10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to __________

 

Commission file number 001-32146

 

 

 

DOCUMENT SECURITY SYSTEMS, INC.

 

(Exact name of registrant as specified in its charter)

 

New York   16-1229730

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S.Employer

Identification No.)

 

6 Framark Drive

Victor, New York 14564

 

(Address of principal executive offices)

 

(585) 325-3610
 
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, par value $0.02 per share   DSS   NYSE American LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. YES [  ] NO [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES [  ] NO [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act

 

Large Accelerated Filer [  ] Accelerated Filer [  ]
Non-Accelerated Filer [x] Smaller Reporting Company [x]
  Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes [  ] No [X]

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold, as reported on the NYSE American LLC exchange on June 30, 2020 was $18,119,034.

 

The number of shares of the registrant’s common stock outstanding as of March 16, 2021, was 27,670,125.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

   
   

 

DOCUMENT SECURITY SYSTEMS, INC. & SUBSIDIARIES

Table of Contents

 

PART I
     
ITEM 1 BUSINESS 3
ITEM 1A RISK FACTORS 13
ITEM 1B UNRESOLVED STAFF COMMENTS 20
ITEM 2 PROPERTIES 20
ITEM 3 LEGAL PROCEEDINGS 20
ITEM 4 MINE SAFETY DISCLOSURES 20
     
PART II
     
ITEM 5 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 20
ITEM 6 SELECTED FINANCIAL DATA 21
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 68
ITEM 9A CONTROLS AND PROCEDURES 68
ITEM 9B OTHER INFORMATION 69
     
PART III
     
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 70
ITEM 11 EXECUTIVE COMPENSATION 77
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 80
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 84
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 87
     
PART IV
     
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 88
ITEM 16 FORM 10-K SUMMARY 89
  SIGNATURES 90

 

2

 

 

PART I

 

ITEM 1 - BUSINESS

 

Overview

 

Document Security Systems, Inc. (together with its consolidated subsidiaries (unless the context otherwise requires), referred to herein as “Document Security Systems,” “DSS,” “we,” “us,” “our” or the “Company”) currently operates nine distinct business lines which primarily operate and are located in North America and Asia. The nine divisions are:

 

  1. Direct Marketing/Online Sales Group,
  2. Premier Packaging,
  3. Digital Group,
  4. IP Technology,
  5. BioHealth Group,
  6. Securities and Fintech Group,
  7. Energy Group,
  8. Secure Living, and
  9. Blockchain Technology

 

Each of these business lines are in different stages of development, growth, and income generation. Because of these varying degrees of business cycle growth, including the size of the revenues and assets acquired, the Company currently financially reports only on four of these operating segments.

 

  1. Direct Marketing/Online Sales Group,
  2. Premier Packaging,
  3. Digital Group, and
  4. IP Technology

 

As the other divisions grow and start generating significant income, those operating segments will be added to our financial segmental reporting.

 

Our divisions, their business lines, subsidiaries and operating territories:

 

1. Direct Marketing/Online Sales Group: (“Direct” or “DM”) Led by the holding corporation, Decentralize Sharing Systems, Inc. (“Decentralized”, this group provides services to assist companies in the emerging growth gig business model of peer-to-peer decentralized sharing marketplaces. Direct specializes in marketing and distributing its products and services through its subsidiary and partner network, using the popular gig economic marketing strategy as a form of direct marketing. Direct marketing products include, among other things, nutritional and personal care products sold throughout North America, Asia Pacific and Eastern Europe. Over the past 12 months, Direct has made substantial investments in acquiring marketing software, product opportunities, and operational capabilities in this marketplace. Additionally, it has acquired and developed an independent contractor sales force. It has also made substantial investments into other direct marketing companies, including its investment and partnership with Sharing Services Global Corporation (OTCQB: SHRG) (“Sharing Services” or “SHRG”), which at the end of 2020, Decentralized owned approximately 32% of the outstanding shares of Sharing Services. Currently, Direct and SHRG operate offices in USA, Canada, Hong Kong, Singapore, S. Korea, Australia, New Zealand, Malaysia, and Singapore, with additional offices or presence being added monthly. Decentralized sharing systems’ mission is to become the leading direct sales platform, training, developing and empowering leaders on a global scale to achieve maximum human and economic potential.
   
2. Premier Packaging: (“Premier”) The Company’s packaging and security printing group is coordinated by the wholly owned subsidiary, Premier Packaging Corporation, a New York corporation. Premier operates in the paper board folding carton, smart packaging, and document security printing markets. It markets, manufactures, and sells mailers, photo sleeves, sophisticated custom folding cartons, and complex 3-dimensional direct mail solutions. These products are designed to provide functionality and marketability while also providing counterfeit protection.  Premier is currently located in Victor, NY and serves the US market.
   
3. Digital Group: (“Digital”) Digital researches, develops, markets, and sells the Company’s digital products worldwide. As an industry leader in brand authentication services, our solutions leverage functional anti-counterfeiting features and cutting-edge technologies to satisfy commercial and consumer product needs for branding, intelligent packaging, and marketing. Digital’s primary product is AuthentiGuard®, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions. Digital Group is headquartered in Rochester, NY, but it also has offices and staff in Hong Kong.
   
4. IP Technology Management: (“IP” or “DSS TM”) DSS TM manages, licenses, and acquires intellectual property assets for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships, and commercial litigation. DSS TM is currently headquartered in Houston, Texas.
   
5. BioHealth Group: (“BioHealth”) The BioHealth Group is our business line created to invest in, or acquire companies in the biohealth and biomedical fields, including businesses focused on the advancement of drug discovery and prevention, inhibition, and treatment of neurological, oncological, and immune related diseases. This division is also developing open-air defense initiatives, which curb transmission of air-borne infectious diseases, such as tuberculosis and influenza. The BioHealth Group is also targeting unmet, urgent medical needs. Assets of this group are organized under the holding company, DSS BioHealth Security, Inc. Its subsidiaries are currently headquartered in Rochester, NY. The group also has a research facility in Winter Haven, Florida.

 

3

 

 

6. Securities and Fintech Group: (“Securities”) Securities was established to develop and/or acquire assets and investments in the securities trading and/or funds management arena. Further, Securities, in partnership with recognized global leaders in alternative trading systems, intends to own and operate in the US a single or multiple vertical digital asset exchanges for securities, tokenized assets, utility tokens, stablecoins and cryptocurrency via a digital asset trading platform using blockchain technology. The scope of services within this section is planned to include asset issuance and allocation (securities and cryptocurrency), FPO, IPO, ITO, PPO, STO and UTO listings on a primary market(s), asset digitization/tokenization (securities, currency and cryptocurrency), and the listing and trading of digital assets (securities and cryptocurrency) on a secondary market(s). This group is led by its holding company, DSS Securities, Inc., (“DSS Securities”) and the group is currently headquartered in Houston, Texas.
   
7. Energy Group: (“Alset Energy”) This group has been established to help lead the Company’s clean energy future with a focus on environmental responsibility and sustainability measures. Alset Energy, Inc, the holding company for this group, recently organized, Alset Solar, Inc., a wholly owned subsidiary, to pursue utility-scale solar farms to serve US regional power grids and to provide underutilized properties with small microgrids for independent energy. But in addition to solar farms and large-scale solar battery banks, Alset Energy will also look at other alternative energy opportunities for investment and development. Our goal is to be a powerful force in the mitigation of the negative effects of climate change by reducing air pollution and expanding access to clean energy for all, while contributing to global economic well-being. Alset Energy is currently headquartered in Houston, Texas and seeking market opportunities in the US sunbelt areas, but specifically in Texas, Arizona, New Mexico and Florida.
   
8. Secure Living: (“Secure Living”), Secure Living has developed a plan for fully sustainable, secure, and healthy living communities with homes incorporating advanced technology, energy efficiency, and quality of life living environments both for new construction and renovations for single and multi-family residential housing. Secure Living is currently working with several land development partners to develop entire fully sustainable, healthy living single-family subdivisions. Secure Living is currently headquartered in Houston, Texas.
   
9. Blockchain Technology: (“Blockchain”) Blockchain specializes in the development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber securities across global markets. DSS Blockchain leverages DSS’s early-to-market anticounterfeiting history in AuthentiChain©, which secures assets across industries to benefit product developers, manufacturers, investors, and consumers. AuthentiChain©, can be applied to decentralize ledgers, help stabilize the token economy, and protect cryptocurrency from counterfeiting, and secure negotiable legal documents and security exchanges.

 

Following is a summary of several DSS reported transactions and investments since January 2020 that confirm the active advancements and investments in these business lines:

 

On March 3, 2020, the Company, via its subsidiary DSS Securities Inc., entered into a share subscription agreement and loan arrangement with LiquidValue Asset Management Pte Ltd., AMRE Asset Management, Inc., and American Medical REIT Inc. under which it acquired a 52.5% controlling ownership interest in AMRE Asset Management, Inc. (“AAMI”) which currently has a 93% equity interest in American Medical REIT Inc. (“AMRE”) (see Note 4).

 

AAMI is a real estate investment trust (“REIT”) management company that sets the strategic vision and formulates investment strategy for AMRE. It manages the REIT’s assets and liabilities and provides recommendations to AMRE on acquisition and divestments in accordance with the investment strategies. American Medical REIT, Inc. is a Maryland corporation, organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. AMRE was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. AMRE is planned to qualify as a Real Estate Investment Trust for federal income tax purposes, which will provide AMRE’s investors the opportunity for direct ownership of Class A licensed medical real estate. As of December 31, 2020, no revenue has been generated.

 

4

 

 

On August 21, 2020, the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”), pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth Security, Inc., Alset International Limited (formally Singapore eDevelopment Ltd.), and Global Biomedical Pte Ltd. (“GBM”), which was previously approved by the Company’s shareholders (the “Share Exchange”). Under the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s common stock, par value $0.02 per share, nominally valued at $6.48 per share, and 46,868 newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, (see Note 4).

 

Impact BioMedical strives to leverage its scientific know-how and intellectual property rights to provide solutions to issues that have been plaguing the biomedical field for decades. By tapping into the scientific expertise of its partners, Impact BioMedical has undertaken a concerted effort in the research and development (R&D), drug discovery and development for the prevention, inhibition, and treatment of neurological, oncological and immune related diseases.

 

In August 2020, DSS Securities entered into a corporate venture to form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc., a Texas corporation (“ATC”). DSS Securities owns 70% of this venture with the other two shareholders being attorneys necessary to the state application and permitting process.

 

On October 7, 2020, DSS Securities took part in an initial public offering of Presidio Property Trust, Inc., a Maryland corporation, that invests primarily in commercial properties, such as office, industrial and retail properties, as well as in residential across the United States. As part of this offering, we purchased 200,000 shares of Presidio’s Series A Common Stock at $5.00 per share for a total purchase price of $1,000,000.

 

Effective December 9, 2020, Impact BioMedical entered into an exclusive distribution agreement with BioMed Technologies Asia Pacific Holdings Limited (“BioMed”), which is focused on manufacturing natural probiotics. Under the terms of this distribution agreement, h Impact BioMedical will directly market, advertise, promote, distribute and sell certain BioMed products to resellers. The products to be distributed by Impact BioMedical include BioMed’s PGut Premium ProbioticsTM, PGut Allergy ProbioticsTM, PGut SupremeSlim ProbioticsTM, PGut Kids ProbioticsTM, and PGut Baby ProbioticsTM. Under the terms of the ten-year distribution agreement, Impact BioMedical will have exclusive rights to distribute the products within the United States, Canada, Singapore, Malaysia, and South Korea and non-exclusive distribution rights in all other countries.

 

On February 8, 2021, DSS Securities announced that it entered into a joint venture (“JV”) with Coinstreet Partners (“Coinstreet”), a global decentralized digital investment banking group and digital asset financial service firm, and GSX Group (“GSX”), a global digital exchange ecosystem for the issuance, trading, and settlement of tokenized securities, using its proprietary blockchain solution. The JV leverages the operational strengths and assets of three key leaders in their field, combining traditional capital market experience, Fintech innovations, and business networks from three continents, North America, Europe, and Asia, to capitalize on unique digital asset opportunities. The JV reported that it intended to first pursue a digital securities exchange license in the US. Moving forward, this JV will be the key operational company building and operating a digital securities exchange that utilizes the GSX STACS blockchain technology, serving corporate issuers and investors in the sector.

 

On February 25, 2021, DSS Securities announced its acquisition of an equity interest in WestPark Capital, Inc.(“WestPark”) and an investment in BMI Capital International LLC (“BMICI”). DSS Securities executed two separate transactions that were designed to grow the Securities division by signing a binding note and stock exchange letter of intent to own 7.5% of the issued and outstanding shares of WestPark and acquiring 24.9% of BMICI through a purchase agreement. WestPark is a full-service investment banking and securities brokerage firm which serves the needs of both private and public companies worldwide, as well as individual and institutional investors. BMI is a private investment bank specializing in corporate finance advising, raising equity, and venture services, providing a global “one-stop” corporate consultancy to listed companies. From corporate finance to professional valuation, corporate communications to event management, BMICI services companies in the US, Hong Kong, Singapore, Taiwan, Japan, Canada, and Australia.

 

On March 1, 2021, Decentralized Sharing Systems, Inc. announced that it increased its investment in Sharing Services Global Corporation, a publicly traded company dedicated to maximizing shareholder value through the acquisition and development of innovative companies, products, and technologies in the direct selling industry, through a $30 million convertible promissory note. Decentralized’s financing was made as an investment that would help accelerate Sharing Services sales and growth, as well as international expansion, with the expectation that such capital reserves would help make Sharing Services a dominant player in the global marketplace over the next two years. It was reported that the new $30 million investment would have the potential to exponentially increase Sharing Services sales channels and substantially expand its product portfolio, and to position Sharing Services to capitalize on consolidation and roll up opportunities of other direct selling companies. In the joint announcement, Sharing Services reported that the additional funding would now allow it to accelerate its global expansion with a direct focus on the Asian markets, and specifically in countries such as South Korea, Japan, Hong Kong, China, Singapore, Taiwan, Thailand, Malaysia, and the Philippines. The announcement also noted that prior to this convertible promissory note investment, DSS owned 37% of the outstanding shares of Sharing Services, and that Sharing Services generated $98.4 million in revenue and $5.6 million net income in the trailing 12-month period ended September 30, 2020.

 

On March 15, 2021, the Company, through one of its subsidiaries, DSS BioMedical International, Inc. entered into a Stock Purchase Agreement (the “Agreement”) with Vivacitas Oncology Inc. (“Vivacitas”), to purchase 500,000 shares of its common stock at the per share price of $1.00, with an option to purchase 1,500,000 additional shares a the per share price of $1.00. In addition, under the terms of the Agreement, the Company will be allocated two seats on the board of Vivacitas. On March 18, 2021, the Company entered into an agreement to with Alset EHome International, Inc. (“Seller”) indirectly the Seller’s wholly owned subsidiary Impact Oncology PTE Ltd. to effectively purchase ownership of 2,480,000 shares of common stock of Vivacitas for a purchase price $2,480,000. This agreement includes an option to purchase an additional 250,000 shares of common stock. As a result of these two transactions, which were closed on March 21, 2021 and March 29, 2021, respectively, the Company owns approximate 10.2% equity position in Vivacitas.

 

Reporting Operationing Segments:

 

As we have reported above, we financially report business operating results on only four operating segments, which we believe will certainly increase and transition as the newer lines of business develop. However, the four business lines that we are reporting on in 2020 are as follows:

 

Premier Packaging - Operating under the name Premier Packaging Corporation (a New York corporation), produces custom consumer packaging serving clients in the pharmaceutical, nutraceutical, beverage, specialty foods, photo packaging, and direct marketing industries, among others. The group also provides active and intelligent packaging and document security printing services for end-user customers along with technical support for our technology licensees. The division produces a wide array of printed materials, such as folding cartons and paperboard packaging, security paper, vital records, prescription paper, birth certificates, receipts, identification materials, entertainment tickets, secure coupons, and parts tracking forms. The division also provides resources and production equipment for our ongoing research and development of security printing and related technologies.

 

Digital Group - This division researches, develops, markets, and sells worldwide the Company’s digital products, including and primarily our AuthentiGuard® product, which is a brand authentication application and consumer engagement product that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions. The AuthentiGuard® product allows our customers to implement a security mark utilizing conventional printing methods that is copy- and counterfeit-resistant and that can be read and recorded utilizing smartphones and other digital image capture devices, which can be utilized by that customer’s suppliers, field personnel and customers throughout its global product supply and distribution chains.

 

IP Technology - Since its acquisition in 2013, DSS Technology Management Inc.’s 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 management announced in its 2019 shareholder meeting, management intended to de-emphasize and ultimately wind down this business line. Management reported that while it would continue to assert and defend the existing patents and purse potential infringements as they are identified, it did not intend to seek out new patent portfolios. As the 2020 financial reporting confirms, management implemented that business plan IP is currently focused on managing two remaining patent portfolios.

 

Direct Marketing/Online Sales Group - Direct marketing or network marketing is designed to sell products or services directly to the public through independent distributors, rather than selling through the traditional retail channels. We believe this business has significant growth potential in the now popular “gig economy”. Consistent with the Company’s strategic business plan and vision, we have entered into the direct marketing or network marketing industry and plan to take advantage of the opportunities that exist in the industry. We are engaging in partnerships with existing direct marketing companies to access U.S., Canadian, Asian, and Pacific Rim markets. In addition, we have, and/or are acquiring various domestic and international operating licenses to further the growth of this division. But in addition, we have developed or procured product licenses, formulas, sales networks, patents, web sites, and other resources to help us accelerate our sales and revenue generation initiatives for this line, and we have launched our HWHGIG and HWH Marketplace direct selling platforms.

 

5

 

 

2019-2020 Strategic Business Plan, and its 2021 Progression:

 

In November 2019, management announced that the Company’s 2019-2020 strategic business plan was to revitalize the company by focusing on strengthening the organization by (i) exiting unprofitable business lines, (ii) investing in and reviving the Company’s core businesses, (iii) improving top line revenues and net margins, (iv) controlling costs and (v) creating new long-term scalable, recurring revenue streams. To realize those goals, management announced that it would execute the strategic plan by:

 

Exiting Unprofitable Business Lines:

 

In 2019, the Company had 4 business lines: Premier Packaging, Digital Group, the IP Technology, and DSS Plastics Printing. At that time, only the Premier Packaging division was generating reoccurring revenue and positive cash flow with annual revenues of $13.5 million and a net EBIDA of approximately $742,000. Conversely, the other 3 business units lost approximately $1,348,000, with the IP Technology group accounting for $475,000, and DSS Plastic Printing accounting for an additional $294,000. To preserve capital and stop further cash drain, the decision was made to exit both business lines, whether by sale, wind down, closure, or by no longer pursuing business opportunities in this area.

 

Wind Down IP Monetization Program:

 

Since entering the intellectual property monetization business in July 2013, we have invested substantial capital and resources into purchasing, maintaining, and enforcing our patents. We have also invested substantial resources in the research and development of internally generated intellectual property for our own use, and/or for potential profitable licensing opportunities.

 

However, the costs of funding a patent pool, including patent maintenance fees, litigation (costs for legal counsel, discovery, consultants, expert witnesses, and travel), and overhead costs associated with the IP business line, had placed a significant financial strain upon the Company. During 2019, our corporate cash burn exceeded approximately $200,000 per month, primarily due to recurring costs related to the IP monetization line of business, which reduced resources for our other lines of business, as well as our own patent research and development projects. Further, because the related IP legal costs are expensed in the year incurred with no corresponding revenue generation, the financial impact to the Company caused us to routinely report negative operating income year over year. Moreover, as a result of the IP monetization line’s high capital demand, the Company did not have the capital to initiate and sustain IP litigation against potential major infringers of DSS patents.

 

Further, as a result of several court decisions and statutory changes, the patent laws in the United States have changed significantly since our entry into this business. Consequently, the enforcement of patents has become more costly and more difficult for DSS and other patent holders, and the likelihood of successful litigation has significantly decreased. In addition, depending upon the type of IP involved and the parties who are the alleged patent infringers, the legal enforcement and recovery process can take five or more years before the matter goes to trial. For instance, the Apple litigation, which we have previously disclosed, and which is described in more detail herein, was initiated in September 2013 and was scheduled to go to trial in late February 2020; a period of approximately 6 ½ years.

 

As a result of the considerable financial, working capital, and resource allocation to the IP monetization program, we executed a critical review of the program. We examined all elements and factors related to the operations of this business line, including what we hold in inventory of patents, the potential of that patent portfolio, the timetables involved to monetize those patents, the cost of capital to maintain the patents to monetization, and the probability of successful monetization. As a result of that extensive review, we determined that it was in the best interest of DSS and its stockholders to de-emphasize and ultimately exit the IP monetization line of business.

 

In 2020, management discontinued making any further patent acquisitions in this business line, and, more importantly, was able to renegotiate all of its previous contracts with its lenders, attorneys, and other professionals to eliminate most, if not all, of the historical losses and cash burn from this division. We will continue to manage the existing patent portfolio and work to maximize those assets. After the conclusion of these pending matters, we intend to close this business line.

 

Divesting DSS PLASTICS:

 

In 2020, we also made the decision to divest the DSS Plastics Group. The DSS Plastics Group manufactured laminated and surface printed cards which included magnetic stripes, bar codes, holograms, signature panels, invisible ink, micro fine printing, biometric, radio frequency identification (RFID), and watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses. As a result of continued historical downward trends of the plastic printing business, mostly due to deteriorating margins due to international competition primarily from China, and increasing operating costs of this San Francisco based company, long term major restructure changes and retooling had been planned to return the company to profitability. But the impact of COVID-19 pandemic and resulting economic shut-down had a major impact on revenues. The impact of Covid, coupled with the negative long-term trend of the plastic card industry being replaced by facial recognition, digital licenses, and identification by individual cell phones, forced us to expedite and ultimately divest the business in 2020

 

In August 2020, the Company sold the primary assets of DSS Plastics Group to a subsidiary of Bristol Graphics for $683,000 at closing, and a contingency payment (earnout) of $517,000 that may be earned over the following 12-month period, $390,000 of which was recognized in 2020. The remaining asset and liability of this division is its lease space located in Brisbane, California. We are in the process of subleasing that facility and expect to consummate a transaction in the 2nd quarter which we expect will release the Company from that trailing lease liability, and thereafter expected final closure.

 

6

 

 

Reviving the Company’s Core Businesses:

 

In 2018, the Premier Packaging and the Digital Group collectively accounted for 78% of the Company’s operating revenues. But while, the two business lines accounted for the lion’s share of the Company’s operating revenue, they were doing so on minimal marketing and operating budgets, and in the case of Premier Packaging, with aged and obsolete equipment with limited remaining life. Management reviewed the business lines of both Premier Packaging and the Digital Group and believed that the core business of each was sound, that DSS held a market niche and/or growth opportunity in each, and that long-term profitability could be achieved with additional investments and changes. In 2020, management made substantial adjustments to revive and improve the productivity and operating revenue of these two divisions.

 

In 2018, Premier Packaging and Digital collectively reported $14,500,000 in operating revenue, $12,957,000 and $1,543,000 respectively, or approximately 78% of the company’s operating revenue that year. In 2019, after initial revitalization efforts, operating revenues grew a combined 5%, and in 2020, after a reduction in sales to each of their two largest customers by 26%, the two divisions reported $15.3 million in revenues, during a harsh pandemic impacted economic period.

 

Substantially Reducing Corporate Overhead and Cash Burn:

 

Since the spring of 2019, we have reduced the Company’s monthly cash burn by eliminating non-essential layers of management and redundant operating expenses, as well as by renegotiating vendor contracts. The goal was, and is, to continue to reduce overhead operating costs, redundancy, improve operating efficiencies, and reduce cash burn through a continuing series of new management initiatives.

 

Implementing Business Diversification Initiatives:

 

One of the most important initiatives of the 2019 strategic business plan was the goal, and commitment, to diversify the Company’s operating revenue. Management believed it imperative to transition the Company’s revenue into new business lines which generated scalable and reoccurring revenue, preferably in exponential and emerging growth business opportunities. To achieve this goal, management sought to acquire, to invest in, or to start-up new business lines that met this criterion. We also planned to add additional products to existing business lines so that existing operations could further transition more toward scalable reoccurring revenue streams.

 

Toward that initiative, in 2019 and continuing through 2020 the Company either acquired, invested in, or started-up new businesses in the biohealth, direct marketing, blockchain, and securities trading fields. In 2020, the Company made substantial investments in the following new business lines:

 

DSS BIOHEALTH SECURITY, INC. This business line was intended to be principally involved in the bio-medical sector, including investing in companies that hold bio-medical intellectual property and/or have, or are securing, strategic alliances, partnerships, and distribution rights for bio-medical and security products, technologies, or enterprises. This new division was also organized to seek out investment and growth opportunities in on open-air defense initiatives that seek to curb transmission of airborne infectious diseases such as tuberculosis and influenza, among others, in open areas, and to seek investments in the oncological cures for various forms of cancer.

 

In 2019, the Company made a substantial commitment to this division by acquiring Impact BioMedical, Inc. in an approximate $50 million all stock acquisition. The Impact Bio acquisition, which was rich with assets, has a foundation of products with international market opportunities and demand, and which can be structured into long- term scalable, reoccurring license revenue. By leveraging technology and new science with strategic partnerships, Impact BioMedical drives mission-oriented research, development, and commercialization of solutions for medical advances in human wellness and healthcare.

 

Direct Marketing/Online Sales Group, The Direct Marketing / Online Sales industry was a market that we believed would help us diversify and meet our scalable reoccurring revenue target in an exponential growth industry with high profit margins. The direct marketing, network marketing, or online sales is designed to sell products or services directly to the public through independent distributors, rather than selling through the traditional retail market. We believed that with the transition of a significant sector of retail sales now converting to the now popular “gig economy”, an investment in this business model would meet our strategic business plan objective and vision. We believed that we could profitably serve this market through lending opportunities, acquisition opportunities, and global partnership ventures.

 

7

 

 

Toward this objective, we made substantial investments in loans and investments into several direct marketing companies in 2019 and 2020. Notable in this area was our $8+ million investment into Sharing Services Global Corporation, located in Dallas, Texas, and the Company’s start-up of HWH World, Inc. and its national and international sales network. Further, on March 1, 2021, Decentralized announced that a binding letter of intent had been executed in which it increased its investment in Sharing Services through a $30 million convertible promissory note. The $30 million is planned to exponentially increase Sharing Services sales channels, substantially expand its product portfolio, and to position Sharing Services to capitalize on consolidation and roll up opportunities.

 

BLOCKCHAIN TECHNOLOGY, This corporate business line was organized in 2019 to specialize in the development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber security across global markets. While no significant acquisitions were made over the past 18 months, this business line is still deemed to be an important business line for our long-term diversification goals.

 

SECURITIES AND FINTECH GROUP The Securities business line was be organized as part of the 2019 strategic business plan to establish or acquire investments in long-term growth and sustainable scalable reoccurring management fee income. The businesses that were to be targeted in this business plan included investments in alternative trading systems and related platforms, REITs, brokerage and other trading fund management platforms that would create recurring fee income.

 

FOR 2021:

 

Our business goal for 2021 is continue many of the 2019-2020 Strategic Goals, including to continue to grow the company with sound acquisitions, to develop and to grow Premier Packaging with major capital investments, and to place a heavy emphasis improving top line revenue and top line revenue diversification and profitability. But special attention, effort, and resources will be made to further the following 2021 business initiatives:

 

● Continue to revitalize and grow Premier Packaging.

 

● Make further investments in the Direct Securities and BioHealth groups in the form of growth and investments.

 

● Focused effort to double top line revenue and bottom- line profitability.

 

Our Core Products:

 

Packaging & Printing

 

Premier Packaging Corporation provides custom packaging services and serves clients in the pharmaceutical, nutraceutical, consumer goods, beverage, specialty foods, confections, photo packaging and direct marketing industries, among others. The group also provides active and intelligent packaging and document security printing services for end-user customers. In addition, the division produces a wide array of printed materials, such as folding cartons and paperboard packaging, security paper, vital records, prescription paper, birth certificates, receipts, identification materials, entertainment tickets, secure coupons and parts tracking forms. The division also provides resources and production equipment for our ongoing research and development of security printing, brand protection, consumer engagement and related technologies.

 

Technology, Counterfeit Prevention and Brand Services

 

The Digital Group specializes in counterfeit prevention, brand protection, consumer engagement technology development. Is products offer platforms for authentication and validation of authentic print media, consumer goods and negotiable instruments, including government-issued documents, retail and consumer packaging, labelling, and identification systems. We are a leader in the research and development of optical deterrent technologies and have commercialized these technologies with a suite of products that offer our customers an array of brand security solutions. In addition, we provide document security technology to security printers, corporations, consumer product companies and governments for protection of vital records, certifications, travel documents, consumer products, pharmaceutical packaging and school transcripts.

 

Our primary anti-counterfeiting products and technologies have evolved from a traditional analog product to a highly advanced digital system and are marketed under our AuthentiGuard® registered trademark. In October 2012, we introduced AuthentiGuard®, a smartphone application for authentication, targeted to major Fortune 500 companies worldwide. The application is a cloud-enabled solution that permits efficient and cost-effective counterfeit deterrence, authentication and consumer engagement. Our solutions leverage functional anti-counterfeiting features and cutting-edge technology to satisfy commercial and consumer product needs for branding, intelligent packaging, and marketing.

 

Since 2012, the AuthentiGuard® product has grown to annual sales of approximately $1.5 million, and we project that over the next three years annual sales of AuthentiGuard® will increase by an annualized growth rate of approximately 17%. Today, our mission is to make world-class authentication, counterfeit prevention and consumer engagement technology that is assessable and scalable to an expanding customer base. We intend to bring our technology-laden packaging, labelling, and document solutions to a broader range of clients including small businesses, develop long-term relationships with those who use them and grow our business organically.

 

Direct Selling

 

Decentralized Sharing Systems, Inc. and its subsidiaries and partners, including Sharing Services Global Corporation provide an array of products and services, through an independent contractor network. 

 

For example, Decentralized’s wholly owned subsidiary, HWH World, Inc. promotes products and services that fulfill its corporate position of health, wealth, and happiness. The HWH Marketplace through its brands desires to help its customers become the healthiest, happiest versions of themselves. For the health component, the company offers herbal alternatives of nutraceutical, consumables and topicals, dietary supplements, beauty and skin care products, personal care, gut health products, aloe vera based supplements, and other wellness products. As to the wealth component, the company is developing educational tools to its users to better manage individual finances and savings programs to help its consumers find each consumer’s individual financial goal. As to the happiness component, the company is working with other partners to either acquire or partner in products and/or services to allow its consumers to enjoy and healthy living, including a global travel membership network.

 

8

 

 

Further, Sharing Services, through its subsidiary Elevacity, markets and distributes health and wellness products under the “Elevate” brand, primarily in the United States and Canada. Sharing Services markets its products and services through its independent contractor distribution system and using its proprietary website: www.elevacity.com. In February 2021, the Company launched its new business brand, “The Happy Co.,” at its Elevacity division. Elevacity has several well-known and signature products, including its top product lines of “Happy Coffees” and “Nootropic Beverages”. Elevacity also sells a “healthy shake”, a “Keto Coffee Booster”, “Energy Caps”, “XanthoMax© Happy Caps”,“Wellness Vitamin Patches”, various beauty and skin care products, and other wellness products.

 

Bio Health

 

BioHealth, through its subsidiary Impact Bio Medical, Inc. targets unmet, urgent medical needs and expands the borders of medical and pharmaceutical science. Impact drives mission-oriented research, development, and commercialization of solutions for medical advances in human wellness and healthcare. By leveraging technology and new science with strategic partnerships, Impact Bio provides advances in drug discovery for the prevention, inhibition, and treatment of neurological, oncology and immuno-related diseases. Other exciting technologies include a breakthrough alternative sugar aimed to combat diabetes and functional fragrance formulations aimed at the industrial and medical industry.

 

BioHealth and Impact Medical have several important and valuable products, technology or compounds that are in continuing development and/or licensing stages:

 

  LineBacker: A polyphenol compound that is believed to be successful in neurological and inflammatory disorders. LineBacker is a platform of small molecule X-bonded polyphenols. X-bonding is a molecular tuning technique that modifies a natural compound to induce potency, efficacy, bioavailability, and trans-membrane permeability while maintaining safety, toxicity, and tolerability. Natural polyphenols have demonstrated strong potential in treating and preventing a range of diseases by inhibiting TNF-α and indication specific causes (e.g. neurology, anti-inflammatory, oncology). Two novel discrete LineBacker molecules have been synthesized and characterized including in vitro efficacy testing, pharmacokinetics, and maximum tolerated dose in vivo.
  Equivir: A polyphenol compound that is believed to be successful in antiviral infection treatments. Equivir/Nemovir technology is a novel blend of FDA Generally Recognized as Safe (GRAS) eligible polyphenols (e.g., Myricetin, Hesperetin, Piperine) which have demonstrated antiviral effects with additional potential application as health supplements or medication. Polyphenols are sourced from fruits, vegetables, and other natural substances. Myricetin is a member of the flavonoid class of polyphenolic compounds with antioxidant properties. Hesperitin is a flavanone and Piperine is an alkaloid, commonly found in black pepper.
  Laetose: Laetose technology is derived from a unique combination of sugar and inositol, which demonstrates the ability to inhibit the inflammatory and metabolic response of sugar alone. A sugar alternative which is believed to lower human glycemic indexes and is believed to be a breakthrough alternative sugar aimed to combat diabetes. The use of Laetose in a daily diet, compared to sugar, could result in 30% lower sugar consumption and lower glycemic index/load.
  3F: A botanical compound believed to serve as an insect repellent and anti-microbial agent. 3F is a unique formulation of specialized ingredients (e.g. terpenes) from botanical sources with demonstrated effect as an insect repellent and an antimicrobial.
    3F Mosquito Repellent: 3F repellent contains botanical ingredients that mosquitos avoid. These ingredients are scientifically proven1 to affect the mosquito’s receptors, essentially making the insect blind to a human’s presence. This can be utilized as a stand-alone repellent or as an additive in detergents, lotions, shampoo, and other substances to provide mosquito protection.
    3F Antimicrobial: 3F antimicrobial contains botanical ingredients known to kill viruses. These ingredients are scientifically proven to inhibit viral replication. This can be utilized as a stand-alone antimicrobial or as an additive in detergents, lotions, shampoo, fabrics, and other substances.
  Therapix (license): BioHealth has a license for cannaniboid technology for neurological pain, sleep apnoea disorders with RX/OTC potential.
  Bio Med (license): A probiotic gut health product that helps to regulate many physiological functions, ranging from energy regulation and cognitive processes to toxin neutralization and immunity against pathogens.

 

The business model of BioHelath and Impact BioMedical revolves around two methodologies – Licensing and Sales Distribution.

 

1) Impact develops valuable and unique patented technologies which will be licensed to pharmaceutical, large consumer package goods companies and venture capitalists in exchange for usage licensing and royalties.

 

2) Impact utilizes the DSS ecosystem to leverage its sister companies that have in place distribution networks on a global scale. Impact will engage in branded and private labelling of its products for sales generation through these channels. This global distribution model will give direct access to end users of Impact’s nutraceutical and health related products.

 

Securities

 

Securities was established to develop and/or acquire assets in the securities trading or management arena, and to pursue, among other product and service lines, real estate investment funds, digital asset exchanges, security and utility tokens and other forms of crypto currency. This business sector has already started or made the following business lines and associated products and services:

 

  REIT Management Fund: In March 2020, DSS Securities formed AMRE (“American Medical REIT”) and its management company AAMI (“AMRE Asset Management, Inc.) Through AAMI/AMRE, a medical real estate investment trust, fulfills community needs for quality healthcare facilities while enabling care providers to allocate their capital to growth and investment in their contemporary clinical and critical care businesses. Urban and suburban communities are in need of modern healthcare facilities that provide a range of medical outpatient services. The funds ultimate product is an investor opportunity in a managed medical real estate investment trust.
  Real Estate Title Services: Alset Title Company, Inc. provides buyers, sellers, and brokers alike confidence during big real estate transactions, not just in a transaction, but in the property itself. Through bundled services, Alset Title Company, Inc. provides it all from title searches and insurance to escrow agent assistance.
  Alternative Trading Systems: Currently in development to operate in the US vertical digital asset exchanges for securities, tokenized assets, utility tokens, stablecoins and cryptocurrency via a digital asset trading platform using blockchain technology.

 

9

 

 

Intellectual Property

 

Patents

 

Our ability to compete effectively depends largely upon our ability to maintain the proprietary nature of our technology, products and manufacturing processes. Across the DSS ecosystem of companies, we principally rely upon patent, trademark, trade secrets and contract law to establish and protect our proprietary rights.

 

As it applies to our digital division’s product line development, we have expended significant resources on research and development in an effort to become a market leader with the ability to provide our customers effective solutions against an ever-changing array of counterfeit risks. Our position in the security print market is based on our technologies and products. The Company recognized a credit in 2019 of approximately $12,000 primarily due to receipt of a 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 on research and development during 2018, primarily toward the development of the Company’s AuthentiGuard product line.

 

Related to out Impact BioMedical Division we have key patents that we will use as the foundation for foster product development and licensing. We have 5 patents for some of our key products including Linebacker, Equivir/Nemovir, Laetose and 3F. Our intellectual property will enable us to be protected as we further these technologies and pave the road to commercialization.

 

10

 

 

We own patents covering semiconductor, light emitting diode, anti-counterfeiting and document authentication, and wireless peripheral technologies, respectively. We also have several patent applications in process, including provisional and Patent Cooperation Treaty (“PCT”) patent applications in various jurisdictions including the United States, Canada, and Europe. These applications cover our anti-counterfeiting technologies, including AuthentiGuard®, AuthentiGuard® Prism™, and AuthentiGuard® VeriGlow™, and several other anti-counterfeiting and authentication technologies in development. Our issued patents have remaining durations ranging from 1 to 16 years.

 

Trademarks

 

We several trademarks related to our Digital Group business. We have registered our “AuthentiGuard®” mark, as well as our “Survivor 21®” electronic check icon and “VeriGlow®” with the U.S. Patent and Trademark Office. A trademark application is pending in Canada for “AuthentiGuard.” AuthentiGuard® is registered in several European countries including the United Kingdom. We have also applied to register AuthentiSite TM, AuthentiShare TM, AuthentiSuiteTM, AuthentiBlockTM, and AuthentiChainTM in the U.S.

 

Websites

 

The primary corporate website we maintain is www.dsssecure.com, which describes our Company, our history, our patented document security solutions, our major product offerings, and our targeted vertical markets across all of our business segments. In addition, we operate www.hwhmarketplace.com which is an online retail site that is centreed around our health and wellness nutraceutical products, www.impbio.com which is the primary site for our product information on that company. In addition to the active websites, the Company owns several other domain names reserved for future use or for strategic competitive reasons. Information on our websites or any other website does not constitute a part of this annual report.

 

Markets and Competition

 

As to the security printing business, the security print market is comprised of a few very large companies and an increasing number of small companies with specific technology niches. The expansion of this market is primarily due to the significant expansion of counterfeiting as advancing technologies in digital duplication and scanning combined with increasingly sophisticated design software has enabled easier reproduction of original documents, vital records and IDs, packaging, and labels. Our competitors include Standard Register Company, which specializes in printing security technologies for the check and forms and medical industries; and De La Rue Plc, that specializes in printing secure currency, tickets, labels, lottery tickets and vital records for governments and Fortune 500 companies. Large office equipment manufacturers, called OEMs, such as Sharp, Xerox Canon, Ricoh, Hewlett Packard and Eastman Kodak are developing “smart copier” technology that recognizes particular graphical images and produces warning words or distorted copies. Some of the OEMs are also developing user assigned and variable pantograph “hidden word” technologies in which users can assign a particular hidden word in copy, such as “void” that is displayed when a copy of such document is made. In addition, other competing hidden word technologies are being marketed by competitors such as NoCopi Technologies which sells and markets secure paper products, and Graphic Security Systems Corporation, which markets Scrambled Indicia.

 

Our packaging division competes with a significant number of national, regional and local companies, many of which are independent and privately-held. The largest competitors in this market are primarily focused on the long-run print order market. They include large integrated paper companies such as West Rock Company, Caraustar Industries, Inc., Graphic Packaging Holding Company and Mead Westvaco. Our printing division competes primarily with locally-based printing companies in the Rochester and Western New York markets. Most of our competitors in these markets are privately-held, single location operations.

 

11

 

 

As to our Digital Group, our technology division also faces competition in the area of patent acquisitions and enforcement. Entities such as Acacia, RPX, AST, Intellectual Ventures, Wi-LAN, MOSAID, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc. and Pendrell Corporation compete in acquiring rights to patents and product authentication from companies like Authentix, Opsec, and Alpvision that have similar technology to help protect against fraud and authenticate consumer packaged goods. .

 

As to the Direct Marketing Group, the network marketing or direct marketing industry is a very competitive marketplace. While not directly competing with HWH and SHRG, the following companies are significant players in the global network marketing business and as a result an indirect competitor of HWH and SHRG: Amay, Avon, Herbalife, Natura, Vorwerk, Mary Kay, Infinitus, Perfect, Forever Living, Nu Skin, Young Living, and New Era, among others.

 

Customers

 

During 2020, two customers accounted for 38% of our consolidated revenue. As of December 31, 2020, these two customers accounted for 60% of our consolidated trade accounts receivable balance. As of December 31, 2019, these two customers accounted for 45% of our consolidated revenue and 48% of the Company’s consolidated trade accounts receivable balance. This customer diversification improvement was driven by addition of several new customers to our overall customer base.

 

Raw Materials

 

As to the packaging business, the primary raw materials the Company uses in its businesses are paper, paperboard, corrugated board and ink. The Company negotiates with leading suppliers to maximize its purchasing efficiencies and uses a wide variety of paper grades, formats, ink formulations and colors. Paper and paperboard prices continued to increase in 2020, and we believe increases in future years are expected. Except for certain packaging customers where the Company enters into annual contracts, for which changes in paperboard pricing is absorbed by the Company, the Company has historically passed substantially all increases and decreases to its customers, although there can be no assurances that the Company will continue to do so in the future.

 

Environmental Compliance

 

It is the Company’s policy to conduct its operations in accordance with all applicable laws, regulations and other requirements. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on the Company’s consolidated annual results of operations, financial position or cash flows.

 

Government Regulation

 

We play an active role with the Document Security Alliance group, as one of our research and development management members sits on various committees of that group and has been involved in design recommendations for important U.S. documents. This group of security industry specialists was formed by the U.S. Secret Service to evaluate and recommend security solutions to the federal government for the protection of credentials and vital records.

 

Our patent monetization business is also faced with potential government regulations. If new legislation, regulations or rules are implemented either by Congress, the U.S. Patent and Trademark Office (the “USPTO”), or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our patent monetization efforts and, in turn, our assets, expenses and revenue. United States patent laws have been amended by the Leahy-Smith America Invents Act. The America Invents Act includes several significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or activities. In addition, the U.S. Department of Justice (“DOJ”) has conducted reviews of the patent system to evaluate the impact of patent assertion entities, such as our Company, on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could adversely impact our ability to effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies.

 

Moreover, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions.

 

12

 

 

Corporate History

 

The Company was incorporated in 1984 and changed its name to Document Security Systems, Inc. in 2002. See, the “Overview” section above for further details about our acquisitions.

 

Employees

 

As of March 26, 2021, all of the Company’s 93 employees were full time. It is important that we continue to retain and attract qualified management and technical personnel. Our employees are not covered by any collective bargaining agreement, and we believe that our relations with our employees are generally good.

 

Available information

 

Our website address is www.dsssecure.com. Information on our website is not incorporated herein by reference. We make available free of charge through our website our press releases, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after electronically filed with or furnished to the Securities and Exchange Commission.

 

ITEM 1A – RISK FACTORS

 

Investing in our common stock involves risk. Before deciding whether to invest in our common stock, you should consider carefully the risks and uncertainties described below. There may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that could have material adverse effects on our future results. If any of these risks actually occur, our business, business prospects, financial condition or results of operations could be seriously harmed. This could cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment. Please also read carefully the section contained in Part II, Item 7, below, entitled “Cautionary Statement Regarding Forward-Looking Statements.”

 

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations in the future. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer, the market price of our common stock could decline, and you could lose all or part of your investment in our common stock.

 

Financial Impact of COVID-19 Pandemic.

 

The COVID-19 pandemic has created global economic turmoil and has potentially permanently impacted how many businesses operate and how individuals will socialize and shop in the future. The Company continues to feel the effect of the COVID-19 business shutdowns and consumer stay-at-home protections. But the effect of the economic shutdown has impacted our business lines differently, some more severely than others. In most cases we believe the negative economic trends and reduced sales will recover over time. However, management determined that one of its business lines, DSS Plastics, had been more severely impacted by the pandemic than our other divisions and we did not believe this was a short-term phenomenon. As a result, management decided to fully impair its goodwill related to DSS Plastics. The impact to DSS’s 2020 first quarter earnings of this impairment was approximately $685,000.

 

The value of our intangible assets and investments may not be equal to their carrying values.

 

As of December 31, 2020, we had approximately $23.4 million of net intangible assets. Approximately $22.3 million is associated with the acquisition of Impact Biomedical, Inc. The Company has completed valuations for certain developed technology assets acquired in the transaction as well the non-controlling interest portion of Impact BioMedical, Inc. and its subsidiaries. Approximately $267,000 of this amount are intangible assets which derive their value from patents or patent rights. If licensing efforts and litigation are not successful, the values of these assets could be reduced. We are required to evaluate the carrying value of such intangibles and goodwill and the fair value of investments whenever events or changes in circumstances indicate that the carrying value of an intangible asset, including goodwill, and investment may not be recoverable. If any of our intangible assets, goodwill or investments are deemed to be impaired then it will result in a significant reduction of the operating results in such period. As noted above, management has determined that the goodwill of DSS Plastics has been permanently and materially impaired due to the global pandemic and other market factors.

 

13

 

 

We have secured indebtedness, and a potential risk exists that we may be unable to satisfy our obligations to pay interest and principal thereon when due or negotiate acceptable extensions or settlements.

 

We have outstanding indebtedness (described below), most of which is secured by assets of various DSS subsidiaries and guaranteed by the Company. Given our history of operating losses and our cash position, there is a risk that we may not be able to repay indebtedness when due. If we were to default on any of our other indebtedness that require payments of cash to settle such default and we do not receive an extension or a waiver from the creditor and the creditor were to foreclose on the secured assets, it could have a material adverse effect on our business, financial condition and operating results.

 

As of December 31, 2020, we had the following significant amounts of outstanding indebtedness:

 

  $1,100,000 due under a promissory note with Citizens Bank used to purchase our packaging division facility. We are required to pay monthly instalments of $7,000 with interest fixed at 4.22% until June 2029, at which time a balloon payment of the remaining principal balance will be due. The promissory note is secured by a first mortgage on our packaging division facility.
  $900,000 in a term note non-revolving line of credit with Citizens Bank used by Premier Packaging Corporation to purchase equipment. 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. The note had no borrowings against it as of December 31, 2020.
  $771,000 in a term note non-revolving line of credit with Citizens Bank used by Premier Packaging Corporation to purchase equipment. The note is amortized over a 48-month period and payable in monthly instalments of $13,000. Interest accrues at 1 Month LIBOR plus 2.00%.
  $800,000 revolving credit line with Citizens Bank by Premier Packaging payable in monthly instalments of interest only. The revolving credit line bears interest at 1 Month LIBOR plus 2.0% and had no borrowings against it at as of December 31, 2020.
  $200,000 unsecured promissory note between AMRE and LiquidValue Asset Management Pte Ltd. The note calls for interest to be paid annually on March 2 with interest fixed at 8.0% and matures on March 2, 2022. The holder is a related party owned by the Chairman of the Company’s board of directors.
  $115,000 under the Paycheck Protection Program, which was established as part of CARES Act, and provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. As of December 31, 2020, pursuant to the terms of the SBA PPP program, the Company submitted an application for AAMI for a requested 100% loan forgiveness. In January 2021, AAMI received notification that the loan was forgiven under the guidelines of the CARES Act.

 

The Citizens credit facilities for the Company’s subsidiary, Premier Packaging, contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested annually as of December 31. For the year ended December 31, 2020, Premier Packaging was in compliance with the annual covenants.

 

A significant amount of our revenue is derived by two customers.

 

During 2020, two customers accounted for approximately 38% of our consolidated revenue. As of December 31, 2020, these two customers accounted for 60% of our trade accounts receivable balance. During 2019, these two customers accounted for approximately 45% of our consolidated revenue. As of December 31, 2019, these two customers accounted for 49% of our trade accounts receivable balance. If we were to lose these customers or if the amount of business we do with these two customers declines significantly, our business would be adversely affected.

 

14

 

 

We may face intellectual property infringement or other claims against us, our customers or our intellectual property that could be costly to defend and result in our loss of significant rights.

 

Although we have received patents with respect to certain of our core business technologies, there can be no assurance that these patents will afford us any meaningful protection. Although we believe that our use of the technology and products we have developed, and other trade secrets used in our operations do not infringe upon the rights of others, our use of the technology and trade secrets we developed may infringe upon the patents or intellectual property rights of others. In the event of infringement, we could, under certain circumstances, be required to obtain a license or modify aspects of the technology and trade secrets we developed or refrain from using the same. We may not be able to successfully terminate any infringement in a timely manner, upon acceptable terms and conditions or at all. Failure to do any of the foregoing could have a material adverse effect on our operations and our financial condition. Moreover, if the patents, technology or trade secrets we developed or use in our business are deemed to infringe upon the rights of others, we could, under certain circumstances, become liable for damages, which could have a material adverse effect on our operations and our financial condition. As we continue to market our products, we could encounter patent barriers that are not known today. A patent search may not disclose all related applications that are currently pending in the United States Patent Office, and there may be one or more such pending applications that would take precedence over any or all of our applications.

 

Furthermore, third parties may assert that our intellectual property rights are invalid, which could result in significant expenditures by us to refute such assertions. If we become involved in litigation, we could lose our proprietary rights, be subject to damages and incur substantial unexpected operating expenses. Intellectual property litigation is expensive and time-consuming, even if the claims are subsequently proven unfounded, and could divert management’s attention from our business. If there is a successful claim of infringement, we may not be able to develop non-infringing technology or enter into royalty or license agreements on acceptable terms, if at all. If we are unsuccessful in defending claims that our intellectual property rights are invalid, we may not be able to enter into royalty or license agreements on acceptable terms, if at all. Moreover, if we are unsuccessful in our pending patent infringement litigation, we could lose certain patents that have been collateralized by third party funding partners. This could prohibit us from providing our products and services to customers, which could have a material adverse effect on our operations and our financial condition.

 

Certain of our recently developed products are not yet commercially accepted and there can be no assurance that those products will be accepted, which would adversely affect our financial results.

 

Over the past several years, we have spent significant funds and time to create or acquire new products by applying our technologies onto media other than paper, including plastic and cardboard packaging, and delivery of our technologies digitally. We’ve also acquired several patents in the bio-health field through our acquisition if Impact Biomedical, Inc. Our business plan includes plans to incur significant marketing, intellectual property development and sales costs for these newer products, particularly the bio-health related products. If we are not able to develop and sell these new products, our financial results will be adversely affected.

 

The results of our research and development efforts are uncertain and there can be no assurance of the commercial success of our products.

 

We believe that we will need to continue to incur research and development expenditures to remain competitive. The products we are currently developing or may develop in the future may not be technologically successful. In addition, the length of our product development cycle may be greater than we originally expected, and we may experience delays in future product development. If our resulting products are not technologically successful, they may not achieve market acceptance or compete effectively with our competitors’ products.

 

Changes in document security technology and standards could render our applications and services obsolete.

 

The market for document security products, applications, and services is fast moving and evolving. Identification and authentication technology is constantly changing as we and our competitors introduce new products, applications, and services, and retire old ones as customer requirements quickly develop and change. In addition, the standards for document security are continuing to evolve. If any segments of our market adopt technologies or standards that are inconsistent with our applications and technology, sales to that market segments could decline, which could have a material adverse effect on our operations and our financial condition.

 

15

 

 

The markets in which we operate is highly competitive, and we may not be able to compete effectively, especially against established industry competitors with greater market presence and financial resources.

 

Our markets are highly competitive and characterized by rapid technological change and product innovations. Our competitors may have advantages over us because of their longer operating histories, more established products, greater name recognition, larger customer bases, and greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements and devote greater resources to the promotion and sale of their products. Competition may also force us to decrease the price of our products and services. We cannot assure you that we will be successful in developing and introducing new technology on a timely basis, new products with enhanced features, or that these products, if introduced, will enable us to establish selling prices and gross margins at profitable levels.

 

If we are unable to respond to regulatory or industry standards effectively, our growth and development could be delayed or limited.

 

Our future success will depend in part on our ability to enhance and improve the functionality and features of our products and services in accordance with regulatory or industry standards. Our ability to compete effectively will depend in part on our ability to influence and respond to emerging industry governmental standards in a timely and cost-effective manner. If we are unable to influence these or other standards or respond to these or other standards effectively, our growth and development of various products and services could be delayed or limited.

 

Breaches in security, whether cyber or physical, and other disruptions and/or our inability to prevent or respond to such breeches, could diminish our ability to generate revenues or contain costs, compromise our assets, and negatively impact our business in other ways.

 

We face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, and threats to physical and cyber security. Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. The risks of a security breach, cyber-attack, cyber intrusion, or disruption, particularly through actions taken by computer hackers, foreign governments and cyber terrorists, have increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Although we have acquired and developed systems and processes designed to protect our proprietary and/or classified information, they may not be sufficient and the failure to prevent these types of events could disrupt our operations, require significant management attention and resources, and could negatively impact our reputation among our customers and the public, which could have a negative impact on our financial condition, and weaken our results of operations and liquidity.

 

Our operations in Asia are subject to unique risks and uncertainties, including tariffs and trade restrictions.

 

Our operating facility in Asia, in addition to our investment in Alset International Limited, presents risks including, but not limited to, changes in share price of investments, changes in local regulatory requirements, changes in labor laws, local wage laws, environmental regulations, taxes and operating licenses, compliance with U.S. regulatory requirements, including the Foreign Corrupt Practices Act, uncertainties as to application and interpretation of local laws and enforcement of contract and intellectual property rights, currency restrictions, currency exchange controls, fluctuations of currency, and currency revaluations, eminent domain claims, civil unrest, power outages, water shortages, labor shortages, labor disputes, increase in labor costs, rapid changes in government, economic and political policies, political or civil unrest, acts of terrorism, or the threat of boycotts, other civil disturbances and the possible impact of the imposition of tariffs as a result of the tariff dispute between the U.S. and China as well as any retaliating trade policies or restrictions. Any such disruptions could depress our earnings and have other material adverse effects on our business, financial condition and results of operations.

 

16

 

 

Future growth in our business could make it difficult to manage our resources.

 

Future business expansion could place a significant strain on our management, administrative and financial resources. Significant growth in our business may require us to implement additional operating, product development and financial controls, improve coordination among marketing, product development and finance functions, increase capital expenditures and hire additional personnel. There can be no assurance that we will be able to successfully manage any substantial expansion of our business, including attracting and retaining qualified personnel. Any failure to properly manage our future growth could negatively impact our business and operating results.

 

If we fail to retain certain of our key personnel and attract and retain additional qualified personnel, we might not be able to remain competitive, continue to expand our technology or pursue growth.

 

Our future success depends upon the continued service of certain of our executive officers and other key sales and research personnel who possess longstanding industry relationships and technical knowledge of our products and operations. Although we believe that our relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future. There can be no assurance that these persons will agree to continue to be employed by us after the expiration dates of their current contracts.

 

We have identified weaknesses in our internal control over financial reporting structure; any material weaknesses may cause errors in our financial statements that could require restatements of our financial statements and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. We have had previously identified weaknesses in our internal control over financial reporting following management’s annual assessment of internal controls over financial reporting and, as a result of that assessment, management had concluded our controls associated may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

We do not intend to pay cash dividends.

 

We do not intend to declare or pay cash dividends on our common stock in the foreseeable future. We anticipate that we will retain any earnings and other cash resources for investment in our business. The payment of dividends on our common stock is subject to the discretion of our board of directors and will depend on our operations, financial position, financial requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors that our board of directors deems relevant.

 

We may seek to develop additional new inventions and intellectual property, which would take time and would be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in such activities.

 

Part of our business may include the development of new inventions and intellectual property that we would seek to monetize. However, this aspect of our business would likely require significant capital and would take time to achieve. Such activities could also distract our management team from our present business initiatives, which could have a material and adverse effect on our business. There is also the risk that these initiatives would not yield any viable new inventions or technology, which would lead to a loss our investments in time and resources in such activities.

 

17

 

 

In addition, even if we are able to develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain, and we would heavily rely on, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally including the following:

 

  patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents;

 

  we may be subject to interference proceedings;

 

  we may be subject to opposition proceedings in the U.S. or foreign countries;

 

  any patents that are issued to us may not provide meaningful protection;

 

  we may not be able to develop additional proprietary technologies that are patentable;

 

  other companies may challenge patents issued to us;

 

  other companies may design around technologies we have developed; and

 

  enforcement of our patents may be complex, uncertain and very expensive.

 

We cannot be certain that patents will be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that it will be the first to make our additional new inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual property rights for our inventions would lead to the loss of our investments in such activities, which would have a material and adverse effect on our business.

 

Moreover, patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.

 

Changes in the laws and regulations to which we are subject may increase our costs.

 

We are subject to numerous laws and regulations, including, but not limited to, environmental and health and welfare benefit regulations, as well as those associated with being a public company. These rules and regulations may be changed by local, state, provincial, national or foreign governments or agencies. Such changes may result in significant increases in our compliance costs. Compliance with changes in rules and regulations could require increases to our workforce, and could result in increased costs for services, compensation and benefits, and investment in new or upgraded equipment.

 

Declines in general economic conditions or acts of war and terrorism may adversely impact our business.

 

Demand for printing services is typically correlated with general economic conditions. The prolonged decline in United States economic conditions associated with the great recession adversely impacted our business and results of operations and may do so again. The overall business climate of our industry may also be impacted by domestic and foreign wars or acts of terrorism, which events may have sudden and unpredictable adverse impacts on demand for our products and services.

 

18

 

 

If we fail to comply with the continued listing standards of the NYSE American LLC Exchange, it may result in a delisting of our common stock from the exchange.

 

Our common stock is currently listed for trading on the NYSE American LLC Exchange (“NYSE American”), and the continued listing of our common stock on the NYSE American is subject to our compliance with a number of listing standards.

 

If our common stock were no longer listed on the NYSE American, investors might only be able to trade our shares on the OTC Bulletin Board ® or in the Pink Sheets ® (a quotation medium operated by Pink Sheets LLC). This would impair the liquidity of our common stock not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and reduction in media coverage.

 

If we are delisted from the NYSE American, your ability to sell your shares of our common stock may be limited by the penny stock restrictions, which could further limit the marketability of your shares.

 

If our common stock is delisted from the NYSE American, it could come within the definition of a “penny stock” as defined in the Exchange Act and could be covered by Rule 15g-9 of the Exchange Act. That rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.

 

If our common stock is not listed on a national securities exchange, compliance with applicable state securities laws may be required for certain offers, transfers and sales of the shares of our common stock.

 

Because our common stock is listed on the NYSE American, we are not required to register or qualify in any state the offer, transfer or sale of the common stock. If our common stock is delisted from the NYSE American and is not eligible to be listed on another national securities exchange, sales of stock pursuant to the exercise of warrants and transfers of the shares of our common stock sold by us in private placements to U.S. holders may not be exempt from state securities laws. In such event, it will be the responsibility of us in the case of warrant exercises or the holder of privately placed shares to register or qualify the shares for any offer, transfer or sale in the United States or to determine that any such offer, transfer or sale is exempt under applicable state securities laws.

 

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Because certain of our stockholders control a significant number of shares of our common stock, they may have effective control over actions requiring stockholder approval.

 

As of March 16, 2021, our directors, executive officers and principal stockholders (those beneficially owning in excess of 5%), and their respective affiliates, beneficially own approximately 32.2% of our outstanding shares of common stock. As a result, these stockholders, acting together, could have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. As such, these stockholders, acting together, could have the ability to exert influence over the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by: • delaying, deferring or preventing a change in corporate control; • impeding a merger, consolidation, takeover or other business combination involving us; or • discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

19

 

 

Additional financing or future equity issuances may result in future dilution to our shareholders.

 

We expect that we will need to raise additional funds in the future to finance our internal growth, our merger and acquisition plans, investment activities, continued research and product development, and for other reasons. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our common stock. The price per share at which we sell additional securities in future transactions may be higher or lower than the price per share in this offering. Alternatively, if we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and would also require us to fund additional interest expense. If adequate additional financing is not available when required or is not available on acceptable terms, we may be unable to successfully execute our business plan.

  

ITEM 1B – UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2 - PROPERTIES

 

Our corporate group and digital division together occupy approximately 2,500 square feet of commercial office space located at 200 Canal View Boulevard, Rochester, New York under a lease that is on a month-to-month basis, at a rental rate of approximately $2,900 per month. Our DSS Asia division leases commercial office space in Hong Kong under a lease that expires September 30, 2021 for approximately $2,834 per month. Our Multilevel Marketing or Direct Selling division leases commercial office space in Irving, Texas under a lease that expires January 1, 2022 for approximately $12,000 per month. In addition, the Company owns a 40,000 square foot packaging and printing plant in Victor, New York, a suburb of Rochester, New York. We believe that our facilities are adequate for our current operations. We also lease approximately 15,000 square feet of production space in Brisbane, CA under a lease that expires January 31, 2024 for approximately $19,422 per month. In March 2021, the Company leased approximately 1,848 sq. ft. in Houston, Texas at 1400 Broadfield Blvd., Suite 100, for corporate offices and subsidiary expansion.

 

ITEM 3 - LEGAL PROCEEDINGS

 

As disclosed in Note 15 to the Consolidated Financial Statements, the Company is engaged in certain legal matters, and the disclosure set forth in Note 15 relating to certain legal matters is incorporated herein by reference.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not applicable.

 

Part II

 

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is listed on the NYSE American LLC Exchange, where it trades under the symbol “DSS”.

 

Holders of Record

 

As of March 16, 2021, we had 252 record holders of our common stock. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.

 

20

 

 

Dividends

 

We did not pay dividends during 2020 or 2019. We anticipate that we will retain any earnings and other cash resources for investment in our business. The payment of dividends on our common stock is subject to the discretion of our board of directors and will depend on our operations, financial position, financial requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors that our board of directors deems relevant.

 

However, the Company has announced its decision to issue shares of Impact BioMedical, Inc. to its shareholders of record at a to be determined record date that will correspond with the registration of Impact BioMedical’s common stock. The Company announced that it intended to issue four (4) shares of Impact BioMedical stock for each share of DSS common stock held by DSS shareholders (with the exception of shares beneficially held by Alset International Ltd).

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of December 31, 2020, securities issued and securities available for future issuance under both our 2013 and 2020 Employee, Director and Consultant Equity Incentive Plan (the “Plans”) is as follows:

 

   Restricted stock to be issued upon vesting   Number of securities to be issued upon exercise of outstanding options, warrants and rights   Weighted average exercise price of outstanding options, warrants and rights  

Number of securities

remaining available for

future issuance (under

equity compensation

Plans (excluding

securities reflected in

column (a & b))

 
                 
                 
Plan Category   (a)    (b)    (c)    (d) 
Equity compensation plans approved by security holders                    
2013 Employee, Director and Consultant Equity Incentive Plan - options   -    19,261   $150.44    - 
                     
2013 Employee, Director and Consultant Equity Incentive Plan - warrants   -    36,514   $33.92    - 
2020 Employee, Director and Consultant Equity Incentive Plan   -    -   $-    191,314 
                     
Total   -    55,775   $74.16    191,314 

  

The warrants listed in the table above were issued to third party service providers in partial or full payment for services rendered and in conjunction with third party funding agreements.

 

Recent Issuances of Unregistered Securities

 

Information regarding any equity securities we have sold during the period covered by this Report that were not registered under the Securities Act of 1933, as amended, and was not included in a quarterly report on Form 10-Q or in a current report on Form 8-K, is set forth below. Each such transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated by the SEC, unless otherwise noted. Unless stated otherwise: (i) the securities were offered and sold only to accredited investors; (ii) there was no general solicitation or general advertising related to the offerings; (iii) each of the persons who received these unregistered securities had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition; (iv) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; and, (v) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.

 

Shares Repurchased by the Registrant

 

We did not purchase or repurchase any of our securities in the fiscal year ended December 31, 2020, including the fourth quarter.

 

 

ITEM 6 - SELECTED FINANCIAL DATA

 

Not applicable.

  

21

 

 

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward-Looking Statements

 

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions.

 

Forward-looking statements that may appear in this Annual Report, including without limitation, statements related to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act and contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all the information set forth in this Annual Report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.

 

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes included in Item 8 of this Annual Report.

 

Overview

 

Document Security Systems, Inc. (together with its consolidated subsidiaries (unless the context otherwise requires), referred to herein as “Document Security Systems,” “DSS,” “we,” “us,” “our” or the “Company”) was formed in New York in 1984 and, in 2002, chose to strategically focus on becoming a developer and marketer of secure document and product technologies. At the time, we specialize in creating dynamic solutions that protect against fraud and ensure the well-being of consumers worldwide. Our mission was to make and deliver world-class authentication, counterfeit prevention and consumer engagement technology attainable and integrated into every product we offerred. The Company holds numerous patents for optical deterrent and authentication technologies that provide protection of printed information from unauthorized alterations, scanning and copying. We also license our anti-counterfeiting technologies to printers and brand-owners. In addition, through our digital division, we provide cloud computing services for our customers, including disaster recovery, back-up and data security services.

 

22

 

 

Prior to 2006, our primary revenue source in our document security division was derived from the licensing of our technology. In 2006, we began a series of acquisitions designed to expand our ability to produce products for end-user customers. In 2006, we acquired Plastic Printing Professionals, Inc., a privately held plastic cards manufacturer located in the San Francisco, California, area (referred to herein as the “DSS Plastics Group”). This was sold in August 2020. In 2008, we acquired DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York. In 2010, we acquired Premier Packaging Corporation, a privately held packaging company located in Victor, New York (referred to herein as the “DSS Packaging and Printing Group”). In May 2011, we acquired ExtraDev, Inc., a privately held information technology and cloud computing company located in Rochester, New York. In 2016, ExtraDev, Inc. changed its name to DSS Digital Inc. DSS Digital Inc. is also referred to herein as the “DSS Digital Group.”

 

In July 2013, the Company expanded its business focus by acquiring Lexington Technology Group, Inc. (“Lexington”), a private intellectual property monetization company. Lexington’s business was primarily to acquire intellectual property assets for the purpose or 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 litigation. DSS Technology Management, Inc., which is also referred to herein as “DSS Technology Management,” was established as a DSS subsidiary to house, account for and further develop this line of business. While similar to Lexington’s business model, DSS Technology Management focuses on extracting the economic benefits of intellectual property assets through acquiring or internally developing patents or other intellectual property assets (or interests therein) and then monetizing such assets through a variety of value enhancing initiatives. However, the Company, as we elaborate below, has determined that it is in the best interests of the Company and its stockholders to wind down our intellectual property monetization business and refocus our efforts on our other existing businesses as well as explore potential new business lines

 

In January 2018, we commenced international operations for our Digital Group with its wholly owned subsidiary, DSS Asia Limited, in our office in Hong Kong. In December 2018, this division acquired a license from Guangzhou Hotapps Technology Ltd, a Chinese company enabling us to do business in China.

 

In 2019, the Company’s Board of Directors decided to restructure and reorganize the Company. At that time, the Company operated four (4) business lines: IP Technology, Premier Packaging, DSS Plastics, and Digital. But due in part to the declining revenue and historic business losses of the Company, the Board set forth a new vision for the Company and instructed management to develop new business models and business lines that would create long term shareholder value through asset growth and revenue growth. The Board was no longer content to wait for results of IP monetization litigation to determine the financial fate of the Company; it sought immediate change. It mandated that a new business model be designed for the Company in which the Company could directly control and manage its outcome daily. The Board insisted upon a three-year business plan to turn to Company profitable. Toward that vision and goal, the Board selected and appointed a new management team, and the management team set about restructuring the Company’s businesses, business models and defining long-term business goals.

 

In November 2019, the new executive management announced that the Company’s 2019-2020 strategic business plan to carry out the Board’s directive. The business plan provided five (5) fundamental building blocks to revitalize the company by (i) strengthening the organization by exiting unprofitable business lines, (ii) investing in and reviving the Company’s core businesses, (iii) improving top line revenues and net margins, (iv) controlling costs and (v) creating or acquiring new long-term scalable, recurring revenue streams. As part of the implementation of that plan, management discontinue operations of unprofitable business lines and reducing capital and cash burn. But in addition, the Company identified six (6) new business lines that it wanted to advance. In addition to the existing Premier Packaging group, Digital Group and IP Technology, the Company created the following new business lines:

 

1.Direct Marketing/Online Sales Group,
2.BioHealth Group,
3.Securities and Fintech Group,
4.Energy Division,
5.Secure Living, and
6.Blockchain Technology.

 

As a result of this 2019 Board directive, the Company was reborn in 2020. The Company now has nine (9) active divisions, and it has actively taken steps to acquire assets and resources for each of these divisions in 2020 (and as reported for the 1st quarter of 2021). Over the past 12 months, the Company has performed a substantial business turnaround. Significant and material assets have been acquired or developed for almost every new division. For the other divisions and the existing divisions, the Company is engaged in obtaining significant additions or acquisitions for these divisions over the coming 2021 year. Each of these new business lines are intended to eventually generate top line reoccurring scalable income. Each of the divisions are on a different growth path with some designed to start generating revenue in 2021, while others are programmed to deliver revenue and growth in 2022, and 2023.

 

The success of the ongoing turnaround of the Company is reflected in its 2020 financials as set forth herein. For 2020, Company assets grew from $20,146,000 for the period ending 12/31/2019 to $91,919,000 for the period ending 12/31/2020. Stockholder’s Equity rose from the period ending 12/31/2019 of $12,303,000 to $76,545,000 for the period ending 12/31/2020. Net Income attributable to stockholders for the 12-month period ending 12/31/2020 was $1,899,000 compared to a $2,889,000 loss for the 12-month period ended 12/31/2019.

 

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 business that 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.

 

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.

 

23

 

 

Additionally, management had determined that one of its business lines, DSS Plastics, has been more severely impacted by the pandemic than our other divisions and we do not believe this is a short-term phenomenon. As a result, management has decided to fully impair its goodwill related to DSS Plastics. The impact to DSS’s first quarter earnings of this impairment was approximately $685,000.

 

RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2020 AND 2019

 

Revenue

 

   Year ended December 31, 2020   Year ended December 31, 2019   % Change 
Revenue               
Printed products  $13,000,000   $13,230,000    -2%
Technology sales, services and licensing   2,085,000    2,148,000    -3%
Direct marketing   2,326,000    172,000    1252%
                
Total Revenue  $17,411,000   $15,550,000    12%

 

Revenue - For the year ended December 31, 2020, revenue increased 12% to approximately $17.4 million as compared to revenues of $15.6 million for the year ended December 31, 2019. Printed products sales, which include sales of packaging and printing products, decreased 2% in 2020 as compared to 2019. The Company’s technology sales, services and licensing revenues decreased 3% in 2020, as compared to 2019. Both decreases in sales were due primarily to the impact of the COVID-19 pandemic as key customers saw a decline in business. A significant part of this decline however was offset by onboarding several new customers throughout the year. The Company’s direct marketing revenues increased 1252% in 2020 as compared to 2019. This is primarily due to the division starting during the fourth quarter 2019.

 

Costs and Expenses

 

    Year ended December 31, 2020     Year ended December 31, 2019     % Change  
Costs and expenses                        
Costs of revenue, exclusive of depreciation and amortization   $ 11,207,000     $ 10,342,000       8 %
Sales, general and administrative compensation     7,873,000       3,450,000       128 %
Depreciation and amortization     1,084,000       1,151,000       -6 %
Professional fees     3,345,000       1,974,000       69 %
Stock based compensation     188,000       422,000       -55 %
Sales and marketing     2,838,000       557,000       410 %
Rent and utilities     359,000       491,000       -27 %
Research and development     210,000       (12,000 )     1850 %
Other operating expenses     1,054,000       (208,000 )     -607 %
                         
Total costs and expenses   $ 28,158,000     $ 18,167,000       55 %

 

24

 

 

Costs of revenue, exclusive of depreciation and amortization includes all direct costs of the Company’s printed products, including its packaging and printing sales and its direct marketing sales, materials, 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 are resold, third-party fees, and fees paid to inventors or others as a result of technology licenses or settlements, if any. Costs of revenue increased 8% in 2020 as compared to 2019, primarily due the increase price of paper as well as cost associated with direct marketing product manufacturing and procurement.

 

Sales, general and administrative compensation costs, increased 128% in 2020 as compared to 2019, primarily due a bonus of approximately $4.3 million accrued for Mr. Heng Fai Ambrose Chan, an executive of the Company’s DSS Cyber Security Pte. Ltd subsidiary in accordance with the terms of his employment contract as compared to $62,000 accrued in 2019.

 

Depreciation and amortization include the depreciation of machinery and equipment used for production, depreciation of office equipment and building and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer lists, trademarks, non-competition agreements and patents, and internally developed patent assets. Depreciation and amortization expense decreased by 6% during 2020, as compared to 2019, primarily due the expiration of the non-compete agreement with a former executive, as well as a large 10-year asset becoming fully depreciated.

 

Professional fees increased 69% in 2020 as compared to 2019, primarily due to an increase in legal fees associated with the direct marketing division, due diligence fees, as well as costs associated with acquisitions.

 

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. Stock-based compensation costs decreased 55% in 2020 as compared to 2019 due to one-time stock grants that took place in 2019 to directors and certain officers with no similar offerings or grants in 2020.

 

Sales and marketing costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses, increased 410% during 2020 as compared to 2019, primarily due to direct marketing distributor commissions.

 

Rent and utilities decreased 27% during 2020 as compared to 2019 due to the relocation of DSS Digital to smaller office space, and the inclusion of our Plastic groups 2019 rent and utilities expense of approximately $325,000 now included in Loss from discontinued operations.

 

Research and development costs consist primarily of third-party research costs and consulting costs. During the year ended December 31, 2020, Research and development costs increased 1850% as compared to the same period in 2019 primarily due to acquisition of Impact Biomedical Inc and their related research costs.

 

Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense, insurance costs, and corporate travel. Other operating expenses increased 607% in 2020 compared to 2019 which is primarily due to a software setup expense for MLM division and D&O insurance increase year over year, as well as amortizing on a pro-rata basis over the expected remaining life of the monetization period of the LED Patent Portfolio through November 30, 2019 of approximately $86,000 per month.

 

25

 

  

Other Income and Expense

 

   Year ended December 31, 2020   Year ended December 31, 2019   % Change 
Other Income (Expense)               
Interest Income  $69,000   $25,000    176%
Interest Expense   (185,000)   (125,000)   48%

Other income

   1,000    -    

N/A

 
Unrealized gains   10,609,000    -    N/A 
Income from equity method investment   604,000    -    N/A 
Gain on extinguishment of debt   969,000    -    N/A 
Amortization of deferred financing costs and debt discount   (8,000)   (3,000)   167%
                
Total other income  $12,059,000   $(103,000)   11808%

 

Interest income increased 176%, during the year ended December 31, 2020, as compared to the same period in 2019, due to interest recognized on the Company’s money market account and notes receivable.

 

Interest expense increased 48%, during the year ended December 31, 2020, as compared to the same period in 2019, due to the interest expense incurred on notes payable, in particular, twelve months of interest associated with the utilization of Premier Packaging equipment line of credit in 2020 versus three months in 2019.

 

Amortized debt discount increased 167% during the year ended December 31, 2020, as compared to the same period in 2019, due to a balance of debt issue costs expensed in 2020.

 

Unrealized gains is recognized on the change in fair market value on our common stock investment in Sharing Services Global Corp $7.1 million and related warrants, Alset International Limited. $3.4 million and other marketable securities $0.1 million for the year 2020.

 

Income from equity method investment represents the Company’s prorated portion of Sharing Services Global Corp’s earnings for the three-months ended October 31, 2020. See Note 6.

 

Gain on extinguishment of debt in April and May 2020 respectively, the Packaging and Digital divisions of the Company received funds from the SBA Paycheck Protection Program of $619,000 and $344,000. As of August 4, 2020, pursuant to the terms of the SBA PPP program, the Company submitted applications for Premier Packaging and DSS Digital for a requested 100% loan forgiveness. During the fourth quarter 2020, both these notes were forgiven in full.

 

26

 

 

During 2020, the Company had net income of $1.4 million as compared to a net loss of $2.9 million in 2019, representing a 149% increase. This achievement of net income in 2020 is primarily due to the impact of a one-time net gain from extinguishment of debt of approximately $1 million, which occurred during the fourth quarter of 2020 and unrealized gains

 

Liquidity and Capital Resources

 

The Company has historically met its liquidity and capital requirements primarily through the sale of its equity securities and debt financings. As of December 31, 2020, the Company had cash of approximately $5.2 million. As of December 31, 2020, the Company believes that it has sufficient cash to meet its cash requirements for at least the next 12 months from the filing date of this Annual Report. In addition, the Company believes that it will have access to sources of capital from the sale of its equity securities and debt financings.

 

Operating Cash Flow - During 2020, the Company expended approximately $5.7 million for operations, which generally reflected by fluctuations in accounts receivable, inventory, and prepaid and other current assets, accrued expenses and other liabilities.

 

Investing Cash Flow - During 2020, the Company expended approximately $10.7 million in investing activities. This includes $0.3 million on equipment for its packaging and direct marketing operations for various pieces of machinery, equipment, and software. In addition, the Company expended approximately $9.8 million on purchases of investments.

 

Financing Cash Flows - During 2020, the Company generated $20.7 million from financing activities, which includes $20.2 million from new issuances of common stock and $1.3 million from the borrowings of long-term debt. This is offset by principal payments on long-term debt of approximately $0.3 million, and payments on its revolving line of credit of $0.5 million.

 

Continuing Operations and Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. While the Company has approximately $5.2 million in cash, and a positive working capital position of approximately $3.6 million as of December 31, 2020, the Company has incurred operating losses as well as negative cash flows from operating and investing activities over the past two years.

 

To continue as a going concern, during the twelve months ended December 31, 2020, the Company through multiple underwriting agreements with Aegis Capital Corp. (“Aegis”), acting as representative of the several underwriters, provided the issuance and sale by the Company in an underwritten public offering shares of the Company’s common stock. The net offering proceeds to the Company approximated $20.2 million. Also, through two separate public offerings underwritten by Aegis during the first quarter of 2021, the Company received net proceeds of approximately $61.0 million.

 

The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters includes, among other things, continued growth among our operating segments, and tightly controlling operating costs and reducing spending growth rates wherever possible to return to profitability. In addition, the Company has taken steps, and will continue to take measures, to materially reduce the expenses and cash burn at all corporate and business line levels. During the twelve months ended December 31, 2020, steps were taken to materially reduce or eliminate cash burns in the IP Monetization program, the DSS Digital Group and the DSS Plastics group.

 

27

 

 

At the Company’s current operating levels and capital usage, we believe that without any further acquisition or investments, our $5.2 million in aggregate cash, cash equivalents, as of December 31, 2020, along with the $61.0 million raised during the first quarter of 2021, would allow us to fund our nine business lines current and planned operations through March 2022. Based on this, the Company has concluded that substantial doubt of its ability to continue as a going concern has been alleviated

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.

 

Inflation

 

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during 2020 or 2019 as we are generally able to pass the increase in our material and labor costs to our customers or absorb them as we improve the efficiency of our operations.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the U.S. (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. The Company’s consolidated financial statements for the fiscal year ended December 31, 2020 describe the significant accounting policies and methods used in the preparation of the consolidated financial statements.

 

Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets.

 

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The carrying amounts reported in the balance sheet of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities classify as a Level 1 fair value financial instrument. The fair value of notes receivable approximates their carrying value as the stated or discounted rates of the notes do not reflect recent market conditions. The fair value of revolving credit lines notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. The fair value of investments carried at cost less impairment; however, the fair value is not considered readily determinable based on the lack of liquidity for the shares owned.

 

Investments – Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at that value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings.

 

For equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value below book value. If there is a decline that is other-than-temporary, the investment is written down to fair value. See Note 6 for further discussion on investments.

 

Related Party Liabilities - The Company’s HWH World, Inc subsidiary has a service agreement pending with HWH Korea, a subsidiary of Alset International Limited (formally Singapore eDevelopment Limited), and thus a related party. This service agreement will allow HWH Korea to utilize the Company’s merchant account in connection with their direct marketing network with periodic remittance of the cash collected to them. As of December 31, 2020, the Company has collected approximately $1,100,000 on behalf of HWH Korea did remit amounts during the first quarter of 2021. The related party liability is included in “Other current liabilities” on the accompanying consolidated balance sheets.

 

Revenue - The Company recognizes its products and services revenue based on when the title passes to the customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. The Company also derives revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products. The Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license revenues through litigation settlements. For these, the Company recognizes revenue upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. The Company generates revenue from its direct marketing line of business primarily through internet sales and recognizes revenue as items are shipped.

 

As of December 31, 2020, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less. 

 

Business Combinations - Business combinations and non-controlling interests are recorded in accordance with FASB ASC 805 Business Combinations. Under the guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition and all acquisition costs are expensed as incurred. The excess of the purchase price over the estimated fair values is recorded as goodwill. If the fair value of the assets acquired exceeds the purchase price and the liabilities assumed, then a gain on acquisition is recorded. The application of business combination accounting requires the use of significant estimates and assumptions. See Note 7 regarding the acquisitions in 2020.

 

Discontinued Operations – On April 20, 2020, the Company executed a nonbinding letter of intent with a perspective buyer for the sale of certain assets of its plastic printing business line, which it operated under Plastic Printing Professionals, Inc. (“DSS Plastics”), a wholly-owned subsidiary of the Company. That sale was consummated and closed on August 14, 2020. The remaining assets of DSS Plastics were either sold, separately disposed, or retained by other existing DSS businesses lines. Accordingly, the operations of DSS Plastics have been discontinued. Based on the magnitude of DSS Plastics’ historical revenue to the Company and because the Company has exited the production of laminated and surface printed cards, this sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for this sale as required by Accounting Standards Codification 210-05—Discontinued Operations. The major classes of assets and liabilities of DSS Plastics are classified as Held For Sale – Discontinued Operations on the Consolidated Balance Sheets and the operating results of the discontinued operations is reflected on the Consolidated Statements of Operations and Comprehensive Income (Loss) as Loss from Discontinued Operations. See Note 16.

 

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

28

 

  

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Financial Statements

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm 30
   
Consolidated Financial Statements:  
   
Consolidated Balance Sheets 31
   
Consolidated Statements of Operations and Comprehensive Income (Loss) 32
   
Consolidated Statements of Cash Flows 33
   
Consolidated Statements of Changes in Stockholders’ Equity 34
   
Notes to the Consolidated Financial Statements 35

 

29

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of Document Security Systems, Inc. and Subsidiaries 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Document Security Systems, Inc and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Accounting for Business Combinations – Impact BioMedical, Inc.

 

As described in Note 7 to the consolidated financial statements, the Company completed its acquisition of Impact BioMedical, Inc. from a related party during the year ended December 31, 2020 for consideration of approximately $38 million. In connection with this transaction, the Company evaluated whether this transaction qualified as a business combination, evaluated the classification of the preferred shares as either a liability or equity, determined the fair value of the consideration paid, determined the fair value of the separately identifiable assets acquired and liabilities assumed and reflected the excess of the consideration paid over net assets acquired as goodwill. In connection with this transaction a deferred tax liability was recorded resulting in the release of a previously recorded valuation allowance. The operations of this acquisition are considered to be a single reporting unit.

 

The evaluation of the classification of the transaction as a business combination and the preferred shares issued as permanent equity is complex. Further, based on the stage of development of the business and the related party nature of the transaction, the valuation of the consideration paid, assets acquired, liabilities assumed, and related non-controlling interest is complex and judgmental. The valuation models used by management when determining their estimated fair value require subjective assumptions. In particular, the fair value estimates are sensitive to changes in assumptions for revenue growth, gross margin, and operating expenses as well as weighted average cost of capital, illiquidity discounts relating to the consideration paid, and lack of control discounts for the non-controlling interest. Additionally, the accounting for the transaction and income tax accounting related to the opening balance sheet was complex. Due to the complexity of the transactions and subjectivity involved with the assumptions used, we identified the business combination as a critical audit matter, which required a high degree of auditor judgement. 

 

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.  The primary procedures we performed included: (i) Obtaining an understanding and evaluating of the design of controls over accounting for and reporting of the transaction, (ii) auditing the appropriateness of management’s conclusions surrounding the classification of this transaction as a business combination and the preferred share consideration as permanent equity, (iii) auditing management’s assessment of the identification of assets to be acquired and valued, (iv) auditing management’s development of the assumptions used in the valuation models applied and the reasonableness of those assumptions, and auditing the disclosures over this transaction, and (v) auditing the calculation of the deferred tax liability recorded related to the transaction. Professionals with specialized skills and knowledge were used to assist in evaluating certain methodologies and assumptions used in determining fair values.

 

Valuation of Investments in Related Parties – Alset International, Inc. and Sharing Services Global Corp

 

As described in Note 6 to the consolidated financial statements, the Company has an equity investment in Alset International, Inc. (“Alset”), a related party, of approximately $6.8 million as of December 31, 2020, recorded as a marketable security with a readily determinable fair value. This investment was previously recorded at cost, less impairment. During the year ended December 31, 2020, the Company recorded unrealized gains associated with this investment of approximately $3.4 million. The Company also has an equity investment in Sharing Services Global Corp (“SHRG”), a related party, of approximately $12.2 million as of December 31, 2020, recorded as an equity method investment, as the Company has significant influence of SHRG. Prior to obtaining significant influence, the investment was accounted for as a marketable security with a readily determinable fair value. During the year ended December 31, 2020, the Company recorded unrealized gains associated with this investment of approximately $6.8 million, prior to gaining significant influence, and income of approximately $600,000 associated with the Company’s share of equity in SHRG. Further, the Company holds a warrant to purchase additional shares of SHRG amounting to approximately $1.1 million, which is accounted for as an investment in an equity instrument and recorded at fair value, resulting in approximately $350,000 of unrealized gains.

 

The evaluation of the related party relationships and proper accounting treatment is complex and involves a high degree of subjectivity and effort in performing procedures surrounding the classification and calculations related to the investments. Due to the complexity of the transactions and subjectivity involved with the assumptions used, we identified the accounting for these related party investments as a critical audit matter, which required a high degree of auditor judgement. 

 

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed included: (i) Obtaining an understanding and evaluating of the design of controls over the determination the investments, (ii) evaluating the related party nature of the investment and whether the investment was classified and recorded utilizing the appropriate accounting guidance, (iii) recalculating the respective investment values and gains associated with those investments, and (iv) auditing the reasonableness of the presentation and disclosure of the investments.

 

/s/ Freed Maxick CPAs, P.C.  
   
We have served as the Company’s auditor since 2004.  
   
Rochester, New York  
March 31, 2021  

 

30

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

As of December 31,

 

  2020   2019 
         
ASSETS        
Current assets:          
Cash and cash equivalents  $5,226,000   $1,096,000 
Accounts receivable, net   3,910,000    4,212,000 
Inventory   1,955,000    1,366,000 
Assets held for sale - discontinued operations   -    342,000 
Prepaid expenses and other current assets   1,359,000    460,000 
Total current assets   12,450,000    7,476,000 
           
Property, plant and equipment, net   4,146,000    4,328,000 
Other investments   1,788,000    2,154,000 
Investment, equity method   12,234,000    - 
Marketable securities   9,136,000    - 
Notes receivable   537,000    793,000 
Non-current assets held for sale - discontinued operations   744,000    1,812,000 
Other assets   384,000    50,000 
Right-of-use assets   182,000    144,000 
Goodwill   26,862,000    2,454,000 
Other intangible assets, net   23,456,000    935,000 
Total assets  $91,919,000   $20,146,000 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $1,482,000   $1,492,000 
Accrued expenses and deferred revenue   5,270,000    936,000 
Other current liabilities   1,435,000    390,000 
Current liabilities held for sale - discontinued operations   240,000    274,000 
Revolving line of credit   -    500,000 
Current portion of lease liability   167,000    123,000 
Current portion of long-term debt, net   278,000    441,000 
Total current liabilities   

8,872,000

    4,156,000 
           
Long-term debt, net   1,976,000    2,310,000 
Long term lease liability   15,000    19,000 
Non-current liabilities held for sale - discontinued operations   505,000    807,000 
Other long-term liabilities   507,000    507,000 
Deferred tax liability, net   3,499,000    44,000 
           
Commitments and contingencies (Note 15)          
           
Stockholders’ equity          
Preferred stock, $.02 par value; 47,000 shares authorized, 43,000 shares issued and outstanding (0 on December 31, 2019); Liquidation value $1,000 per share, $43,000,000 aggregate.   1,000    - 
Common stock, $.02 par value; 200,000,000 shares authorized, 5,836,000 shares issued and outstanding (1,206,000 on December 31, 2019)   116,000    24,000 
Additional paid-in capital   174,380,000    115,560,000 
Non-controlling interest in subsidiary   3,430,000    - 
Accumulated deficit   (101,382,000)   (103,281,000)
Total stockholders’ equity   

76,545,000

    12,303,000 
           
Total liabilities and stockholders’ equity  $91,919,000   $20,146,000 

 

See accompanying notes.

 

31

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Years Ended December 31,

 

    2020     2019  
Revenue:                
Printed products   $ 13,000,000     $ 13,230,000  
Technology sales, services and licensing     2,085,000       2,148,000  
Direct marketing     2,326,000       172,000  
Total revenue     17,411,000       15,550,000  
                 
Costs and expenses:                
Cost of revenue, exclusive of depreciation and amortization     11,207,000       10,342,000  
Selling, general and administrative (including stock based compensation)     15,867,000       6,674,000  
Depreciation and amortization     1,084,000       1,151,000  
Total costs and expenses     28,158,000       18,167,000  
Operating loss     (10,747,000 )     (2,617,000 )
                 
Other income (expense):                
Interest income     69,000       25,000  
Other income     1,000       -  
Interest expense     (185,000 )     (125,000 )
Gain on extinguishment of debt     969,000       -  
Income from equity method investment     604,000       -  
Unrealized gains     10,609,000       -  
Amortization of deferred financing costs and debt discount     (8,000 )     (3,000 )
Income (loss) from continuing operations before income taxes     1,312,000       (2,720,000 )
                 
Income tax benefit     (1,774,000)       (125,000 )
Income (loss) from continuing operations     3,086,000       (2,595,000 )
Loss from discontinued operations     (1,668,000 )     (294,000 )
Net income (loss)     1,418,000       (2,889,000 )
                 

Loss from continuing operations attributed to noncontrolling interest

    481,000       -  
                 
Net income (loss) attributable to common stockholders     1,899,000       (2,889,000 )
                 
Other comprehensive income (loss):                
Interest rate swap loss     -       (15,000 )
Settlement of interest rate swap     -       22,000  
                 
Comprehensive income (loss):     1,418,000       (2,882,000 )
                 
Earnings (loss) per common share - continuing operations:                
Basic   $ 1.01     $ (3.05 )
Diluted   $ 0.59     $ (3.05 )
                 
Loss per common share - discontinued operations:                
Basic   $ (0.47 )   $ (0.35 )
Diluted   $ (0.28 )   $ (0.35 )
                 
Shares used in computing earnings (loss) per common share:                
Basic     3,548,421       850,180  
Diluted     6,019,207       850,180  

 

See accompanying notes.

 

32

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31,

 

   2020   2019 
Cash flows from operating activities:          
Net income (loss) from continuing operations  $3,086,000   $(2,595,000)
Adjustments to reconcile net income (loss) from continuing operations to net cash used by operating activities:          
Depreciation and amortization   1,084,000    1,151,000 
Stock based compensation   188,000    422,000 
Income from equity investment   (604,000)   - 
Unrealized gains   (10,609,000)   - 
Gain on extinguishment of debt   (969,000)   - 
Deferred tax benefit   (1,774,000)   (125,000)
Amortization of deferred financing cost and debt discounts   -    2,000 
Decrease (increase) in assets:          
Accounts receivable   (309,000)   (1,659,000)
Inventory   (705,000)   (848,000)
Prepaid expenses and other current assets   (499,000)   (154,000)
Other assets   355,000    - 
Increase (decrease) in liabilities:          
Accounts payable   (201,000)   392,000 
Accrued expenses   4,230,000    (307,000)
Deferred revenue and customer deposits   -    21,000 
Other liabilities   1,044,000    (1,750,000)
Net cash used by operating activities   (5,683,000)   (5,450,000)
           
Cash flows from investing activities:          
Purchase of property, plant and equipment   (325,000)   (947,000)
Purchase of investments   (9,791,000)   (1,829,000)
Note receivable investment   (574,000)   (793,000)
Purchase of intangible assets   -    (370,000)
Net cash used by investing activities   (10,690,000)   (3,939,000)
           
Cash flows from financing activities:          
Payments of long-term debt   (304,000)   (167,000)
Borrowings of long-term debt   1,278,000      
Borrowings from lines of credit, net   -    588,000 
Payments of revolving lines of credit, net   (500,000)   500,000 
Borrowings from convertible of note   -    500,000 
Issuances of common stock, net of issuance costs   20,195,000    6,659,000 
Net cash provided by financing activities   20,669,000    8,080,000 
           
Cash flows from discontinued operations:          
Cash (used) provided by operations   (469,000)   106,000 
Cash provided (used) by investing activities   880,000    (42,000)
Cash used by financing activities   (577,000)   (107,000)
Net cash used by discontinued operations   (166,000)   (43,000)
           
Net increase (decrease) in cash and cash equivalents   4,130,000    (1,352,000)
Cash and cash equivalents at beginning of year   1,096,000    2,448,000 
           
Cash and cash equivalents at end of year  $5,226,000   $1,096,000 

 

See accompanying notes.

 

33

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2020 and 2019

 

    Common Stock     Preferred Stock     Additional Paid-in     Accumulated Other Comprehensive     Non- controlling Interest in     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Loss     Subsidiary     Deficit     Total  
                                                       
Balance, December 31, 2019     1,206,000     $ 24,000       -       -     $ 115,560,000     $ -     $ -     $ (103,281,000 )   $ 12,303,000  
                                                                         
Issuance of common stock, net     3,434,000       68,000       -       -       20,127,000       -       -       -       20,195,000  
                                                                         
Conversion of preferred stock     663,000        13,000        (4,000 )     -       (13,000 )                       -  
Stock based payments, net of tax effect     50,000       1,000       -       -       397,000       -       -       -       398,000  
Acquisition of Impact BioMedical, Inc.     483,000       10,000       47,000       1,000       38,309,000       -       3,911,000               42,231,000  
Net income     -       -       -       -       -       -       (481,000 )     1,899,000       1,418,000  
Balance, December 31, 2020     5,836,000     $ 116,000       43,000      $ 1,000     $ 174,380,000     $                  -     $ 3,430,000     $ (101,382,000 )   $ 76,545,000  
                                                                         
Balance, December 31, 2018     581,000     $ 12,000       -       -     $ 107,962,000     $ (7,000 )     -     $ (100,392,000 )   $ 7,575,000  
                                                                         
Issuance of common stock, net     610,000       12,000       -       -       7,292,000       -       -       -       7,304,000  
Stock based payments, net of tax effect     15,000       -       -       -       306,000       -       -       -       306,000  
Other comprehensive loss     -       -       -       -       -       7,000       -       -       7,000  
Net loss     -       -       -       -       -       -       -       (2,889,000 )     (2,889,000 )
Balance, December 31, 2019     1,206,000     $ 24,000                     $ 115,560,000     $ -     $ -     $ (103,281,000 )   $ 12,303,000  

 

See accompanying notes.

 

34

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Document Security Systems, Inc. (the “Company of DSS”) operates eight (8) business lines through eight (8) DSS subsidiaries located around the globe.

 

Of the eight subsidiaries, three of those have historically been the core subsidiaries of the Company: (1) Premier Packaging Corporation (“Premier Packaging”), (2) DSS Digital Inc., and its subsidiaries (“Digital Group”), and (3) DSS Technology Management, Inc. (“IP Technology”). Premier Packaging operates in the paper board folding carton, smart packaging, and document security printing markets. It markets, manufactures, and sells mailers, photo sleeves, sophisticated custom folding cartons, and complex 3-dimensional direct mail solutions designed to provide functionality, marketability, and sustainability to product packaging while providing counterfeit protection and consumer engagement platform. Digital Group researches, develops, markets, and sells the Company’s digital products worldwide. As an industry leader in brand authentication services, our solutions leverage functional anti-counterfeiting features and cutting-edge technologies to satisfy commercial and consumer product needs for branding, intelligent packaging, and marketing. Digital’s primary product is AuthentiGuard®, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions. IP Technology Management Inc., manages, licenses, and acquires intellectual property assets for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships, and commercial litigation. In 2020, under its (4) Decentralize Sharing Systems, Inc. subsidiary, created a fourth business segment, Direct Marketing/Online Sales Group. This group provides services to assist companies in the emerging growth gig business model of peer-to-peer decentralized sharing marketplaces. Direct specializes in marketing and distributing its products and services through its subsidiary and partner network, using the popular gig economic marketing strategy as a form of direct marketing. 

 

In addition to the four subsidiaries listed above, in 2019 and early 2020, DSS has created four new, wholly owned subsidiaries. (5) DSS Blockchain Security, Inc., a Nevada corporation, specializes in the development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber securities across global markets. (6) DSS Securities, Inc., a Nevada corporation, has been established to develop or to acquire assets in the securities trading or management arena, and to pursue two parallel streams of digital asset exchanges in multiple jurisdictions: (i) securitized token exchanges, focusing on digitized assets from different vertical industries and (ii) utilities token exchanges, focusing on “blue-chip” utility tokens from solid businesses. (7) DSS BioHealth Security, Inc., a Nevada corporation, is our business line which we will intend to invest in or to acquire companies related to the bio-health and biomedical field, including businesses focused on the research to advance drug discovery and development for the prevention, inhibition, and treatment of neurological, oncology and immuno-related diseases. This new division will place special focus on open-air defense initiatives, which curb transmission of air-borne infectious diseases such as tuberculosis and influenza, among others. (8) DSS Secure Living, Inc., a Nevada Corporation, develops top of the line advanced technology, energy efficiency, quality of life living environments and home security for everyone for new construction and renovations of residential single and multifamily living facilities. Aside from Decentralized Sharing Systems, Inc. the activity in the these newly created subsidiaries have been minimal or in various start-up or organizational phases.

 

On March 3, 2020, the Company, via its subsidiary DSS Securities, entered into a share subscription agreement and loan arrangement with LiquidValue Asset Management Pte Ltd., AMRE Asset Management, Inc. and American Medical REIT Inc. under which it acquired a 52.5% controlling ownership interest in AMRE Asset Management Inc. (“AAMI”) which currently has a 93% equity interest in American Medical REIT Inc. (“AMRE”) (see Note 7). AAMI is a real estate investment trust (“REIT”) management company that sets the strategic vision and formulate investment strategy for AMRE. It manages the REIT’s assets and liabilities and provides recommendations to AMRE on acquisition and divestments in accordance with the investment strategies. AMRE is a Maryland corporation, organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. AMRE was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. AMRE is planned to qualify as a Real Estate Investment Trust for federal income tax purposes, which will provide. AMRE’s investors the opportunity for direct ownership of Class A licensed medical real estate. As of December 31, 2020, AAMI has yet to generate any revenue.

  

On August 21, 2020, the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”), pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth Security, Inc. (“DSS BioHealth”), Alset International Limited (formally Singapore eDevelopment Ltd.), and Global Biomedical Pte Ltd. (“GBM”), which was previously approved by the Company’s shareholders (the “Share Exchange”). Under the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s common stock, par value $0.02 per share, nominally valued at $6.48 per share, and 46,868 newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary (see Note 7).

 

Impact BioMedical strives to leverage its scientific know-how and intellectual property rights to provide solutions that have been plaguing the biomedical field for decades. By tapping into the scientific expertise of its partners, Impact BioMedical has undertook a concerted effort in the research and development (R&D), drug discovery and development for the prevention, inhibition, and treatment of neurological, oncological and immune related diseases.

 

In August 2020, the Company’s wholly owned subsidiary, DSS Securities, Inc. entered into a corporate venture to form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”). DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application and permitting process.

 

35

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation - The consolidated financial statements include the accounts of Document Security System and its wholly owned and its majority owned or subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts and notes receivable, inventory, fair values of investments, recoverability of long-lived assets and goodwill, useful lives of intangible assets and property and equipment, contingencies fair values of options and warrants to purchase the Company’s common stock, deferred revenue and income taxes, substantial doubt about ability to continue as a going concern among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Reclassifications - Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 2019 have been reclassified to conform to current year presentation.

 

Cash Equivalents - All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Amounts included in cash equivalents in the accompanying consolidated balance sheets are money market funds whose adjusted costs approximate fair value.

 

Accounts Receivable - The Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and generally do not require collateral. Payment terms are generally 30 days but up to net 105 for certain customers. The Company carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management’s estimates that include a review of the history of past write-offs and collections and an analysis of current credit conditions. As of December 31, 2020, the Company established a reserve for doubtful accounts of approximately $25,000 ($41,000 – 2019). The Company does not accrue interest on past due accounts receivable.

 

36

 

 

Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets.

 

● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The carrying amounts reported in the balance sheet of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities classify as a Level 1 fair value financial instrument. The fair value of notes receivable approximates their carrying value as the stated or discounted rates of the notes do not reflect recent market conditions. The fair value of revolving credit lines notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. The fair value of investments where the fair value is not considered readily determinable, are carried at cost.

 

Inventory - Inventories consist primarily of paper, pre-printed security paper, paperboard, fully prepared packaging, and health and beauty products which and are stated at the lower of cost or net realizable value on the first-in, first-out (“FIFO”) method. Packaging work-in-process and finished goods included the cost of materials, direct labor and overhead. At the closing of each reporting period, the Company evaluates its inventory in order to adjust the inventory balance for obsolete and slow-moving items. No reserve was recorded as of December 31, 2020 or 2019. Write-downs and write-offs are charged to cost of revenue.

 

Investments – Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at fair value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings.

 

For equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value below book value. If there is a decline that is other-than-temporary, the investment is written down to fair value. See Note 6 for further discussion on investments.

 

Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives or lease period of the assets whichever is shorter. Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Any gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Depreciation expense in 2020 was approximately $710,000 ($690,000 - 2019).

 

37

 

 

Goodwill - Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. FASB ASC Topic 350 provides an entity with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company will proceed to a quantitative test. The Company may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units. The test compares the fair value of an entity’s reporting units to the carrying value of those reporting units. This quantitative test requires various judgments and estimates. The Company estimates the fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. The Company performed its annual goodwill impairment test as of December 31, 2020, and no impairment was deemed necessary for the goodwill associated with Premier Packaging Company of approximately $1,768,600. Consistent with this accounting impairment analysis, the Company determined that due to many factors, including the impact of the COVID-19 outbreak and the related closing of the operations of the Plastic Group, the Company has quantitatively tested the carrying value of its goodwill associated with the DSS Plastics Group and determined that an impairment of the DSS Plastics’ goodwill had occurred and the Company recorded a full goodwill impairment of $685,000 during the twelve-months ended December 31, 2020. This impairment has been included in the calculation of the discontinued operations of DSS Plastics group. There was no goodwill impairment recorded during the year ended December 31, 2019.

 

Intangible Assets - The estimated fair values of acquired intangibles are generally determined based upon future economic benefits such as earnings and cash flows. Acquired identifiable intangible assets are recorded at fair value and are amortized over their estimated useful lives. Acquired intangible assets with an indefinite life are not amortized but are reviewed for impairment at least annually or more frequently whenever events or changes in circumstances indicate that the carrying amounts of those assets are below their estimated fair values. Impairment is tested under ASC 350.

 

Long-Lived Assets - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value.

 

Related Party Liabilities - The Company’s HWH World, Inc subsidiary has a service agreement with HWH Korea, a subsidiary of Alset International Limited (“Alset Intl.”) (formally Singapore eDevelopment Limited). The Chairman of the Company, Mr. Heng Fai Ambrose Chan, is the Executive Director and Chief Executive Officer of Alset Intl. Mr. Chan is also the majority shareholder of Alset Intl as well as the largest shareholder of the Company. The Company also owns approximately 127,179,000 shares of Alset International, a company publicly listed on the Singapore Exchange Limited. This service agreement will allow HWH Korea to utilize the Company’s merchant account in connection with their direct marketing network with periodic remittance of the cash collected to them for a fee of 2.5% of amounts collected. As of December 31, 2020, the Company has collected approximately $1,100,000 on behalf of HWH Korea. This amount was remitted to HWH Korea, net of fees and other expenses, in the first quarter of 2021. The related party liability is included in “Other current liabilities” on the accompanying consolidated balance sheets. There were no amounts outstanding to this related party at December 31, 2019.

 

Reverse Stock Split - On May 4, 2020, Document Security Systems, Inc. held a Special Meeting of Stockholders at which the Company’s stockholders approved amendment to the Company’s certificate of incorporation to effect a reverse split of common stock of the Company by a ratio of 1-for-30 with the effectiveness of such amendment to be determined by the Board of Directors of the Company The form of the certificate of amendment to effect the Reverse Split was subsequently approved by the Board on May 4, 2020. On May 7, 2020, the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of New York to effect a 1-for-30 reverse stock split of the Company’s outstanding common stock. The Amendment was effective at 5:01 p.m. Eastern Time on May 7, 2020. The reverse stock split has been retroactively applied to all financial statements presented.

 

38

 

 

Revenue - The Company recognizes its products and services revenue based on when the title passes to the customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. The Company also derives revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products. The Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license revenues through litigation settlements. For these, the Company recognizes revenue upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. The Company generates revenue from its direct marketing line of business primarily through internet sales and recognizes revenue as items are shipped.

 

As of December 31, 2020, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less.

 

Costs of revenue - Costs of revenue includes all direct cost of the Company’s packaging, commercial and security printing sales, primarily, paper, inks, dies, and other consumables, and direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs associated with the manufacturing and procurement of the products sold in the Company’s Direct Marketing line of business as well as with the Company’s technology sales, services and licensing including hardware and software that is resold, third-party fees, and fees paid to inventors or others as a result of technology licenses or settlements, if any. Amortization of patent costs and acquired technology are included in depreciation and amortization on the consolidated statement of operations. Costs of revenue do not include expenses related to product development, integration, and support. These costs are included in research and development, which is a component of selling, general and administrative expenses on the consolidated statement of operations. Legal costs are included in selling, general and administrative.

 

Shipping and Handling Costs - Costs incurred by the Company related to shipping and handling are included in cost of revenue. Amounts charged to customers pertaining to these costs are reflected as revenue.

 

Share-Based Payments - Compensation cost for stock awards are measured at fair value and the Company recognizes compensation expense over the service period for which awards are expected to vest. The Company uses the Black-Scholes-Merton option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes-Merton model requires the use of subjective assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. For equity instruments issued to consultants and vendors in exchange for goods and services the Company determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

Sales Commissions - Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. A significant portion of the Company’s sales commissions expense is generated from its direct marketing line of business. These commissions are based on current month shipments and are paid one month in arrears. There were no sales commissions capitalized as of December 31, 2020.

 

Contingent Legal Expenses - Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any unamortized patent acquisition costs will be expensed in the period a conclusion is reached in an enforcement action that does not yield future royalties potential.

 

39

 

 

Research and Development - Research and development costs are expensed as incurred. Research and development costs consist primarily of third-party research costs and consulting costs. The Company recognized costs of approximately $210,000 in 2020, and a credit in 2019 of approximately $12,000 primarily due to receipt of the anticipated $33,000 refund on development costs for the development of proprietary blockchain solutions for the Company’s AuthentiGuard product line.

 

Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in income tax expense.

 

Comprehensive Income (Loss) - Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions and other events and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income (loss). The change in fair value of interest rate swaps was the only item impacting accumulated other comprehensive loss for the year ended December 31, 2019.

 

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares from outstanding warrants, stock options and preferred stock that would have been outstanding if dilutive potential shares had been issued and is calculated utilizing the treasury stock method. In a loss period, the calculation for basic and diluted earnings per share is the same, as the impact of potential common shares is anti-dilutive. Weighted average shares outstanding used for diluted earnings per share includes the assumed conversion of the 47,000 preferred shares, convertible into 7,233,000 common shares, for the period they were outstanding resulting in an additional 2,471,000 shares for the year ended December 31, 2020.

 

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.

 

During 2020, two customers accounted for 38% of our consolidated revenue. As of December 31, 2020, these two customers accounted for 60% of our consolidated trade accounts receivable balance. As of December 31, 2019, these two customers accounted for 45% of our consolidated revenue and 48% of our consolidated trade accounts receivable balance.

 

Business Combinations - Business combinations and non-controlling interests are recorded in accordance with FASB ASC 805 Business Combinations. Although Impact BioMedical historically, and to date has not generated any revenues, the acquisition of Impact BioMedical meets the definition of a business with inputs, processes, and outputs, and therefore, the Company has concluded to account for this transaction in accordance with the acquisition method of accounting under Topic 805. Under the guidance, we determine the fair value of consideration paid and the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition and all acquisition costs are expensed as incurred. The excess of the purchase price over the estimated fair values is recorded as goodwill. If the fair value of the assets acquired exceeds the purchase price and the liabilities assumed, then a gain on acquisition is recorded. The application of business combination accounting requires the use of significant estimates and assumptions. See Note 7 regarding the acquisitions in 2020.

 

Discontinued Operations – On April 20, 2020, the Company executed a nonbinding letter of intent with a perspective buyer for the sale of certain assets of its plastic printing business line, which it operated under Plastic Printing Professionals, Inc. (“DSS Plastics”), a wholly-owned subsidiary of the Company. That sale was consummated and closed on August 14, 2020. The remaining assets of DSS Plastics were either sold, separately disposed, or retained by other existing DSS businesses lines. Accordingly, the operations of DSS Plastics have been discontinued. Based on the magnitude of DSS Plastics’ historical revenue to the Company and because the Company has exited the production of laminated and surface printed cards, this sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for this sale as required by Accounting Standards Codification 205—Discontinued Operations. The major classes of assets and liabilities of DSS Plastics are classified as Held for Sale – Discontinued Operations on the Consolidated Balance Sheets and the operating results of the discontinued operations is reflected on the Consolidated Statements of Operations and Comprehensive Income (Loss) as Loss from Discontinued Operations. See Note 16.

 

40

 

 

Newly Adopted and Recent Accounting Pronouncements - In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment”, which eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. The standards update is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019 and has been adopted by the Company effective January 1, 2020.

 

In February 2016, the FASB issued ASU No. 2016-02 and its related amendments which introduced Leases (Topic 842, or “ASC 842”), a new comprehensive lease accounting model that supersedes the current lease guidance under Leases (Topic 840). The new accounting standard requires lessees to recognize right-of-use (“ROU”) assets and corresponding lease liabilities for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. In July 2018, the FASB added a transition option for implementation that allows companies to continue to use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three practical expedients permitted under the transition guidance and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption, without a restatement of prior periods. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). As a result of the adoption, the Company adjusted its beginning balance as of January 1, 2019 by recording operating lease ROU asset and liabilities through a cumulative-effect adjustment. The adoption impacted the accompanying consolidated balance sheet but did not have an impact on the consolidated statements of operations and comprehensive income (loss).

 

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding ROU assets upon lease commencement using a discount rate based on a credit adjusted secured borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current or noncurrent liabilities based upon the length of time associated with the lease payments. The operating lease ROU assets includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any, and are recorded as noncurrent assets. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are not recorded on the accompanying consolidated balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The impact of the adoption of ASC 842 on the accompanying consolidated balance sheet as of January 1, 2019 was a right-of-use asset and a lease liability of approximately $1,443,800.

 

41

 

 

Impact of COVID-19 Outbreak - The COVID-19 pandemic has created global economic turmoil and has potentially permanently impacted how many businesses operate and how individuals will socialize and shop in the future. We continue to feel the effect of the COVID-19 business shutdowns and consumer stay-at-home protections. But the effect of the economic shutdown has impacted our business lines differently, some more severely than others. In most cases, we believe the negative economic trends and reduced sales will recover over time. However, management determined that one of its business lines, DSS Plastics, had been, and would continue to be, more severely impacted by the pandemic than our other divisions, and we did not believe this was a short-term phenomenon. We expected that this business would be permanently impacted because we believe that both consumer and corporate future travel habits will be negatively impacted and, as a result, use of hotel access cards will be diminished. We believe that conventions and sporting events will be fewer and smaller in attendance, and therefore demand for our card identification products would be reduced. Further, we believe that physical security cards and individual IDs will be replaced by more digital and optical technologies. As a result, management decided to fully impair its goodwill related to DSS Plastics during the first quarter 2020, and to exit this business line. The impact of this decision in our first quarter 2020 earnings and for as of December 31, 2020 was an impairment of approximately $685,000. Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including losses on inventory; impairment losses related to goodwill and other long-lived assets and current obligations.

 

Continuing Operations and Going Concern - The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. While the Company has approximately $5.2 million in cash, and a positive working capital position of approximately $3.6 million as of December 31, 2020, the Company has incurred operating losses as well as negative cash flows from operating and investing activities over the past two years.

 

To continue as a going concern, during the twelve months ended December 31, 2020, the Company through multiple underwriting agreements with Aegis Capital Corp. (“Aegis”), acting as representative of the several underwriters, provided the issuance and sale by the Company in an underwritten public offering shares of the Company’s common stock. The net offering proceeds to the Company approximated $20.2 million. Also, through two separate public offerings underwritten by Aegis during the first quarter of 2021, the Company received net proceeds of approximately $61.0 million.

 

The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters includes, among other things, continued growth among our operating segments, and tightly controlling operating costs and reducing spending growth rates wherever possible to return to profitability. In addition, the Company has taken steps, and will continue to take measures, to materially reduce the expenses and cash burn at all corporate and business line levels. During the twelve months ended December 31, 2020, steps were taken to materially reduce or eliminate cash burns in the IP Monetization program, the DSS Digital Group and the DSS Plastics group.

 

At the Company’s current operating levels and capital usage, we believe that without any further acquisition or investments, our $5.2 million in aggregate cash, and cash equivalents, as of December 31, 2020, along with the $61.0 million raised during the first quarter of 2021, would allow us to fund our nine business lines current and planned operations through March 2022. Based on this, the Company has concluded that substantial doubt of its ability to continue as a going concern has been alleviated

 

NOTE 3 – INVENTORY

 

Inventory consisted of the following as of December 31:

 

   2020   2019 
Finished Goods  $1,544,000   $756,000 
Work in Process   280,000    246,000 
Raw Materials   131,000    364,000 
   $1,955,000   $1,366,000 

 

42

 

 

NOTE 4 – NOTES RECEIVABLE

 

On October 10, 2019, the Company entered into a convertible promissory note (“TBD Note”) with Century TBD Holdings, LLC (“TBD”), a Florida limited liability company. The Company loaned the principal sum of $500,000, of which up to $500,000 and all accrued interest can be paid by an “Optional Conversion” of such amount up to 19.8% (non-dilutable) of all outstanding membership interest in TBD. This TBD Note accrues interest at 6% and matures on October 9, 2021. As of December 31, 2020, and 2019 this TBD Note had outstanding principal and interest of approximately $537,000 and $507,000, respectively. On December 30, 2020, the Company signed a binding letter of intent with West Park Capital, Inc (“West Park”). and TBD where the parties agreed to prepare a note and stock exchange agreement whereby DSS will assign the TBD Note to West Park and West Park shall issue to DSS a stock certificate reflecting 7.5% of the issued and outstanding shares of West Park. This note and stock exchange agreement is expected to be finalized sometime during the second quarter of 2021.

 

On October 9, 2019 and November 11, 2019, the Company’s subsidiary Decentralized Sharing Systems, Inc. entered into two, separate on demand, secured, convertible notes with RBC Life Sciences, Inc. (RBC), a Nevada corporation. The first Note, dated October 9th , lent the principal sum of $200,000 which accrued at a non-default interest rate of 6% with a scheduled maturity date of November 11, 2019 (“Note #1) This Note #1 also contains an “Optional Conversion” clause that allows the Company at any time, before or after the occurrence of an event of default, at its option, to convert the outstanding principal amount, plus accrued interest into a number of newly issued shares of its common stock equal to 75% of the total shares common stock that will be outstanding upon such conversion at a fully-diluted basis. Note #1 was also secured by and among other things a first lien on all of the assets of RBC and its subsidiaries, and was guaranteed by its subsidiary, RBC Life Sciences USA, Inc. As of December 31, 2019, the Company had advanced under the terms of Note #1 the sum of $200,000.

 

The second note (Note #2) dated November 11, 2019, established a secured, convertible, revolving line of credit to RBC up to an aggregate principal sum of $800,000, funded at the sole discretion of lender, and accruing at annual non-default interest rate of 10% with a scheduled maturity date of November 11, 2024, payable to Decentralized Sharing Systems’ wholly owned subsidiary, HWH World, Inc.. Accrued interest on the outstanding principal balance was scheduled to be paid monthly commencing on December 25, 2019. Further, any amount of principal repaid during the term of the note was allowed to be re-advanced at any time prior to the earlier of the acceleration of note to maturity or its maturity date. This note also contains an “Optional Conversion” feature that allows the Company, at any time, before or after the occurrence of an event of default, at its option, to convert the outstanding principal balance, plus accrued interest into a number of newly issued shares of its common stock equal to 100% of the outstanding shares of common stock of RBC’s direct and indirect subsidiaries. This Note #2 was also secured by a second lien on all of the assets of RBC, behind the first lien securing Note #1, and a first lien on all of the assets of RBC’s multiple subsidiaries and the full guarantee of these subsidiaries. As of December 31, 2019, this Note #2 had an outstanding principal balance of approximately $82,000, and advances of approximately $518,000 were made during 2020.

 

On January 24, 2020, as a result of the borrower’s default on Note #1, Decentralized Sharing Systems, Inc. made demand for repayment of the outstanding balance of the Note #1. In partial resolution, Decentralized Sharing Systems, Inc and RBC agreed to accept and tender, respectively, pursuant to the Uniform Commercial Code Article 9, collateral in partial satisfaction of debt under the terms of Note#1. The Company chose to not exercise its option convert the outstanding principal and interest into equity, but instead elected to accept this specific collateral. On February 7, 2020, RBC agreed to the deed-in-lieu of specific assets in satisfaction of part of the amount owing under Note #1.

 

On April 8, 2020, the Company initiated Uniform Commercial Code Article 9 foreclosure proceedings against the remaining assets of RBC and its subsidiaries which culminated with an Article 9 public sale on April 23, 2020. Again, the Company chose to forego the optional conversion of the outstanding principal and interest into 100% ownership, as was allowed in the terms of the note. Instead it elected to pursue through a public foreclosure sale collateral that secured Note #2. At that April Article 9 public sale, HWH World, Inc a wholly-owned subsidiary of the Company was the high bidder, and the company received a Bill of Sale for all of the remaining assets of RBC. As a result of this foreclosure sale and the Note #1, collateral accepted in lieu of partial debt, the Company now owns and controls most of the former assets of RBC and its subsidiaries.

 

43

 

 

During the second quarter of 2020, the Company completed its evaluation of the assets acquired through foreclosure of Note #1 and #2 above and determined the value received supported the recoverability of the carrying value of the two notes. In accordance with ASC 310 Receivables Goodwill and Other, the assets value will be recorded at the carrying value of the debt, allocated based on the value identified. The carrying values of Note #1 and Note #2 were reclassed as property, plant, and equipment and other intangible assets in the amounts of $201,000 and $637,000 respectively within the accompanying financial statements. These amounts are being depreciated and amortized over their useful lives. The Company is currently a defendant in a lawsuit brought against it for unjust enrichment and fraudulent transfer under Texas Uniform Fraudulent Transfer Act. See Note 15 for further details on related litigation.

 

NOTE 5 – FINANCIAL INSTRUMENTS

 

Cash, Cash Equivalents and Marketable Securities

 

The following tables show the Company’s cash and marketable securities by significant investment category as of December 31, 2020 and December 31, 2019:

 

   2020 
  

Adjusted

Cost

  

Unrealized

Gain/(Loss)

  

Fair

Value

  

Cash and

Cash

Equivalents

  

Current

Marketable

Securities

   Investments 
Cash and cash equivalents  $1,733,000   $-   $1,733,000   $1,733,000   $-   $- 
Level 1                              
Money Market Funds   3,493,000    -    3,493,000    3,493,000    -    - 
Marketable Securities   5,641,000    3,495,000    9,136,000    -    9,136,000    - 
Level 2                              
Warrants   700,000    356,000    1,056,000    -    -    1,056,000 
Total  $11,567,000   $3,851,000   $15,418,000   $5,226,000   $9,136,000   $1,056,000 

 

   2019 
  

Adjusted

Cost

  

Unrealized

Gain/(Loss)

  

Fair

Value

  

Cash and

Cash

Equivalents

  

Current

Marketable

Securities

   Investment 
Cash and cash equivalents  $1,096,000   $-   $1,096,000   $1,096,000   $-   $      - 
Level 1                              
Money Market Funds   -          -    -    -            -    - 
Marketable Securities   -    -    -    -    -    - 
Level 2                              
Warrants   -    -    -    -    -    - 
Total  $1,096,000   $-   $1,096,000   $1,096,000   $-   $- 

 

The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.

 

44

 

 

NOTE 6 - INVESTMENT

 

Alset International Limited (formally Singapore eDevelopment Limited)

 

As of December 31, 2018, the Company owned 21,196,552 ordinary shares of Alset International Limited (“Alset Intl”), formerly named Singapore eDevelopment Limited (“SED”), a company incorporated in Singapore and publicly listed on the Singapore Exchange Limited. and an existing three-year warrant to purchase up to 105,982,759 ordinary shares at an exercise price of SGD$0.040 (US$0.0298) per share During the year ended December 31, 2019 the Company exercised 61,977,577 of the warrants for total cost of $1,829,000 and at December 31, 2019 recorded the investment at cost, less impairment under the measurement alternative in ASC 321 for a total value of $2,154,000. As of June 25, 2020, the Company exercised the remaining warrants for total cost of $1,291,000 bringing its total ownership to 127,179,311 shares or approximately 7% of the outstanding shares of Alset Intl as of December 31, 2020. Historically and through June 30, 2020, the Company carried its investment in Alset Intl at cost, less impairments under the measurement alternative in ASC 321 in part due to the restriction on the sale of shares which expired on September 17, 2019 as well as the lack of historical volume associated with the shares of Alset Intl. During the third quarter 2020, the Company determined fair value based on the volume of shares traded on the Singapore Exchange which has a breadth and scope comparable to United States markets, as well as a consistent and observable market price. Accordingly, this investment is now classified as a marketable security and is classified as long-term assets on the consolidated balance sheets as the Company has the intent and ability to hold the investments for a period of at least one year. The Chairman of the Company, Mr. Heng Fai Ambrose Chan, is the Executive Director and Chief Executive Officer of Alset Intl. Mr. Chan is also the majority shareholder of Alset Intl as well as the largest shareholder of the Company. The fair value of the marketable security as of December 31, 2020 was approximately $6,830,000 and during the year ended December 31, 2020 the Company recorded unrealized gains on this investment of approximately $3,384,200.

 

Sharing Services Global Corp. (“SHRG”)

 

The Company had acquired in a series of open-market transactions, between March 2020 and December 2020 an aggregate of 13,957,378 of additional Class A common shares of Sharing Services Global Corp. (“SHRG”), a publicly traded company at an average purchase price of $0.06 per share. The Company, during this same period, had also purchased 20,250,000 shares of SHRG in private purchases at an average purchase price of $0.09 per share. The aggregate cost of these transactions approximated $2,572,000.

 

On July 22, 2020, Chan Heng Fai Ambrose, the Chairman of the Company’s board of directors, assigned a Stock Purchase and Share Subscription Agreement by and between Mr. Chan and SHRG, pursuant to which the Company purchased 30,000,000 shares of Class A common stock and 10,000,000 warrants to purchase Class A common stock for $3 million. The warrants have an average exercise price of $0.20, immediately vested and may be exercised at any time commencing on the date of issuance and ending three year from such date. As of the date of issuance the warrants the consideration paid allocated to the warrants amounted to approximately $700,000.  The warrants are considered an equity investment that is recorded at fair value with gains and losses recorded through net income. These warrants have been recorded at the fair market value of $1,056,000 on the Company’s consolidated balance sheet and are included in “other investments” with the increase representing an unrealized gain of $356,000 as of 12/31/2020. These shares and warrants are also subject to a one-year trading restriction pursuant to the terms of a Lock-Up Agreement entered into between Mr. Chan and the Company and assigned to the Company.

 

As of June 30, 2020, the Company, had acquired and owned approximately 17% of the issued and outstanding shares of SHRG, which was recorded as a marketable security investment. In the 3rd quarter of 2020, the Company, through a series of Class A common shares acquisitions in July 2020, with such acquisition history detailed below, the Company acquired in aggregate, an ownership interest in SHRG of greater than 20%. At that time, it was determined that the Company had the ability to exercise significant influence over SHRG. Accordingly, on July 22nd, the Company began prospectively utilizing the equity method of accounting for its investment into SHRG in accordance with ASC Topic 323 and recognizing our share of SHRG’s earnings and losses within our consolidated statement of operations and comprehensive income (loss). Due to the difference in fiscal year ends between the two companies, DSS has elected to recognize its portion of SHRG’s earnings and losses on a quarter lag basis and utilized SHRG’s three-month ended October 31, 2020 reported results in calculating its portion of SHRG’s gain which approximated $604,000. As of July 22, 2020, the Company owned 62,417,593 Class A common shares of SHRG with an adjusted basis of $11.3 million. As of December 31, 2020, the Company held 64,207,378 class A common shares equating to a 32.6% ownership interest in SHRG and had recorded unrealized gains on marketable securities of approximately $6.8 million for the twelve-months then ended related to the period prior to the Company achieving significant influence and recording the investment under the equity method. As of July 22, 2020, the carrying value of the Company’s equity method investment exceeded our share of the book value of the investee’s underlying net assets by approximately $9.2 million, which represents primarily intangible assets in the form of customer and distributor lists and goodwill arising from acquisitions. The Company is still in the process of valuing the intangible assets as of December 31, 2020 and no amortization has been recorded during the period ended December 31, 2020. The aggregate fair value of the Company’s investment in SHRG at December 31, 2020 was approximately $14,774,000. The following table represents SHRG operating results for the six-months ended October 31, 2020:

 

Net sales  $41,339,507 
Gross profit  $30,390,874 
Operating earnings  $1,265,192 
Earnings before income taxes  $1,113,971 
Income tax provision  $(355,991)
Net earnings  $757,980 

 

45

 

 

The Company, via four (4) of the Company’s existing board members, currently holds four (4) of the five (5) SHRG board of director seats. Mr. John “JT” Thatch, DSS’s Lead Independent Director and as well the CEO of SHRG is on the SHRG Board, along with Mr. Chan, DSS’s Executive Chairman of the board of directors (joined the SHRG Board effective May 4, 2020), Mr. Sassuan “Sam” Lee, DSS Independent Director (joined the SHRG Board effective September 29, 2020) and Mr. Frank D. Heuszel, the CEO of the Company (joined the SHRG Board effective September 29, 2020).

 

BMI Capital International LLC

 

On September 10, 2020, the Company’s wholly owned subsidiary DSS Securities, Inc. entered into membership interest purchase agreement with BMI Financial Group, Inc. a Delaware corporation (“BMIF”) and BMI Capital International LLC, a Texas limited liability company (“BMIC”) whereas DSS Securities, Inc. purchased 14.9% membership interests in BMIC for $100,000. DSS Securities also had the option to purchase an additional 10% of the outstanding membership interest which it exercised in January of 2021 and increased its ownership to 24.9%. This investment is valued at cost as it does not have a readily determined fair value.

 

BMIC is a broker-dealer registered with the Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”), and is a member of the Securities Investor Protection Corporation (“SIPC”). The Company’s chairman of the board and another independent board member of the Company also have ownership interest in this joint venture.

 

Alset Title Company

 

On or about August 28, 2020, the Company’s wholly owned subsidiary, DSS Securities, Inc. entered into a corporate venture to form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”). DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application and permitting process. ATC have initiated or have pending applications to do business in a number of states, including Texas, Tennessee, Connecticut, Florida, and Illinois. For the purpose of organization and the state application process, the Company’s CEO, who is a licensed attorney, has a stated non-compensated 15% ownership interest in the venture. There was no activity for the twelve-months ended December 31, 2020.

 

BioMed Technologies Asia Pacific Holdings Limited

 

On December 19, 2020, Impact BioMedical, a wholly-owned subsidiary of the Company, entered into a subscription agreement (the “Subscription Agreement”) with BioMed Technologies Asia Pacific Holdings Limited (“BioMed”), a limited liability company incorporated in the British Virgin Islands, pursuant to which the Company agreed to purchase 525 ordinary shares or 4.99% of BioMed at a purchase price of approximately $630,000. The Subscription Agreement provides, among other things, the Company the right to appoint a new director to the board of BioMed. With respect to an issuance of shares to a third party by BioMed, the Company will have the right of first refusal to purchase such shares, as well as customary tag-along rights. In connection with the Subscription Agreement, Impact entered into an exclusive distribution agreement (the “Distribution Agreement”) with BioMed, to directly market, advertise, promote, distribute, and sell certain BioMed products, which focus on manufacturing natural probiotics, to resellers. This investment is valued at cost as it does not have a readily determined fair value.

 

BioMed focuses on manufacturing natural probiotics, pursuant to which the Company will directly market, advertise, promote, distribute and sell certain BioMed products to resellers. The products to be distributed by the Company include BioMed’s PGut Premium Probiotics®, PGut Allergy Probiotics®, PGut SupremeSlim Probiotics®, PGut Kids Probiotics®, and PGut Baby Probiotics®.

 

46

 

 

Under the terms of the Distribution Agreement, the Company will have exclusive rights to distribute the products within the United States, Canada, Singapore, Malaysia, and South Korea and non-exclusive distribution rights in all other countries. In exchange, the Company agreed to certain obligations, including mutual marketing obligations to promote sales of the products. This agreement is for ten years with an one year auto-renewal feature.

 

NOTE 7 – BUSINESS COMBINATIONS

 

American Medical REIT Inc.

 

On March 3, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with LiquidValue Asset Management Pte Ltd (“LVAM”), AMRE Asset Management Inc. (“AAMI”) and American Medical REIT Inc. (“AMRE”), regarding a share subscription and loan arrangement. The Term Sheet set forth the terms of a proposed transaction to establish a medical real estate investment trust in the United States and AAMI providing certain services related to the financial and capital structure of AMRE. Pursuant to the final signed Stockholders’ Agreement, dated March 3, 2020, the Company has subscribed 5,250 ordinary shares of AAMI at a purchase price of $0.01 per share for total consideration of $52.50. Concurrently, AAMI will issue 3,500 shares to LVAM, and 1,250 shares to AMRE Tennessee, LLC, AAMI’s executive management’s holding company. As a result, the Company now holds 52.5% of the outstanding shares of AAMI, with LVAM and AMRE Tennessee, LLC, holding 35% and 12.5% of the remaining outstanding shares of AAMI, respectively. At the completion of the share subscription, AAMI has a 93% equity interest in AMRE. Also, at the completion of the transaction, AAMI had no assets or liabilities. LVAM is an 82% owned subsidiary of Alset Intl. whose Chief Executive Officer and largest shareholder is Heng Fai Ambrose Chan, the Chairman of the Board and largest shareholder of the Company.

 

Further, pursuant to and in connection with the Term Sheet, effective on March 3, 2020, the Company entered into a Promissory Note with AMRE, pursuant to which AMRE has issued the Company a promissory note for the principal amount of $800,000 (the “Note”). The Note matures on March 3, 2022 and accrues interest at the rate of 8.0% per annum and shall be payable in accordance with the terms set forth in the Note. Under the Note, AMRE may prepay or repay all or any portion of the Note at any time, without a premium or penalty. If not sooner prepaid, the entire unpaid principal balance of the Note including accrued interest will be due and payable in full on March 3, 2022. AMRE’s failure to pay any amount due on the Note within five days of when payment is due constitutes an event of default under the Note, pursuant to which the Company can declare the Note due and payable. The Note also provides the Company an option to provide AMRE an additional $800,000 on the same terms and conditions as the Note, including the issuance of warrants as described below. As further incentive to enter into the Note, AMRE issued the Company warrants to purchase 160,000 shares of AMRE common stock (the “Warrants”). The Warrants have an exercise price of $5.00 per share, subject to adjustment as set forth in the Warrants, and expire on March 3, 2024. Pursuant to the Warrants, if AMRE files a registration statement with the Securities and Exchange Commission for an initial public offering (“IPO”) of AMRE’s common stock and the IPO price per share offered to the public is less than $10.00 per share, the exercise price of the Warrants shall be adjusted downward to 50% of the IPO price. The Warrants also grants piggyback registration rights to the Company as set forth in the Warrants. As of December 31, 2020, this Note had outstanding principal and interest of approximately $844,000. Upon consolidation this Note is eliminated. AMRE entered into a $200,000 unsecured promissory note with LVAM. The Note calls for interest to be paid annually on March 2 with interest fixed at 8.0%. See Note 10 for further details.

 

U.S. GAAP requires that for each business combination, one of the combining entities shall be identified as the acquirer, and the existence of a controlling financial interest shall be used to identify the acquirer in a business combination. The Company has determined that its aforementioned 52.5% equity interest in AAMI provides existence of a controlling financial interest and has concluded to account for this transaction in accordance with the acquisition method of accounting under FASB ASC Topic 805, “Business Combinations” (“Topic 805”). As of December 31, 2020, AMRE had incurred $900,000 of cost of which $430,000 is attributable to the non-controlling interest. AAMI does not qualify for a separate reporting segment and is included in Corporate (see Note 18).

 

Impact BioMedical, Inc.

 

On August 21, 2020, the Company, completed its acquisition of Impact BioMedical,, pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth, and related parties Alset Intl (formally Singapore eDevelopment Limited), and Global Biomedical Pte Ltd. (“GBM”) which was previously approved by the Company’s shareholders (the “Share Exchange”).Under the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s common stock, par value $0.02 per share, nominally valued at $6.48 per share, and 46,868 newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), with a stated value of $46,868,000, or $1,000 per share, for a total consideration of $50 million (Note 12) to acquire 100% of the outstanding shares of Impact BioMedical. The acquisition was done to add assets and a foundation of products with international market opportunities and demand, and which can be structured into long- term scalable, reoccurring license revenue within the DSS BioHealth line of business. Due to several factors, including a discount for illiquidity, the value of the Series A Preferred Stock was discounted from $46,868,000 to $35,187,000, thus reducing the final consideration given to approximately $38,319,000. The Company incurred approximately $295,000 in cost associated with the acquisition of Impact Biomedical which were recorded as general and administrative expenses. As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary and operating results of the acquisition will be included in the Company’s financial statements beginning August 21, 2020. Impact BioMedical has several subsidiaries that are not wholly owned by Impact BioMedical, and have an ownership percentage ranging from 63.6% to 100%. Since acquisition, approximately $440,000 of cost have been incurred, of which $51,000 of cost incurred is attributable to non-controlling interest. Although Impact BioMedical historically, and to date has not generated any revenues, the acquisition of Impact BioMedical meets the definition of a business with inputs, processes and outputs, and therefore, the Company has concluded to account for this transaction in accordance with the acquisition method of accounting under Topic 805.

 

The following summary, prepared on a proforma basis, combines the consolidated results of operations of the Company with those of Impact Biomedical as if the acquisition took place on January 1, 2019. The pro forma consolidated results include the impact of certain adjustments.

 

   2020 Unaudited   2019 Unaudited 
Sales  $17,411,000   $15,550,000 
Net income (loss) attributed to common stockholders  $1,219,000  $(3,343,000)
Basic earnings per share  $0.30  $(2.51)
Diluted earnings per share  $0.11  $(0.39)

 

47

 

 

The Company has completed its valuations of certain developed technology and pending patents assets acquired in the transaction as well the fair value of the non-controlling interests. These have been valued at approximately $22,260,000 and $3,910,000 respectively. Other assets acquired and liabilities assumed were not significant. The Company has also completed an initial valuation of goodwill and deferred tax liabilities of Impact BioMedical, which are pending as of December 31, 2020 as several of the 2019 tax returns have yet to be filed. For the purposes of these financial statements, the Company has recorded goodwill of approximately $25,093,000, driven by other intangible assets that do not qualify for separate recognition, and a deferred tax liability of approximately $5,234,000. The goodwill is not deductible for tax purposes, and has been allocated to Impact BioMedical in totality as a single reporting unit. Impact BioMedical does not qualify for a separate reporting segment and is included in Corporate (see Note 18).

 

NOTE 8 - PROPERTY PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following as of December 31:

 

   Estimated        
   Useful Life  2020   2019 
Machinery and equipment  5-10 years  $6,944,000   $6,507,000 
Building and improvements  39 years   1,976,000    1,962,000 
Land      185,000    185,000 
Furniture and fixtures  7 years   130,000    102,000 
Software and websites  3 years   298,000    251,000 
Total Cost      9,533,000    9,007,000 
Less accumulated depreciation      5,387,000    4,679,000 
Property, plant and equipment, net     $4,146,000   $4,328,000 

 

NOTE 9 - INTANGIBLE ASSETS

 

During 2020 and 2019, the Company spent approximately $0 and $10,000, respectively, on capitalized patent application costs.

 

On March 5, 2019, the Company paid $350,000 and issued 130,435 shares of the Company’s common stock valued at $144,783 in conjunction with the signing of a Master Distributor Agreement with Advanced Cyber Security Corp. (“ACS”) for the Company to distribute ACS’s EndpointLockV™ cyber security software exclusively in thirteen countries in Asia and Australia, and non-exclusively, in the U.S. and Middle East. The aggregate cost of $494,783 of the agreement was recorded as an intangible asset to be amortized over the expected useful life of 36 months.

 

On January 24, 2020 and April 8, 2020, the Company foreclosed on two separate note receivables with RBC Life Sciences, Inc. (see Note 4) during which the Company acquired $637,000 of intangible assets as settlement of the amounts owed. These assets are being amortized over their useful lives.

 

On August 21, 2020, the Company completed its acquisition of Impact BioMedical, (see Note 7) during which the Company, based on valuations performed, acquired $22,260,000 of developed technology assets. These assets are not yet placed in service and will be amortized over a 20-year useful life when placed in service, which is expected to be during the year ended December 31, 2021.

 

48

 

 

Intangible assets are comprised of the following:

 

        2020     2019  
    Useful Life   Gross Carrying Amount     Accumulated Amortization     Net Carrying Amount     Gross Carrying Amount     Accumulated Amortization     Net Carrying Amount  
Developed technology assets   20 years     $22,260,000     $ -     $ 22,260,000     $ -     $ -     $ -  
Acquired intangibles customer lists, licenses and non-compete agreements   2-10 years     1,259,000       330,000       929,000       1,789,000       1,203,000       586,000  
Acquired intangibles patents and patent rights         500,000       500,000       -       500,000       500,000       -  
Patent application costs   Varied (1)     1,178,000       911,000       267,000       1,178,000       829,000       349,000  
        $ 25,197,000       1,741,000     $  23,456,000       3,467,000       2,532,000       935,000  

 

  (1) Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of December 31, 2020, the weighted average remaining useful life of these assets in service was approximately 8.2 years.

 

Amortization expense for the year ended December 31, 2020 amounted to approximately $374,000 ($461,000 –2019).

 

Expected amortization for each of the five succeeding fiscal years is as follows:

 

Year  Amount 
2021   1,389,000 
2022   1,243,000 
2023   1,169,000 
2024   1,147,000 
2025   1,161,000 

 

NOTE 10 – SHORT TERM AND LONG-TERM DEBT

 

Revolving Credit Lines - The Company’s subsidiary Premier Packaging has a revolving credit line with Citizens Bank (“Citizens”) of up to $800,000 that bears interest at 1 Month LIBOR plus 2.0% (2.1% as of December 31, 2020). This revolving line of credit was renewed and has a maturity date of May 31, 2021 and is renewable annually. As of December 31, 2020 and December 31, 2019, the revolving line had a balance of $0 and $500,000 respectively.

 

49

 

 

On July 26, 2017, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with Citizens pursuant to which Citizens agreed to lend up to $1,200,000 to permit Premier Packaging to purchase equipment from time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit shall bear interest thereon at a per annum rate of 2% above the LIBOR Advantage Rate until the Conversion Date (as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens. Current maturities of long-term debt are based on an estimated 48-month amortization which will be adjusted upon conversion. As of December 31, 2020 and December 31, 2019, the Term Note had a balance of $771,000 and $899,000 respectively. The Company pays a monthly amount of $13,000 in principal and interest.

 

On December 1, 2017, the Company’s subsidiary Plastic Printing Professionals entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with Citizens which was converted into two term notes under which the Company will make monthly payments of $14,000 until November 30, 2023. Interest under the term notes is payable monthly at 5.37%. On December 31, 2019 this note had a balance of $577,000. On July 20, 2020 the Company paid off this note.

 

Equipment Line of Credit - On July 31, 2020, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with Citizens pursuant to which Citizens agreed to lend up to $900,000 to permit Premier Packaging to purchase equipment from time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit shall bear interest thereon at a per annum rate of 2% above the LIBOR Advantage Rate until the Conversion Date (as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens. As of December 31, 2020, the loan had a balance of $0 and Premier Packaging still has available $900,000 for equipment borrowings.

 

Promissory Notes - On June 27, 2019 Premier Packaging refinanced and consolidated the outstanding principal associated with the two promissory notes for its packaging plant located in Victor, New York, for $1,200,000 with Citizens Bank. The new Promissory Note calls for monthly payments of $7,000, with interest fixed at 4.22%. The new Promissory Note matures on June 27, 2029, at which time a balloon payment of $708,000 is due. As of December 31, 2020 and December 31, 2019, the new Promissory Note had a balance of $1,100,000 and $1,141,000 respectively.

 

The Citizens credit facilities to the Company’s subsidiary Premier Packaging, contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested annually at December 31. For the year ended December 31, 2020, Premier Packaging was in compliance with the annual covenants.

 

On October 24, 2018, the Company’s subsidiary, DSS Asia Limited entered into a $100,000 unsecured promissory note with HotApps International Pte Ltd in conjunction with the acquisition of Guangzhou HotApps Technology Ltd., a Chinese subsidiary of HotApps International Pte Ltd, by DSS Asia Limited. The promissory note does not accrue interest and had a maturity date of October 24, 2020. This note was paid in full on October 9, 2020.

 

On March 2, 2020, AMRE entered into a $200,000 unsecured promissory note with LVAM. The Note calls for interest to be paid annually on March 2 with interest fixed at 8.0%. As of December 31, 2020, accrued interest is included in the outstanding balance. If not paid sooner, the entire unpaid principal balance is due in full on March 2, 2022. As further incentive to enter into this Note, AMRE granted LVAM warrants to purchase shares of common stock of AMRE (the “Warrants”). The amount of the warrants granted is the equivalent of the Note Principal divided by the Exercise Price. The Warrants are exercisable for four years and are exercisable at $5.00 per share (the “Exercise” Price). The value of the warrants is not considered to be material. The holder is a related party owned by the Chairman of the Company’s board of directors. As of December 31, 2020, the new promissory note, inclusive of unpaid interest, had a balance of $214,000.

 

During Q2 2020, the Company received loan proceeds for Premier Packaging, DSS Digital, and AAMI in the amount of approximately $1,078,000 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. These funds were used for payroll, benefits, rent, mortgage interest, and utilities. As of August 4, 2020, pursuant to the terms of the SBA PPP program, the Company submitted applications for Premier Packaging and DSS Digital for a requested 100% loan forgiveness. During the fourth quarter 2020, both these notes approximating $969,000 were forgiven in full and recognized as a gain on the extinguishment of debt on the accompanying consolidated financial statements as of December 31, 2020. AAMI, pursuant to the terms of the SBA PPP program, submitted its application for 100% loan forgiveness in October 2020, and received confirmation of forgiveness in January 2021.

 

50

 

 

A summary of scheduled principal payments of long-term debt, not including revolving lines of credit, subsequent to December 31, 2020 are as follows:

 

Year  Amount 
2021  $278,000 
2022   439,000 
2023   178,000 
2024   185,000 
2025   193,000 
Thereafter   981,000 

 

NOTE 11 – OTHER LIABILITIES

 

On November 14, 2016, the Company entered into a Proceeds Investment Agreement (the “Agreement”) with Brickell Key Investments LP (“BKI”). Pursuant to the Agreement, BKI financed an aggregate of $13,500,000 in a patent purchase and monetization program to be implemented and managed by the Company (the “Financing”). Pursuant to the Agreement. $3,000,000 of the Financing was used to cover the Company’s purchase of a portfolio of U.S. and foreign LED patents and a license from Intellectual Discovery Co., Ltd., a Korean company (collectively, the “LED Patent Portfolio”), resulting in a basis in these assets of $0. A total of $6,000,000 of the Financing was directed by BKI to attorneys to cover anticipated attorneys’ fees and out-of-pocket expenses for legal proceedings that may transpire relating to enforcement of the LED Patent Portfolio. This amount is not included in the Company’s financial statements as the Company has no control over these funds, which are segregated and escrowed in the attorneys’ trust account.

 

In addition, on November 14, 2016, the Company received $4,500,000 of the Financing, which was required to be used by the Company to pay for the defense of Inter Partes Review or other similar proceedings that may be filed from time to time by defendants with the U.S. Patent & Trademark Office relating to the LED Patent Portfolio, with excess amounts available for general working capital needs. Of this amount, the Company allocated $2,500,000 which it subsequently adjusted to $1,500,000 for the payment of estimated future Inter Partes Review costs. The Company will reduce this liability as it pays legal and other expenses related to the Inter Partes Review matters involving the LED Patent Portfolio as incurred. As of December 31, 2020, an aggregate of $780,988 is recorded as other liabilities by the Company, of which $390,494 is classified as current. For the remaining $3,000,000 the Company reduced the liability with an offset to selling, general and administrative costs by $47,500 per month from January 2017 through July 2017, $80,000 per month for the remainder of 2017 through March 2018, $86,500 per month for the remainder of 2018, and through November of 2019. As of December 31, 2019, the liability has been fully amortized. An aggregate of $955,000 was recorded as a reduction of the liability allocated to working capital in 2019.