,532,659 recorded
2018. As of December 31, 2018, the balance of the term loan was $0.
NOTE
9 – 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 December 31, 2019, an aggregate of $780,988 is recorded as other liabilities by the Company, of which
$390,494 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. 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 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.
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 December 31, 2019 and 2018, the Company had received an aggregate of $750,000 from the investors pursuant
to the agreement of which $0 was in current liabilities in the consolidated balance sheets ($476,000 as of December 31, 2018).
The Company reduced the liability as it paid 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.
NOTE
10 - STOCKHOLDERS’ EQUITY
Sales
of Equity – On July 3, 2018, the Company sold 214,286 shares of its common stock, par value $0.02 per share, to
a related party accredited investor, Heng Fai Holdings Limited. The purchase price was $1.40 per share, for total proceeds of
$300,000.
On
December 17, 2018, the Company sold 612,245 shares of its common stock, par value $0.02 per share, to a related party accredited
investor, Heng Fai Holdings Limited. The purchase price was $0.98 per share, for total proceeds of $600,000.
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 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. (Note 8)
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. (Note7)
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.
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 $0.30 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 $1.6 million after deducting
underwriting discounts, commissions and other offering expenses.
Stock
Warrants –The following is a summary with respect to warrants outstanding and exercisable at December 31, 2019 and
2018 and activity during the years then ended:
|
|
2019
|
|
|
2018
|
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding at January 1,
|
|
|
1,430,116
|
|
|
$
|
4.00
|
|
|
|
2,645,090
|
|
|
$
|
10.98
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lapsed/terminated
|
|
|
(209,812
|
)
|
|
|
20.78
|
|
|
|
(1,214,974
|
)
|
|
|
19.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
|
|
|
1,220,304
|
|
|
$
|
1.12
|
|
|
|
1,430,116
|
|
|
$
|
4.00
|
|
Exercisable at December 31,
|
|
|
1,220,304
|
|
|
$
|
1.12
|
|
|
|
1,430,116
|
|
|
$
|
4.00
|
|
Weighted average of months
remaining
|
|
|
|
|
|
|
20.7
|
|
|
|
|
|
|
|
27.9
|
|
The
Company did not issue any warrants in 2019 or 2018.
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 1,500,000 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, 2019, 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 7,236,125 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 at December 31, 2019 and 2018 and activity during the years then ended:
|
|
2019
|
|
|
2018
|
|
|
|
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,
|
|
|
782,655
|
|
|
$
|
6.66
|
|
|
|
|
|
|
|
482,667
|
|
|
$
|
10.72
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
405,000
|
|
|
|
1.38
|
|
|
|
|
|
Lapsed/terminated
|
|
|
(204,738
|
)
|
|
|
7.7
|
|
|
|
|
|
|
|
(105,012
|
)
|
|
|
4.96
|
|
|
|
|
|
Outstanding at December 31,
|
|
|
577,917
|
|
|
$
|
5.01
|
|
|
|
3.2
|
|
|
|
782,655
|
|
|
$
|
6.66
|
|
|
|
3.2
|
|
Exercisable at December 31,
|
|
|
408,750
|
|
|
$
|
6.50
|
|
|
|
3.5
|
|
|
|
490,988
|
|
|
$
|
8.30
|
|
|
|
2.8
|
|
Expected to vest
at December 31,
|
|
|
169,167
|
|
|
$
|
1.43
|
|
|
|
3.4
|
|
|
|
291,667
|
|
|
$
|
1.41
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 2018, the Company issued an aggregate of 405,000 options to purchase the Company’s common stock
at between $1.30 and $1.55 per share with a term of five years to employees at its technology, corporate and printed products
divisions, as well as independent board members. For 265,000 options granted during 2018 the options vest pro-ratably as follows:
1/3 on the grant date, 1/3 on the first anniversary of the grant date and 1/3 on the second anniversary of the grant date. For
the remaining 140,000 options granted during 2018 the options vest pro-ratably as follows: 1/3 on the first anniversary of the
grant date, 1/3 on the second anniversary of the grant date and 1/3 on the third anniversary of the grant date.
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
following table shows our weighted average assumptions used to compute the share-based compensation expense for stock options
and warrants granted during the year ended December 31, 2018. There were no options or warrants granted for compensation during
the year ended December 31, 2019.
Volatility
|
|
|
98.20
|
%
|
Expected option term
|
|
|
3.6
years
|
|
Risk-free interest rate
|
|
|
2.7
|
%
|
Expected forfeiture rate
|
|
|
0.0
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
The aggregate grant date
fair value of options that vested during 2019 and 2018 was approximately $104,000 and $122,000, respectively. There were
no options exercised during 2019 or 2018.
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 224,310 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. The Company did not grant any
restricted stock in 2018.
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, 2019, the Company had stock compensation expense of approximately $422,000 or less than $0.01
basic and diluted earnings per share ($132,000, or less than $0.01 basic and diluted earnings per share for the corresponding
twelve months ended December 31, 2018). Of the $422,000, $114,500 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. 224,310 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.
NOTE
11 - INCOME TAXES
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:
|
|
2019
|
|
|
2018
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(68
|
)
|
|
|
6,920
|
|
Total currently payable
|
|
|
(68
|
)
|
|
|
6,920
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(367,473
|
)
|
|
|
458,446
|
|
State
|
|
|
(124,975
|
)
|
|
|
67,451
|
|
Foreign
|
|
|
(116,863
|
)
|
|
|
(92,690.00
|
)
|
Total deferred
|
|
|
(609,311
|
)
|
|
|
433,207
|
|
Less: increase
in allowance
|
|
|
476,972
|
|
|
|
(423,534
|
)
|
Net deferred
|
|
|
(125,419
|
)
|
|
|
9,673
|
|
Total
income tax provision
|
|
$
|
(125,487
|
)
|
|
$
|
16,593
|
|
Individual
components of deferred taxes are as follows:
Deferred tax
assets:
|
|
2019
|
|
|
2018
|
|
Net
operating loss carry forwards
|
|
$
|
11,188,858
|
|
|
$
|
10,135,005
|
|
Equity issued for
services
|
|
|
169,445
|
|
|
|
152,240
|
|
Goodwill and other
intangibles
|
|
|
675,885
|
|
|
|
788,288
|
|
Investment in pass-through
entity
|
|
|
11,621
|
|
|
|
11,499
|
|
Deferred revenue
|
|
|
181,519
|
|
|
|
472,466
|
|
Operating Lease
Liability
|
|
|
284,193
|
|
|
|
-
|
|
Other
|
|
|
376,462
|
|
|
|
470,780
|
|
Gross deferred tax
assets
|
|
|
12,887,983
|
|
|
|
12,030,278
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill and other
intangibles
|
|
|
29,046
|
|
|
|
33,333
|
|
Depreciation and
amortization
|
|
|
-
|
|
|
|
31,512
|
|
Right
-of-use asset
|
|
|
284,193
|
|
|
|
-
|
|
Gross deferred tax
liabilities
|
|
|
313,239
|
|
|
|
64,845
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(12,618,311
|
)
|
|
|
(12,134,419
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(43,567
|
)
|
|
$
|
(168,986
|
)
|
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, 2019, the Company had $46,601 of minimum tax credit included
in prepaids and other current assets in the accompanying consolidated balance sheet.
The
Company has approximately $50.6 million in federal net operating loss carryforwards (“NOLs”) available to reduce future
taxable income, of which $3.8 million will never expire with the remaining expiring at various dates from
2022 through 2039. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in the future
and utilize the NOLs before they expire and any other deferred tax assets, the Company has recorded a valuation allowance accordingly.
The Company’s NOLs are subject to annual limitations as a result of a change in its equity ownership as defined under the
Internal Revenue Code Section 382. These limitations, as applicable, could further limit the use of the NOLs. The valuation allowance
for deferred tax assets increased by approximately $484,000 in the year ended December 31, 2019. The increase in the valuation
allowance was primarily due to taxable loss in the current year.
The
Company has adopted the provisions of ASU 2016-09 as of the beginning of 2018 which requires recognition through opening retained
earnings of any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g.,
restricted shares and share appreciation rights), as well as recognition of all income tax effects from share-based payments arising
on or after January 1, 2017 (our adoption date) in income tax expense. In light of the Company’s valuation allowance on
its deferred tax assets there was no adjustment required to its retained earnings nor was there any windfall tax benefit to recognize
in the Company’s income tax provision.
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:
|
|
2019
|
|
|
2018
|
|
Statutory United
States federal rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State income taxes net of federal benefit
|
|
|
3.28
|
%
|
|
|
4.00
|
%
|
Permanent differences
|
|
|
(1.61
|
)%
|
|
|
2.20
|
%
|
Other
|
|
|
(1.24
|
)%
|
|
|
0.70
|
%
|
Foreign
taxes
|
|
|
(1.09
|
)%
|
|
|
1.70
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation
reserves
|
|
|
(16.34
|
)%
|
|
|
(28.50)
|
%
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
4.00
|
%
|
|
|
1.10
|
%
|
The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended
December 31, 2019 and 2018, 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 2016-2019 generally remain
open to examination by major taxing jurisdictions to which the Company is subject.
NOTE
12 - 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 2019 and 2018 were approximately $123,000 and $136,000, respectively.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
The
Company has operating leases predominantly for operating facilities. As of December 31, 2019, the remaining lease terms on our
operating leases range from less than one year to approximately four 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 December 31, 2019. Rent expense for the year ended December 31, 2019
was approximately $474,000.
Future
minimum lease payments as of December 31,2019 are as follows:
2020
|
|
$
|
396,678
|
|
2021
|
|
|
304,669
|
|
2022
|
|
|
289,997
|
|
2023
|
|
|
269,913
|
|
2024
|
|
|
21,860
|
|
|
|
|
|
|
Total lease payments
|
|
$
|
1,283,117
|
|
Less imputed
interest
|
|
|
(60,375
|
)
|
Present value
of remaining lease payments
|
|
$
|
1,222,742
|
|
|
|
|
|
|
Current
|
|
$
|
397,097
|
|
Non-current
|
|
$
|
825,645
|
|
|
|
|
|
|
Weighted average remaining lease
term (years)
|
|
|
4
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
5.4
|
%
|
Employment
Agreements - The Company has employment or severance agreements with members of its management team with terms no longer
than twelve months. The employment or severance agreements provide for severance payments in the event of termination for certain
causes. As of December 31, 2019, the minimum severance payments under these employment agreements are, in aggregate, approximately
$255,000.000.
Legal
Proceedings -
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.” DSS intends to appeal the ruling.
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. 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 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. 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.
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
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, Dree filed an IPR petition challenging the validity of the patent claims. The Court has conducted an initial scheduling
conference and has set a procedural schedule for the case.
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.
In
April 2019 DSS commenced an action in New York State Supreme Court, Monroe County against Jeffrey Ronaldi, our former Chief Executive
Officer. This New York action seeks a declaratory judgment that, contrary to informal claims made by him, Mr. Ronaldi’s
employment agreement with us expired by its terms and that he is not entitled to any cash bonuses or other unpaid amounts. The
lawsuit also seeks an injunction against Mr. Ronaldi from interfering with any of DSS’ IP litigation. The defendant has
been granted an extension to respond pending settlement negotiations. Mr. Ronaldi subsequently commenced an action against us
in the Superior Court of California, County of San Diego, in November 2019, in which he alleges that we terminated his employment
in April 2019 in order to avoid paying him certain employment-related amounts. Mr. Ronaldi contends that he is owed a $100,000
performance bonus for 2017 under this employment agreement with us as well as $91,000 in documented and unreimbursed expenses,
and that DSS purported to terminate him for cause under the terms of his employment agreement in order to avoid paying such amounts.
Mr. Ronaldi also contends that he is entitled to receive additional amounts, either under the terms of the employment agreement,
or under theories of implied-in-fact contract or promissory estoppel, including, but not limited to, (i) additional performance
bonuses of up to 15% of net litigation proceeds received by us from pending patent infringement litigations, of net licensing
proceeds received by us other than from our internally developed IP, or of the net sales proceeds received by us in connection
with the sale of any of our patent assets, (ii) earned but unpaid base salary, (iii) an equity grant of shares of our common stock,
and (iv) payments for unused personal time and sick days. He seeks actual, compensatory, restitutionary and/or incidental damages
in an amount to be determined at trial; prejudgment interest in an amount to be determined at trial; attorneys’ fees and
costs; other costs of the suit; and such other and further relief as the court deems proper. We have made a motion to have the
case dismissed and consolidated with the Monroe Co., New York, litigation. A hearing has been set for April 24, 2020, for the
court to consider that request. 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 alleging acts of self-dealing and conflicts of interest while
he served as CEO of both DSS and DSS TM. That litigation is in the process of being served upon the defendant.
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. On December 13, 2019, the court granted the parties’ stipulation to extend the deadline for DSS Technology
Management and other defendants to respond to the complaint to February 4, 2020. A hearing on any motions filed in response to
the complaint is set for April 23, 2020.
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, 2019, the Company had not accrued any
contingent legal fees pursuant to these arrangements.
Contingent
Payments – The Company is party to certain agreements with funding partners who have rights to portions of intellectual
property monetization proceeds that the Company receives. As of December 31, 2019, there are no contingent payments due.
NOTE
14 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental
cash flow information for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
157,000
|
|
|
$
|
133,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Impact of adoption
of lease accounting standards
|
|
$
|
1,568,000
|
|
|
$
|
-
|
|
Gain
from change in fair value of interest rate swap derivatives
|
|
$
|
7,000
|
|
|
$
|
16,000
|
|
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
|
|
Purchase of intangible
assets with term note inclusive of tax
|
|
$
|
-
|
|
|
$
|
119,065
|
|
NOTE
15 - SEGMENT INFORMATION
The
Company’s businesses are organized, managed and internally reported as four 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. A third operating segment, Digital, is comprised of DSS Digital
Group, and DSS International, and is engaged
in research, development, marketing and selling worldwide the Company’s digital products, including and primarily our AuthentiGuard®
product, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with
proprietary digital data security-based solutions. The fourth operating segment, Technology Management, primary mission has been
to monetize its various patent portfolios through commercial litigation and licensing. Except for investment in its social networking
related patents, we have historically partnered with various third-party funding groups in connection with patent monetization
programs.
As
reported herein, DSS is in the process of establishing several new business lines, and we anticipate each of these new business
division to be future operating segments. For instance, Direct Marketing is a newly added operating segment in December 2019 and
focuses on direct marketing or network marketing
engaged in the selling of products or services directly to the public, e.g., by online or telephone selling, rather than
through retailers. But for the period ending December 31, 2019, these segments have either yet to be materially formed or to have
generated any material revenues.
Approximate
information concerning the Company’s operations by reportable segment for the years ended December 31, 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:
Year
Ended December 31, 2019
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Digital
|
|
|
Technology
Management
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
13,230,000
|
|
|
$
|
3,860,000
|
|
|
$
|
2,147,000
|
|
|
$
|
-
|
|
|
$
|
172,000
|
|
|
$
|
19,409,000
|
|
Depreciation
and amortization
|
|
|
904,000
|
|
|
|
253,000
|
|
|
|
33,000
|
|
|
|
82,000
|
|
|
|
132,000
|
|
|
|
1,404,000
|
|
Interest expense
|
|
|
96,000
|
|
|
|
32,000
|
|
|
|
7,000
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
157,000
|
|
Amortized
Debt Discount
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
Stock based
compensation
|
|
|
17,000
|
|
|
|
-
|
|
|
|
81,000
|
|
|
|
-
|
|
|
|
324,000
|
|
|
|
422,000
|
|
Income tax
benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(125,000
|
)
|
|
|
(125,000
|
)
|
Net Income
(loss)
|
|
|
311,000
|
|
|
|
(294,000
|
)
|
|
|
(579,000
|
)
|
|
|
(475,000
|
)
|
|
|
(1,852,000
|
)
|
|
|
(2,889,000
|
)
|
Capital Expenditures
|
|
|
819,000
|
|
|
|
42,000
|
|
|
|
24,000
|
|
|
|
-
|
|
|
|
104,000
|
|
|
|
989,0000
|
|
Identifiable
assets
|
|
|
10,425,000
|
|
|
|
3,934,000
|
|
|
|
924,000
|
|
|
|
58,000
|
|
|
|
4,804,000
|
|
|
|
20,145,000
|
|
Year
Ended December 31, 2018
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Digital
|
|
|
Technology
Management
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
12,957,000
|
|
|
$
|
3,983,000
|
|
|
$
|
1,543,000
|
|
|
$
|
32,000
|
|
|
$
|
-
|
|
|
$
|
18,515,000
|
|
Depreciation
and amortization
|
|
|
775,000
|
|
|
|
159,000
|
|
|
|
8,000
|
|
|
|
338,000
|
|
|
|
2,000
|
|
|
|
1,282,000
|
|
Interest Expense
|
|
|
(89,000
|
)
|
|
|
(24,000
|
)
|
|
|
|
|
|
|
(13,000
|
)
|
|
|
(19,000
|
)
|
|
|
(145,000
|
)
|
Amortized
Debt Discount
|
|
|
(2,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(22,000
|
)
|
|
|
(22,000
|
)
|
|
|
(46,000
|
)
|
Stock based
compensation
|
|
|
6,000
|
|
|
|
-
|
|
|
|
99,000
|
|
|
|
-
|
|
|
|
27,000
|
|
|
|
132,000
|
|
Income tax
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,000
|
|
|
|
17,000
|
|
Net Income
(loss)
|
|
|
785,000
|
|
|
|
28,000
|
|
|
|
(1,267,000
|
)
|
|
|
3,028,000
|
|
|
|
(1,109,000
|
)
|
|
|
1,465,000
|
|
Capital Expenditures
|
|
|
643,000
|
|
|
|
305,000
|
|
|
|
54,000
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,003,000
|
|
Identifiable
assets
|
|
|
9,643,000
|
|
|
|
3,492,000
|
|
|
|
955,000
|
|
|
|
130,000
|
|
|
|
1,060,000
|
|
|
|
15,280,000
|
|
International
revenue, which consists of sales to customers with operations in Canada, Western Europe, Latin America, Africa, the Middle East
and Asia comprised 2.0% of total revenue for 2019 (3.4% - 2018). 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, 2019
|
|
|
|
Packaging
Printing and Fabrication
|
|
$
|
12,307,000
|
|
Commercial and
Security Printing
|
|
|
1,159,000
|
|
Technology Integrated
Plastic Cards and Badges
|
|
|
1,262,000
|
|
Plastic Cards,
Badges and Accessories
|
|
|
2,361,000
|
|
Total
Printed Products
|
|
$
|
17,089,000
|
|
|
|
|
|
|
Twelve months
ended December 31, 2018
|
|
|
|
|
Packaging Printing
and Fabrication
|
|
$
|
11,741,000
|
|
Commercial and
Security Printing
|
|
|
1,241,000
|
|
Technology Integrated
Plastic Cards and Badges
|
|
|
1,354,000
|
|
Plastic Cards,
Badges and Accessories
|
|
|
2,604,000
|
|
Total
Printed Products
|
|
$
|
16,940,000
|
|
Technology
Sales, Services and Licensing Revenue Information:
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
Technology Sales, Services and Licensing
|
|
$
|
2,148,000
|
|
|
|
|
|
|
Twelve months
ended December 31, 2018
|
|
|
|
|
Information Technology
Sales and Services
|
|
$
|
345,000
|
|
Digital Authentication
Products and Services
|
|
|
772,000
|
|
Royalties from
Licensees
|
|
|
458,000
|
|
Total
Technology Sales, Services and Licensing
|
|
$
|
1,575,000
|
|
NOTE
16 – SUBSEQUENT EVENTS
On
March 12, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with DSS BioHealth Security, Inc.,
a Delaware corporation and wholly owned subsidiary of the Company (“DBHS”), Global BioMedical Pte Ltd, a Singapore
corporation (“GBM”), and Impact BioMedical Inc., a Nevada corporation and wholly owned subsidiary of GBM (“Impact”).
Pursuant to the Term Sheet, the Company will acquire Impact, a company engaged in the development and marketing of biohealth security
technologies, in a proposed share exchange transaction with a purchase price capped at $50 million, subject to completion of due
diligence and an independent valuation. In consideration of 100% of Impact, the Company will issue GBM (i) up to 14,500,000 shares
of its common stock, par value $0.02 (the “Common Stock”), at a price of $0.216 per share (valued at $3,132,00), and
(ii) perpetual convertible preferred stock (“Convertible Preferred Stock”) for the remaining balance of the purchase
price, as adjusted by the independent valuation and subject to a 19.9% blocker based on the total issued outstanding shares of
Common Stock held or to be held by GBM. Pursuant to the Term Sheet, in consideration for the Convertible Preferred Stock, the
Company will have certain rights, including appointing members of the Board of Directors of Impact, as set forth in the Term Sheet.
GBM is a 100% owned subsidiary of Singapore eDevelopment Limited whose Chief Executive Office and largest shareholder is Mr. Heng
Fai Ambrose Chan, the Chairman of the Board and largest shareholder of the Company. As such, the above transactions constitute
related party transactions which have been duly approved by the Company’s Board of Directors and Audit Committee.
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 sets out the terms of a proposed joint venture to establish
a medical real estate investment trust in the United States. Pursuant to the Term Sheet, the Company will subscribe for 5,250
ordinary shares of AAMI at a purchase price of $0.01 per share for total consideration of $52.50. Concurrently, AAMI will issue
2,500 shares to LVAM, and 1,250 shares to AMRE Tennessee, LLC, AMRE’s executive management’s holding company (collectively,
the “Subscription Shares”). As a result, the Company will hold 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. Further, pursuant to
and in connection with the Term Sheet, on March 3, 2020, the Company entered into a Promissory Note with AMRE, pursuant to which
AMRE will issue the Company a promissory note for the principal amount of $800,000.00 (the “Note”). The Note matures
on March 3, 2022 and accrues interest at the rate of 8.0% per annum, and shall be payable in accordance with the terms set forth
in the Note. 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 Warrant, and expire on March 3, 2024.
On
February 25, 2020, the Company, closed its previously announced underwritten public offering of 25,555,556 shares of its
common stock. The Offering included 22,222,223 shares of the Company’s common stock, and 3,333,333 additional shares
from the exercise of the underwriter’s purchase option to cover over-allotments at the public offering price of $0.18
per share. The net offering proceeds (inclusive of the over-allotment exercise) to the Company approximated $4.0 million. Mr.
Heng Fai Ambrose Chan, the Chairman of the Board, purchased 11,111,112 shares of Common Stock in the Offering, for an
aggregate purchase price of $2,000,000.
In
January 2020, the Company began foreclosure proceedings on both of its Note receivables with RBC identified in Note 4. These proceedings
were finalized in February 2020. The Company chose to forego the optional conversion of the outstanding principal and interest
into 75% ownership and 100% ownership, respectively, as was allowed in the terms of both agreements. In lieu of common stock,
the Company took ownership of certain assets of RBC. Management has concluded that the fair value of these assets equal or exceeds
the amounts outstanding under the obligations.
Subsequent
to December 31, 2019, the Company has invested approximately $460,000 for less than 10% ownership of an entity over which one
of the Company’s directors serves as CEO.
Impact of COVID-19 Outbreak
On
January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International
Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread
of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of
public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an
adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company
operates. While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if the
outbreak continues on its current trajectory the duration of the supply chain disruption could reduce the availability, or result
in delays, of materials or supplies to and from the Company, which in turn could materially interrupt the Company’s business
operations. Given the speed and frequency of the continuously evolving developments with respect to this pandemic, the Company
cannot reasonably estimate the magnitude of the impact to its consolidated results of operations. The Company’s manufacturing
facilities in both California and New York support businesses have been deemed essential by their respective state governments
and remain operational. We have taken every precaution possible to ensure the safety of our employees.
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.
Subsequent
to December 31, 2019, the Company has invested approximately $460,000 for less than 10% ownership of an entity over which one
of the Company’s directors serves as CEO.