UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from ______to_______ .
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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
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Indicate
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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.
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As of August 4, 2021, there were shares of the registrant’s common stock, $0.02 par value, outstanding.
DOCUMENT SECURITY SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
| June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Assets held for sale - discontinued operations | - | |||||||
| Current portion of notes receivable, net | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Investment, real estate | - | |||||||
| Other investments | ||||||||
| Investment, equity method | ||||||||
| Marketable securities | ||||||||
| Notes receivable | ||||||||
| Non-current assets held for sale - discontinued operations | - | |||||||
| Other assets | ||||||||
| Right-of-use assets | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Current Liabilities held for sale - discontinued operations | - | |||||||
| Current portion of lease liability | ||||||||
| Current portion of long-term debt, net | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net | ||||||||
| Long term lease liability | ||||||||
| Non-current liabilities held for sale - discontinued operations | - | |||||||
| Other long-term liabilities | ||||||||
| Deferred tax liability, net | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $ | - | |||||||
| Common stock, $par value; shares authorized, shares issued and outstanding ( on December 31, 2020) | ||||||||
| Additional paid-in capital | ||||||||
| Non-controlling interest in subsidiary | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
| 3 |
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Printed products | $ | $ | $ | $ | ||||||||||||
| Direct marketing | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | ||||||||||||||||
| Selling, general and administrative (including stock based compensation) | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other income | - | - | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on extinguishment of debt | - | - | - | |||||||||||||
| (Loss) gain on investments | ( | ) | ( | ) | ||||||||||||
| Loss on equity method investment | ( | ) | - | ( | ) | - | ||||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | - | - | ||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations attributed to noncontrolling interest | ||||||||||||||||
| Net loss attributable to common stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss per common share - continuing operations: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings/ (loss) per common share - discontinued operations: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Shares used in computing earnings (loss) per common share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
| 4 |
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
(unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss from continuing operations to net cash used by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ( | ) | ||||||
| Loss on equity method investment | - | |||||||
| Loss (gain) on investments | ( | ) | ||||||
| Gain on extinguishment of debt | ( | ) | - | |||||
| Deferred tax benefit | ( | ) | - | |||||
| Accretion of debt discount, origination fee, and prepaid interest | ( | ) | - | |||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and deferred revenue | ( | ) | ||||||
| Other liabilities | ( | ) | ||||||
| Net cash used by operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ||||
| Purchase of real estate | ( | ) | - | |||||
| Purchase of investments | ( | ) | ( | ) | ||||
| Purchase of marketable securities | ( | ) | ( | ) | ||||
| Purchase of equity investment | ( | ) | - | |||||
| Sale of marketable securities | - | |||||||
| Purchase of intangible assets | ( | ) | - | |||||
| Note receivable investment | ( | ) | ( | ) | ||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments of long-term debt | ( | ) | ( | ) | ||||
| Borrowings of long-term debt | ||||||||
| Borrowings from revolving lines of credit, net | - | ( | ) | |||||
| Deferred financing fees | ( | ) | - | |||||
| Issuances of common stock, net of issuance costs | ||||||||
| Net cash provided by financing activities | ||||||||
| Cash flows from discontinued operations: | ||||||||
| Cash provided by discontinued operations | ||||||||
| Cash provided (used) by investing activities | ( | ) | ||||||
| Cash used by financing activities | - | ( | ) | |||||
| Net cash provided by discontinued operations | ||||||||
| Net increase in cash | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
| 5 |
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
| Common Stock | Preferred Stock | Additional Paid-in | Non- controlling Interest in | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Subsidiary | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common stock, net | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common stock, net | $ | - | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||
| Conversion of preferred stock | ( | ) | ( | ) | ( | ) | - | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | - | $ | - | $ | ( | ) | $ | |||||||||||||||||||||||
| Issuance of common stock, net | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | - | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of common stock, net | $ | - | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
| 6 |
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Document Security Systems, Inc. (the “Company of DSS”) operates seven (7) business lines through seven (7) DSS subsidiaries located around the globe.
Of the seven subsidiaries, two of those have historically been the core subsidiaries of the Company: (1) Premier Packaging Corporation (“Premier Packaging”), and (2) 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. 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 (3) Decentralize Sharing Systems, Inc. (“Decentralized”) subsidiary, created a third business segment, Direct Marketing/Online Sales Group (“Direct”). This group provides services to assist companies in the growing gig economic business model of peer-to-peer direct marketing. Direct specializes in marketing and distributing its products and services through its subsidiaries, partner networks, and online marketplaces. Products include health and wellness for personal use, healthy living and lifestyle, and travel. Direct will also help to support the direct selling industry by offering services to its piers that streamline operations, enhance financing, and provide back-end business continuity.
In addition to the three subsidiaries listed above DSS has created four new, wholly owned subsidiaries. (4) DSS Blockchain Security, Inc (“DSS Blockchain”)., 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. (5) DSS Securities, Inc. (“DSS Securities”), a Nevada corporation, 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, stable coins 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). Also in this segment is the Company’s real estate investment trust (“REIT”), 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. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. (6) DSS BioHealth Security, Inc. (“DSS BioHealth”), 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. (7) DSS Secure Living, Inc. (“DSS Secure Living”), 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. The activity in DSS Blockchain and DSS Secure Living has been minimal or in various start-up or organizational phases.
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 shares of the Company’s common stock, par value $ per share, nominally valued at $ per share, and 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 5).
| 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.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and cash flows include all adjustments considered necessary for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2020.
Principles of Consolidation - The consolidated financial statements include the accounts of Document Security Systems, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable, convertible notes receivable, inventory, fair values of investments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants to purchase the Company’s common stock, preferred stock, deferred revenue and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Reclassifications - Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 2020 have been reclassified to conform to current period presentation.
| 8 |
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. The Company considers debt instruments as available-for-sale securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations.
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.
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 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.
Impairment of Long-Lived Assets and Goodwill - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value.
Related
Party Liabilities – On April 1, 2020
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 shares of Alset Intl, 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
| 9 |
Acquisitions - In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-01, Business Combinations (“Topic 805”): Clarifying the Definition of a Business (“ASU 2017-01”). The guidance is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. Under this guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If the threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. See Note 5 regarding the acquisitions.
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.
Acquisition of assets are recorded at their relative fair value based on total accumulated costs of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired assets. This includes all costs related to finding, analyzing and negotiating a transaction. The allocation of the purchase price is an area that requires judgment and significant estimates. Tangible and intangible assets include land, building and improvements, furniture, fixtures and equipment, acquired above market and below market leases, in-place lease value (if applicable). Acquisition-date fair values of assets and assumed liabilities are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers and that use appropriate discount and/or capitalization rates and available market information.
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 as Loss from Discontinued Operations. See Note 11.
On May 7, 2021, the Company completed the sale of 100% of the capital stock of DSS Digital Inc. (“DSS Digital”), the Company’s wholly owned subsidiary, which researched, developed, marketed, and sold the Company’s digital products worldwide. Based on the magnitude of DSS Digital’s historical revenue to the Company and because the Company has exited the brand authentication services, functional anti-counterfeiting technology and technologies to satisfy commercial and consumer product needs for branding, intelligent packaging, and marketing, 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. See Note 11.
Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.
During
the six months ended June 30, 2021, two customers accounted for
Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in income tax expense.
Recent Accounting Pronouncements - In June 2016, the 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.
| 10 |
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. 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.
2. Revenue
The Company recognizes its products and services revenue based on when the title passes to the customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. The Company also derives revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products. The Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license revenues through litigation settlements. For these, the Company recognizes revenue upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. The Company generates revenue from its direct marketing line of business primarily through internet sales and recognizes revenue as items are shipped.
As of June 30, 2021, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less.
Accounts Receivable
The
Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and generally
does not require collateral. Payment terms are generally 30 days but up to net 105 for certain customers. The Company carries its trade
accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts based upon management’s estimates that include a review of the history
of past write-offs and collections and an analysis of current credit conditions. At June 30, 2021, the Company established a reserve
for doubtful accounts of approximately $
| 11 |
Sales Commissions
Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions capitalized as of June 30, 2021.
Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to these costs are reflected as revenue.
See Note 14 for disaggregated revenue information.
3. Notes Receivable
Century TBD Holdings, LLC
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 $
| 12 |
GSX Group Limited
On
February 8, 2021, the Company entered into a convertible promissory note (“GSX Note”) with GSX Group Limited
(“GSX”), a company registered in Gibraltar. The Company loaned the principal sum of $
On February 3, 2021, USX Holdings Company, Inc., a subsidiary of the Company entered into a binding joint venture term sheet (“GSX JV”) for the creation of a USA based joint venture alternative trading system or exchange (“JV Exchange”). If definitive terms of a joint venture agreement cannot be reached within 12 months from the date of the GSX JV, if mutually agreed upon, the parties shall continue to form JV Exchange based on terms of the GSX JV, or agree to terminate the GSX JV.
Dustin Crum
On
February 21, 2021, Impact BioMedical, Inc. a subsidiary of the Company, entered into a promissory note (“Crum
Note”) with Dustin Crum (“Crum”). The Company loaned the principal sum of $
Sharing Services Global Corporation
On
April 5, 2021, Decentralized Sharing Systems, Inc., a subsidiary of the Company entered into a convertible promissory note
(“SHRG Note”) with Sharing Services Global Corporation (“SHRG”), a company registered in the state of
Nevada. The Company loaned the principal sum of $
The Company, via three (3) of the Company’s existing board members, currently holds three (3) 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), and Mr. Frank D. Heuszel, the CEO of the Company (joined the SHRG Board effective September 29, 2020).
Sentinel Brokers Company, Inc.
On May 13, 2021, a subsidiary
of the Company entered a revolving credit promissory note (“Sentinel Note”) with Sentinel Brokers Company, Inc. (“Sentinel”),
a company registered in the state of New York. The Sentinel Note has an aggregate principal balance up to $
Puradigm, LLC
On
May 14, 2021, DSS Pure Air, Inc. a subsidiary of the Company entered into a convertible promissory note (“Puradigm Note”)
with Puradigm, LLC (“Puradigm”), a company registered in the state of Texas. The Puradigm Note has an aggregate principal
balance up to $
4. Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and cash equivalents and marketable securities and investments by significant investment category as of June 30, 2021, and December 31, 2020:
| 2021 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | Cash and Cash Equivalents |
Marketable Securities | Investments | |||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Level 1 | - | |||||||||||||||||||||||
| Money Market Funds | ||||||||||||||||||||||||
| Marketable Securities | ||||||||||||||||||||||||
| Level 2 | ||||||||||||||||||||||||
| Warrants | ( | ) | ||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
| 13 |
| 2020 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | Cash and Cash Equivalents |
Marketable Securities | Investment | |||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Level 1 | ||||||||||||||||||||||||
| Money Market Funds | ||||||||||||||||||||||||
| Marketable Securities | ||||||||||||||||||||||||
| Level 2 | ||||||||||||||||||||||||
| Warrants | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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.
5. Acquisitions
American Medical REIT Inc.
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
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 $
On
June 18, 2021, DSS Securities, entered into a stock purchase agreement with AMRE to acquire Class A Common Shares of AMRE at
a per share price of $, for a total consideration of $
On
June 18, 2021, AMRE Shelton, LLC., (“AMRE Shelton”) a subsidiary of AMRE financed the purchase of a 40,000 square foot, 2.0
story, Class A+ multi-tenant medical office building located on a 13.62 acre site in Shelton, Connecticut (See Note 7). In accordance
with Topic 805, the acquisition of the medical facility has been determined to be an acquisition of assets as substantially
all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable
assets.
During
the three and six months ended June 30, 2021, AMRE had net losses of $
| 14 |
Impact BioMedical, Inc.
On
August 21, 2020, the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact”), 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 shares
of the Company’s common stock, par value $per
share, nominally valued at $per
share, and newly
issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), with a stated
value of $,
or $per
share, for a total consideration of $million
to acquire %
of the outstanding shares of Impact. 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 $to
$
6. Investments
Alset International Limited (formally Singapore eDevelopment Limited)
The
Company owns shares or approximately
Sharing Services Global Corp. (“SHRG”)
As
of and through June 30, 2020, the Company classified its investment in Sharing Services Global Corp. (“SHRG”), a publicly
traded company, as marketable equity security and measured it at fair value with gains and losses recognized in other income. In July
2020, through continued acquisition of common stock, as detailed below, the Company obtained greater than
| 15 |
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 shares
of Class A common stock and
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 $
The following table represents SHRG operating results for the eleven-months ended March 31, 2021:
| Net sales | $ | |||
| Gross profit | $ | |||
| Operating loss | $ | ( | ) | |
| Loss before income taxes | $ | ( | ) | |
| Income tax provision | $ | |||
| Net loss | $ | ( | ) |
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
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.
| 16 |
Alset Title Company
On
or about August 28, 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 ordinary shares or
BioMed focuses on manufacturing natural probiotics, pursuant to which the Company will directly market, advertise, promote, distribute and sell certain BioMed products to resellers. The products to be distributed by the Company include BioMed’s PGut Premium Probiotics®, PGut Allergy Probiotics®, PGut SupremeSlim Probiotics®, PGut Kids Probiotics®, and PGut Baby Probiotics®.
Under the terms of the Distribution Agreement, the Company will have exclusive rights to distribute the products within the United States, Canada, Singapore, Malaysia, and South Korea and non-exclusive distribution rights in all other countries. In exchange, the Company agreed to certain obligations, including mutual marketing obligations to promote sales of the products. This agreement is for ten years with an one year auto-renewal feature.
Vivacitas Oncology, Inc.
On
March 15, 2021, the Company, through one of its subsidiaries, entered into a Stock Purchase Agreement (the “Vivacitas Agreement
#1”) with Vivacitas Oncology Inc. (“Vivacitas”), to purchase shares of its common stock at the per share price
of $,
with an option to purchase additional shares at the per share price of $.
This option will terminate upon one of the following events: (i) Vivacitas’ board of directors cancels this option because it is
no longer in the best interest of the Company; (ii) December 31, 2021; or (iii) the date on which Vivacitas receives more than $per share of the Company’s common stock
in a private placement with gross proceeds of $
On
April 1, 2021, the Company entered into an additional stock purchase agreement with Vivacitas (“Vivacitas Agreement #2”),
whereas Vivacities wished to employee the service of the Chief Business Officer of Impact Biomedical, and in return for the services
of this individual, Vivacitas shall issue to the Company, the aggregate purchase price for the Class A Common Shares of Vivacitas at
the value of $per share shall be $
On
July 22, 2021, the Company exercised of
the available options under the Vivacitas Agreement #1 for $
Sentinel Brokers Company, Inc.
On
May 13, 2021, a Sentinel Brokers, LLC., subsidiary of the Company entered into a stock purchase agreement (“Sentinel Agreement”)
to acquire a
Sentinel is a broker-dealer operating primarily as a fiduciary intermediary, facilitating intuitional trading of municipal and corporate bonds as well as preferred stock, and is 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”).
| 17 |
7. Short-Term and Long-Term Debt
Revolving
Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving
credit line with Citizens Bank (“Citizens”) of up to $
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 $
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 $
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 $
The Citizens credit facilities to each of the Company’s subsidiaries, 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
March 2, 2020, AMRE entered into a $
| 18 |
During
Q2 2020, the Company received loan proceeds for Premier Packaging, DSS Digital, and AAMI in the amount of approximately $
On
March 16, 2021, American Medical REIT, Inc. received loan proceeds in the amount of approximately $
On
May 20, 2021, Premier Packaging entered into master loan and security agreement (“BOA Note”) with Bank of America, N.A. (“BOA”)
to secure financing in an amount not to exceed $
On June 18, 2021,
8. Lease Liability
The
Company has operating leases predominantly for operating facilities. As of June 30, 2021,
Future minimum lease payments as of June 30, 2021 are as follows:
Maturity of Lease Liability
| Totals | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total lease payments | ||||
| Less: Imputed Interest | ( | ) | ||
| Present value of remaining lease payments | $ | |||
| Current | $ | |||
| Noncurrent | $ | |||
| Weighted-average remaining lease term (years) | ||||
| Weighted-average discount rate | % | |||
| 19 |
9. Commitments and Contingencies
The Apple Litigation
On November 26, 2013, DSS Technology Management, Inc. (“DSSTM”) filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSSTM’s patents that relate to systems and methods of using low power wireless peripheral devices. DSSTM is seeking a judgment for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, Apple’s motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two Inter Partes Review (“IPR”) petitions with the Patent Trial and Appeal Board (“PTAB”) for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. The California District Court then stayed the case pending the outcome of those IPR proceedings. Oral arguments of the IPRs took place on March 15, 2016, and on June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions. DSSTM then filed an appeal with the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on August 9, 2017. On March 23, 2018, the Federal Circuit reversed the PTAB, finding that the PTAB erred when it found the claims of U.S. Patent No. 6,128,290 to be unpatentable. The Federal Circuit affirmed its decision on July 12, 2018, when it denied Apple’s petition for panel rehearing of the Federal Circuit’s Opinion and Judgment issued on March 23, 2018. On July 27, 2018, the District Court judge lifted the Stay resuming the litigation, which had a trial date set for the week of February 24, 2020. On January 14, 2020, the Court in the case DSS Technology Management, Inc. v. Apple, Inc., 4:14-cv-05330-HSG pending in the Northern District of California issued an order that denied DSS’ motion to amend its infringement contentions. In the same Order, the Court granted Apple’s motion to strike DSS’ infringement expert report. DSS filed a motion for leave to file a motion for reconsideration of the Court’s order denying DSS the right to amend its infringement contentions and motion to strike DSS infringement expert report. On February 18, 2020, the Court denied DSS’s motion for leave to file a motion for reconsideration. On February 24, 2020, the Court signed a Final Judgment stipulating that Apple was “entitled to a judgment of non-infringement of U.S. Patent No. 6,128,290 as a matter of law.” On March 10, 2020, DSS filed an appeal of this Final Judgment to the United States Court of Appeals for the Federal Circuit under DSS Technology Management v. Apple, Federal Circuit Docket no. 2020-1570. On April 27, 2021, the Court of Appeals heard oral argument, and on April 30, 2021, the Court affirmed the District Court’s judgment. The Company is currently evaluating its options for further proceedings on appeal.
On March 10, 2020 DSS filed an appeal of this Final Judgment to the United States Court of Appeals for the Federal Circuit under DSS Technology Management v. Apple, Federal Circuit Docket no. 2020-1570. On April 27, 2021, the Court of Appeals heard oral argument, and on April 30, 2021, the Court affirmed the District Court’s judgment. After considering all factors the Company has elected to not pursue any further appeals on this matter. Case is deemed closed.
The Ronaldi Litigation
| 20 |
Additionally,
on March 2, 2020 DSS and DSSTM filed a second litigation action against Jeffrey Ronaldi in the State of New York, Supreme Court, County
of Monroe, Document Security Systems, Inc. and DSS Technology Management, Inc. vs. Jeffrey Ronaldi, Index No.: 2020002300, alleging acts
of self-dealing and conflicts of interest while he served as CEO of both DSS and DSS TM. Mr. Ronaldi filed a Notice of Removal of this
civil litigation to the United States District Court for the Western District of New York where it was assigned Case No. 6:20-cv-06265-EAW.
Mr. Ronaldi filed a motion seeking to compel DSS to advance his legal fees to defend the action, which motion was fully briefed as of
June 30, 2020 and remains pending and undecided. On March 16, 2021 the Western District of New York granted Mr. Ronaldi’s motion
to have his defense costs advanced to him during the pendency of the action as they are incurred. On March 26, 2021 Mr. Ronaldi applied
to the court for reimbursement of $
Maiden Biosciences Litigation
On February 15, 2021, Maiden Biosciences, Inc. (“Maiden”) commenced an action against Document Security Stems, Inc. (“DSS”), Decentralized Sharing Systems, Inc. (“Decentralized”), HWH World, Inc. (“HWH”), RBC Life International, Inc., RBC Life Sciences, Inc (“RBC”)., Frank D. Heuszel (“Heuszel”), Steven E. Brown, Clinton Howard, and Andrew Howard (collectively, “Defendants”). The lawsuit is currently pending in the United States District Court Northern District of Texas, Dallas Division, and is styled and numbered Maiden Biosciences, Inc. v. Document Security Stems, Inc., et al., Case No. 3:21-cv-00327.
On March 30, 2021, Defendants DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel filed a motion to dismiss seeking to dismiss Maiden’s unjust enrichment, exemplary damages, and RICO claims against DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel, as well as Maiden’s fraudulent transfer claims against DSS and RBC International, Inc. On August 9, 2021, the Court the entered an order granting in part the motion to dismiss filed on behalf of DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel. Among other things, the Court held that Maiden failed to plausibly plead certain causes of action, including (1) the civil RICO claim against DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel, (2) the TUFTA claim against DSS, and (3) the unjust enrichment claim against DSS and RBC Life International, Inc. Notably, the Court declined the request to dismiss the TUFTA claim against RBC Life International, Inc. The Court granted Maiden leave to file an amended complaint. Maiden’s deadline to do so is Monday, September 6, 2021. The Company intends to vigorously defend its position.
In addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and have not been finally adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss is probable and estimable.
| 21 |
10. Stockholders’ Equity
Sales of Equity –
In connection with the Share Exchange for Impact BioMedical described in Note 5, on August 18, 2020, the Company filed a Certificate of Amendment of its Certificate of Incorporation (the “Certificate of Amendment”) to increase the number of authorized shares of the Company, including shares of Preferred Stock, with a par value of $, of which shares were designated Series A Preferred Stock. The Certificate of Amendment, the form of which was previously disclosed in a Schedule 14A Definitive Proxy Statement filed with the Securities and Exchange Commission on July 14, 2020. As described in Note 5, this transaction is a related party transaction.
Holders
of the Series A Preferred Stock have no voting rights, except as required by applicable law or regulation, and no dividends accrue or
are payable on the Series A Preferred Stock. The holders of Series A Preferred Stock are entitled to a liquidation preference at a liquidation
value of $
On
January 19, 2021, the Company entered into an underwriting agreement, as amended by Amendment No. 1 effective as of January 19, 2021
(the “Jan. 2021 Underwriting Agreement”), with Aegis Capital Corp., as representative of the underwriters, which provided
for the issuance and sale by the Company and the purchase by the underwriters, in a firm commitment underwritten public offering (the
“Jan. 2021 Offering”), of shares of the Company’s common stock, $ par value per share. Subject to the
terms and conditions contained in the Jan. 2021 Underwriting Agreement, the shares were offered in a public offering at a price of $
per share, less certain underwriting discounts and commissions. The Company also granted the underwriters a 45-day option to purchase
up to additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any
over-allotments in connection with the Jan. 2021 Offering. This overallotment was exercised in full. The net offering proceeds to the
Company from the Jan. 2021 Offering are approximately $
On
February 4, 2021, the Company entered into an underwriting agreement (the “Feb. 2021 Underwriting Agreement”) with Aegis
Capital Corp., as representative of the underwriters named therein, which provided for the issuance and sale by the Company and the purchase
by the underwriters, in a firm commitment underwritten public offering (the “Feb. 2021 Offering”), of shares of
the Company’s common stock, $ par value per share. Subject to the terms and conditions contained in the Feb. 2021 Underwriting
Agreement, the shares were sold at a public offering price of $ per share, less certain underwriting discounts and commissions. The
Company also granted the underwriters a 45-day option to purchase up to additional shares of the Company’s common stock
on the same terms and conditions for the purpose of covering any over-allotments in connection with the Feb. 2021 Offering, which over-allotment
option was exercised in full on February 9, 2021. The net offering proceeds to the Company from the Feb. 2021 Offering are approximately
$
On
May 26, 2021, the Company entered into an underwriting agreement (the “May 2021 Underwriting Agreement”) with Aegis Capital
Corp., as representative of the underwriters named therein, which provided for the issuance and sale by the Company and the purchase
by the underwriters, in a firm commitment underwritten public offering (the “May 2021 Offering”), of shares of
the Company’s common stock, $ par value per share. Subject to the terms and conditions contained in the May 2021 Underwriting
Agreement, the shares were sold at a public offering price of $ per share, less certain underwriting discounts and commissions. The
Company also granted the underwriters a 45-day option to purchase up to additional shares of the Company’s common stock
on the same terms and conditions for the purpose of covering any over-allotments in connection with the May 2021 Offering, which over-allotment
option was exercised in full on June 16, 2021. The net offering proceeds to the Company from the May 2021 Offering are approximately
$
Stock-Based Compensation - The Company records stock-based payment expense related to options and warrants based on the grant date fair value in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the three months ended June 30, 2021, the Company’s stock compensation was a credit of approximately $or less than ($basic and diluted loss per share for the three months ended June 30, 2021($or less than $basic and diluted loss per share – June 30, 2020).
| 22 |
On
June 4, 2020, the Company entered into an agreement with an investor relations firm to provide services over a 14-month period in exchange
for shares of common stock. The shares were issued
on the date of the agreement and were valued by the Company at $
11. Discontinued Operations
As
a result of the insufficient cash flows from the operations of Plastic Printing Professionals, Inc. as well as the disruption of our
business from the COVID-19 pandemic, on April 20, 2020, the Company executed a nonbinding letter of intent with a buyer for substantially
all the assets of this business line. with an intent to exit this business line. As a result, management has decided to fully impair
its goodwill related to DSS Plastics. The impact to DSS’s first quarter earnings of this impairment was approximately $
The
consideration paid to the Company under the Asset Purchase Agreement for the sale of the assets included a one-time cash payment of $
The following table shows the results of operations of the discontinued operation.
Plastic Printing Professionals, Inc.
Consolidated Statements of Operations and Comprehensive Loss - Discontinued Operations
(unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||
| June 30, 2020 | June 30, 2020 | |||||||
| Revenue: | ||||||||
| Printed products | $ | $ | ||||||
| Total revenue | ||||||||
| Costs and expenses: | ||||||||
| Cost of revenue, exclusive of depreciation and amortization | ||||||||
| Selling, general and administrative (including stock based compensation) | ||||||||
| Depreciation and amortization | ||||||||
| Impairment of goodwill | - | |||||||
| Total costs and expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||
| Income tax expense (benefit) | - | - | ||||||
| Income (loss) from discontinued operations | $ | ( | ) | $ | ( | ) | ||
On
May 7, 2021, the Company completed the sale of
The following tables show the major classes of assets and liabilities held for sale and results of operations of the discontinued operation.
DSS Digital, Inc.
Consolidated Balance Sheets - Assets and Liabilities Held for Sale
| June 30, 2021 | December 31, 2020 | |||||||
| unaudited | unaudited | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | - | $ | |||||
| Accounts receivable, net | - | |||||||
| Prepaid expenses and other current assets | - | |||||||
| Total current assets | - | |||||||
| Property, plant and equipment, net | - | |||||||
| Total assets | - | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and deferred revenue | - | |||||||
| Total current liabilities | - | |||||||
DSS Digital, Inc.
Consolidated Statements of Operations - Discontinued Operations
(unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Technology sales, services and licensing | $ | $ | $ | $ | ||||||||||||
| Total revenue | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | ||||||||||||||||
| Selling, general and administrative (including stock based compensation) | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating (loss) income | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense (benefit) | - | - | - | - | ||||||||||||
| Income (loss) from discontinued operations | $ | ( | ) | $ | $ | $ | ||||||||||
12. Income Taxes
Our
effective tax rate for the six-month ended June 30, 2021 was
As
of December 31, 2020, the Company has domestic net operating loss (“NOL”) carryforwards of approximately $
As of June 30, 2021, no benefit for losses incurred by our foreign subsidiaries have been recorded as those losses are not anticipated to provide any tax benefits in future periods.
There
were
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. At June 30, 2021, there are no ongoing income tax audits.
13. Supplemental Cash Flow Information
The following table summarizes supplemental cash flows for the six months ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Termination of right of use lease asset | $ | ( | ) | $ | ||||
| Termination of right of use lease liability | $ | $ | ||||||
| Shares received for loan origination fee | $ | ) | ||||||
| Shares received for prepaid loan interest | $ | ) | ||||||
| Long-lived assets acquired through settlement of notes receivable | $ | $ | ||||||
| Shares issued for marketing services | $ | $ | ||||||
| 23 |
14. Segment Information
The
Company’s eight businesses lines are organized, managed and internally reported as
Our segment structure presented below represents a change from the prior year for the inclusion of our BioHealth Group and REITs segments and the removal of our Plastics segment, Digital Group and IP Technology Management segment as the Plastics segment was discontinued in 2020, DSS Digital was sold and discontinued in May 2021 and activities surrounding our IP Technology Management segment have significantly decreased. The amounts for these segments have been included in the Corporate reporting segment for the three months ended June 30, 2021 and 2020 below for reconciliation purposes.
Approximate information concerning the Company’s operations by reportable segment for the three and six months ended June 30, 2021 and 2020 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:
| Three Months Ended June 30, 2021 | Packaging and Printing | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Stock based compensation | ( | ) | ( | ) | ||||||||||||||||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Capital expenditures | ( | ) | ||||||||||||||||||||||
| Identifiable assets | ||||||||||||||||||||||||
| Three Months Ended June 30, 2020 | Packaging and Printing | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||||||
| Depreciation and amortization | - | |||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Stock based compensation | ( | ) | ( | ) | ||||||||||||||||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Identifiable assets | ||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | Packaging and Printing | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||||||||||
| Stock based compensation | ( | ) | ( | ) | ||||||||||||||||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Identifiable assets | ||||||||||||||||||||||||
| Six Months Ended June 30, 2020 | Packaging and Printing | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | - | $ | - | $ | $ | ||||||||||||||||
| Depreciation and amortization | - | |||||||||||||||||||||||
| Interest expense | - | |||||||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||||||
| Net income (loss) from continuing operations | - | ( | ) | ( | ) | |||||||||||||||||||
| Capital expenditures | - | |||||||||||||||||||||||
| Identifiable assets | - | |||||||||||||||||||||||
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The following tables disaggregate our business segment revenues by major source:
Printed Products Revenue Information:
| Three months ended June 30, 2021 | ||||
| Packaging Printing and Fabrication | $ | |||
| Commercial and Security Printing | ||||
| Total Printed Products | $ | |||
| Three months ended June 30, 2020 | ||||
| Packaging Printing and Fabrication | $ | |||
| Commercial and Security Printing | ||||
| Total Printed Products | $ | |||
| Six months ended June 30, 2021 | ||||
| Packaging Printing and Fabrication | $ | |||
| Commercial and Security Printing | ||||
| Total Printed Products | $ | |||
| Six months ended June 30, 2020 | ||||
| Packaging Printing and Fabrication | $ | |||
| Commercial and Security Printing | ||||
| Total Printed Products | $ | |||
Direct Marketing
| Three months ended June 30, 2021 | ||||
| Direct Marketing Internet Sales | $ | |||
| Total Direct Marketing | $ | |||
| Three months ended June 30, 2020 | ||||
| Direct Marketing Internet Sales | $ | |||
| Total Direct Marketing | $ | |||
| Six months ended June 30, 2021 | ||||
| Direct Marketing Internet Sales | $ | |||
| Total Direct Marketing | $ | |||
| Six months ended June 30, 2020 | ||||
| Direct Marketing Internet Sales | $ | |||
| Total Direct Marketing | $ | |||
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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Except for the historical information contained herein, this report contains forward-looking statements (identified by words such as “estimate”, “project”, “anticipate”, “plan”, “expect”, “intend”, “believe”, “hope”, “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, that could cause actual results to differ materially from the results anticipated in the forward-looking statements.
Overview
Document Security Systems, Inc. (the “Company of DSS”) operates seven (7) business lines through seven (7) DSS subsidiaries located around the globe.
Of the seven subsidiaries, two of those have historically been the core subsidiaries of the Company: (1) Premier Packaging Corporation (“Premier Packaging”), and (2) 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. 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 (3) 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 three subsidiaries listed above, in 2019 and early 2020, DSS has created four new, wholly owned subsidiaries. (4) 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. (5) DSS Securities, Inc., a Nevada corporation, 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, stable coins 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). Also in this segment is the Company’s real estate investment trust (“REIT”), 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. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. (6) 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. (7) 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. The activity in DSS Blockchain and DSS Secure Living has been minimal or in various start-up or organizational phases.
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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”). 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. On June 18, 2021, DSS Securities, entered into a stock purchase agreement with AMRE to acquire 264,525 Class A Common Shares of AMRE at a per share price of $10, for a total consideration of $2,645,250. The additional 264,525 Class A Common Shares acquired increases the Company’s total equity interest in AMRE to approximately 93%.
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.
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.
On October 7, 2020, DSS Securities took part in an initial public offering of Presidio Property Trust, Inc. (“Presidio”), 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, 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. (“Decentralized”) announced that it increased its investment in Sharing Services Global Corporation (“Sharing Services” or “SHRG”), 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 dated April 5, 2021. 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. In accordance with the April 5, 2021 convertible promissory note, SHRG issued to the Company 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of the loan origination fee and 12,000,000 shares in prepayment of interest for the first year. As of June 30, 2021, the Company held 91,207,378 class A common shares equating to a 46.7% ownership interest in SHRG with aggregate fair value of the Company’s investment in SHRG at June 30, 2021 of approximately $12,769,000. The Company, via three (3) 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. Heng Fai Ambrose Chan, DSS’s Executive Chairman of the board of directors (joined the SHRG Board effective May 4, 2020), and Mr. Frank D. Heuszel, the CEO of the Company (joined the SHRG Board effective September 29, 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 at 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 with Alset EHome International, Inc. (“Seller”) to acquire the Seller’s wholly owned subsidiary Impact Oncology PTE Ltd for the purchase price of $2,480,000 to effectively purchase ownership of 2,480,000 shares of common stock of Vivacitas.. 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 an approximate 15.7% equity position in Vivacitas. The Seller’s largest shareholder is Mr. Heng Fai Ambrose Chan, the Chairman of the Company’s board of directors and its largest shareholder. On July 22, 2021, the Company exercised 1,000,000 of the available options under the Vivacitas Agreement #1, increasing the Company’s equity position in Vivacitas to 19.3%.
On April 21, 2021, the Company announced its wholly owned subsidiary, Premier Packaging Corporation’s intentions to relocate from its current 48,000 square-foot manufacturing facility from Victor, NY to a new 105,000 square-foot facility in the Town of Henrietta, NY approximately 15 miles from its Victor location by the end of 2021. In connection with this relocation, Premier Packaging has entered into an agreement to sell its current Victor location with the anticipated closing date of January 31, 2022.
On May 13, 2021, Sentinel Brokers, LLC., a subsidiary of the Company entered into a stock purchase agreement (“Sentinel Agreement”) to acquire a 24.9% equity position of Sentinel Brokers Company, Inc. (“Sentinel”), a company registered in the state of New York, for the purchase price of $300,000. Under the terms of this agreement, the Company as the option to purchase an additional 50.1% of the outstanding Class A Common Shares. Upon the exercising of this option, but no earlier than one year following the effective date the Sentinel Agreement, Sentinel has the option to sell the remaining 25% to the Company. In consideration of purchase price investment in Sentinel, the Company is entitled to an additional 50.1% of the net profits of Sentinel
On May 19, 2021, the Company announced that its wholly owned subsidiary, DSS PureAir, Inc., a Texas corporation (“DSS PureAir”), closed on a Securities Purchase Agreement with Puradigm LLC, a Nevada limited liability corporation (“Puradigm”). Pursuant to the terms of the Securities Purchase Agreement, DSS PureAir agreed to provide Puradigm a secured convertible promissory note in the maximum principal amount of $5,000,000.00 (the “Puradigm Note”). The Puradigm Note has a two year term with interest at 6.65% payable quarterly. All, or part of the Puradigm Note principal balance can be converted at the sole discretion of DSS PureAir for up to an 18% membership interest in Puradigm LLC. The Puradigm Note is secured by all the assets of Puradigm under a security agreement with Puradigm.
On June 18, 2021, AMRE Shelton, LLC., (“AMRE Shelton”) a subsidiary of AMRE financed the purchase of a 40,000 square foot, 2.0 story, Class A+ multi-tenant medical office building located on a 13.62 acre site in Shelton, Connecticut (See Note 7). In accordance with Topic 805, the acquisition of the medical acquired has been determined to be an acquisition of assets as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. This property was appraised at approximately $7,150,000, of which $6,027,000 and $815,000 was allocated to the facility and land respectively. Also include in the value of the property is $308,000 of intangible assets with an estimated useful life of 11 years. Contained within the sale-purchase agreement for this facility, is a $1,500,000 earnout due to the seller if certain criteria are met. As of June 30, 2021, no liability has been recorded for this earnout as management determined it is currently remote.
The four reporting segments are as follows:
Premier Packaging: (“Premier”) The Company’s consumer 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.
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.
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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, stable coins 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). Also in this segment is the Company’s real estate investment trust (“REIT”), 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. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. This group is headquartered in Huston, Texas.
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 direct marketing. Direct specializes in marketing and distributing its products and services through its subsidiaries, partner networks, and online marketplaces. Direct marketing products include, among other things, nutritional and personal care products sold throughout North America, Asia Pacific and Eastern Europe. Over the past 18 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 as of June 30, 2021, Decentralized owned approximately 47% 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.
Results of operations for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020.
This discussion should be read in conjunction with the financial statements and footnotes contained in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2020.
Revenue
| Three months ended June 30, 2021 | Three months ended June 30, 2020 | % Change | Six months ended June 30, 2021 | Six months ended June 30, 2020 | % Change | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Printed products | $ | 3,376,000 | $ | 2,272,000 | 49 | % | $ | 7,237,000 | $ | 5,438,000 | 33 | % | ||||||||||||
| Direct marketing | 809,000 | 506,000 | 60 | % | 1,416,000 | 1,078,000 | 31 | % | ||||||||||||||||
| Total Revenue | $ | 4,185,000 | $ | 2,778,000 | 51 | % | $ | 8,653,000 | $ | 6,516,000 | 33 | % | ||||||||||||
For the three and six months ended June 30, 2021, total revenue increased 51% and 33% respectively, as compared to the three and six months ended June 30, 2020. Revenues from the sale of Printed products increased 49%, and 33% during the three and six months ended June 30, 2021, respectively, as compared to the same period in 2020, primarily due to an increase in packaging sales due to the addition of new customers and existing customers return to pre-Covid 19 operations. Direct marketing revenue increase illustrates the Company’s continued expansion into the direct marketing industry and its associated opportunities.
Costs and expenses
| Three months ended June 30, 2021 | Three months ended June 30, 2020 | % Change | Six months ended June 30, 2021 | Six months ended June 30,2020 | % Change | |||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | $ | 3,042,000 | $ | 1,729,000 | 76 | % | $ | 6,330,000 | $ | 4,302,000 | 47 | % | ||||||||||||
| Sales, general and administrative compensation | 4,609,000 | 749,000 | 515 | % | 6,337,000 | 1,393,000 | 355 | % | ||||||||||||||||
| Depreciation and amortization | 821,000 | 273,000 | 201 | % | 1,335,000 | 573,000 | 133 | % | ||||||||||||||||
| Professional fees | 1,235,000 | 692,000 | 78 | % | 2,205,000 | 1,272,000 | 73 | % | ||||||||||||||||
| Stock based compensation | (30,000 | ) | 47,000 | -164 | % | (15,000 | ) | 54,000 | -128 | % | ||||||||||||||
| Sales and marketing | 896,000 | 340,000 | 164 | % | 1,570,000 | 664,000 | 136 | % | ||||||||||||||||
| Rent and utilities | 75,000 | 78,000 | -4 | % | 108,000 | 178,000 | -39 | % | ||||||||||||||||
| Research and development | 211,000 | - | N/A | 455,000 | - | N/A | ||||||||||||||||||
| Other operating expenses | 381,000 | 133,000 | 186 | % | 774,000 | 317,000 | 144 | % | ||||||||||||||||
| Total costs and expenses | $ | 11,240,000 | $ | 4,041,000 | 178 | % | $ | 19,099,000 | $ | 8,753,000 | 118 | % | ||||||||||||
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Costs of revenue, exclusive of depreciation and amortization includes all direct costs of direct marketing and printed products revenues, including materials, direct labor, transportation and manufacturing facility costs. Costs of goods sold increased 76% and 47% for the three and six months ended June 30, 2021, respectively as compared to the same periods in 2020. This increase is driven primarily by an increase in manufacturing costs associated with the products sold as part of our Direct Marketing, and Packaging and Printing segments, in particular, increases in freight and overhead costs.
Sales, general and administrative compensation costs, excluding stock-based compensation, increased 515% and 355% during the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2020, primarily due to changes in headcount year over year associated with addition of our Direct Marketing and BioHealth business segments, and performance bonus accruals approximating $4,574,000.
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-compete agreements and patents, and internally developed patent assets. For the three and six months ended June 30, 2021, depreciation and amortization expense increased 201% and 133% respectively as compared to the same periods in 2020 due to sale and disposal of assets and amortization on newly acquired intangibles assets.
Professional fees increased 78% and 73% respectively during the three and six months ended June 30, 2021, as compared to the same periods in 2020, mostly due to increases in legal services related to the Direct Marketing business segment, and yearly audit fees.
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 decreased 164% and 128% respectively during the three and six ended June 30, 2021 as compared to the same periods in 2020, driven by the expiration of options awarded to employees no longer with the company
Sales and marketing which include internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses increased 164% and 136% respectively during the three and six months ended June 30, 2021, as compared to the same periods in 2020, resulting from an increase in commissions paid to brokers associated with the Company’s Direct Marketing segment.
Rent and utilities decreased by 4% and of 39% respectively during the three and six months ended June 30, 2021, as compared to the same period in 2020, primarily due to a decrease in facilities maintenance costs and utilities for the Company. This was offset by a new facility lease in Houston, Texas started during the first quarter of 2021.
Research and development costs increased $211,000 and $455,000 during the three and six months ended June 30, 2021 respectively as compared to the same period in 2020 due to the acquisition of Impact Biomedical, Inc. in 2020 and the related costs for continued research and development of the acquired product formulations.
Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, and insurance costs. During the three and six months ended June 30, 2021, other operating expenses increased 191% and 186% respectively as compared to the same period in 2020 due to increased software costs associated with enhancements to the Company’s ERP system as well as new software implement as part of the Company’s Direct Marketing segment and increased D&O insurance.
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Other Income (Expense)
| Three months ended June 30, 2021 | Three months ended June 30, 2020 | % Change | Six months ended June 30, 2021 | Six months ended June 30,2020 | % Change | |||||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Interest Income | $ | 1,485,000 | $ | 27,000 | 5400 | % | $ | 1,537,000 | $ | 50,000 | 2974 | % | ||||||||||||
| Other Income | 250,000 | - | N/A | 250,000 | - | N/A | ||||||||||||||||||
| Interest Expense | (106,000 | ) | (42,000 | ) | 152 | % | (126,000 | ) | (73,000 | ) | 73 | % | ||||||||||||
| Loss on equity method investment | (332,000 | ) | - | N/A | (911,000 | ) | - | N/A | ||||||||||||||||
| (Loss) gain on investments | (6,821,000 | ) | 580,000 | -1276 | % | (7,898,000 | ) | 584,000 | -1452 | % | ||||||||||||||
| Gain/(Loss) on extinguishment of debt | - | - | N/A | 116,000 | - | N/A | ||||||||||||||||||
| Total other income | $ | (5,524,000 | ) | $ | 565,000 | 1078 | % | $ | (7,032,000 | ) | $ | 561,000 | 1353 | % | ||||||||||
Interest income is recognized on the Company’s money markets as well as the accretion of the discount on convertible notes receivable identified in Note 3.
Other income represents recognition of amortization of note origination fees.
Interest expense increased 152% and 73% during the three and six months ended June 30, 2021 respectively, as compared to the same period in 2020, due to increasing debt balances.
Unrealized loss on equity investment Loss from equity method investment is driven by the Company’s prorated portion of Sharing Services Global Corp’s earnings for the three and six months ended June 30, 2021.
(Loss) gain on investments consists of realized losses on marketable securities which are recognized as the difference between the purchase price and sale price of the common stock investment. For the three and six months ended June 30, 2021, $509,000 and $519,000 respectively, realized loss was recorded. Also unrealized losses on marketable securities which are recognized on the change in fair market value on our common stock investment driven by unrealized losses on Alset International Limited of approximately $967,000 for six months ended June 30, 2021. Also included are the loss of approximately $6,589,000 on warrants which are recognized as the change in option value of warrants held at June 30, 2021 (See Note 6).
Gain on extinguishment of debt in April 2020, AAMI received funds from the SBA Paycheck Protection Program of $116,000. As of January 8, 2021, this note was forgiven in full.
Net Loss
| Three months ended June 30, 2021 | Three months ended June 29, 2020 | % Change | Six months ended June 30, 2021 | Six months ended June 30,2020 | % Change | |||||||||||||||||||
| Loss from continuing operations | $ | (10,725,000 | ) | $ | (698,000 | ) | -1437 | % | $ | (14,787,000 | ) | $ | (1,676,000 | ) | -782 | % | ||||||||
| Income (loss) from discontinued operations | 2,079,000 | (208,000 | ) | 1100 | % | 2,129,000 | (1,197,000 | ) | 278 | % | ||||||||||||||
| Net loss | $ | (8,646,000 | ) | $ | (906,000 | ) | -854 | % | $ | (12,658,000 | ) | $ | (2,873,000 | ) | -341 | % | ||||||||
For the three and six months ended June 30, 2021, the Company recorded net loss from continuing operations of $10,725,000 and $14,787,000 respectively, as compared to a net loss of $698,000 and $1,676,000 during the same periods in 2020. The increase in net loss during the three and six months ended June 30, 2021 as compared to the same periods in 2020 primarily reflect the company’s unrealized losses on its marketable securities, and warrants, increased costs associated with new business lines, as well as increases in performance based compensation. The gain from continuing operations for the three and six months ended June 30, 2021 is inclusive of a $2,079,000 and 2,129,000 respectively, income tax benefit as compared to the losses of $208,000 and $1,197,000 for the three and six months ended June 30, 2020. Our effective tax rate for the six month periods ended June 30, 2021 is 17.3%. There was no tax provision for June 30, 2020 due to the expected tax benefit from net operating losses (NOLs) being fully offset by an increase in the valuation allowance.
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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 June 30, 2021, the Company had cash of approximately $65.6 million. As of June 30, 2021, 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.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. The financial statements as of December 31, 2020 describe the significant accounting policies and methods used in the preparation of the financial statements. There have been no material changes to such critical accounting policies as of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer who is also our principal financial officer, we conducted an evaluation of our disclosure controls and procedures for the quarter ended June 30, 2021, pursuant to Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation and on the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 which remained as of June 30, 2021, our principal executive officer and principal financial officer concluded that as of June 30, 2021, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is being recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that our disclosure controls are not effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is being accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Because of its inherent limitations, internal control over financial reporting 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.
Plan for Remediation of Material Weaknesses
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, the Company has a remediation plan and is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in our controls. The Company has started to implement these steps, however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weaknesses described above will continue to exist.
Changes in Internal Control over Financial Reporting
While changes in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2021 as the Company began implementation of the remediation steps described above, we believe that there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See commentary in Note 9 Commitments and Contingencies.
ITEM 1A - RISK FACTORS
There have been no material changes to the discussion of risk factors previously disclosed in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
| 101.INS | XBRL Instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DOCUMENT SECURITY SYSTEMS, INC. | ||
| August 23, 2021 | By: | /s/ Frank D. Heuszel |
| Frank D. Heuszel | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| August 23, 2021 | By: | /s/ Todd D. Macko |
| Todd D. Macko | ||
| Interim Chief Financial Officer | ||
| 33 |