SECURITIES & EXCHANGE COMMISSION EDGAR FILING
DOCUMENT SECURITY SYSTEMS INC
Form: 10-K
Date Filed: 2020-03-31
Corporate Issuer CIK: 771999
© Copyright 2020, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 001-32146
DOCUMENT SECURITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
16-1229730
(I.R.S.Employer
Identification No.)
200 Canal View Boulevard
Suite 300
Rochester, New York 14623
(Address of principal executive offices)
(585) 325-3610
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.02 per share
DSS
NYSE American LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act
Large Accelerated Filer [ ]
Non-Accelerated Filer [ ]
Accelerated Filer [ ]
Smaller Reporting Company [x]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common
stock was last sold, as reported on the NYSE American LLC exchange on June 30, 2019 was $11,583,641.
The number of shares of the registrant’s common stock outstanding as of March 20, 2020, was 62,086,099.
DOCUMENTS INCORPORATED BY REFERENCE
None.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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DOCUMENT SECURITY SYSTEMS, INC. & SUBSIDIARIES
Table of Contents
ITEM 1
ITEM 1A
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 6
ITEM 7
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8
ITEM 9
ITEM 9A
ITEM 9B OTHER INFORMATION
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
ITEM 10
ITEM 11
ITEM 12
ITEM 13
ITEM 14
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART III
ITEM 15
ITEM 16
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
PART IV
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ITEM 1 - BUSINESS
Overview
PART I
Document Security Systems, Inc. (together with its consolidated subsidiaries (unless the context otherwise requires), referred to herein as “Document
Security Systems,” “DSS,” “we,” “us,” “our” or the “Company”) was formed in New York in 1984 and, in 2002, chose to strategically focus on becoming a
developer and marketer of secure document and product technologies. We specialize in creating dynamic solutions that protect against fraud and ensure the
well-being of consumers worldwide. Our mission is to make and deliver world-class authentication, counterfeit prevention and consumer engagement technology
attainable and integrated into every product we offer. The Company holds numerous patents for optical deterrent and authentication technologies that provide
protection of printed information from unauthorized alterations, scanning and copying. We operate two production facilities, consisting of a combined security
printing and packaging facility and a plastic card facility, where we produce secure and non-secure products for our customers. We also license our anti-
counterfeiting technologies to printers and brand-owners. In addition, through our digital division, we provide cloud computing services for our customers,
including disaster recovery, back-up and data security services.
Prior to 2006, our primary revenue source in our document security division was derived from the licensing of our technology. In 2006, we began a
series of acquisitions designed to expand our ability to produce products for end-user customers. In 2006, we acquired Plastic Printing Professionals, Inc., a
privately held plastic cards manufacturer located in the San Francisco, California, area (referred to herein as the “DSS Plastics Group”). In 2008, we acquired
DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York. In 2010, we acquired Premier Packaging Corporation, a privately
held packaging company located in Victor, New York (referred to herein as the “DSS Packaging and Printing Group”). In May 2011, we acquired ExtraDev, Inc.,
a privately held information technology and cloud computing company located in Rochester, New York. In 2016, ExtraDev, Inc. changed its name to DSS Digital
Inc. DSS Digital Inc. is also referred to herein as the “DSS Digital Group.”
In July 2013, the Company expanded its business focus by acquiring Lexington Technology Group, Inc. (“Lexington”), a private intellectual property
monetization company. Lexington’s business was primarily to acquire intellectual property assets for the purpose or monetizing these assets through a variety of
value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic
partnerships and litigation. DSS Technology Management, Inc., which is also referred to herein as “DSS Technology Management,” was established as a DSS
subsidiary to house, account for and further develop this line of business. While similar to Lexington’s business model, DSS Technology Management focuses on
extracting the economic benefits of intellectual property assets through acquiring or internally developing patents or other intellectual property assets (or
interests therein) and then monetizing such assets through a variety of value enhancing initiatives. However, the Company, as we elaborate below, has
determined that it is in the best interests of the Company and its stockholders to wind down our intellectual property monetization business and refocus our
efforts on our other existing businesses as well as explore potential new business lines
In January 2018, we commenced international operations for our DSS Digital Group with our wholly owned subsidiary, DSS Asia Limited, in our office in
Hong Kong. In December 2018, this division acquired Guangzhou Hotapps Technology Ltd, a Chinese company with a valuable license enabling us to do
business in China.
We do business in four operating segments as follows:
DSS Packaging and Printing Group -Operating under the name Premier Packaging Corporation (a New York corporation), the DSS Packaging and
Printing Group produces custom packaging serving clients in the pharmaceutical, nutraceutical, beverage, specialty foods, photo packaging and direct marketing
industries, among others. The group also provides active and intelligent packaging and document security printing services for end-user customers along with
technical support for our technology licensees. The division produces a wide array of printed materials, such as folding cartons and paperboard packaging,
security paper, vital records, prescription paper, birth certificates, receipts, identification materials, entertainment tickets, secure coupons and parts tracking
forms. The division also provides resources and production equipment for our ongoing research and development of security printing and related technologies.
DSS Plastics Group - Manufactures laminated and surface printed cards, which can include magnetic stripes, bar codes, holograms, signature panels,
invisible ink, micro fine printing, guilloche patterns, biometrics, radio frequency identification (RFID) and watermarks for printed plastic documents such as ID
cards, event badges and driver’s licenses. DSS Plastics Group is headquartered in Brisbane, California and operates under the name of Plastic Printing
Professionals, Inc., a New York corporation.
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DSS Digital Group - This division researches, develops, markets and sells worldwide the Company’s digital products, including and primarily our
AuthentiGuard® product, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data
security-based solutions. The AuthentiGuard® product allows our customers to implement a security mark utilizing conventional printing methods that is copy-
and counterfeit-resistant and that can be read and recorded utilizing smartphones and other digital image capture devices, which can be utilized by that
customer’s suppliers, field personnel and customers throughout its global product supply and distribution chains.
DSS Technology Management - Since its acquisition in 2013, DSS Technology Management’s primary mission has been to monetize its various patent
portfolios through commercial litigation and licensing. Except for investment in its social networking related patents, we have historically partnered with various
third-party funding groups in connection with patent monetization programs. It is our intent to de-emphasize and ultimately wind down this business line. While
Management will continue to assert and defend the existing patents and purse potential infringements as they are identified, we do not intend to seek out new
patent portfolios.
Strategic Business Plan
In November 2019, we announced the Company’s new strategic business plan, which focuses on strengthening our organization, investing in our core
lines of business, improving top line revenues and net margins, controlling costs and creating new long-term recurring revenue streams. This strategic business
plan has the following core elements, which are discussed in further detail below:
•
Revive the Company’s core businesses;
• Optimize cost structure and reduce cash burn;
•
•
Exit unprofitable business lines; and
Business diversification.
Reviving the Company’s Core Businesses – We are upgrading equipment and products to enhance cross-selling opportunities with existing customers
and intend to rejuvenate research and development on digital anti-counterfeit technology products.
Substantially Reducing Corporate Overhead and Cash Burn – Since the spring of 2019, we have reduced the Company’s monthly cash burn by more
than $160,000, by eliminating non-essential layers of management and redundant operating expenses, as well as by renegotiating vendor contracts. We
plan to continue to reduce overhead operating costs, redundancy and cash burn through a series of new management initiatives.
Exiting Unprofitable Business Lines – To preserve capital and stop further cash drain, we intend, as we have noted above, to de-emphasize and
ultimately wind down our intellectual property monetization business line.
Since entering the intellectual property (“IP”) monetization business in July 2013, we have invested substantial capital and resources into purchasing,
maintaining and enforcing our patents. We have also invested substantial resources in the research and development of internally generated IP for our
own use and/or for potential profitable licensing opportunities.
However, the costs of funding a patent pool, including patent maintenance fees, litigation (costs for legal counsel, discovery, consultants, expert
witnesses and travel), and overhead costs associated with the IP business line, has placed a significant financial strain upon the Company. In 2019, our
corporate cash burn reached approximately $255,000 per month primarily related to recurring costs related to the IP monetization line of business, which
reduced resources for our other lines of business, as well as our own patent research and development. Further, because the related IP legal costs are
expensed in the year incurred with no corresponding revenue generation, the financial impact to the Company caused us to routinely report negative
operating income year over year. Moreover, as a result of the IP monetization line’s high capital demand, the Company did not have the capital to
initiate and sustain IP litigation against potential major infringers of DSS patents.
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In addition, as a result of several court decisions and statutory changes, the patent laws in the United States have changed significantly since our entry
into this business. Consequently, the enforcement of patents has become more costly and more difficult for DSS and other patent holders, and the
likelihood of successful litigation has decreased. Further, depending upon the type of IP involved and the parties who are the alleged patent infringers,
the legal enforcement and recovery process can take five or more years before the matter goes to trial. For instance, the Apple litigation, which we have
previously disclosed and which is described in more detail herein, was initiated in September 2013 and was scheduled to go to trial in late February
2020; a period of approximately 6 ½ years.
As a result of the significant financial, working capital and resource allocation to the IP monetization program, we made a critical review of the program.
We reviewed all elements and factors related to the operations of this business line, including what we hold in inventory of patents, the potential of that
patent portfolio, the timetables involved to monetize those patents, the cost of capital to maintain the patents to monetization, and the probability of
successful monetization. As a result of that extensive review, we determined that it was in the best interest of DSS and its stockholders to de-emphasize
and ultimately exit the IP monetization line of business.
The process of exiting this line of business will not be immediate. DSS has outstanding contracts with third parties, including attorneys, lenders and
former patent holders, which must be addressed. We have determined that the cost to stop all litigation and recovery actions at this time would be too
high. As a result, we have elected to not immediately terminate and exit this line of business, but to wind it down in an organized fashion. We will honor
our existing contracts and complete the existing IP monetization programs without adding any new costs. We do not intend to make any further
investments in acquiring patents that do not directly support our existing and targeted product lines. We estimate that the timetable necessary to exit this
business line will be approximately 18 to 24 months.
Implementing Business Diversification Initiatives – We plan to both internally develop and to acquire profitable new businesses, which will in some cases
be complimentary to our core businesses and addressable markets. In other instances, we intend to explore opportunities for expansion into new
business lines in which we believe we can successfully compete, which are scalable, and which generate sustainable reoccurring revenue. Management
has already taken steps toward this diversification by performing initial research and cost analysis into specific new business lines, and in 2019 we
formed the following four new subsidiaries, in an effort to grow and expand our technologies and market reach. These four potential new business lines
are in various stages of development and have not yet generated any significant revenues.
•
•
DSS BIOHEALTH SECURITY, INC. (a Nevada corporation). This business will be principally involved in the bio-medical sector, including investing
in companies that hold bio-medical intellectual property and/or have, or are securing, strategic alliances, partnerships and distribution rights for bio-
medical and security products, technologies or enterprises. This new division will focus on open-air defense initiatives that seek to curb transmission
of airborne infectious diseases such as tuberculosis and influenza, among others, in open areas.
Consistent with that growth initiative, on March 12, 2020, the Company announced that it had entered into a binding term sheet to acquire Impact
Biomedical, Inc. (“Impact”), a company engaged in the development and marketing of biohealth security technologies, in a proposed share
exchange transaction with a purchase price capped at $50 million, subject to completion of due diligence and an independent valuation. According to
the terms of the term sheet between the parties, DSS will issue up to 14.5 M shares of common stock and a perpetual convertible preferred stock to
which DSS will have certain customary rights and requirements, including appointing members of the Board of Directors of Impact. The preferred
stock will be convertible at $0.216 per share and have a 19.9% blocker. Subject to a favorable due diligence and recommendation, the acquisition is
subject to final DSS Board, DSS shareholder, and NYSE approval, of which there can be no guarantee. See Note 16 for further disclosure on this
transaction.
DECENTRALIZE SHARING SYSTEMS, INC. (a Nevada corporation) (“Decentralized”). Decentralized intends to develop and operate its own marketing
network. We intend to offer product financing to small and mid-sized network marketing companies in the U.S. to assist them with growth
opportunities. Direct marketing or network marketing is designed to sell products or services directly to the public through independent distributors,
rather than selling through the traditional retail market. We believe this business has significant growth potential in the now popular “gig economy”.
Consistent with the Company’s strategic business plan and vision, we plan to enter the direct marketing or network marketing industry and take
advantage of the opportunities that exist. We have entered into partnerships with existing direct marketing companies to access U.S., Canadian,
Asian and Pacific Rim markets. In addition, we have acquired various domestic and international operating licenses from those companies. Through
the acquisitions we have secured product licenses, formulas, existing sales networks, patents, web sites, and other resources to initiate sales and
revenue generation for this line. We are currently planning different options on how to take advantage of this opportunities in the direct selling market
and help DSS in its global branding.
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•
•
D S S BLOCKCHAIN SECURITY, INC., (a Nevada corporation). This corporate business line will specialize in the development of blockchain security
technologies for tracking and tracing solutions for supply chain logistics and cyber security across global markets.
DSS SECURITIES, INC., (a Nevada corporation) (“DSS Securities”). This line of business will seek to establish or acquire investments in long-term
growth and sustainable reoccurring revenue generating activities; not in the trading of securities under an investment format. This Securities group,
while not limited to the following investment opportunities, will primarily seek out investment opportunities in the biomedical, health services, and
blockchain-based technologies industries. The blockchain-based technologies are anticipated to include digital asset exchanges in multiple
jurisdictions, including: (i) security token exchanges, focused on digitized assets from different vertical industries, and (ii) utility token exchanges,
focusing on “blue-chip” utility tokens from solid businesses.
Consistent with that development plan, on March 3, 2020, DSS Securities entered into a binding term sheet with LiquidValue Asset Management
Pte Ltd (“LVAM”), AMRE Asset Management Inc. (“AAMI”) and American Medical REIT Inc. (“AMRE”), regarding a share subscription and loan
arrangement. The terms of the proposed joint venture, which has now been consummated, intends to create a medical real estate investment trust in
the United States. AMRE has been formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. AMRE shall
provide investors the opportunity for direct ownership of Class A licensed medical real estate. AMRE intends to acquire purpose-built healthcare
facilities and lease them to leading clinical operators with strong market share under secure triple net leases. AMRE targets hospitals (both Critical
Access and Specialty Surgical), Physician Group Practices, Ambulatory Surgical Centers, and other licensed medical treatment facilities. AAMI is a
real estate investment trust (“REIT”) management company that sets the strategic vision and formulates the investment strategy for AMRE. It shall
manage the REIT’s assets and liabilities and provide recommendations to AMRE on acquisition and divestments in accordance with the investment
strategies.
Pursuant to the term sheet, the DSS Securities will hold 52.5% of the outstanding shares of AAMI, with LVAM and AMRE Tennessee, LLC, holding
35% and 12.5% of the remaining outstanding shares of AAMI, respectively. Further, pursuant to and in connection with the term sheet, on March 3,
2020, the Company entered into a Promissory Note with AMRE, pursuant to which AMRE will issue the Company a promissory note for the principal
amount of $800,000 (the “Note”). The Note matures on March 3, 2022 and accrues interest at the rate of 8.0% per annum, and shall be payable in
accordance with the terms set forth in the Note. Under the Note, AMRE may prepay or repay all or any portion of the Note at any time, without a
premium or penalty. If not sooner prepaid, the entire unpaid principal balance of the Note including accrued interest will be due and payable in full
on March 3, 2022. AMRE’s failure to pay any amount due on the Note within five days of when payment is due constitutes an event of default under
the Note, pursuant to which the Company can declare the Note due and payable. The Note also provides the Company an option to provide AMRE
an additional $800,000 on the same terms and conditions as the Note, including the issuance of warrants, See Note 16 for further disclosure on this
transaction.
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Our Core Products:
Technology and Counterfeit Prevention and Brand Services
DSS Digital Group’s core business is counterfeit prevention, brand protection, consumer engagement and validation of authentic print media, including
government-issued documents, packaging, ID cards and licenses. We believe we are a leader in the research and development of optical deterrent technologies
and have commercialized these technologies with a suite of products that offer our customers an array of brand security solutions. In addition, we provide
document security technology to security printers, corporations, consumer product companies and governments for protection of vital records, certifications,
travel documents, consumer products, pharmaceutical packaging and school transcripts.
Optical deterrent features such as ours have traditionally been utilized mainly by large security printers for the protection of important printed documents,
such as vital records and identification documents. Many of these competitive features were developed pre-1980 and were designed to be effective on the
imaging devices of the day, which were mainly photography mechanisms. With the advent of modern-day scanners, digital copiers, digital cameras,
smartphones and easy-to-use imaging software such as Adobe Photoshop, many of the pre-1980 optical deterrents such as micro-printing are much less
effective in the prevention of counterfeiting.
Unlike some of our competitors, our technologies are built to defeat modern scanners and digital copiers, and we believe that our products are the most
effective in doing so in the market today.
Our primary anti-counterfeiting products and technologies have evolved from a traditional analog product to a highly advanced digital system and are
marketed under our AuthentiGuard® registered trademark. In October 2012, we introduced AuthentiGuard®, a smartphone application for authentication,
targeted to major Fortune 500 companies worldwide. The application is a cloud-enabled solution that permits efficient and cost-effective counterfeit deterrence,
authentication and consumer engagement. The solution embeds customizable, covert AuthentiGuard® Prism technology that resists counterfeiting or alteration
on product packaging, labeling, documents and credentials. Product verification using the smartphone application creates real-time, accurate authentication
results for brand owners, government officials and supply chain personnel that can be integrated into existing information systems.
Since 2012, the AuthentiGuard® product has grown to annual sales of approximately $1.5 million, and we project that over the next three years annual
sales of AuthentiGuard® will increase by an annualized growth rate of approximately 17%. Today, our mission is to make world-class authentication, counterfeit
prevention and consumer engagement technology that is assessable and scalable to an expanding customer base. We intend to bring our technology-laden
plastic and packaging solutions to a broader range of clients including small businesses, develop long-term relationships with those who use them and grow our
business organically.
Printing & Packaging Business
Premier Packaging Corporation provides custom packaging services and serves clients in the pharmaceutical, nutraceutical, beverage, specialty foods,
photo packaging and direct marketing industries, among others. The group also provides active and intelligent packaging and document security printing services
for end-user customers. In addition, the division produces a wide array of printed materials, such as folding cartons and paperboard packaging, security paper,
vital records, prescription paper, birth certificates, receipts, identification materials, entertainment tickets, secure coupons and parts tracking forms. The division
also provides resources and production equipment for our ongoing research and development of security printing and related technologies.
IP Patent Monetization Business
Since its acquisition in 2013, DSS Technology Management’s primary mission has been the attempted monetization of its various patent portfolios
through commercial litigation.
Except for its investment in its social networking related patents, DSS Technology Management and the Company have partnered with various third-party
funding groups in connection with patent monetization programs. In connection with this business line, the Company has purchased patents in a variety of fields,
including social networking, mobile communications, semi-conductors, Bluetooth and LED, and has initiated patent infringement litigation against a wide range of
domestic and global Companies. In connection with these litigation matters, the Company engages with legal firms that typically work under fee caps and
contingency fee arrangements. To date, the Company has been or is currently in litigation with, among others, Apple, Samsung, Taiwan Semiconductor
Manufacturing Company, Intel, NEC, Lenovo, Seoul Semiconductor, Everlight Electronics, Cree, Nichia and Osram, GMBH. During the course of these litigation
matters, the Company typically incurs a variety of legal challenges from defendants, including defendants seeking to have the patents in question adjudicated to
be invalid by the United States Patent Office through the Inter Partes Review process (“IPR”). As a result of these various legal challenges issued by defendants,
the Company has experienced varying levels of success in its efforts to monetize its patent investments. In addition, to date, most of settlements or payments
received from defendants have been remitted to the Company’s third-party funders in accordance with the terms of those respective funding agreements.
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The status of pending patent infringement lawsuits which have been filed by DSS Technology Management and the Company are more particularly
described in Part 1, Item 3 of this Report.
Intellectual Property
Patents
Our ability to compete effectively depends largely upon our ability to maintain the proprietary nature of our technology, products and manufacturing
processes. We principally rely upon patent, trademark, trade secrets and contract law to establish and protect our proprietary rights. During our development, we
have expended significant resources on research and development in an effort to become a market leader with the ability to provide our customers effective
solutions against an ever-changing array of counterfeit risks. Our position in the security print market is based on our technologies and products. We dedicate
two staff members to research and development of print technologies, digital graphic files, and printing techniques to allow us to expand our ability to combat a
wide variety of counterfeiting and brand protection issues. The Company recognized a credit in 2019 of approximately $12,000 primarily due to receipt of a
refund on development costs for the development of proprietary blockchain solutions for the Company’s AuthentiGuard product line. In comparison, the
Company spent approximately $146,000 on research and development during 2018, primarily toward the development of the Company’s AuthentiGuard product
line.
We own patents covering semiconductor, light emitting diode, anti-counterfeiting and document authentication, and wireless peripheral technologies,
respectively. We also have several patent applications in process, including provisional and Patent Cooperation Treaty (“PCT”) patent applications in various
jurisdictions including the United States, Canada, and Europe. These applications cover our anti-counterfeiting technologies, including AuthentiGuard®,
AuthentiGuard® Prism™, and AuthentiGuard® VeriGlow™, and several other anti-counterfeiting and authentication technologies in development. Our issued
patents have remaining durations ranging from 1 to 16 years.
Trademarks
We have registered our “AuthentiGuard®” mark, as well as our “Survivor 21®” electronic check icon and “VeriGlow®” with the U.S. Patent and
Trademark Office. A trademark application is pending in Canada for “AuthentiGuard.” AuthentiGuard® is registered in several European countries including the
United Kingdom. We have also applied to register AuthentiSite TM, AuthentiShare TM, AuthentiSuiteTM, AuthentiBlockTM, and AuthentiChainTM in the U.S.
Websites
The primary website we maintain is www.dsssecure.com, which describes our Company, our history, our patented document security solutions, our
major product offerings, and our targeted vertical markets. In addition to the active websites, the Company owns several other domain names reserved for future
use or for strategic competitive reasons. Information on our websites or any other website does not constitute a part of this annual report.
Markets and Competition
The security print market is comprised of a few very large companies and an increasing number of small companies with specific technology niches. The
expansion of this market is primarily due to the significant expansion of counterfeiting as advancing technologies in digital duplication and scanning combined
with increasingly sophisticated design software has enabled easier reproduction of original documents, vital records and IDs, packaging, and labels. Our
competitors include Standard Register Company, which specializes in printing security technologies for the check and forms and medical industries; and De La
Rue Plc, that specializes in printing secure currency, tickets, labels, lottery tickets and vital records for governments and Fortune 500 companies. Large office
equipment manufacturers, called OEMs, such as Sharp, Xerox Canon, Ricoh, Hewlett Packard and Eastman Kodak are developing “smart copier” technology
that recognizes particular graphical images and produces warning words or distorted copies. Some of the OEMs are also developing user assigned and variable
pantograph “hidden word” technologies in which users can assign a particular hidden word in copy, such as “void” that is displayed when a copy of such
document is made. In addition, other competing hidden word technologies are being marketed by competitors such as NoCopi Technologies which sells and
markets secure paper products, and Graphic Security Systems Corporation, which markets Scrambled Indicia.
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Our packaging division competes with a significant number of national, regional and local companies, many of which are independent and privately-held.
The largest competitors in this market are primarily focused on the long-run print order market. They include large integrated paper companies such as Rock-
Tenn Company, Caraustar Industries, Inc., Graphic Packaging Holding Company and Mead Westvaco. Our printing division competes primarily with locally-
based printing companies in the Rochester and Western New York markets. Most of our competitors in these markets are privately-held, single location
operations.
Our plastics division competes with several companies including Bristol ID, AbNote (formerly Arthur Blanks), LaserCard Corporation and L-1 Identity
Solutions. The plastics division primarily delivers its products through a dealer network, but also provides products to end-user customers. Competition in the
plastic card industry is primarily based on production capabilities based on specialized equipment, geographic location, quality and service. In addition,
competition is increasingly influenced by proprietary or niche offerings provided by competitors, such as RFID, biometric, read-write, and security features built-
into the plastic card.
Our technology division also faces competition in the area of patent acquisitions and enforcement. Entities such as Acacia, RPX, AST, Intellectual
Ventures, Wi-LAN, MOSAID, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc. and Pendrell Corporation compete in acquiring rights to patents.
Customers
During 2019, two customers accounted for 45% of our consolidated revenue. As of December 31, 2019, these two customers accounted for 49% of our
consolidated trade accounts receivable balance. As of December 31, 2018, these two customers accounted for 44% of our consolidated revenue and 38% of the
Company’s consolidated trade accounts receivable balance.
Raw Materials
The primary raw materials the Company uses in its businesses are paper, corrugated paperboard, plastic sheets, and ink. The Company negotiates with
leading suppliers to maximize its purchasing efficiencies and uses a wide variety of paper grades, formats, ink formulations and colors. Paper and paperboard
prices continued to increase in 2019, and we believe increases in future years are expected. Except for certain packaging customers where the Company enters
into annual contracts, for which changes in paperboard pricing is absorbed by the Company, the Company has historically passed substantially all increases and
decreases to its customers, although there can be no assurances that the Company will continue to do so in the future.
Environmental Compliance
It is the Company’s policy to conduct its operations in accordance with all applicable laws, regulations and other requirements. While it is not possible to
quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company
may undertake in the future, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated
recoveries from third parties, will not have a material adverse effect on the Company’s consolidated annual results of operations, financial position or cash flows.
Government Regulation
We play an active role with the Document Security Alliance group, as one of our research and development management members sits on various
committees of that group and has been involved in design recommendations for important U.S. documents. This group of security industry specialists was formed
by the U.S. Secret Service to evaluate and recommend security solutions to the federal government for the protection of credentials and vital records.
Our patent monetization business is also faced with potential government regulations. If new legislation, regulations or rules are implemented either by
Congress, the U.S. Patent and Trademark Office (the “USPTO”), or the courts that impact the patent application process, the patent enforcement process or the
rights of patent holders, these changes could negatively affect our patent monetization efforts and, in turn, our assets, expenses and revenue. United States
patent laws have been amended by the Leahy-Smith America Invents Act. The America Invents Act includes several significant changes to U.S. patent law. In
general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things,
establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement
actions, increasing the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or
activities. In addition, the U.S. Department of Justice (“DOJ”) has conducted reviews of the patent system to evaluate the impact of patent assertion entities, such
as our Company, on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could adversely impact our ability to
effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented
technologies.
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Moreover, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and
new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions.
Corporate History
The Company was incorporated in 1984 and changed its name to Document Security Systems, Inc. in 2002. Since then, the Company has acquired a
plastics card manufacturer, a printing company, a packaging company, an IT services company, and an intellectual property monetization company. See, the
“Overview” section above for further details about our acquisitions.
Employees
As of March 20, 2020, all of the Company’s 100 employees were full time. It is important that we continue to retain and attract qualified management and
technical personnel. Our employees are not covered by any collective bargaining agreement, and we believe that our relations with our employees are generally
good.
Available information
Our website address is www.dsssecure.com. Information on our website is not incorporated herein by reference. We make available free of charge through
our website our press releases, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after electronically filed with or furnished to the Securities and Exchange Commission.
ITEM 1A – RISK FACTORS
The Company is a smaller reporting company, as such term is defined in Item 10(f)(1) of Regulation S-K, and is therefore not required to provide the information
required under this item.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
Our corporate group and digital division together occupy approximately 5,700 square feet of commercial office space located at 200 Canal View
Boulevard, Rochester, New York under a lease that expires in February 2021, at a rental rate of approximately $6,100 per month. Our Plastics division leases
approximately 15,000 square feet under a lease that expires January 31, 2024 for approximately $19,422 per month. Our DSS Asia division leases commercial
office space in Hong Kong under a lease that expires November 30, 2020 for approximately $3,382 per month. In addition, the Company owns a 40,000 square
foot packaging and printing plant in Victor, New York, a suburb of Rochester, New York. We believe that our facilities are adequate for our current operations.
ITEM 3 - LEGAL PROCEEDINGS
On November 26, 2013, DSSTM filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern District of Texas, for patent
infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSSTM’s patents that relate to systems and methods of using low power
wireless peripheral devices. DSSTM is seeking a judgment for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the
case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014,
Apple’s motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two Inter Partes Review (“IPR”)
petitions with the Patent Trial and Appeal Board (“PTAB”) for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. The
California District Court then stayed the case pending the outcome of those IPR proceedings. Oral arguments of the IPRs took place on March 15, 2016, and on
June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions. DSSTM then filed an appeal with the U.S. Court of Appeals for the Federal Circuit (the
“Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on August 9, 2017. On March 23, 2018, the Federal Circuit
reversed the PTAB, finding that the PTAB erred when it found the claims of U.S. Patent No. 6,128,290 to be unpatentable. The Federal Circuit affirmed its
decision on July 12, 2018, when it denied Apple’s petition for panel rehearing of the Federal Circuit’s Opinion and Judgment issued on March 23, 2018. On July
27, 2018, the District Court judge lifted the Stay resuming the litigation, which had a trial date set for the week of February 24, 2020. On January 14, 2020, the
Court in the case DSS Technology Management, Inc. v. Apple, Inc., 4:14-cv-05330-HSG pending in the Northern District of California issued an order that
denied DSS’ motion to amend its infringement contentions. In the same Order, the Court granted Apple’s motion to strike DSS’ infringement expert report. DSS
filed a motion for leave to file a motion for reconsideration of the Court’s order denying DSS the right to amend its infringement contentions and motion to strike
DSS infringement expert report. On February 18, 2020, the Court denied DSS’s motion for leave to file a motion for reconsideration. On February 24, 2020, the
Court signed a Final Judgment stipulating that Apple was “entitled to a judgment of non-infringement of U.S. Patent No. 6,128,290 as a matter of law.” DSS
intends to appeal the ruling.
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On February 16, 2015, DSSTM filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation, Dell, Inc.,
GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC, and AT&T, Inc. The
complaint alleged patent infringement and sought judgment for infringement of two of DSSTM’s patents, injunctive relief and money damages. On December 9,
2015, Intel filed IPR petitions with PTAB for review of the patents at issue in the case. Intel’s IPRs were instituted by PTAB on June 8, 2016. On June 1, 2017,
the PTAB ruled in favor of Intel for all the challenged claims. On July 28, 2017, DSSTM filed a notice of appeal of the PTAB’s decision relating to U.S. Patent
6,784,552 with the Federal Circuit. On January 8, 2019, DSSTM entered into a confidential settlement agreement with Intel Corporation, Dell Inc., GameStop
Corp, Conn’s Inc., Conn Appliances, Inc., Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC and AT&T Mobility LLC (collectively, the “Defendants”). The
Federal Circuit Appeal involving DSSTM and Intel was dismissed on January 16, 2019, and the District Court case against the Defendants was dismissed, as to
all the Defendants, on February 5, 2019. On July 16, 2015, DSSTM filed three separate lawsuits in the United States District Court for the Eastern District of
Texas alleging infringement of certain of its semiconductor patents. The defendants were SK Hynix et al., Samsung Electronics et al., and Qualcomm
Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and money damages. On November
12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at issue in their case. SK Hynix’s IPR was instituted by the PTAB on May 11, 2016.
On August 16, 2016, DSSTM and SK Hynix entered into a confidential settlement agreement ending the litigation between them. The pending SK Hynix IPR was
then terminated by mutual agreement of the parties on August 31, 2016. On March 18, 2016, Samsung also filed an IPR petition, which was instituted by the
PTAB. On September 20, 2017, PTAB ruled in favor of Samsung for all the challenged claims relating to U.S. Patent 6,784,552. DSSTM then appealed this
PTAB ruling to the Federal Circuit on November 17, 2017. The Federal Circuit joined this appeal with the Intel appeal effective on December 7, 2017.
Qualcomm filed its IPR proceeding on July 1, 2016, which was then later joined with Intel’s IPRs in August 2016 by PTAB. On June 1, 2017, the PTAB ruled in
favor of Intel/Qualcomm for all the challenged claims. On July 28, 2017, DSSTM filed a notice of appeal of the PTAB’s decision relating to U.S. Patent 6,784,552
with the Federal Circuit. A confidential patent license agreement was executed by DSSTM on November 14, 2018, covering Samsung and Qualcomm. On
December 12, 2018, DSSTM and Samsung entered into a confidential release. On December 27, 2018, DSSTM and Qualcomm entered into a confidential
settlement agreement. The DSSTM - Samsung District Court case was dismissed on December 17, 2018. The DSSTM - Samsung Federal Circuit Appeal was
dismissed on January 2, 2019. The Federal Circuit Appeal involving DSSTM and Qualcomm was dismissed on January 16, 2019. The DSSTM - Qualcomm
District Court case was dismissed on January 16, 2019. As a result, all of DSSTM’s litigation matters originally filed in the District Court for the Eastern District of
Texas have been resolved and are now dismissed.
On April 13, 2017, the Company filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor, Inc. (collectively,
“Seoul Semiconductor”) in the United States District Court for the Eastern District of Texas, alleging infringement of certain of the Company’s Light-Emitting
Diode (“LED”) patents. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages,
costs and disbursements. On June 7, 2017, the Company refiled its patent infringement complaint against Seoul Semiconductor in the United States District
Court for the Central District of California, Southern Division. On December 3, 2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of
U.S. Patent No. 6,949,771. This IPR was instituted by the PTAB on June 7, 2018. On April 18, 2019, the PTAB issued a written decision determining claims 1-9
of the ‘771 patent unpatentable. The Company did not appeal that determination. On December 21, 2017, Seoul Semiconductor filed an IPR challenging the
validity of certain claims of U.S. Patent No. 7,256,486. This IPR was instituted by the PTAB on June 21, 2018. On June 10, 2019, the PTAB issued a written
decision determining claims 1-3 of the ‘486 patent unpatentable. On August 12, 2019, the Company filed a Notice of Appeal with the Federal Circuit Court of
Appeals challenging the PTAB’s decisions. The Company subsequently filed a motion to vacate and remand the PTAB’s decision in light of intervening
precedent under the Appointments Clause. That motion was granted on January 23, 2020. On January 25, 2018, Seoul Semiconductor filed an IPR challenging
the validity of certain claims of U.S. Patent No. 7,524,087. This IPR was instituted by the PTAB on July 27, 2018. On July 22, 2019, the PTAB issued a written
decision determining claims 1, 6-8, 15, and 17 of the ‘087 patent unpatentable. On September 23, 2019, the Company filed a Notice of Appeal with the Federal
Circuit Court of Appeals challenging the PTAB’s decisions. The Company subsequently filed a motion to vacate and remand the PTAB’s decision in light of
intervening precedent under the Appointments Clause. That motion was granted on February 3, 2020. These challenged patents are the patents that are the
subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR proceedings.
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On April 13, 2017, the Company filed a patent infringement lawsuit against Everlight Electronics Co., Ltd. and Everlight Americas, Inc. (collectively,
“Everlight”) in the United States District Court for the Eastern District of Texas, alleging infringement of certain of the Company’s LED patents. The Company is
seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. On June 8,
2017, the Company refiled its patent infringement complaint against Everlight in the United States District Court for the Central District of California. On June 8,
2018, Everlight filed IPR petitions challenging the validity of claims under U.S. Patent Nos. 7,256,486 and 7,524,087. On June 12, 2018, Everlight filed an IPR
petition challenging the validity of claims under U.S. Patent No. 6,949,771, and on June 15, 2018, filed an IPR petition challenging the validity of claims under
U.S. Patent No 7,919,787. These challenged patents are the patents that are the subject matter of the infringement lawsuit. On January 18, 2019, the Company
and Everlight entered into a confidential settlement agreement resolving the litigation.
On April 13, 2017, the Company filed a patent infringement lawsuit against Cree, Inc. (“Cree”) in the United States District Court for the Eastern District
of Texas, alleging infringement of certain of the Company’s LED patents. The Company is seeking a judgment for infringement of the patents along with other
relief including, but not limited to, money damages, costs and disbursements. On June 8, 2017, the Company refiled its patent infringement complaint against
Cree in the United States District Court for the Central District of California, and thereafter filed a first amended complaint for patent infringement against Cree in
that same court on July 14, 2017. The case is currently pending as of the date of this Report. On June 6, 2018, Cree filed an IPR petition challenging the validity
of claims under U.S. Patent No. 7,256,486. This IPR was instituted and joined with the Seoul Semiconductor IPR. On June 7, 2018, Cree filed IPR petitions
challenging the validity of certain claims U.S. Patent Nos. 7,524,087 and 6,949,771. Both IPRs were denied by the PTAB on November 14, 2018 as time-barred.
The challenged patent is the patent that is the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR.
On August 15, 2017, the Company filed a patent infringement lawsuit against Lite-On, Inc., and Lite-On Technology Corporation (collectively, “Lite-On”)
in the United States District Court for the Central District of California, alleging infringement of certain of the Company’s LED patents. The Company is seeking a
judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The case is currently
pending but is stayed pending the outcome of IPR proceedings filed by other parties.
On December 7, 2017, DSS filed a patent infringement lawsuit against Nichia Corporation and Nichia America Corporation in the United States District
Court for the Central District of California, alleging infringement of certain of DSS’s LED patents. The Company is seeking a judgment for infringement of the
patents along with other relief including, but not limited to, money damages, costs and disbursements. The case is currently pending as of the date of this
Report. On May 10, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,919,787. On May 11, 2018, Nichia filed an IPR
petition challenging the validity of claims under U.S. Patent No. 7,652,297. On May 25, 2018, Nichia filed an IPR petition challenging the validity of claims under
U.S. Patent No. 7,524,087. On May 29, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 6,949,771. On May 30, 2018,
Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,256,486. The 6,949,771 IPR was denied institution, but the remaining IPRs
were instituted by the PTAB. On December 10, 2018, Nichia refiled IPRs relating to 6,949,771, which was denied by the PTAB on April 15, 2019. These
challenged patents are the patents that are the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR
proceedings. On September 17, 2019, the PTAB issued a written decision determining claims 1-14 of the ‘787 patent unpatentable. The Company did not
appeal that determination. On October 30, 2019, the PTAB issued a written decision determining claims 1-17 of the ‘297 patent unpatentable. The Company did
not appeal that determination. On November 19, 2019, the PTAB issued a written decision determining claims 1-5 of the ‘486 patent unpatentable. The
Company has appealed that determination to the U.S. Court of Appeals for the Federal Circuit.
On September 18, 2019, DSS filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor Inc. in the United
States District Court for the Central District of California alleging infringement of U.S. Patent No. 7,315,119. The Company is seeking a judgment for infringement
of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The Court has conducted an initial scheduling
conference and has set a procedural schedule for the case.
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On September 19, 2019, DSS filed a patent infringement lawsuit against Cree, Inc. in the United States District Court for the Central District of California
alleging infringement of U.S. Patent No. 6,784,460. The Company is seeking a judgment for infringement of the patents along with other relief including, but not
limited to, money damages, costs and disbursements. On February 11, 2020, Cree filed an IPR petition challenging the validity of the patent claims. The Court
has conducted an initial scheduling conference and has set a procedural schedule for the case.
On September 20, 2019, DSS filed a patent infringement lawsuit against Nichia Corp. and Nichia America Corp. in the United States District Court for the
Central District of California alleging infringement of U.S. Patent No. 6,879,040. The Company is seeking a judgment for infringement of the patents along with
other relief including, but not limited to, money damages, costs and disbursements. The Court has conducted an initial scheduling conference and has set a
procedural schedule for the case.
In April 2019, DSS commenced an action in New York State Supreme Court, Monroe County against Jeffrey Ronaldi, our former Chief Executive Officer.
This New York action seeks a declaratory judgment that, contrary to informal claims made by him, Mr. Ronaldi’s employment agreement with us expired by its
terms and that he is not entitled to any cash bonuses or other unpaid amounts. The lawsuit also seeks an injunction against Mr. Ronaldi from interfering with any
of DSS’ IP litigation. The defendant has been granted an extension to respond pending settlement negotiations. Mr. Ronaldi subsequently commenced an action
against us in the Superior Court of California, County of San Diego, in November 2019, in which he alleges that we terminated his employment in April 2019 in
order to avoid paying him certain employment-related amounts. Mr. Ronaldi contends that he is owed a $100,000 performance bonus for 2017 under this
employment agreement with us as well as $91,000 in documented and unreimbursed expenses, and that DSS purported to terminate him for cause under the
terms of his employment agreement in order to avoid paying such amounts. Mr. Ronaldi also contends that he is entitled to receive additional amounts, either
under the terms of the employment agreement, or under theories of implied-in-fact contract or promissory estoppel, including, but not limited to, (i) additional
performance bonuses of up to 15% of net litigation proceeds received by us from pending patent infringement litigations, of net licensing proceeds received by
us other than from our internally developed IP, or of the net sales proceeds received by us in connection with the sale of any of our patent assets, (ii) earned but
unpaid base salary, (iii) an equity grant of shares of our common stock, and (iv) payments for unused personal time and sick days. He seeks actual,
compensatory, restitutionary and/or incidental damages in an amount to be determined at trial; prejudgment interest in an amount to be determined at trial;
attorneys’ fees and costs; other costs of the suit; and such other and further relief as the court deems proper. We have made a motion to have the case
dismissed and consolidated with the Monroe Co., New York, litigation. A hearing has been set for April 24, 2020, for the court to consider that request.
Additionally, on March 2, 2020, DSS and DSSTM filed a second litigation action against Jeffrey Ronaldi in the State of New York, Supreme Court, County of
Monroe alleging acts of self-dealing and conflicts of interest while he served as CEO of both DSS and DSS TM. That litigation is in the process of being served
upon the defendant.
On November 20, 2019, DSS Technology Management was sued in the United States District Court, Northern District of California, by Intel Corporation
(“Intel”) and Apple Inc. (“Apple”). The other defendants in the litigation are Fortress Investment Group LLC, Fortress Credit Co. LLC, Uniloc 2017 LLC, Uniloc
USA, INC., Uniloc Luxembourg S.A.R.L., VLSI Technology LLC, INVT SPE LLC, Inventergy Global, INC., IXI IP, LLC, and Seven Networks, LLC. The complaint
includes allegations regarding a February 13, 2014 Investment Agreement between DSS Technology Management and Fortress Credit Co. LLC as well as two
subsequent agreements. The complaint also contains allegations regarding DSS Technology Management’s lawsuit against Intel that was filed in February 2015
in the United States District Court, Eastern District of Texas (referred to below). In the complaint, Intel and Apple allege violations of Section 1 of the Sherman Act
and unfair competition under Cal. Bus. & Prof. Code § 17200 against DSS Technology Management. Additional claims are alleged against other defendants.
Intel and Apple seek relief from the court including that defendants’ conduct be declared a violation of Section 1 of the Sherman Act, Section 7 of the Clayton Act,
and Cal. Bus. & Prof. Code § 17200, et seq.; that Intel and Apple recover damages against defendants in an amount to be determined and multiplied to the
extent provided by law, including under Section 4 of the Clayton Act; that all contracts or agreements defendants entered into in violation of the Sherman Act,
Clayton Act, or Cal. Bus. & Prof. Code § 17200, et seq. be declared void and the patents covered by those transfer agreements be transferred back to the
transferors; that all patents transferred to defendants in violation of the Sherman Act, Clayton Act, or Cal. Bus. & Prof. Code § 17200, et seq. be declared
unenforceable; and that Intel and Apple recover their costs and expenses associated with this case, together with interest. On December 13, 2019, the court
granted the parties’ stipulation to extend the deadline for DSS Technology Management and other defendants to respond to the complaint to February 4, 2020. A
hearing on any motions filed in response to the complaint is set for April 23, 2020.
In addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and have not been finally
adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results of operations, cash flows or our financial condition. The
Company accrues for potential litigation losses when a loss is probable and estimable.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Part II
Market Information
Our common stock is listed on the NYSE American LLC Exchange, where it trades under the symbol “DSS”
Holders of Record
As of March 20, 2020, we had 242 record holders of our common stock. This number does not include the number of persons whose shares are in
nominee or in “street name” accounts through brokers.
Dividends
We did not pay dividends during 2019 or 2018. We anticipate that we will retain any earnings and other cash resources for investment in our business.
The payment of dividends on our common stock is subject to the discretion of our board of directors and will depend on our operations, financial position, financial
requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other
factors that our board of directors deems relevant.
Securities authorized for issuance under equity compensation plans
As of December 31, 2019, securities issued and securities available for future issuance under both our 2013 and 2020 Employee, Director and
Consultant Equity Incentive Plan (the “Plans”) is as follows:
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
Weighted
average exercise
price of
outstanding
options, warrants
and rights
Restricted stock
to be issued
upon vesting
Number of
securities
remaining
available for
future issuance
(under equity
compensation
Plans
(excluding
securities
reflected in
column (a & b))
Plan Category
Equity compensation plans approved by security holders 2013
Employee, Director and Consultant Equity Incentive Plan - options
2013 Employee, Director and Consultant Equity Incentive Plan -
warrants
2020 Employee, Director and Consultant Equity Incentive Plan
Total
(a)
(b)
(c)
(d)
-
577,917
$
5.01
-
-
-
1,220,304
$
1.12
-
-
7,236,125
1,798,221
$
2.37
7,236,125
-
-
The warrants listed in the table above were issued to third party service providers in partial or full payment for services rendered and in conjunction with
third party funding agreements.
Recent Issuances of Unregistered Securities
Information regarding any equity securities we have sold during the period covered by this Report that were not registered under the Securities Act of 1933, as
amended, and was not included in a quarterly report on Form 10-Q or in a current report on Form 8-K, is set forth below. Each such transaction was exempt
from the registration requirements of the Securities Act by virtue of Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated by the SEC,
unless otherwise noted. Unless stated otherwise: (i) the securities were offered and sold only to accredited investors; (ii) there was no general solicitation or
general advertising related to the offerings; (iii) each of the persons who received these unregistered securities had knowledge and experience in financial and
business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations
and financial condition; (iv) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; and,
(v) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and
setting forth the restrictions on the transferability and the sale of the securities.
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On December 17, 2018, the Company sold 612,245 shares of its common stock to an accredited investor, at a price of $0.98 per share.
On October 29, 2019 and subsequently October 30, 2019, the Audit Committee and the Board approved the issuance of common stock, not to exceed
6,000,000 shares, via private placement with a related party. Pursuant to a Subscription Agreement, the Company issued 6,000,000 shares of Common Stock to
LiquidValue Development Pte LTD, a company owned and controlled by Mr. Heng Fai Ambrose Chan, Chairman of the Board of Directors for DSS, for an above
market purchase price equal to $0.30 per share for gross proceeds to the Company of $1,822,200 (before deductions for placement agent fees and other
expenses). This transaction was executed on November 1, 2019.
Shares Repurchased by the Registrant
We did not purchase or repurchase any of our securities in the fiscal year ended December 31, 2019, including the fourth quarter.
ITEM 6 - SELECTED FINANCIAL DATA
Not applicable.
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make
informed investment decisions.
Forward-looking statements that may appear in this Annual Report, including without limitation, statements related to the Company’s plans, strategies,
objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act
and contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. The forward-looking
statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why
actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this Annual Report
and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, including our reports on Forms 10-Q and 8-K.
The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results
of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes included in Item 8 of this Annual
Report.
Overview
Document Security Systems, Inc. (together with its consolidated subsidiaries (unless the context otherwise requires), referred to herein as “Document
Security Systems,” “DSS,” “we,” “us,” “our” or the “Company”) was formed in New York in 1984 and, in 2002, chose to strategically focus on becoming a
developer and marketer of secure document and product technologies. We specialize in creating dynamic solutions that protect against fraud and ensure the
well-being of consumers worldwide. Our mission is to make and deliver world-class authentication, counterfeit prevention and consumer engagement technology
attainable and integrated into every product we offer. The Company holds numerous patents for optical deterrent and authentication technologies that provide
protection of printed information from unauthorized alterations, scanning and copying. We operate two production facilities, consisting of a combined security
printing and packaging facility and a plastic card facility, where we produce secure and non-secure products for our customers. We also license our anti-
counterfeiting technologies to printers and brand-owners. In addition, through our digital division, we provide cloud computing services for our customers,
including disaster recovery, back-up and data security services.
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Prior to 2006, our primary revenue source in our document security division was derived from the licensing of our technology. In 2006, we began a
series of acquisitions designed to expand our ability to produce products for end-user customers. In 2006, we acquired Plastic Printing Professionals, Inc., a
privately held plastic cards manufacturer located in the San Francisco, California, area (referred to herein as the “DSS Plastics Group”). In 2008, we acquired
DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York. In 2010, we acquired Premier Packaging Corporation, a privately
held packaging company located in Victor, New York (referred to herein as the “DSS Packaging and Printing Group”). In May 2011, we acquired ExtraDev, Inc.,
a privately held information technology and cloud computing company located in Rochester, New York. In 2016, ExtraDev, Inc. changed its name to DSS Digital
Inc. DSS Digital Inc. is also referred to herein as the “DSS Digital Group.”
In July 2013, the Company expanded its business focus by acquiring Lexington Technology Group, Inc. (“Lexington”), a private intellectual property
monetization company. Lexington’s business was primarily to acquire intellectual property assets for the purpose or monetizing these assets through a variety of
value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic
partnerships and litigation. DSS Technology Management, Inc., which is also referred to herein as “DSS Technology Management,” was established as a DSS
subsidiary to house, account for and further develop this line of business. While similar to Lexington’s business model, DSS Technology Management focuses on
extracting the economic benefits of intellectual property assets through acquiring or internally developing patents or other intellectual property assets (or
interests therein) and then monetizing such assets through a variety of value enhancing initiatives. However, the Company, as we elaborate below, has
determined that it is in the best interests of the Company and its stockholders to wind down our intellectual property monetization business and refocus our
efforts on our other existing businesses as well as explore potential new business lines
In January 2018, we commenced international operations for our DSS Digital Group with our wholly owned subsidiary, DSS Asia Limited, in our office in
Hong Kong. In December 2018, this division acquired Guangzhou Hotapps Technology Ltd, a Chinese company with a valuable license enabling us to do
business in China
We do business in four operating segments: packaging and printing; plastics; digital; and technology management, which includes our IP monetization
business.
Impact of COVID-19 Outbreak
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on
March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and
quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and
are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the
Company operates. While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if the outbreak continues on
its current trajectory the duration of the supply chain disruption could reduce the availability, or result in delays, of materials or supplies to and from the
Company, which in turn could materially interrupt the Company’s business operations. Given the speed and frequency of the continuously evolving
developments with respect to this pandemic, the Company cannot reasonably estimate the magnitude of the impact to its consolidated results of operations. The
Company’s manufacturing facilities in both California and New York support business have been deemed essential by their respective state governments and
remain operational. We have taken every precaution possible to ensure the safety of our employees.
Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the
near term as a result of these conditions, including losses on inventory; impairment losses related to goodwill and other long-lived assets and current obligations.
16
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RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2019 AND 2018
Revenue
Revenue
Year Ended
December 31, 2019
Year Ended
December 31, 2018
% change
Printed products
Technology sales, services and licensing
Direct Selling
Total revenue
$
$
$
$
$
17,090,000
2,148,000
171,000
16,940,000
1,575,000
-
19,409,000
$
18,515,000
1%
36%
n/a
5%
Revenue - For the year ended December 31, 2019, revenue increased 5% to approximately $19.4 million as compared to revenues of $18.5 million for
the year ended December 31, 2018. Printed products sales, which include sales of packaging, printing and plastic products, increased 1% in 2019 as compared
to 2019, driven by an increase in the sales of printing and packaging products of 4% offset by a decrease in sales of plastic card products of 8% . The
Company’s technology sales, services and licensing revenues increased 36% in 2019, as compared to 2018, due primarily to increases in sales of our
AuthentiGuard product, which increased approximately $642,000 year-over-year.
Costs and Expenses
Costs and expenses
Year Ended
December 31, 2019
Year Ended
December 31, 2018
% change
Costs of goods sold, exclusive of depreciation and amortization
$
12,602,000
$
11,853,000
Sales, general and administrative compensation
Depreciation and amortization
Professional fees
Stock based compensation
Sales and marketing
Rent and utilities
Other operating expenses
Research and development
4,267,000
1,404,000
1,987,000
422,000
616,000
850,000
154,000
(12,000)
4,420,000
1,282,000
1,073,000
132,000
559,000
655,000
104,000
146,000
Total costs and expenses
$
22,290,000
$
20,224,000
17
6%
)
(3
%
10%
85%
220%
10%
30%
48%
)
%
(108
10%
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Costs of revenue sold, exclusive of depreciation and amortization includes all direct cost of the Company’s printed products, including its packaging,
printing and plastic ID card sales, materials, direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs
associated with the Company’s technology sales, services and licensing including hardware and software that are resold, third-party fees, and fees paid to
inventors or others as a result of technology licenses or settlements, if any. Costs of revenue increased 6% in 2019 as compared to 2018, primarily due to an
increase in paperboard costs and outside service costs at our packaging division.
Sales, general and administrative compensation costs, decreased 3% in 2019 as compared to 2018, primarily due to the impact cost control activities
taken during the year within the Digital and Corporate segments. The cost controlling resulting in a decrease $1.1 million in annualized payroll and payroll related
costs. These measures were offset with additions of key personnel to support the Company’s strategic plan.
Depreciation and amortization include the depreciation of machinery and equipment used for production, depreciation of office equipment and building
and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer lists, trademarks, non-competition
agreements and patents, and internally developed patent assets. Depreciation and amortization expense increased by 10% during 2019, as compared to 2018,
primarily due to twelve months of expense associated with the non-compete agreement with a former executive, as well as capital additions throughout 2019.
Professional fees increased 85% in 2019 as compared to 2018, primarily due to an increase in legal fees associated with the Company’s intellectual
property litigation matters , outsourcing corporate legal matters, as well as cost of approximately $0.5 million associated with the diversification of the Company’s
revenue portfolio.
Stock based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option
grants, warrant grants, and restricted stock awards. Stock-based compensation costs increased 220% in 2019 as compared to 2018 due to a stock based
compensation totaling approximately $114,500 accrued for the CEO of a subsidiary of the Company. Also, in July 2019, by unanimous written consent, the Board
of Directors authorized the Company to issue individual stock grants of the Company’s common stock, pursuant to the Company’s 2013 Employee, Director and
Consultant Equity Incentive Plan, to certain officers and directors in the amount of 458,719 shares, at $0.42 per share which were immediately vested and
issued on September 6, 2019.
Sales and marketing costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and
trade show participation expenses, increased 10% during 2019 as compared to 2018, primarily due to increase in travel due to on boarding new customers
associated with our AuthentiGuard product.
Rent and utilities increased 30% during 2019 as compared to 2018 due to increases in rental costs for warehousing space at the Company’s packaging
division as well as cost at the Company’s plastic division.
Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense, insurance costs , and
corporate travel. Other operating expenses increased 48% in 2019 compared to 2018 which primarily reflected increases in office, equipment rental and
maintenance , as well as travel associated with corporate activities costs in 2019.
Research and development costs consist primarily of third-party research costs and consulting costs. During the year ended December 31, 2019,
Research and development costs decreased 108% as compared to the same period in 2018 primarily due to development costs related to the development of
proprietary blockchain solutions for the Company’s AuthentiGuard product line recognized in 2018, as well as receipt of an anticipated $33,000 refund on
development costs for the development of proprietary block chain solutions for DSS International.
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Other Income and Expense
Year Ended December
31, 2019
Year Ended December
31, 2018
% change
Other income and expense
Interest income
Interest expense
Amortization of deferred financing costs and debt
discount
Impairment of investment
Gain on extinguishment of liabilities, net
$
25,000 $
(157,000)
(2,000)
-
-
Total other income and expense
$
(134,000) $
9,000
(145,000)
(47,000)
(160,000)
3,533,000
3,191,000
178%
8%
)
(96
%
100%
100%
104%
Interest income increased 178%, during the year ended December 31, 2019, as compared to the same period in 2018, due revenue recognized on the
Company’s money market account and notes receivable.
Interest expense increased 8%, during the year ended December 31, 2019, as compared to the same period in 2018, due to the interest expense
incurred with the settlement of the swap agreement associated with the consolidation of the two Promissory Notes.
Amortized debt discount decreased 96% during the year ended December 31, 2019, as compared to the same period in 2018, due to a decrease in the
total debt carried by the Company in 2019 as compared to 2018.
Impairment of investment During the 4 th quarter of 2018, the Company determined that its investment in Singapore eDevelopment (“SED”) was impaired
due to the decline in the share price of SED, especially since November of 2018, which the Company believes was influenced by a general decline in equity
markets in Asia caused by the tariff dispute between the United States and China. The Company has carried its investment in SED at costs in accordance with
ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” as the Company determined that these trading value of the SED
share did not represent a readily determinable fair value due to a potential lack of liquidity of the SED shares due to a low average trading volume of the SED
shares and the effect of the time restriction on the ability of the Company to sell the shares until September 17, 2019. As such, in response to the decline in the
trading value of the SED shares in the fourth quarter of 2018, the Company performed an impairment test and determined an impairment of approximately
$160,000 was warranted.
Gain on extinguishment of liabilities, net On June 26, 2018, the Company reached an agreement with one of its third-party IP monetization co-investors
that, among other things, discharged the amounts recorded as liabilities by the Company under an agreement executed in 2014. As a result this agreement, the
Company recorded a gain of extinguishment of liabilities of $3,714,129 to reflect the discharge of the notes, a write down of other current labilities of $114,000 to
reflect the elimination of the contingent equity interests of $459,000 offset by the repayment of the $345,000 restricted cash, and the Company wrote-off the
value of the underlying patents which had a net book value of $295,470, all of which resulted in the a net gain on the extinguishment of liabilities of $3,532,659
recorded in the period ended June 30, 2018.
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Net Income (Loss) Per Share
Net income (loss)
Income (loss) per common share:
Basic
Diluted
$
$
$
Shares used in computing income (loss) per common
share:
Basic
Diluted
Year Ended December
31, 2019
Year Ended December
31, 2018
% change
(2,889,000) $
1,465,000
(468)%
(0.11) $
(0.11) $
0.09
0.09
25,505,404
25,505,404
16,724,376
16,930,805
222%
222%
53%
51%
During 2019, the Company had net loss of $2.9 million as compared to a net income of $1.5 million in 2018, representing a 468% decrease. This
achievement of net income in 2018 is primarily due to the impact of a one time net gain from extinguishment of liabilities of approximately $3.5 million which
occurred during the second quarter of 2018, offset by the operating loss incurred during 2018.
Liquidity and Capital Resources
The Company has historically met its liquidity and capital requirements primarily through the sale of its equity securities and debt financings. As of
December 31, 2019, the Company had cash of approximately $1.1 million. As of December 31, 2019, the Company believes that it has sufficient cash to meet
its cash requirements for at least the next 12 months from the filing date of this Annual Report. In addition, the Company believes that it will have access to
sources of capital from the sale of its equity securities and debt financings.
Operating Cash Flow - During 2019, the Company expended approximately $5.3 million for operations, which generally reflected by decreases in
accrued expenses and other liabilities, and an increase in accounts receivable, offset by a decrease in inventory and an increase in accounts payable balances,
respectively.
Investing Cash Flow - During 2019, the Company expended approximately $989,000 on equipment for its packaging and plastic card operations for
various machinery, equipment, and software including a folder-gluer machine for packaging and laminating plates for plastic card operations. In addition, the
Company expended approximately $370,000 on intangible assets, and $1.8 million on the purchase of investments
Financing Cash Flows - During 2019, the Company made aggregate principal payments on long-term debt of approximately $274,000 million. In
addition, the Company also received proceeds of approximately $1.1 million in borrowings from the lines of credit for its printing divisions, and approximately
$6.7 million from the sale of the Company’s common stock.
Continuing Operations and Going Concern – The accompanying consolidated financial statements have been prepared assuming that we will
continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business.
These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be
necessary should we be unable to continue as a going concern. While the Company has approximately $1.1 million in cash, and a positive working capital
position of approximately $3.2 million as of December 31, 2019, the Company has incurred negative cash flows from operating and investing activities over the
past two years and has incurred negative cash flows from operations in 2019. To continue as a going concern, on June 5, 2019, the Company entered into an
underwriting agreement with Aegis Capital Corp., acting as representative of the several underwriters, which provided for the issuance and sale by the Company
in an underwritten public offering (the “Offering”) of 11,200,000 shares of the Company’s common stock. The Company also granted the Underwriters a 45-day
option to purchase up to 1,680,000 additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-
allotments in connection with the Offering (519,186 shares were exercised on July 18, 2019.) The net offering proceeds to the Company was approximately $5.0
million, inclusive of the July 18, 2019 transaction and after deducting underwriting discounts, commissions and other offering expenses. On February 25, 2020,
the Company entered into another underwriting agreement with Aegis Capital Corp., acting as representative of the several underwriters, which provided for the
issuance and sale by the Company in an underwritten public offering (the “Offering”) of 25,555,556 shares (inclusive of 3,333,333 over-allotment that was
exercised immediately) of the Company’s common stock. The net offering proceeds to the Company approximated $4.0 million.
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The expected use of cash for operations in 2020 will be primarily for funding operating losses, working capital, legal expenses associated with its
intellectual property related litigation, and the costs associated with the global roll-out of the Company’s AuthentiGuard product line. The Company will also use
these funds to make capital improvements at its two manufacturing facilities to increase production capacity and create efficiencies, as well as to diversify its
revenue streams and take advantage of profit opportunities.
The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters includes,
among other things, continued growth among our operating segments including international expansion of our AuthentiGuard product, and tightly controlling
operating costs and reducing spending growth rates wherever possible to return to profitability.
We believe that our $1.1 million in aggregate cash and equivalents as of December 31, 2019, as well as the $4.0 million raised on February 25, 2020 will
allow us to fund our four operating segments and planned operations through March 2021. Based on this, as well as the additional funding raised in February
2020, we have concluded that substantial doubt of our ability to continue as a going concern has been alleviated.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements,
revenues or expenses.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations
during 2019 or 2018 as we are generally able to pass the increase in our material and labor costs to our customers or absorb them as we improve the efficiency
of our operations.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the U.S. (“U.S. GAAP”)
requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and
accompanying notes. The Company’s consolidated financial statements for the fiscal year ended December 31, 2019 describe the significant accounting policies
and methods used in the preparation of the consolidated financial statements.
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, fair values of intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and
warrants to purchase the Company’s common stock, deferred revenue and income taxes, among others. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying
values of assets and liabilities.
Investment - In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment Limited at cost, less
impairment as the fair market value of the investment is not readily determinable. The Company evaluates investment for indications of impairment at least
annually.
21
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Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value
hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
•
•
•
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as
valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying amounts reported in the balance sheet of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued
expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes receivable approximates
their carrying value as the stated or discounted rates of the notes do not reflect recent market conditions. The fair value of revolving credit lines notes payable
and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. Derivative instruments, as
discussed below, are recorded as assets and liabilities at estimated fair value based on available market information. The fair value of investments carried at cost
less impairment; however, the fair value is not considered readily determinable based on the lack of liquidity for the shares owned. Impairment of Long-Lived
Assets - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or
changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of
recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and
independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can
identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by
comparing the fair value of the asset or asset group to its carrying value.
Revenue Recognition - The Company sells printed products including packaging printing and fabrication, commercial and security printing and plastic
cards and badges, including cards and badges integrated with technology such as RFID and smart chips. The Company also provides information technology
services and digital authentication products and services to its customers. The Company recognizes its products and services revenue based on when the title
passes to the customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company
expects to receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue.
Customers, including distributors, do not have a general right of return. The Company also derives revenue from royalties from third parties which are typically
based on licensees’ net sales of products that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products.
The Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license revenues through
litigation settlements. For these, the Company recognizes revenue upon the execution of the agreement, when collectability is reasonably assured, or upon
receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.
As of December 31, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one
year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue
recognition for transaction price allocated to remaining performance obligations.
Goodwill - Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a
business combination. Goodwill is subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be impaired. FASB ASC Topic 350 provides an entity with the option to first assess
qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the two-step impairment test is
necessary, a fair-value-based test is applied at the reporting unit level, which is generally one level below the operating segment level. The test compares the fair
value of an entity’s reporting units to the carrying value of those reporting units. This test requires various judgments and estimates. The Company estimates the
fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment of goodwill is measured as
the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. An adjustment to
goodwill will be recorded for any goodwill that is determined to be impaired. The Company tests goodwill for impairment at least annually in conjunction with
preparation of its annual business plan, or more frequently if events or circumstances indicate it might be impaired.
Other Intangible Assets and Patent Application Costs - Other intangible assets consists of costs associated with the application for patents,
acquisition of patents and contractual rights to patents and trade secrets associated with the Company’s technologies. The Company’s patents and trade secrets
are generally for document anti-counterfeiting and anti-scanning technologies and processes that form the basis of the Company’s document security business.
Patent application costs are capitalized and amortized over the estimated useful life of the patent, which generally approximates its legal life. In addition,
intangible assets include customer lists and non-compete agreements obtained as a result of acquisitions. Intangible asset amortization expense is classified as
an operating expense. The Company believes that the decision to incur patent costs is discretionary as the associated products or services can be sold prior to or
during the application process. The Company accounts for other intangible amortization as an operating expense, unless the underlying asset is directly
associated with the production or delivery of a product. Subsequent to acquisition of patents and trade secrets, legal and associated costs incurred in
prosecuting alleged infringements of the patents will be recognized as expense when incurred. Costs incurred to renew or extend the term of recognized
intangible assets, including patent annuities and fees, and patent defense costs are expensed as incurred. To date, the amount of related amortization expense
for other intangible assets directly attributable to revenue recognized is not material.
Impairment of Long-Lived Assets - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability
of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs,
the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash
flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets
for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company
measures any impairment by comparing the fair value of the asset or asset group to its carrying value.
Contingent Legal Expenses - Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues
are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
certain out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or
licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any
unamortized patent acquisition costs will be expensed in the period in which a conclusion is reached in an enforcement action that does not yield future royalties
potential.
Segment Reporting – In accordance with ASC 280, the Company has identified its reportable segments and, for each period for which an income
statement is presented, disclose certain information, separately by reportable segment, relative to the segment products or services, revenue, some items of
expense and cash flow, profit or loss, and assets.
Continuing Operations and Going Concern – The accompanying consolidated financial statements have been prepared assuming that we will
continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business.
These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be
necessary should we be unable to continue as a going concern.
22
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Share-Based Payments - We measure compensation cost for stock awards at fair value and recognize compensation expense over the service period
for which awards are expected to vest. The Company uses the Black-Scholes-Merton option pricing model for determining the estimated fair value for stock-
based awards. The Black-Scholes-Merton model requires the use of subjective assumptions which determine the fair value of stock-based awards, including the
option’s expected term and the price volatility of the underlying stock. For equity instruments issued to consultants and vendors in exchange for goods and
services, the Company determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date at which a commitment
for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity
instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
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.
Leases - The Company adopted ASU No. 2016-02 and its related amendments which introduced Leases (Topic 842, or “ASC 842”), as required,
effective January 1, 2019 and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption, without a
restatement of prior periods. The new accounting standard requires lessees to recognize right-of-use (“ROU”) assets and corresponding lease liabilities for all
leases with lease terms of greater than 12 months. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the
recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). As a result of the adoption, the Company adjusted its
balance sheet by recording an ROU asset and lease liability. The adoption impacted the accompanying consolidated balance sheet, but did not have an impact
on the consolidated statements of operations and comprehensive income (loss). The Company uses a discount rate to determine the present value based on the
rate implicit in the lease, if readily determinable, or its incremental borrowing rate.
Recent Accounting Pronouncements –See Note 2 “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements
in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to the Consolidated Financial Statements
24
Page
25
26
27
28
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Document Security Systems, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Document Security Systems, Inc. and Subsidiaries (the Company) as of December 31, 2019
and 2018, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity and cash flows for the years
then ended, and the related notes to the consolidated financial statement (collectively, the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of a Matter
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02,
Leases (Topic 842), and the related amendments. Our opinion is not modified with respect to this matter.
/s/ Freed Maxick CPAs, P.C.
We have served as the Company’s auditor since 2004.
Rochester, New York
March 30, 2020
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DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
2019
2018
ASSETS
Current assets:
Cash
Accounts receivable, net of $41,000 and $50,000 respectively allowance for doubtful accounts
Inventory
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Investment
Notes receivable
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
Revolving line of credit
Current portion of lease liability
Current portion of long-term debt, net
Total current liabilities
Long-term debt, net
Long term lease liability
Other long-term liabilities
Deferred tax liability, net
Commitments and contingencies (Note 13)
Stockholders’ equity
$
$
$
$
$
$
1,096,248
4,211,906
1,707,690
459,868
7,475,712
5,060,698
2,154,175
793,195
49,875
1,222,742
2,453,597
934,765
20,144,759
1,492,494
935,041
390,494
500,000
397,097
440,699
4,155,825
2,309,847
825,645
507,058
43,567
2,447,985
2,217,877
1,563,593
285,580
6,515,035
5,014,494
324,930
-
90,319
-
2,453,597
881,411
15,279,786
1,347,491
1,106,346
2,255,942
-
-
713,427
5,423,206
1,721,936
-
391,325
168,986
Common stock, $.02 par value; 200,000,000 shares authorized, 36,180,626 shares issued and
outstanding (17,425,858 on December 31, 2018)
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
723,612
114,860,150
-
(103,280,945)
12,302,817
348,517
107,624,666
(7,052)
(100,391,798)
7,574,333
Total liabilities and stockholders’ equity
$
20,144,759
$
15,279,786
See accompanying notes.
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DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Years Ended December 31,
Revenue:
Printed products
Technology sales, services and licensing
Direct selling
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
Interest expense
Amortization of deferred financing costs and debt discount
Impairment of investment
Gain on extinguishment of liabilities, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Other comprehensive income (loss):
Interest rate swap gain (loss)
Settlement of Interest rate swap
Comprehensive income (loss):
Income (loss) per common share:
Basic
Diluted
Shares used in computing income (loss) per common share:
Basic
Diluted
See accompanying notes.
27
$
$
$
$
$
2019
2018
$
17,089,740
2,147,740
171,750
16,940,262
1,574,820
-
19,409,230
18,515,082
12,602,494
8,283,266
1,403,836
11,853,499
7,088,610
1,281,634
22,289,596
20,223,743
(2,880,366)
(1,708,661)
24,953
(157,319)
(1,901)
-
-
(3,014,634)
(125,487)
(2,889,147)
$
(15,431)
22,483
8,634
(144,819)
(46,251)
(160,000)
3,532,659
1,481,562
16,593
1,464,969
16,017
(2,882,095)
$
1,480,986
(0.11)
(0.11)
$
$
0.09
0.09
25,505,404
25,505,404
16,724,376
16,930,805
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization
Stock based compensation
Paid in-kind interest
Change in deferred tax provision
Amortization of deferred financing costs and debt discount
Gain on extinguishment of liabilities, net
Impairment of investment
Decrease (increase) in assets:
Accounts receivable
Inventory
Prepaid expenses and other assets
Increase (decrease) in liabilities:
Accounts payable
Accrued expenses
Other liabilities
Net cash used by operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Purchase of investment
Issuance of notes receivable
Purchase of intangible assets
Net cash used by investing activities
Cash flows from financing activities:
Payments of long-term debt
Borrowings from lines of credit, net
Borrowings from revolving lines of credit, net
Borrowings from conversion of note
Issuances of common stock, net of issuance costs
Receipt of subscription receivable, net of issuance costs
Net cash provided by financing activities
Net decrease in cash
Cash and cash equivalents at beginning of year
2019
2018
$
(2,889,147)
$
1,464,969
1,403,836
421,673
-
(125,419)
1,901
-
-
(1,994,029)
(144,097)
(133,844)
145,003
(279,036)
(1,749,715)
(5,342,874)
(988,876)
(1,829,245)
(793,195)
(369,735)
(3,981,051)
(274,468)
587,750
500,000
500,000
6,658,906
-
7,972,188
(1,351,737)
2,447,985
1,281,634
131,733
12,000
9,673
46,251
(3,532,659)
160,000
(192,593)
87,653
(31,198)
618,836
(113,793)
(1,325,427)
(1,382,921)
(1,003,413)
-
-
(100,138)
(1,103,551)
(1,188,081)
502,155
-
-
887,755
288,000
489,829
(1,996,643)
4,444,628
Cash and cash equivalents at end of year
$
1,096,248
$
2,447,985
See accompanying notes.
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DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2019 and 2018
Common Stock
Additional
Paid-in
Subscription
Accumulated Other
Comprehensive
Accumulated
Shares
Amount
Capital
Receivable
Loss
Deficit
Total
Balance, December 31, 2017
16,599,327
331,987
106,633,708
(300,000)
(23,069)
(101,856,767)
4,785,859
Issuance of common stock, net
Stock based payments, net of tax effect
Other comprehensive gain
Net income
826,531
-
-
-
16,530
-
-
-
859,225
131,733
-
-
300,000
-
-
-
Balance, December 31, 2018
17,425,858
348,517
107,624,666
Issuance of common stock, net
Stock based payments, net of tax effect
Other comprehensive gain
Net loss
18,296,049
458,719
-
-
365,921
9,174
-
-
6,937,768
297,716
-
-
Balance, December 31, 2019
36,180,626
723,612
114,860,150
-
-
-
-
-
-
-
-
16,017
-
-
-
-
1,464,969
1,175,755
131,733
16,017
1,464,969
(7,052)
(100,391,798)
7,574,333
-
-
7,052
-
-
-
(2,889,147)
7,303,689
306,890
7,052
(2,889,147)
-
(103,280,945)
12,302,817
See accompanying notes.
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DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Document Security Systems, Inc. (the “Company”), through two of its subsidiaries, Premier Packaging Corporation, which operates under the assumed
name of DSS Packaging Group, and Plastic Printing Professionals, Inc., which operates under the name of DSS Plastics Group, operates in the security and
commercial printing, packaging and plastic ID markets. The Company develops, markets, manufactures and sells paper and plastic products designed to protect
valuable information from unauthorized scanning, copying, and digital imaging. The Company’s subsidiary, DSS Digital Inc., which also operates under the name
of DSS Digital Group, researches, develops, markets and sells worldwide the Company’s digital products, including and primarily our AuthentiGuard® product,
which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions.
The Company’s subsidiary, DSS Technology Management (“DSSTM”), Inc., manages, licenses and acquires intellectual property (“IP”) assets for the purpose of
monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of
patented technologies, licensing, strategic partnerships and commercial litigation. In 2018, the Company commenced operations in the Asia Pacific market
through its subsidiary DSS Asia Limited, which was formed in 2017.
In 2019, DSS created four new, wholly owned subsidiaries all of which currently have no employees and are in the exploratory stage and looking for
opportunities. DSS Blockchain Security, Inc., that intends to specialize in the development of blockchain security technologies for tracking and tracing solutions
for supply chain logistics and cyber securities across global markets. Decentralize Sharing Systems, Inc., that amongst other things, intends to provide services
to assist companies utilizing blockchain technologies for sharing system solutions in the new economics of the peer-to-peer decentralized sharing marketplaces.
DSS Securities, Inc., anticipates establishing or acquiring two parallel streams of digital asset exchanges in multiple jurisdictions: (i) securitized token exchanges,
focusing on digitized assets from different vertical industries and (ii) utilities token exchanges, focusing on “blue-chip” utility tokens from solid businesses. DSS
BioHealth Security, Inc., to invest in companies that include, but not limited to, holding bio-medical intellectual property and/or which have, or are securing,
strategic alliances, partnerships and distributing rights for biomedical and security products, technologies or enterprises. This new division will focus on open-air
defense initiatives, which curb transmission of air-borne infectious diseases such as tuberculosis, influenza, among others, in open areas.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the accounts of Document Security System and its subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying
notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the
accounts and notes receivable, inventory, fair values of investments , recoverability of long-lived assets and goodwill, useful lives of intangible assets and
property and equipment, contingencies fair values of options and warrants to purchase the Company’s common stock, deferred revenue and income taxes ,
substantial doubt about ability to continue as a going concern among others. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Reclassifications - Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 2018 have been reclassified
to conform to current year presentation.
Cash Equivalents - All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
Amounts included in cash equivalents in the accompanying consolidated balance sheets are money market funds whose adjusted costs approximate fair value.
Accounts Receivable - The Company extends credit to its customers in the normal course of business. The Company performs ongoing credit
evaluations and generally do not require collateral. Payment terms are generally 30 days but up to net 105 for certain customers. The Company carries its trade
accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and
establishes an allowance for doubtful accounts based upon management’s estimates that include a review of the history of past write-offs and collections and an
analysis of current credit conditions. At December 31, 2019, the Company established a reserve for doubtful accounts of approximately $41,000 ($50,000 –
2018). The Company does not accrue interest on past due accounts receivable.
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Inventory - Inventories consist primarily of paper, plastic materials and cards, pre-printed security paper, paperboard and fully prepared packaging
which and are stated at the lower of cost or net realizable value on the first-in, first-out (“FIFO”) method. Packaging work-in-process and finished goods included
the cost of materials, direct labor and overhead. At the closing of each reporting period, the Company evaluates its inventory in order to adjust the inventory
balance for obsolete and slow moving items. No reserve was recorded at December 31, 2019 or 2018. Write-downs and write-offs are charged to cost of goods
sold.
Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the
estimated useful lives or lease period of the assets whichever is shorter. Expenditures for renewals and betterments are capitalized. Expenditures for minor
items, repairs and maintenance are charged to operations as incurred. Any gain or loss upon sale or retirement due to obsolescence is reflected in the operating
results in the period the event takes place. Depreciation expense in 2019 was approximately $943,000 ($795,000 - 2018).
Investment - – In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment Limited at cost, less
impairment as the fair market value of the investment is not readily determinable. The Company evaluates investment for indications of impairment at least
annually.
Goodwill - Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a
business combination. Goodwill is subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be impaired. Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 350 provides an entity with the option to first assess qualitative factors to determine whether the existence of events or circumstances
leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events
or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-
step impairment test is unnecessary. If the two-step impairment test is necessary, a fair-value-based test is applied at the reporting unit level, which is generally
one level below the operating segment level. The test compares the fair value of an entity’s reporting units to the carrying value of those reporting units. This test
requires various judgments and estimates. The Company estimates the fair value of the reporting unit using a market approach in combination with a discounted
operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized and
unrecognized assets and liabilities of the reporting unit. The Company performed its annual goodwill impairment test as of December 31, 2019, and no
impairment was deemed necessary. At December 31, 2019 and 2018 the Company’s goodwill consisted of approximately $685,000 and $1,768,600 for Plastic
Printing Professionals, and Premier Packaging Corp., respectively.
Other Intangible Assets and Patent Application Costs - Other intangible assets consist of costs associated with the application for patents,
acquisition of patents and contractual rights to patents and trade secrets associated with the Company’s technologies. The Company’s patents and trade secrets
are generally for document anti-counterfeiting and anti-scanning technologies and processes that form the basis of the Company’s document security business.
Patent application costs are capitalized and amortized over the estimated useful life of the patent, which generally approximates its legal life. In addition,
intangible assets include customer lists and non-compete agreements obtained because of acquisitions. Intangible asset amortization expense is classified as
an operating expense. The Company believes that the decision to incur patent costs is discretionary as the associated products or services can be sold prior to or
during the application process. The Company accounts for other intangible amortization as an operating expense, unless the underlying asset is directly
associated with the production or delivery of a product. Subsequent to acquisition of patents and trade secrets, legal and associated costs incurred in
prosecuting alleged infringements of the patents will be recognized as expense when incurred. Costs incurred to renew or extend the term of recognized
intangible assets, including patent annuities and fees, and patent defense costs are expensed as incurred. To date, the amount of related amortization expense
for other intangible assets directly attributable to revenue recognized is not material.
Impairment of Long-Lived Assets - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability
of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs,
the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash
flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets
for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company
measures any impairment by comparing the fair value of the asset or asset group to its carrying value.
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Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value
hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
•
•
•
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as
valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying amounts reported in the balance sheet of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued
expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes receivable approximates
their carrying value as the stated or discounted rates of the notes do not reflect recent market conditions. The fair value of revolving credit lines notes payable
and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. Derivative instruments, as
discussed below, are recorded as assets and liabilities at estimated fair value based on available market information. The fair value of investments carried at cost
less impairment; however, the fair value is not considered readily determinable based on the lack of liquidity for the shares owned.
Derivative Instruments - The Company maintains an overall interest rate risk management strategy that may incorporate the use of interest rate swap
contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company had an interest rate swap that changes variable
rates into fixed rates on one Citizens Bank term loan relating to the Company’s subsidiary, Premier Packaging. This swap qualified as a Level 2 fair value
financial instrument. This swap agreement was not held for trading purposes and the Company did not intend to sell this derivative swap financial instrument.
The Company recorded the interest swap agreement on the balance sheet at fair value because the agreement qualifies as a cash flow hedge under accounting
principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive loss until the
underlying transaction is recorded in earnings. When the hedged item was realized, gains or losses are reclassified from accumulated other comprehensive loss
(“AOCI”) to the consolidated statement of operations. The valuations of the interest rate swap has been derived from proprietary models of Citizens Bank, N.A
(Citizens), based upon recognized financial principles and reasonable estimates about relevant future market conditions and may reflect certain other financial
factors such as anticipated profit or hedging, transactional, and other costs. The notional amounts of the swap decreased over the life of the agreements. The
Company would be exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreements. The Company did not
anticipate non-performance by the counter parties. The swap was settled in September 2019 with the effect of the settlement of an approximate loss of $22,000
recorded in other comprehensive income in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
Share-Based Payments - Compensation cost for stock awards are measured at fair value and the Company recognizes compensation expense over
the service period for which awards are expected to vest. The Company uses the Black-Scholes-Merton option pricing model for determining the estimated fair
value for stock-based awards. The Black-Scholes-Merton model requires the use of subjective assumptions which determine the fair value of stock-based
awards, including the option’s expected term and the price volatility of the underlying stock. For equity instruments issued to consultants and vendors in
exchange for goods and services the Company determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date
at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the
case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Revenue Recognition - Effective January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach and applied the guidance
to those contracts which were not completed as of January 1, 2018. Adoption of Topic 606 did not impact the timing of revenue recognition in the Company’s
Consolidated Financial Statements for the current or prior interim or annual periods.
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The Company sells printed products including packaging printing and fabrication, commercial and security printing and plastic cards and badges, including
cards and badges integrated with technology such as RFID and smart chips. The Company also provides information technology services and digital
authentication products and services to its customers. The Company recognizes its products and services revenue based on when the title passes to the
customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to
receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. Customers,
including distributors, do not have a general right of return. The Company also derives revenue from royalties from third parties which are typically based on
licensees’ net sales of products that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products. The
Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license revenues through litigation
settlements. For these, the Company recognizes revenue upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the
minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.
As of December 31, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one
year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue
recognition for transaction price allocated to remaining performance obligations. The Company elected the practical expedient allowing it to not recognize as a
contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather
recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year
or less.
Sales Commissions
Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions capitalized
as of December 31, 2019.
Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to
these costs are reflected as revenue.
Costs of revenue - Costs of revenue includes all direct cost of the Company’s packaging, commercial and security printing and plastic ID card sales,
primarily, paper, plastic, inks, dies, and other consumables, and direct labor, transportation and manufacturing facility costs. In addition, this category includes all
direct costs associated with the Company’s technology sales, services and licensing including hardware and software that is resold, third-party fees, and fees
paid to inventors or others as a result of technology licenses or settlements, if any. Costs of revenue recorded in the DSS Technology Management group
include contingent legal fees, inventor royalties, legal, consulting and other professional fees directly related to the Company’s patent monetization, litigation and
licensing activities. Amortization of patent costs and acquired technology are included in depreciation and amortization on the consolidated statement of
operations. Costs of revenue do not include expenses related to product development, integration, and support. These costs are included in research and
development, which is a component of selling, general and administrative expenses on the consolidated statement of operations. Legal costs are included in
selling, general and administrative.
Contingent Legal Expenses - Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues
are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for
certain out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or
licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any
unamortized patent acquisition costs will be expensed in the period a conclusion is reached in an enforcement action that does not yield future royalties potential.
Advertising Costs – Generally consist of online, keyword advertising with Google with additional amounts spent on certain print media in targeted
industry publications. Advertising costs were approximately $81,000 in 2018 ($67,000 – 2018).
Research and Development - Research and development costs are expensed as incurred. Research and development costs consist primarily of third-
party research costs and consulting costs. The Company recognized a credit in 2019 of approximately $12,000 primarily due to receipt of the anticipated
$33,000 refund on development costs for the development of proprietary blockchain solutions for the Company’s AuthentiGuard product line. In comparison, the
Company spent approximately $146,000 and on research and development during 2018 primarily toward the development of the Company’s AuthentiGuard
product line.
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Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the
estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws
including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. We recognize
penalties and accrued interest related to unrecognized tax benefits in income tax expense.
Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted
average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have
been outstanding if dilutive potential shares had been issued and is calculated utilizing the treasury stock method. In a loss period, the calculation for basic and
diluted earnings per share is the same, as the impact of potential common shares is anti-dilutive.
As of December 31, 2019, and 2018, there were 1,798,221 and 2,212,773, respectively, of common stock share equivalents potentially issuable under
options, warrants, and restricted stock agreements that could potentially dilute basic earnings per share in the future. For the twelve-months ended December
31, 2019, equivalents were excluded from the calculation of diluted earnings per share since their inclusion would have been anti-dilutive. For the twelve-months
ended December 31, 2018, based on the average market price of the Company’s common stock during that period of $1.27, 206,429 common stock equivalents
were added to the basic shares outstanding to calculate dilutive earnings per share.
Comprehensive Income (Loss) - Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions
and other events and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’ equity that,
under U.S. GAAP, are excluded from net income (loss). The change in fair value of interest rate swaps was the only item impacting accumulated other
comprehensive loss for the years ended December 31, 2019 and 2018.
Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The
Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.
During 2019, two customers accounted for 45% of our consolidated revenue. As of December 31, 2019, these two customers accounted for 49% of our
consolidated trade accounts receivable balance. As of December 31, 2018, these two customers accounted for 44% of our consolidated revenue and 38% of our
consolidated trade accounts receivable balance.
Continuing Operations and Going Concern – The accompanying consolidated financial statements have been prepared assuming that we will
continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business.
These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be
necessary should we be unable to continue as a going concern. While the Company has approximately $1.1 million in cash and cash equivalents, and a positive
working capital position of approximately $3.2 million as of December 31, 2019, the Company has incurred negative cash flows from operating and investing
activities over the past two years. To continue as a going concern, on June 5, 2019, the Company entered into an underwriting agreement with Aegis Capital
Corp., acting as representative of the several underwriters, which provided for the issuance and sale by the Company in an underwritten public offering (the
“Offering”) of 11,200,000 shares of the Company’s common stock. The Company also granted the Underwriters a 45-day option to purchase up to 1,680,000
additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the
Offering (519,186 shares were exercised on July 18, 2019.) The net offering proceeds to the Company was approximately $5.0 million, inclusive of the July 18,
2019 transaction and after deducting underwriting discounts, commissions and other offering expenses. Also, on February 25, 2020, Company entered into an
underwriting agreement with Aegis Capital Corp., acting as representative of the several underwriters, which provided for the issuance and sale by the Company
in an underwritten public offering (the “Offering”) of 25,555,556 shares (inclusive of 3,333,333 over-allotment that was exercised immediately) of the Company’s
common stock. The net offering proceeds (inclusive of the over-allotment exercise) to the Company approximated $4.0 million.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The expected use of cash for operations in 2020 will be primarily for funding operating losses, working capital, legal expenses associated with intellectual
property related litigation, and the costs associated with the global roll-out of the Company’s AuthentiGuard product line. The Company will also use these funds
to make capital improvements at its two manufacturing facilities to increase production capacity and create efficiencies, as well as to diversify its revenue streams
and take advantage of profit opportunities.
The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters includes,
among other things, continued growth among our operating segments including international expansion of our AuthentiGuard product, and tightly controlling
operating costs and reducing spending growth rates wherever possible to return to profitability.
We believe that our $1.1 million in aggregate cash and equivalents as of December 31, 2019 as well as the $4.0 million raised on February 25, 2020 will
allow us to fund our four operating segments current and planned operations through March 2021. Based on this, we have concluded that substantial doubt of
our ability to continue as a going concern has been alleviated.
Recently Adopted Accounting Pronouncements –
In February 2016, the FASB issued ASU No. 2016-02 and its related amendments which introduced Leases (Topic 842, or “ASC 842”), a new
comprehensive lease accounting model that supersedes the current lease guidance under Leases (Topic 840). The new accounting standard requires lessees
to recognize right-of-use (“ROU”) assets and corresponding lease liabilities for all leases with lease terms of greater than 12 months. It also changes the
definition of a lease and expands the disclosure requirements of lease arrangements. In July 2018, the FASB added a transition option for implementation that
allows companies to continue to use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the
year of adoption. The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three practical expedients
permitted under the transition guidance and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption,
without a restatement of prior periods. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition
requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). As a result of the adoption, the Company adjusted its beginning
balance as of January 1, 2019 by recording operating lease ROU asset and liabilities through a cumulative-effect adjustment. The adoption impacted the
accompanying consolidated balance sheet, but did not have an impact on the consolidated statements of operations and comprehensive income (loss).
At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an
identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both
criteria are met, the Company calculates the associated lease liability and corresponding ROU assets upon lease commencement using a discount rate based
on a credit adjusted secured borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current or noncurrent
liabilities based upon the length of time associated with the lease payments. The operating lease ROU assets includes any lease payments made and excludes
lease incentives and initial direct costs incurred, if any, and are recorded as noncurrent assets. Lease terms may include options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are not recorded on the accompanying
consolidated balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The impact of the adoption
of ASC 842 on the accompanying consolidated balance sheet as of January 1, 2019 was a right-of-use asset and a lease liability of approximately $1,443,800.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit
Losses (Topic 326)”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit
losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated
financial statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment”, which
eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. The annual assessment of
goodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. The standards update is
effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently assessing the impact that adopting this new
accounting standard will have on its Consolidated Financial Statements and plans to adopt ASU 2017-04 in the first quarter of 2020.
NOTE 3 – INVENTORY
Inventory consisted of the following at December 31:
Finished Goods
Work in Process
Raw Materials
NOTE 4 – NOTES RECEIVABLE
2019
2018
1,097,616 $
246,159
363,915
1,707,690 $
1,144,695
339,091
79,807
1,563,593
$
$
On October 10, 2019, the Company entered into a convertible promissory note (“Note”) with Century TBD Holdings, LLC (“TBD”), a Florida limited
liability company. The Company loaned the principal sum of $500,000, of which up to $500,000 and all accrued interest can be paid by an “Optional Conversion”
of such amount up to 19.8% (non-dilutable) of all outstanding membership interest in TBD. This Note accrues interest at 6% and matures on October 9, 2021. As
of December 31, 2019, this Note had outstanding principle and interest of $506,756.
On October 9, 2019 and November 11, 2019 the Company entered into two, separate on demand, convertible notes (“Note” or “Notes”) with RBC Life
Sciences, Inc. (RBC), a Nevada corporation. The first Note, dated October 9th, lent the principal sum of $200,000 and accrues interest at 6% with a maturity date
of November 11, 2019. This Note also contains an “Optional Conversion” clause that allows the Company at any time, before or after the occurrence of an Event
of Default, at its option, to convert the outstanding principal amount, plus accrued interest into a number of newly issued shares of its common stock equal to
75% of the total shares common stock that will be outstanding upon such conversion at a fully-diluted basis. At December 31, 2019, this Noted had outstanding
principle and interest of $203,988. The second Note, dated November 11th, allowed for the borrow by RBC up to an aggregate principal sum of $800,000 and
accrues interest at 10% with a maturity date of November 11, 2024. Interest on any outstanding principal is payable monthly commencing on December 25,
2019. Any amount of principal repaid during this time is allowed to be re-borrowed at any time prior to the earlier of the termination of this Note or the maturity
date. This Note also contains an “Optional Conversion” clause that allows the Company at any time, before or after the occurrence of an Event of Default, at its
option, to convert the outstanding principal amount, plus accrued interest into a number of newly issued shares of its common stock equal to 100% of the
outstanding shares of common stock of RBC direct and indirect subsidiaries. The outstanding principle and interest at December 31, 2019 was $82,451. See
Note 16 for information regarding foreclosure on these Notes subsequent to December 31, 2019.
NOTE 5 - INVESTMENT
As of December 31, 2018, the Company owned 21,196,552 ordinary shares and an existing three-year warrant to purchase up to 105,982,759 ordinary
shares at an exercise price of SGD$0.040 (US$0.0298) per share of Singapore eDevelopment Limited (“SED”), a company incorporated in Singapore and
publicly listed on the Singapore Exchange Limited. The restriction on the sale of shares, and execution of the warrants expired on September 17, 2019. At the
time of the investment, the cost of the investment was determined to be the fair value of the Company’s common stock issued in the transaction, which was
determined to have the most readily determinable fair value. In 2018, the Company adopted ASU No. 2016-01, “Recognition and Measurement of Financial
Assets and Financial Liabilities.” has and carries its investment in SED at costs. During the 4th quarter of 2018, the Company determined that its investment in
Singapore eDevelopment (“SED”) was impaired due to the decline in the share price of SED, especially since November of 2018, which the Company believes
was influenced by a general decline in equity markets in Asia caused by the tariff dispute between the United States and China. As such, in response to the
decline in the trading value of the SED shares in the fourth quarter of 2018, the Company performed an impairment test and determined an impairment of
approximately $160,000 was warranted. Similar analysis was performed at December 31, 2019 and no further impairment is deemed necessary as the stock
price has rebounded in excess of 15%. The carrying value of the initial 21,196,552 ordinary shares investment as of December 31, 2019 was $324,930.
On December 19, 2019, the Company exercised the warrant, in part, pursuant to which the Company acquired 61,977,577 ordinary shares of SED. The
total consideration paid by the Company for these ordinary shares was SGD$2,479,103.08, or approximately $1,833,000 USD, the investment value at
December 31, 2019. After giving effect to the warrant exercise, the Company now owns 83,174,129 ordinary shares of SED, representing approximately 7.1% of
the outstanding shares of SED, and the remaining warrant to purchase 44,005,182 ordinary shares of SED. The Chairman of the Company, Mr. Heng Fai
Ambrose Chan, is the Executive Director and Chief Executive Officer of SED.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 6 - PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
Machinery and equipment
Building and improvements
Land
Leasehold improvements
Furniture and fixtures
Software and websites
Total Cost
Less accumulated depreciation
Property, plant and equipment, net
NOTE 7 - INTANGIBLE ASSETS
Estimated
Useful Life
5-10 years
39 years
3-10 years
7 years
3 years
2019
2018
8,567,911
1,961,544
185,000
776,674
109,862
298,797
11,899,788
6,839,090
5,060,698
7,723,763
1,923,027
185,000
760,286
94,364
187,511
10,873,951
5,859,457
5,014,494
During 2019 and 2018, the Company spent approximately $10,000 and $20,000, respectively, on capitalized patent application costs.
On June 26, 2018, the Company entered into an agreement with Fortress Credit Co LLC (“Fortress”), which among other things transferred to Fortress
all of the remaining economic rights to certain of the Company’s semi-conductor related patents (See Note 8) . As a result, the Company wrote-off these patents
which had an aggregated gross cost of $2,655,000 and a net unamortized carrying amount of $295,470 on the agreement date.
On July 31, 2018, the Company entered into a Non-Compete Letter Agreement (the “Agreement”) with its former President and Chief Executive Officer
of its wholly owned subsidiary, Premier Packaging Corporation. The Agreement called for payments of $16,000 per month, for a period of 19 months, as
consideration for the two-year non-competition and non-solicitation restrictive covenants. The Company recorded the aggregate cost of the Agreement of
$304,000 as an intangible asset to be amortized over the 24-month period commencing August 1, 2018.
On October 24, 2018, the Company’s subsidiary, DSS Asia Limited acquired Guangzhou Hotapps Technology Ltd., (“Guangzhou Hotapps”) a Chinese
company, in exchange for a 2-year, $100,000 unsecured promissory note. In connection with this acquisition, the Company acquired the license to do business
in China to which the Company allocated a value of $85,734 as well as a related deferred tax liability of $33,333 due to outside basis differences and recorded as
an intangible asset that it will amortize over a five-year period.
On March 5, 2019, the Company paid $350,000 and issued 130,435 shares of the Company’s common stock valued at $144,783 in conjunction with the
signing of a Master Distributor Agreement with Advanced Cyber Security Corp. (“ACS”) for the Company to distribute ACS’s EndpointLockV™ cyber security
software exclusively in thirteen countries in Asia and Australia, and non-exclusively, in the U.S. and Middle East. The aggregate cost of $494,783 of the
agreement was recorded as an intangible asset to be amortized over the expected useful life of 36 months.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Intangible assets are comprised of the following:
Acquired intangibles customer lists, licenses and
non-compete agreements
Acquired intangibles patents and patent rights
Patent application costs
2019
2018
Useful
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
2-10 years 1,788,699
500,000
Varied (1) 1,178,176
3,466,875
1,202,832 585,867 1,284,065
500,000
500,000
829,278 348,898 1,168,155
2,532,110 934,765 2,952,220
-
823,884 460,181
500,000
-
746,925 421,230
2,070,809 881,411
(1) Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of December 31,
2019, the weighted average remaining useful life of these assets in service was approximately 6.9 years.
Amortization expense for the year ended December 31, 2019 amounted to approximately $461,000 ($487,000 –2018).
Expected amortization for each of the five succeeding fiscal years is as follows:
Year
2020
2021
2022
2023
2024
Amount
383,276
273,626
127,408
39,378
19,112
NOTE 8 – SHORT TERM AND LONG-TERM DEBT
Revolving Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving credit line with Citizens
Bank (“Citizens”) of up to $800,000 that bears interest at 1 Month LIBOR plus 2.0% (4.5% as of December 31, 2019). This revolving line of credit was renewed
and has a maturity date of May 31, 2020, and is renewed annually. As of December 31, 2019, and December 31, 2018, the revolving line had a balance of
$500,000 and $0 respectively.
On July 26, 2017, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with
Citizens pursuant to which Citizens agreed to lend up to $1,200,000 to permit Premier Packaging to purchase equipment from time to time that it may need for
use in its business. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit shall bear interest thereon at a per annum rate
of 2% above the LIBOR Advantage Rate until the Conversion Date (as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion
Date, the interest shall be adjusted to a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens. Current maturities of long-term debt
are based on an estimated 48-month amortization which will be adjusted upon conversion. As of December 31, 2019, the line had not yet converted into a credit
facility and had a balance of $898,762 ($339,000 at December 31, 2018). The Company pays a monthly amount of $12,756 in principal and interest.
On December 1, 2017, the Company’s subsidiary Plastic Printing Professionals entered into a Loan Agreement and accompanying Term Note Non-
Revolving Line of Credit Agreement with Citizens pursuant to which Citizens agreed to lend up to $800,000 to enable Plastic Printing Professionals to purchase
equipment from time to time that it may need for use in its business. Advances may be made under this Equipment Acquisition Line of Credit, from time to time,
from December 1, 2017 until December 1, 2018. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit bore interest at 2%
above the LIBOR Advantage Rate (as defined in the agreement) until it was converted. Commencing March 30, 2019, the line was converted into two term
notes under which the Company will make monthly payments of $13,657 until November 30, 2023. Interest under the term notes is payable monthly at 5.37%.
As of December 31, 2019, the combined balance of the term notes was $576,946 ($684,554 at December 31, 2018).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Term Loan Debt - On April 28, 2015, Premier Packaging entered into a term note with Citizens for $525,000, repayable over a 60-month period. The
loan bears interest at 3.62% and is payable in equal monthly installments of $9,591 until April 28, 2020. Premier Packaging used the proceeds of the term note
to acquire a HP Indigo 7800 Digital press. The loan is secured by the printing press. As of December 31, 2019, the loan had a balance of $39,294 ($149,542 at
December 31, 2018).
Promissory Notes - On August 30, 2011, Premier Packaging purchased the packaging plant it occupies in Victor, New York, for $1,500,000, which was
partially financed with a $1,200,000 promissory note obtained from Citizens Bank (“Promissory Note”). The Promissory Note called for monthly payments of
principal and interest in the amount of $7,658, with interest calculated as 1 Month LIBOR plus 3.15%. This note, in conjunction with the Construction to
Permanent Loan described below, was refinanced as of June 27, 2019.
On December 6, 2013, Premier Packaging entered into a Construction to Permanent Loan with Citizens Bank for up to $450,000 that was converted into
a promissory note upon the completion and acceptance of building improvements to the Company’s packaging plant in Victor, New York. In May 2014, the
Company converted the loan into a $450,000 note payable in monthly installments over a 5-year period of $2,500 plus interest calculated at a variable rate of 1
Month LIBOR plus 3.15%. The note was set to mature in July 2019 at which time a balloon payment of the remaining principal balance of $300,000 was due. On
June 27, 2019 the balloon payment, in conjunction with the remaining balance on promissory note identified above, was refinanced.
On June 27, 2019 Premier Packaging refinanced and consolidated the outstanding principal associated with the two promissory notes for its packaging
plant located in Victor, New York, for $1,156,742 with Citizens Bank. The new Promissory Note calls for monthly payments of $7,181, with interest fixed at
4.22%. The new Promissory Note matures on June 27, 2029, at which time a balloon payment of $707,689 is due. As of December 31, 2019, the new,
consolidated Promissory Note had a balance of $1,141,487. At December 31, 2018, the two refinanced notes had outstanding balances of $869,865 and
$315,000.
The Citizens credit facilities to each of the Company’s subsidiaries, Premier Packaging and Plastic Printing Professionals, contain various covenants
including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested annually at December 31. For the year ended December
31, 2019, Premier Packaging was in compliance with the annual covenants, however Plastic Printing Professionals was not. Plastic Printing Professionals has
sought and received a one-time waiver from compliance from Citizens for this violation.
On October 24, 2018, the Company’s subsidiary, DSS Asia Limited entered into a $100,000 unsecured promissory note with HotApps International Pte
Ltd in conjunction with the acquisition of Guangzhou Hotapps Technology Ltd., a Chinese subsidiary of HotApps International Pte Ltd, by DSS Asia Limited. The
promissory note does not accrue interest and is payable in full on October 24, 2020.
Effective on February 18, 2019, Document Security Systems, Inc. entered into a Convertible Promissory Note (the “Note”) with LiquidValue
Development Pte Ltd (the “Holder”) in the principal sum of $500,000 (the “Principal Amount”), of which up to $500,000 of the Principal Amount can be paid by
the conversion of such amount into the Company’s common stock, par value $0.02 per share, up to a maximum of 446,428 shares of common stock (the
“Common Stock”), at a conversion price of $1.12 per share. The Holder is a related party, owned by one of the Company’s directors. The Note carried a fixed
interest rate of 8% per annum and had a term of 12- months. Accrued interest was payable in cash in arrears on the last day of each calendar quarter, with the
first interest payment due on June 30, 2019, and remained payable until the Principal Amount was paid in full. The Holder is a related party, owned by one of the
Company’s directors. Effective on March 25, 2019, the Holder exercised its conversion option and converted the Maximum Conversion Amount under the Note.
As a result of Holder’s election to exercise its full conversion rights under the Note, the Note was cancelled effective on March 25, 2019.
Effective on May 31, 2019, Document Security Systems, Inc. (the “Company” or “Borrower”) entered into a Promissory Note (the “Note”) with
LiquidValue Development Pte Ltd (the “Holder”) in the principal sum of $650,000 (the “Principal Amount”). The Note was not interest bearing with a maturity date
of July 31, 2019. The Holder is a related party, owned by one of the Company’s directors. This Note was paid in full on June 12, 2019.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A summary of scheduled principal payments of long-term debt, not including revolving lines of credit and other debt which can be settled with non-
monetary assets, subsequent to December 31, 2019 are as follows:
Year
2020
2021
2022
2023
2024
Thereafter
Amount
440,699
307,324
322,160
322,926
185,218
1,186,387
$
$
Other Debt - On February 13, 2014, the Company’s subsidiary, DSS Technology Management, Inc. (“DSSTM”), entered into an Investment Agreement
(the “Agreement”) dated February 13, 2014 (the “Effective Date”) with Fortress Credit Co LLC, as collateral agent (the “Collateral Agent” or “Fortress”), and
certain investors (the “Investors”), pursuant to which DSSTM contracted to receive a series of advances up to $4,500,000 (collectively, the “Advances”). On June
26, 2018, the parties agreed that the amounts due under the Agreement having an aggregate remaining balance of $3,714,129 as of the Maturity Date, are
discharged, without the assignment to the Investors of any of the collateral that secured the repayment under the Agreement. In addition, the Company
confirmed its obligation to pay the Investors $345,000 that remained from an aggregate of $600,000 that had been deposited and restricted to cover expenses
related to the IP monetization activities. Furthermore, the parties agreed that in the event there are any future recoveries by DSSTM with respect to monetization
activities relating to the collateralized patents or applicable proceed rights set forth in the Agreement, the contractual payment provisions of the original
Agreement will apply, and the Investors will be entitled to receive payment of such proceeds. As a result of this agreement, the Company paid $345,000 from
restricted cash and recorded a gain of extinguishment of liabilities of $3,372,129 to reflect the discharge of the notes, wrote off contingent equity interests of
$459,000 eliminated by the agreement, and wrote-off the underlying patents which had an aggregated gross cost of $2,655,000 and an net unamortized carrying
amount of $295,470 on the agreement date, all of which resulted in the a net gain on the extinguishment of liabilities of $3,532,659 recorded 2018. As of
December 31, 2018, the balance of the term loan was $0.
NOTE 9 – OTHER LIABILITIES
On November 14, 2016, the Company entered into a Proceeds Investment Agreement (the “Agreement”) with Brickell Key Investments LP (“BKI”).
Pursuant to the Agreement, BKI financed an aggregate of $13,500,000 in a patent purchase and monetization program to be implemented and managed by the
Company (the “Financing”). Pursuant to the Agreement. $3,000,000 of the Financing was used to cover the Company’s purchase of a portfolio of U.S. and
foreign LED patents and a license from Intellectual Discovery Co., Ltd., a Korean company (collectively, the “LED Patent Portfolio”), resulting in a basis in these
assets of $0. A total of $6,000,000 of the Financing was directed by BKI to attorneys to cover anticipated attorneys’ fees and out-of-pocket expenses for legal
proceedings that may transpire relating to enforcement of the LED Patent Portfolio. This amount is not included in the Company’s financial statements as the
Company has no control over these funds, which are segregated and escrowed in the attorneys’ trust account.
In addition, on November 14, 2016, the Company received $4,500,000 of the Financing, which was required to be used by the Company to pay for the
defense of Inter Partes Review or other similar proceedings that may be filed from time to time by defendants with the U.S. Patent & Trademark Office relating
to the LED Patent Portfolio, with excess amounts available for general working capital needs. As of December 31, 2019, an aggregate of $780,988 is recorded
as other liabilities by the Company, of which $390,494 is classified as short-term. Of this amount, the Company allocated $2,500,000 which it subsequently
adjusted to $1,500,000 for the payment of estimated future Inter Partes Review costs. The Company will reduce this liability as it pays legal and other expenses
related to the Inter Partes Review matters involving the LED Patent Portfolio as incurred. For this amount, the Company reduced the liability with an offset to
selling, general and administrative costs by $47,500 per month from January 2017 through July 2017, $80,000 per month for the remainder of 2017 through
March 2018, $86,500 per month for the remainder of 2018, and through November of 2019. As of December 31, 2019 the liability has been fully amortized. An
aggregate of $955,000 was recorded as a reduction of the liability allocated to working capital in 2019.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On July 8, 2013, the Company’s subsidiary, DSSTM, purchased two patents for $500,000 covering certain methods and processes related to Bluetooth
devices. In conjunction with the patent purchases, DSSTM entered into a Proceed Right Agreement with certain investors pursuant to which DSSTM initially
received $250,000 of a total of $750,000 which it will ultimately receive thereunder, subject to certain payment milestones, in exchange for 40% of the proceeds
which it receives, if any, from the use, sale or licensing of the two patents. As of December 31, 2019 and 2018, the Company had received an aggregate of
$750,000 from the investors pursuant to the agreement of which $0 was in current liabilities in the consolidated balance sheets ($476,000 as of December 31,
2018). The Company reduced the liability as it paid legal and other expenses related to its litigation involving the Bluetooth patents, for which the amount is
available to be used for 50% of all such expenses.
NOTE 10 - STOCKHOLDERS’ EQUITY
Sales of Equity – On July 3, 2018, the Company sold 214,286 shares of its common stock, par value $0.02 per share, to a related party accredited
investor, Heng Fai Holdings Limited. The purchase price was $1.40 per share, for total proceeds of $300,000.
On December 17, 2018, the Company sold 612,245 shares of its common stock, par value $0.02 per share, to a related party accredited investor, Heng
Fai Holdings Limited. The purchase price was $0.98 per share, for total proceeds of $600,000.
On February 18, 2019, the Company had entered into a Convertible Promissory Note with LiquidValue Development Pte Ltd ., a company owned and
controlled by Mr. Heng Fai Ambrose Chan, DSS’s Chairman, in the principal sum of $500,000, of which up to $500,000 of the Principal Amount could be paid by
the conversion of such amount into the Company’s common stock, par value $0.02 per share, up to a maximum of 446,428 shares of common stock (the
“Maximum Conversion Amount”), at a conversion price of $1.12 per share. Effective on March 25, 2019, LiquidValue Development Pte Ltd exercised its
conversion option and converted the Maximum Conversion Amount under the Note. (Note 8)
On March 5, 2019, the Company issued 130,435 shares of its common stock at $1.15 per share as partial consideration for a licensing and distribution
agreement entered into with Advanced Cyber Security Corp. (Note7)
On June 5, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., acting as
representative of the several underwriters, which provided for the issuance and sale by the Company in an underwritten public offering (the “Offering”) and the
purchase by the Underwriters of 11,200,000 shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained
in the Underwriting Agreement, the shares were sold to the Underwriters at a public offering price of $0.50 per share, less certain underwriting discounts and
commissions. As part of this transaction, 2,000,000 shares were purchased by Heng Fai Ambrose Chan, Chairman of the Board of directors. The Company also
granted the Underwriters a 45-day option to purchase up to 1,680,000 additional shares of the Company’s common stock on the same terms and conditions for
the purpose of covering any over-allotments in connection with the Offering (519,186 shares were exercised on July 18, 2019 at $0.50 per share, less
underwriting discounts and expenses). The net offering proceeds to the Company was approximately $5.0 million, inclusive of the July 18, 2019 transaction and
after deducting underwriting discounts, commissions and other offering expenses.
On November 1, 2019, pursuant to a Subscription Agreement, LiquidValue Development Pte LTD, a company owned and controlled by Mr. Heng Fai
Ambrose Chan, DSS’s Chairman, purchased from the Company, in a private placement, and aggregate of 6,000,000 shares of common stock, for an above
market purchase price equal to $0.30 per share (at the time of LiquidValues’ commitment, the closing stock price was $0.26 per share) for net proceeds to the
Company of approximately $1.6 million after deducting underwriting discounts, commissions and other offering expenses.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock Warrants –The following is a summary with respect to warrants outstanding and exercisable at December 31, 2019 and 2018 and activity during
the years then ended:
Outstanding at January 1,
Granted
Lapsed/terminated
Outstanding at December 31,
Exercisable at December 31,
Weighted average of months remaining
2019
2018
Number of
Warrants
Weighted Average
Exercise Price
Number of
Warrants
Weighted Average
Exercise Price
1,430,116
-
(209,812)
1,220,304
1,220,304
$
$
$
4.00
-
20.78
1.12
1.12
20.7
2,645,090
-
(1,214,974)
1,430,116
1,430,116
$
$
$
10.98
-
19.20
4.00
4.00
27.9
The Company did not issue any warrants in 2019 or 2018.
Stock Options - On June 20, 2013 the Company’s shareholders adopted the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013
Plan”). The 2013 Plan provides for the issuance of up to a total of 1,500,000 shares of common stock authorized to be issued for grants of options, restricted
stock and other forms of equity to employees, directors and consultants. Under the terms of the 2013 Plan, options granted thereunder may be designated as
options which qualify for incentive stock option treatment (“ISOs”) under Section 422A of the Internal Revenue Code, or options which do not qualify (“NQSOs”).
As of December 31, 2019, no shares remained available under this plan.
On December 9, 2019, the Company’s shareholders adopted the 2020 Employee, Director and Consultant Equity Incentive Plan (the “2020 Plan”). The
2020 Plan provides for the issuance of up to a total of 7,236,125 shares of common stock authorized to be issued for grants of options, restricted stock and other
forms of equity to employees, directors and consultants. Under the terms of the 2020 Plan, options granted thereunder may be designated as options which
qualify for incentive stock option treatment (“ISOs”) under Section 422A of the Internal Revenue Code, or options which do not qualify (“NQSOs”).
The following is a summary with respect to options outstanding at December 31, 2019 and 2018 and activity during the years then ended:
Outstanding at January 1,
Granted
Lapsed/terminated
Outstanding at December 31,
Exercisable at December 31,
Expected to vest at December 31,
2019
Weighted
Average
Exercise
Price
Weighted
Average life
Remaining
(Years)
6.66
-
7.7
5.01
6.50
1.43
3.2
3.5
3.4
2018
Weighted
Average
Exercise
Price
Weighted
Average life
Remaining
(Years)
10.72
1.38
4.96
6.66
8.30
1.41
3.2
2.8
4.5
Number of
Options
482,667 $
405,000
(105,012)
782,655 $
490,988 $
291,667 $
Number of
Options
782,655 $
-
(204,738)
577,917 $
408,750 $
169,167 $
Aggregate intrinsic value of outstanding options at December
31,
Aggregate intrinsic value of exercisable options at December
31,
Aggregate intrinsic value of options expected to vest at
December 31,
$
$
$
-
-
-
42
$
$
$
-
-
-
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During the year ended December 31, 2018, the Company issued an aggregate of 405,000 options to purchase the Company’s common stock at
between $1.30 and $1.55 per share with a term of five years to employees at its technology, corporate and printed products divisions, as well as independent
board members. For 265,000 options granted during 2018 the options vest pro-ratably as follows: 1/3 on the grant date, 1/3 on the first anniversary of the grant
date and 1/3 on the second anniversary of the grant date. For the remaining 140,000 options granted during 2018 the options vest pro-ratably as follows: 1/3 on
the first anniversary of the grant date, 1/3 on the second anniversary of the grant date and 1/3 on the third anniversary of the grant date.
The fair value of each option award is estimated on the date of grant utilizing the Black-Scholes-Merton Option Pricing Model. The Company estimates
the expected volatility of the Company’s common stock at the grant date using the historical volatility of the Company’s common stock over the most recent
period equal to the expected stock option term.
The following table shows our weighted average assumptions used to compute the share-based compensation expense for stock options and warrants
granted during the year ended December 31, 2018. There were no options or warrants granted for compensation during the year ended December 31, 2019.
Volatility
Expected option term
Risk-free interest rate
Expected forfeiture rate
Expected dividend yield
98.20%
3.6 years
2.7%
0.0%
0.0%
The aggregate grant date fair value of options that vested during 2019 and 2018 was approximately $104,000 and $122,000, respectively. There were
no options exercised during 2019 or 2018.
Restricted Stock - Restricted common stock may be issued under the Company’s 2013 or 2020 Plan for services to be rendered which may not be
sold, transferred or pledged for such period as determined by our Compensation Committee and Management Resources. Restricted stock compensation cost is
measured as the stock’s fair value based on the quoted market price at the date of grant. The restricted shares issued reduce the amount available under the
employee stock option plans. Compensation cost is recognized only on restricted shares that will ultimately vest. The Company estimates the number of shares
that will ultimately vest at each grant date based on historical experience and adjust compensation cost and the carrying amount of unearned compensation
based on changes in those estimates over time. Restricted stock compensation cost is recognized ratably over the requisite service period which approximates
the vesting period. An employee may not sell or otherwise transfer unvested shares and, if employment is terminated prior to the end of the vesting period, any
unvested shares are surrendered to us. The Company has no obligation to repurchase any restricted stock.
On September 6, 2019, the Company issued an aggregate of 224,310 shares of fully vested restricted stock to members of the Company’s
management team of with a two-year lock-up period and had an aggregated grant date fair value of approximately $94,000 which is included in stock based
compensation for the year ended December 31, 2019. The Company did not grant any restricted stock in 2018.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock-Based Compensation – The Company records stock-based payment expense related to options and warrants based on the grant date fair value
in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based awards to employees, directors and consultants.
Such awards include option grants, warrant grants, and restricted stock awards. During the twelve months ended December 31, 2019, the Company had stock
compensation expense of approximately $422,000 or less than $0.01 basic and diluted earnings per share ($132,000, or less than $0.01 basic and diluted
earnings per share for the corresponding twelve months ended December 31, 2018). Of the $422,000, $114,500 was accrued for the CEO of a subsidiary of the
Company.
In July 2019, by unanimous written consent, the Board of Directors authorized the Company to issue individual stock grants of the Company’s common
stock, pursuant to the Company’s 2013 Employee, Director and Consultant Equity Incentive Plan, to certain officers and directors in the amount of 458,719
shares, at $0.42 per share which were immediately vested and issued on September 6, 2019. 224,310 of these shares where were fully vested restricted stock
to members of the Company’s management team of with a two-year lock-up period.
NOTE 11 - INCOME TAXES
Following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31:
The provision (benefit) for income taxes consists of the following:
Currently payable:
Federal
State
Total currently payable
Deferred:
Federal
State
Foreign
Total deferred
Less: increase in allowance
Net deferred
Total income tax provision
Individual components of deferred taxes are as follows:
Deferred tax assets:
Net operating loss carry forwards
Equity issued for services
Goodwill and other intangibles
Investment in pass-through entity
Deferred revenue
Operating Lease Liability
Other
Gross deferred tax assets
Deferred tax liabilities:
Goodwill and other intangibles
Depreciation and amortization
Right -of-use asset
Gross deferred tax liabilities
Less: valuation allowance
Net deferred tax liabilities
2019
2018
- $
(68)
(68)
(367,473)
(124,975)
(116,863)
(609,311)
476,972
(125,419)
(125,487) $
-
6,920
6,920
458,446
67,451
(92,690.00)
433,207
(423,534)
9,673
16,593
2019
2018
11,188,858 $
169,445
675,885
11,621
181,519
284,193
376,462
12,887,983
29,046
-
284,193
313,239
10,135,005
152,240
788,288
11,499
472,466
-
470,780
12,030,278
33,333
31,512
-
64,845
(12,618,311)
(12,134,419)
(43,567) $
(168,986)
$
$
$
$
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The 2017 Tax Cuts and Jobs Act repeals the corporate alternative minimum tax (AMT) and permits existing minimum tax credits carryovers to offset the
regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017 and before December 31, 2020 in an
amount equal to 50 percent of the excess of the minimum tax credit over regular liability. Any remaining credit will be fully refundable for the year ended
December 31, 2021. As of December 31, 2019, the Company had $46,601 of minimum tax credit included in prepaids and other current assets in the
accompanying consolidated balance sheet.
The Company has approximately $50.6 million in federal net operating loss carryforwards (“NOLs”) available to reduce future taxable income, of which
$3.8 million will never expire with the remaining expiring at various dates from 2022 through 2039. Due to the uncertainty as to the Company’s ability to generate
sufficient taxable income in the future and utilize the NOLs before they expire and any other deferred tax assets, the Company has recorded a valuation
allowance accordingly. The Company’s NOLs are subject to annual limitations as a result of a change in its equity ownership as defined under the Internal
Revenue Code Section 382. These limitations, as applicable, could further limit the use of the NOLs. The valuation allowance for deferred tax assets increased
by approximately $484,000 in the year ended December 31, 2019. The increase in the valuation allowance was primarily due to taxable loss in the current year.
The Company has adopted the provisions of ASU 2016-09 as of the beginning of 2018 which requires recognition through opening retained earnings of
any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g., restricted shares and share
appreciation rights), as well as recognition of all income tax effects from share-based payments arising on or after January 1, 2017 (our adoption date) in income
tax expense. In light of the Company’s valuation allowance on its deferred tax assets there was no adjustment required to its retained earnings nor was there
any windfall tax benefit to recognize in the Company’s income tax provision.
The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying consolidated
statements of operations are as follows:
Statutory United States federal rate
State income taxes net of federal benefit
Permanent differences
Other
Foreign taxes
2019
2018
21.00%
3.28%
(1.61)%
(1.24)%
(1.09)%
21.00%
4.00%
2.20%
0.70%
1.70%
Change in valuation reserves
(16.34)%
(28.50)%
Effective rate
4.00%
1.10%
The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31,
2019 and 2018, the Company recognized no interest and penalties.
The Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years 2016-2019 generally remain open to examination
by major taxing jurisdictions to which the Company is subject.
NOTE 12 - DEFINED CONTRIBUTION PENSION PLAN
The Company maintains a qualified employee savings plans (the “401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code and which covers all eligible employees. Employees generally become eligible to participate in the 401(k) Plan two months following
the employee’s hire date. Employees may contribute a percentage of their earnings, subject to the limitations of the Internal Revenue Code. Commencing on
January 1, 2018, the Company matched 100% of the first 1% of employee contributions, then 50% of additional contributions up to an aggregate maximum
match of 3.5%. The total matching contributions for 2019 and 2018 were approximately $123,000 and $136,000, respectively.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Company has operating leases predominantly for operating facilities. As of December 31, 2019, the remaining lease terms on our operating leases
range from less than one year to approximately four years. Renewal options to extend our leases have not been exercised due to uncertainty. Termination
options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are
no residual value guarantees or material restrictive covenants. There are no significant finance leases as of December 31, 2019. Rent expense for the year
ended December 31, 2019 was approximately $474,000.
Future minimum lease payments as of December 31,2019 are as follows:
2020 $
2021
2022
2023
2024
Total lease payments $
Less imputed interest
Present value of remaining lease payments $
Current $
Non-current $
Weighted average remaining lease term (years)
Weighted average discount rate
396,678
304,669
289,997
269,913
21,860
1,283,117
(60,375)
1,222,742
397,097
825,645
4
5.4%
Employment Agreements - The Company has employment or severance agreements with members of its management team with terms no longer
than twelve months. The employment or severance agreements provide for severance payments in the event of termination for certain causes. As of December
31, 2019, the minimum severance payments under these employment agreements are, in aggregate, approximately $255,000.000.
Legal Proceedings -
On November 26, 2013, DSSTM filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern District of Texas, for patent
infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSSTM’s patents that relate to systems and methods of using low power
wireless peripheral devices. DSSTM is seeking a judgment for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the
case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014,
Apple’s motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two Inter Partes Review (“IPR”)
petitions with the Patent Trial and Appeal Board (“PTAB”) for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. The
California District Court then stayed the case pending the outcome of those IPR proceedings. Oral arguments of the IPRs took place on March 15, 2016, and on
June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions. DSSTM then filed an appeal with the U.S. Court of Appeals for the Federal Circuit (the
“Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on August 9, 2017. On March 23, 2018, the Federal Circuit
reversed the PTAB, finding that the PTAB erred when it found the claims of U.S. Patent No. 6,128,290 to be unpatentable. The Federal Circuit affirmed its
decision on July 12, 2018, when it denied Apple’s petition for panel rehearing of the Federal Circuit’s Opinion and Judgment issued on March 23, 2018. On July
27, 2018, the District Court judge lifted the Stay resuming the litigation, which had a trial date set for the week of February 24, 2020. On January 14, 2020, the
Court in the case DSS Technology Management, Inc. v. Apple, Inc., 4:14-cv-05330-HSG pending in the Northern District of California issued an order that
denied DSS’ motion to amend its infringement contentions. In the same Order, the Court granted Apple’s motion to strike DSS’ infringement expert report. DSS
filed a motion for leave to file a motion for reconsideration of the Court’s order denying DSS the right to amend its infringement contentions and motion to strike
DSS infringement expert report. On February 18, 2020, the Court denied DSS’s motion for leave to file a motion for reconsideration. On February 24, 2020, the
Court signed a Final Judgment stipulating that Apple was “entitled to a judgment of non-infringement of U.S. Patent No. 6,128,290 as a matter of law.” DSS
intends to appeal the ruling.
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On February 16, 2015, DSSTM filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation, Dell, Inc.,
GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC, and AT&T, Inc. The
complaint alleged patent infringement and sought judgment for infringement of two of DSSTM’s patents, injunctive relief and money damages. On December 9,
2015, Intel filed IPR petitions with PTAB for review of the patents at issue in the case. Intel’s IPRs were instituted by PTAB on June 8, 2016. On June 1, 2017,
the PTAB ruled in favor of Intel for all the challenged claims. On July 28, 2017, DSSTM filed a notice of appeal of the PTAB’s decision relating to U.S. Patent
6,784,552 with the Federal Circuit. On January 8, 2019, DSSTM entered into a confidential settlement agreement with Intel Corporation, Dell Inc., GameStop
Corp, Conn’s Inc., Conn Appliances, Inc., Wal-Mart Stores, Inc., Wal-Mart Stores Texas, LLC and AT&T Mobility LLC (collectively, the “Defendants”). The
Federal Circuit Appeal involving DSSTM and Intel was dismissed on January 16, 2019, and the District Court case against the Defendants was dismissed, as to
all the Defendants, on February 5, 2019. On July 16, 2015, DSSTM filed three separate lawsuits in the United States District Court for the Eastern District of
Texas alleging infringement of certain of its semiconductor patents. The defendants were SK Hynix et al., Samsung Electronics et al., and Qualcomm
Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and money damages. On November
12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at issue in their case. SK Hynix’s IPR was instituted by the PTAB on May 11, 2016.
On August 16, 2016, DSSTM and SK Hynix entered into a confidential settlement agreement ending the litigation between them. The pending SK Hynix IPR was
then terminated by mutual agreement of the parties on August 31, 2016. On March 18, 2016, Samsung also filed an IPR petition, which was instituted by the
PTAB. On September 20, 2017, PTAB ruled in favor of Samsung for all the challenged claims relating to U.S. Patent 6,784,552. DSSTM then appealed this
PTAB ruling to the Federal Circuit on November 17, 2017. The Federal Circuit joined this appeal with the Intel appeal effective on December 7, 2017.
Qualcomm filed its IPR proceeding on July 1, 2016, which was then later joined with Intel’s IPRs in August 2016 by PTAB. On June 1, 2017, the PTAB ruled in
favor of Intel/Qualcomm for all the challenged claims. On July 28, 2017, DSSTM filed a notice of appeal of the PTAB’s decision relating to U.S. Patent 6,784,552
with the Federal Circuit. A confidential patent license agreement was executed by DSSTM on November 14, 2018, covering Samsung and Qualcomm. On
December 12, 2018, DSSTM and Samsung entered into a confidential release. On December 27, 2018, DSSTM and Qualcomm entered into a confidential
settlement agreement. The DSSTM - Samsung District Court case was dismissed on December 17, 2018. The DSSTM - Samsung Federal Circuit Appeal was
dismissed on January 2, 2019. The Federal Circuit Appeal involving DSSTM and Qualcomm was dismissed on January 16, 2019. The DSSTM - Qualcomm
District Court case was dismissed on January 16, 2019. As a result, all of DSSTM’s litigation matters originally filed in the District Court for the Eastern District of
Texas have been resolved and are now dismissed.
On April 13, 2017, the Company filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor, Inc. (collectively,
“Seoul Semiconductor”) in the United States District Court for the Eastern District of Texas, alleging infringement of certain of the Company’s Light-Emitting
Diode (“LED”) patents. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages,
costs and disbursements. On June 7, 2017, the Company refiled its patent infringement complaint against Seoul Semiconductor in the United States District
Court for the Central District of California, Southern Division. On December 3, 2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of
U.S. Patent No. 6,949,771. This IPR was instituted by the PTAB on June 7, 2018. On April 18, 2019, the PTAB issued a written decision determining claims 1-9
of the ‘771 patent unpatentable. The Company did not appeal that determination. On December 21, 2017, Seoul Semiconductor filed an IPR challenging the
validity of certain claims of U.S. Patent No. 7,256,486. This IPR was instituted by the PTAB on June 21, 2018. On June 10, 2019, the PTAB issued a written
decision determining claims 1-3 of the ‘486 patent unpatentable. On August 12, 2019, the Company filed a Notice of Appeal with the Federal Circuit Court of
Appeals challenging the PTAB’s decisions. The Company subsequently filed a motion to vacate and remand the PTAB’s decision in light of intervening
precedent under the Appointments Clause. That motion was granted on January 23, 2020. On January 25, 2018, Seoul Semiconductor filed an IPR challenging
the validity of certain claims of U.S. Patent No. 7,524,087. This IPR was instituted by the PTAB on July 27, 2018. On July 22, 2019, the PTAB issued a written
decision determining claims 1, 6-8, 15, and 17 of the ‘087 patent unpatentable. On September 23, 2019, the Company filed a Notice of Appeal with the Federal
Circuit Court of Appeals challenging the PTAB’s decisions. The Company subsequently filed a motion to vacate and remand the PTAB’s decision in light of
intervening precedent under the Appointments Clause. That motion was granted on February 3, 2020. These challenged patents are the patents that are the
subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR proceedings.
47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On April 13, 2017, the Company filed a patent infringement lawsuit against Everlight Electronics Co., Ltd. and Everlight Americas, Inc. (collectively,
“Everlight”) in the United States District Court for the Eastern District of Texas, alleging infringement of certain of the Company’s LED patents. The Company is
seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. On June 8,
2017, the Company refiled its patent infringement complaint against Everlight in the United States District Court for the Central District of California. On June 8,
2018, Everlight filed IPR petitions challenging the validity of claims under U.S. Patent Nos. 7,256,486 and 7,524,087. On June 12, 2018, Everlight filed an IPR
petition challenging the validity of claims under U.S. Patent No. 6,949,771, and on June 15, 2018, filed an IPR petition challenging the validity of claims under
U.S. Patent No 7,919,787. These challenged patents are the patents that are the subject matter of the infringement lawsuit. On January 18, 2019, the Company
and Everlight entered into a confidential settlement agreement resolving the litigation.
On April 13, 2017, the Company filed a patent infringement lawsuit against Cree, Inc. (“Cree”) in the United States District Court for the Eastern District
of Texas, alleging infringement of certain of the Company’s LED patents. The Company is seeking a judgment for infringement of the patents along with other
relief including, but not limited to, money damages, costs and disbursements. On June 8, 2017, the Company refiled its patent infringement complaint against
Cree in the United States District Court for the Central District of California, and thereafter filed a first amended complaint for patent infringement against Cree in
that same court on July 14, 2017. The case is currently pending as of the date of this Report. On June 6, 2018, Cree filed an IPR petition challenging the validity
of claims under U.S. Patent No. 7,256,486. This IPR was instituted and joined with the Seoul Semiconductor IPR. On June 7, 2018, Cree filed IPR petitions
challenging the validity of certain claims U.S. Patent Nos. 7,524,087 and 6,949,771. Both IPRs were denied by the PTAB on November 14, 2018 as time-barred.
The challenged patent is the patent that is the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR.
On August 15, 2017, the Company filed a patent infringement lawsuit against Lite-On, Inc., and Lite-On Technology Corporation (collectively, “Lite-On”)
in the United States District Court for the Central District of California, alleging infringement of certain of the Company’s LED patents. The Company is seeking a
judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The case is currently
pending but is stayed pending the outcome of IPR proceedings filed by other parties.
On December 7, 2017, DSS filed a patent infringement lawsuit against Nichia Corporation and Nichia America Corporation in the United States District
Court for the Central District of California, alleging infringement of certain of DSS’s LED patents. The Company is seeking a judgment for infringement of the
patents along with other relief including, but not limited to, money damages, costs and disbursements. The case is currently pending as of the date of this
Report. On May 10, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,919,787. On May 11, 2018, Nichia filed an IPR
petition challenging the validity of claims under U.S. Patent No. 7,652,297. On May 25, 2018, Nichia filed an IPR petition challenging the validity of claims under
U.S. Patent No. 7,524,087. On May 29, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 6,949,771. On May 30, 2018,
Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,256,486. The 6,949,771 IPR was denied institution, but the remaining IPRs
were instituted by the PTAB. On December 10, 2018, Nichia refiled IPRs relating to 6,949,771, which was denied by the PTAB on April 15, 2019. These
challenged patents are the patents that are the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR
proceedings. On September 17, 2019, the PTAB issued a written decision determining claims 1-14 of the ‘787 patent unpatentable. The Company did not
appeal that determination. On October 30, 2019, the PTAB issued a written decision determining claims 1-17 of the ‘297 patent unpatentable. The Company did
not appeal that determination. On November 19, 2019, the PTAB issued a written decision determining claims 1-5 of the ‘486 patent unpatentable. The
Company has appealed that determination to the U.S. Court of Appeals for the Federal Circuit.
On September 18, 2019, DSS filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor Inc. in the United
States District Court for the Central District of California alleging infringement of U.S. Patent No. 7,315,119. The Company is seeking a judgment for infringement
of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The Court has conducted an initial scheduling
conference and has set a procedural schedule for the case.
On September 19, 2019, DSS filed a patent infringement lawsuit against Cree, Inc. in the United States District Court for the Central District of California
alleging infringement of U.S. Patent No. 6,784,460. The Company is seeking a judgment for infringement of the patents along with other relief including, but not
limited to, money damages, costs and disbursements. On February 11, 2020, Dree filed an IPR petition challenging the validity of the patent claims. The Court
has conducted an initial scheduling conference and has set a procedural schedule for the case.
On September 20, 2019, DSS filed a patent infringement lawsuit against Nichia Corp. and Nichia America Corp. in the United States District Court for the
Central District of California alleging infringement of U.S. Patent No. 6,879,040. The Company is seeking a judgment for infringement of the patents along with
other relief including, but not limited to, money damages, costs and disbursements. The Court has conducted an initial scheduling conference and has set a
procedural schedule for the case.
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In April 2019 DSS commenced an action in New York State Supreme Court, Monroe County against Jeffrey Ronaldi, our former Chief Executive Officer.
This New York action seeks a declaratory judgment that, contrary to informal claims made by him, Mr. Ronaldi’s employment agreement with us expired by its
terms and that he is not entitled to any cash bonuses or other unpaid amounts. The lawsuit also seeks an injunction against Mr. Ronaldi from interfering with any
of DSS’ IP litigation. The defendant has been granted an extension to respond pending settlement negotiations. Mr. Ronaldi subsequently commenced an action
against us in the Superior Court of California, County of San Diego, in November 2019, in which he alleges that we terminated his employment in April 2019 in
order to avoid paying him certain employment-related amounts. Mr. Ronaldi contends that he is owed a $100,000 performance bonus for 2017 under this
employment agreement with us as well as $91,000 in documented and unreimbursed expenses, and that DSS purported to terminate him for cause under the
terms of his employment agreement in order to avoid paying such amounts. Mr. Ronaldi also contends that he is entitled to receive additional amounts, either
under the terms of the employment agreement, or under theories of implied-in-fact contract or promissory estoppel, including, but not limited to, (i) additional
performance bonuses of up to 15% of net litigation proceeds received by us from pending patent infringement litigations, of net licensing proceeds received by
us other than from our internally developed IP, or of the net sales proceeds received by us in connection with the sale of any of our patent assets, (ii) earned but
unpaid base salary, (iii) an equity grant of shares of our common stock, and (iv) payments for unused personal time and sick days. He seeks actual,
compensatory, restitutionary and/or incidental damages in an amount to be determined at trial; prejudgment interest in an amount to be determined at trial;
attorneys’ fees and costs; other costs of the suit; and such other and further relief as the court deems proper. We have made a motion to have the case
dismissed and consolidated with the Monroe Co., New York, litigation. A hearing has been set for April 24, 2020, for the court to consider that request.
Additionally, on March 2, 2020 DSS and DSSTM filed a second litigation action against Jeffrey Ronaldi in the State of New York, Supreme Court, County of
Monroe alleging acts of self-dealing and conflicts of interest while he served as CEO of both DSS and DSS TM. That litigation is in the process of being served
upon the defendant.
On November 20, 2019, DSS Technology Management was sued in the United States District Court, Northern District of California, by Intel Corporation
(“Intel”) and Apple Inc. (“Apple”). The other defendants in the litigation are Fortress Investment Group LLC, Fortress Credit Co. LLC, Uniloc 2017 LLC, Uniloc
USA, INC., Uniloc Luxembourg S.A.R.L., VLSI Technology LLC, INVT SPE LLC, Inventergy Global, INC., IXI IP, LLC, and Seven Networks, LLC. The complaint
includes allegations regarding a February 13, 2014 Investment Agreement between DSS Technology Management and Fortress Credit Co. LLC as well as two
subsequent agreements. The complaint also contains allegations regarding DSS Technology Management’s lawsuit against Intel that was filed in February 2015
in the United States District Court, Eastern District of Texas (referred to below). In the complaint, Intel and Apple allege violations of Section 1 of the Sherman Act
and unfair competition under Cal. Bus. & Prof. Code § 17200 against DSS Technology Management. Additional claims are alleged against other defendants.
Intel and Apple seek relief from the court including that defendants’ conduct be declared a violation of Section 1 of the Sherman Act, Section 7 of the Clayton Act,
and Cal. Bus. & Prof. Code § 17200, et seq.; that Intel and Apple recover damages against defendants in an amount to be determined and multiplied to the
extent provided by law, including under Section 4 of the Clayton Act; that all contracts or agreements defendants entered into in violation of the Sherman Act,
Clayton Act, or Cal. Bus. & Prof. Code § 17200, et seq. be declared void and the patents covered by those transfer agreements be transferred back to the
transferors; that all patents transferred to defendants in violation of the Sherman Act, Clayton Act, or Cal. Bus. & Prof. Code § 17200, et seq. be declared
unenforceable; and that Intel and Apple recover their costs and expenses associated with this case, together with interest. On December 13, 2019, the court
granted the parties’ stipulation to extend the deadline for DSS Technology Management and other defendants to respond to the complaint to February 4, 2020. A
hearing on any motions filed in response to the complaint is set for April 23, 2020.
In addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and have not been finally
adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results of operations, cash flows or our financial condition. The
Company accrues for potential litigation losses when a loss is probable and estimable.
Contingent Litigation Payments – The Company retains the services of professional service providers, including law firms that specialize in intellectual
property licensing, enforcement and patent law. These service providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In
contingency fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company
accrues contingent fees when it is probable that the milestones will be achieved, and the fees can be reasonably estimated. As of December 31, 2019, the
Company had not accrued any contingent legal fees pursuant to these arrangements.
Contingent Payments – The Company is party to certain agreements with funding partners who have rights to portions of intellectual property
monetization proceeds that the Company receives. As of December 31, 2019, there are no contingent payments due.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31:
Cash paid for interest
Non-cash investing and financing activities:
Impact of adoption of lease accounting standards
Gain from change in fair value of interest rate swap derivatives
Common stock issued upon conversion of convertible note
Equity issued to purchase intangible assets
Elimination of contingent liabilities through agreement
Purchase of intangible assets to be paid in installments
Purchase of intangible assets with term note inclusive of tax
NOTE 15 - SEGMENT INFORMATION
$
$
$
$
$
$
$
$
2019
2018
157,000 $
133,000
1,568,000 $
7,000 $
500,000 $
145,000 $
- $
- $
- $
-
16,000
-
-
459,000
304,000
119,065
The Company’s businesses are organized, managed and internally reported as four operating segments. Two of these operating segments, Packaging and
Printing, and Plastics are engaged in the printing and production of paper, cardboard and plastic documents with a wide range of features, including the
Company’s patented technologies and trade secrets designed for the protection of documents against unauthorized duplication and altering. A third operating
segment, Digital, is comprised of DSS Digital Group, and DSS International, and is engaged in research, development, marketing and selling worldwide the
Company’s digital products, including and primarily our AuthentiGuard® product, which is a brand authentication application that integrates the Company’s
counterfeit deterrent technologies with proprietary digital data security-based solutions. The fourth operating segment, Technology Management, primary
mission has been to monetize its various patent portfolios through commercial litigation and licensing. Except for investment in its social networking related
patents, we have historically partnered with various third-party funding groups in connection with patent monetization programs.
As reported herein, DSS is in the process of establishing several new business lines, and we anticipate each of these new business division to be future
operating segments. For instance, Direct Marketing is a newly added operating segment in December 2019 and focuses on direct marketing or network
marketing engaged in the selling of products or services directly to the public, e.g., by online or telephone selling, rather than through retailers. But for the period
ending December 31, 2019, these segments have either yet to be materially formed or to have generated any material revenues.
Approximate information concerning the Company’s operations by reportable segment for the years ended December 31, 2019 and 2018 is as follows.
The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results
contained herein:
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Year Ended December 31, 2019
Packaging and
Printing
Plastics
Digital
$
Revenue
Depreciation and amortization
Interest expense
Amortized Debt Discount
Stock based compensation
Income tax benefit
Net Income (loss)
Capital Expenditures
Identifiable assets
13,230,000 $ 3,860,000 $ 2,147,000
33,000
7,000
-
81,000
-
(579,000)
24,000
924,000
253,000
32,000
-
-
-
(294,000)
42,000
3,934,000
904,000
96,000
2,000
17,000
-
311,000
819,000
10,425,000
Year Ended December 31, 2018
Packaging and
Printing
Plastics
Digital
$
Technology
Management
-
82,000
-
-
-
-
(475,000)
-
58,000
Technology
Management
$
Corporate
172,000
132,000
22,000
-
324,000
(125,000)
(1,852,000)
104,000
4,804,000
Total
$ 19,409,000
1,404,000
157,000
2,000
422,000
(125,000)
(2,889,000)
989,0000
20,145,000
Corporate
Total
32,000 $
338,000
(13,000)
(22,000)
-
-
3,028,000
-
130,000
2,000
(19,000)
(22,000)
27,000
17,000
(1,109,000)
1,000
1,060,000
- $ 18,515,000
1,282,000
(145,000)
(46,000)
132,000
17,000
1,465,000
1,003,000
15,280,000
$
Revenue
Depreciation and amortization
Interest Expense
Amortized Debt Discount
Stock based compensation
Income tax expense
Net Income (loss)
Capital Expenditures
Identifiable assets
8,000
12,957,000 $ 3,983,000 $ 1,543,000 $
159,000
(24,000)
-
-
-
28,000
305,000
3,492,000
775,000
(89,000)
(2,000)
6,000
-
785,000
643,000
9,643,000
99,000
-
(1,267,000)
54,000
955,000
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
International revenue, which consists of sales to customers with operations in Canada, Western Europe, Latin America, Africa, the Middle East and Asia
comprised 2.0% of total revenue for 2019 (3.4% - 2018). Revenue is allocated to individual countries by customer based on where the product is shipped. The
Company had no long-lived assets in any country other than the United States for any period presented.
The following tables disaggregate our business segment revenues by major source:
Printed Products Revenue Information:
Twelve months ended December 31, 2019
Packaging Printing and Fabrication
Commercial and Security Printing
Technology Integrated Plastic Cards and Badges
Plastic Cards, Badges and Accessories
Total Printed Products
Twelve months ended December 31, 2018
Packaging Printing and Fabrication
Commercial and Security Printing
Technology Integrated Plastic Cards and Badges
Plastic Cards, Badges and Accessories
Total Printed Products
Technology Sales, Services and Licensing Revenue Information:
Twelve months ended December 31, 2019
Information Technology Sales and Services
Digital Authentication Products and Services
Royalties from Licensees
Total Technology Sales, Services and Licensing
Twelve months ended December 31, 2018
Information Technology Sales and Services
Digital Authentication Products and Services
Royalties from Licensees
Total Technology Sales, Services and Licensing
NOTE 16 – SUBSEQUENT EVENTS
$
$
$
$
$
$
$
$
12,307,000
1,159,000
1,262,000
2,361,000
17,089,000
11,741,000
1,241,000
1,354,000
2,604,000
16,940,000
189,000
1,414,000
545,000
2,148,000
345,000
772,000
458,000
1,575,000
On March 12, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with DSS BioHealth Security, Inc., a Delaware corporation and
wholly owned subsidiary of the Company (“DBHS”), Global BioMedical Pte Ltd, a Singapore corporation (“GBM”), and Impact BioMedical Inc., a Nevada
corporation and wholly owned subsidiary of GBM (“Impact”). Pursuant to the Term Sheet, the Company will acquire Impact, a company engaged in the
development and marketing of biohealth security technologies, in a proposed share exchange transaction with a purchase price capped at $50 million, subject to
completion of due diligence and an independent valuation. In consideration of 100% of Impact, the Company will issue GBM (i) up to 14,500,000 shares of its
common stock, par value $0.02 (the “Common Stock”), at a price of $0.216 per share (valued at $3,132,00), and (ii) perpetual convertible preferred stock
(“Convertible Preferred Stock”) for the remaining balance of the purchase price, as adjusted by the independent valuation and subject to a 19.9% blocker based
on the total issued outstanding shares of Common Stock held or to be held by GBM. Pursuant to the Term Sheet, in consideration for the Convertible Preferred
Stock, the Company will have certain rights, including appointing members of the Board of Directors of Impact, as set forth in the Term Sheet. GBM is a 100%
owned subsidiary of Singapore eDevelopment Limited whose Chief Executive Office and largest shareholder is Mr. Heng Fai Ambrose Chan, the Chairman of
the Board and largest shareholder of the Company. As such, the above transactions constitute related party transactions which have been duly approved by the
Company’s Board of Directors and Audit Committee.
On March 3, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with LiquidValue Asset Management Pte Ltd (“LVAM”), AMRE
Asset Management Inc. (“AAMI”) and American Medical REIT Inc. (“AMRE”), regarding a share subscription and loan arrangement. The Term Sheet sets out the
terms of a proposed joint venture to establish a medical real estate investment trust in the United States. Pursuant to the Term Sheet, the Company will
subscribe for 5,250 ordinary shares of AAMI at a purchase price of $0.01 per share for total consideration of $52.50. Concurrently, AAMI will issue 2,500 shares
to LVAM, and 1,250 shares to AMRE Tennessee, LLC, AMRE’s executive management’s holding company (collectively, the “Subscription Shares”). As a result,
the Company will hold 52.5% of the outstanding shares of AAMI, with LVAM and AMRE Tennessee, LLC, holding 35% and 12.5% of the remaining outstanding
shares of AAMI, respectively. Further, pursuant to and in connection with the Term Sheet, on March 3, 2020, the Company entered into a Promissory Note with
AMRE, pursuant to which AMRE will issue the Company a promissory note for the principal amount of $800,000.00 (the “Note”). The Note matures on March 3,
2022 and accrues interest at the rate of 8.0% per annum, and shall be payable in accordance with the terms set forth in the Note. As further incentive to enter
into the Note, AMRE issued the Company warrants to purchase 160,000 shares of AMRE common stock (the “Warrants”). The Warrants have an exercise price
of $5.00 per share, subject to adjustment as set forth in the Warrant, and expire on March 3, 2024.
On February 25, 2020, the Company, closed its previously announced underwritten public offering of 25,555,556 shares of its common stock. The
Offering included 22,222,223 shares of the Company’s common stock, and 3,333,333 additional shares from the exercise of the underwriter’s purchase option to
cover over-allotments at the public offering price of $0.18 per share. The net offering proceeds (inclusive of the over-allotment exercise) to the Company
approximated $4.0 million. Mr. Heng Fai Ambrose Chan, the Chairman of the Board, purchased 11,111,112 shares of Common Stock in the Offering, for an
aggregate purchase price of $2,000,000.
In January 2020, the Company began foreclosure proceedings on both of its Note receivables with RBC identified in Note 4. These proceedings were
finalized in February 2020. The Company chose to forego the optional conversion of the outstanding principal and interest into 75% ownership and 100%
ownership, respectively, as was allowed in the terms of both agreements. In lieu of common stock, the Company took ownership of certain assets of RBC.
Management has concluded that the fair value of these assets equal or exceeds the amounts outstanding under the obligations.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Subsequent to December 31, 2019, the Company has invested approximately $460,000 for less than 10% ownership of an entity over which one of the
Company’s directors serves as CEO.
Impact of COVID-19 Outbreak
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on
March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and
quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and
are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the
Company operates. While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if the outbreak continues on
its current trajectory the duration of the supply chain disruption could reduce the availability, or result in delays, of materials or supplies to and from the
Company, which in turn could materially interrupt the Company’s business operations. Given the speed and frequency of the continuously evolving
developments with respect to this pandemic, the Company cannot reasonably estimate the magnitude of the impact to its consolidated results of operations. The
Company’s manufacturing facilities in both California and New York support businesses have been deemed essential by their respective state governments and
remain operational. We have taken every precaution possible to ensure the safety of our employees.
Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the
near term as a result of these conditions, including losses on inventory; impairment losses related to goodwill and other long-lived assets and current obligations.
Subsequent to December 31, 2019, the Company has invested approximately $460,000 for less than 10% ownership of an entity over which one of the
Company’s directors serves as CEO.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief
Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange
Act of 1934) as of December 31, 2019. Based on their evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure
controls and procedures were not effective as of December 31, 2019, to ensure that information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and Interim CFO, as
appropriate, to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are
met. Further, the design of disclosure controls and procedures must reflect the fact that there were resource constraints, and the benefits must be considered
relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can
provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures
also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Interim Chief Financial Officer, assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2019. In making this assessment, management used the framework established in “Internal Control—Integrated
Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, commonly referred to as the “COSO” criteria.
Based on our assessment, we concluded that, as of December 31, 2019, our internal control over financial reporting was not effective based on those criteria.
In connection with management’s assessment of our internal control over financial reporting described above, the following weakness have been
identified in the Company’s internal control over financial reporting as of December 31, 2019:
1. The Company did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties.
2. There was no systematic method of documenting that timely and complete monthly reconciliation and closing procedures take place.
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.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual report.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Changes in Internal Control over Financial Reporting
Remediation of the Material Weaknesses
Management believes it has taken significant steps during 2019 , and subsequently in 2020, to strengthen our overall internal controls and eliminate the material
weakness of those controls. During the 2020 fiscal year, the Company will document and test the remediations put in place. Such remediation includes the
following:
•
•
•
•
•
•
•
•
•
•
The Company has hired a Vice President of Finance for its Printed Products group, who will also be utilized to assist in the Company’s financial reporting
process.
Along with hiring a Senior Corporate Accountant, and a Senior Financial Analyst, the Company has re-assigned responsibilities of other staff members
to assist in the Company’s financial reporting as well as segregating duties to serve as a check and balance on employees’ integrity and to maintain the
best control system possible.
The Company has centralized its accounting functions across all divisions. The goal of this process is to support the segregation of duties and to allow
the Interim Chief Financial Officer to focus on ensuring reporting packages, reconciliations, and other financial reports are accurate and timely reported.
The Company has adopted one ERP system to serve all business divisions to support its centralized accounting function.
Controls have been put into place to ensure there are proper segregations of duties within the cash function. The preparer of a check or wire is unable to
sign or approve the same, whereas the signor or approver does not have the ability to prepare a check or wire.
A monthly operations and financial review is performed with key members of the management team, executive committee, and accounting team which
has enhanced the timeliness, formality and rigor of our financial statement preparation, review and reporting process.
Routine account reconciliations for all key balance sheet accounts have been initiated. These account reconciliations are reviewed timely by an
independent person.
All manual journal entries are reviewed by an independent person prior to inclusion in the financial statements.
Capital spend levels of approvals have been set to include the CEO, Interim CFO, the executive team and the Board of Directors.
The Company hired and consulted an external, independent accounting firm to review the Company’s internal controls; such firm only provided a report
of its findings, it did not express an opinion. The Company used the report to assist in management’s evaluation of the adequacy of the Company’s
policies and procedures in the areas of internal operational controls.
The Company 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.
Changes in Internal Control over Financial Reporting
While changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2019, as the Company
continued to implement the remediation steps described above, we have not been able to fully document and test these controls to ensure their effectiveness
over financial reporting during the quarter ended December 31, 2019, and thus cannot conclude that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B - OTHER INFORMATION
Please see the disclosure related to the winding down of our intellectual property monetization business included in ITEM 1 – BUSINESS, Overview,
Strategic Business Plan, Exiting Unprofitable Business Lines, which information is incorporated in this Item 9B by reference.
DSS intends to hold its 2020 Annual Meeting of Stockholders in late 3 rd quarter or early 4 th quarter of 2020.
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The Company’s Board of Directors currently consists of seven directors; the Board size was reduced from nine to seven persons on December 9, 2019,
pursuant to an October 2019 Special Meeting of the Board, upon recommendation and approval by the Nominating and Corporate Governance Committee to do
so. The Board, also upon recommendation and approval by the Nominating and Corporate Governance Committee, reduced the size of the Board to seven
members effective at the time of the Annual Meeting.
Our executive officers and directors as of the date of this report are as follows:
NAME
Frank D. Heuszel
Jason Grady
Heng Fai Ambrose Chan
John Thatch
Jose Escudero
Sassuan Lee
Lowell Wai Wah
William Wu
POSITION
Chief Executive Officer, Interim Chief Financial Officer and Director
Chief Operating Officer
Director, Chairman
Director
Director
Director
Director
Director
Biographical and certain other information concerning the Company’s officers and directors is set forth below. There are no familial relationships among
any of our directors. Except as indicated below, none of our directors is a director in any other reporting companies. None of our directors has been affiliated with
any company that has filed for bankruptcy within the last ten years. We are not aware of any proceedings to which any of our directors, or any associate of any
such director is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries. Each executive officer serves
at the pleasure of the Board of Directors.
Name
Frank D. Heuszel
Age
63
Director/Officer
Since
2018
Principal Occupation or
Occupations and Directorships
CEO, Interim CFO, Frank Heuszel has served as a director of the Company since
July 30, 2018. He has served as the Company’s Chief Executive Officer since
April 11, 2019, and as the Company’s interim Chief Financial Officer since April
17, 2019. Mr. Heuszel is a practicing attorney, a Certified Public Accountant, and
a Certified Internal Auditor, and has over 39 years of experience in accounting
and finance matters. Mr. Heuszel’s law practice focuses on the regulation and
operation of banks, corporate restructures, and mergers and acquisitions. Mr.
Heuszel’s experience and expertise
financial
statements and complex financial transactions has been beneficial to the
Company and qualifies him to serve on the Company’s Board of Directors.
the areas of evaluating
in
Jason Grady
45
2018
S i n c e July 2018, Mr. Grady has been President of Premier Packaging
Corporation (“PPC”), a multi-division folding carton and security packaging
company and wholly-owned subsidiary of the Company. From April 2010 through
July 2018, Mr. Grady served as the Company’s Vice President of Sales. Mr.
Grady’s role included strategic leadership and driving key initiatives that include
re-engineering sales organizations, new business development, international
sales, sales management and corporate marketing. He was responsible for the
overall management of multi-divisional sales
including anti-counterfeit &
authentication solutions, enterprise security software technologies, and document
security printing. Prior to joining the Company, Mr. Grady served as Sales
Director for the Paul T. Freund Corporation, a custom-ridged set up box
manufacturer, from May 2009 to August 2010. Mr. Grady also served as Vice
President of Marketing for Parlec, Inc., a multi-market machine tool manufacturer,
f r o m October 2004 to May 2009. Mr. Grady held the position of Marketing
Manager for Fonte Health Care Solutions from December 2002 to October 2004
and previously served as Sales and Marketing Executive for OutStart, an
enterprise e-learning software company. Mr. Grady obtained an undergraduate
degree in marketing and design and a Masters Degree in Business Administration
from the Rochester Institute of Technology.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
John Thatch
58
2019
John Thatch has served as a director of the Company since May 9, 2019 and as
Lead
is an
Independent Director since December 9, 2019. Mr. Thatch
accomplished professional and entrepreneur who has started, owned and
operated several businesses in various industries and in both the public and
private arena. The industries in which his companies have operated include the
service, retail, wholesale, education, finance, real estate management and
technology industries. Since March 2018, Mr. Thatch has served as the Chief
Executive Officer and a director of Sharing Services Global Corporation, a publicly
traded holding company focused in the direct selling and marketing industry. He
is also a principal owner of Superior Wine & Spirits, a Florida-based company that
imports, wholesales and distributes wine and liquor throughout the State of
Florida. He has been involved in this business venture since February of 2016.
Mr. Thatch served as Chief Executive Officer of Universal Education Strategies,
Inc. from January 2009 - January 2016, an organization consisting of six
companies that specialized in the development and sales of educational products
and services. From 2000 - 2005, he was the Chief Executive Officer of Onscreen
Technologies, Inc., currently listed on NASDAQ as CUI Global, Inc., a global
leader in the development of cutting-edge thermal management technologies for
integrated LED technologies, circuits and superconductors. Mr. Thatch was
responsible for all aspects of the company including board and shareholder
communications, public
reporting and compliance with Sarbanes-Oxley,
structuring and managing the firm’s financial operations, and expansion initiatives
for all corporate products and services. Mr. Thatch’s public company financial and
management experience in the strategic growth and development of various
companies qualify him to Board serve on the Company’s Board of Directors and a
member of the DSS Audit Committee.
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Jose Escudero has served as a director of the Company since August 5, 2019. He
has served as the Managing Partner at BMI Capital Spain, a private investment
bank, since September 2013. Previously, Mr. Escudero served as Principal at
Hallman & Burke, an international consulting firm, from July 2009 through
September 2013. Mr. Escudero has a B.Sc. in Economics from the Francisco de
Vitoria University and a Master’s degree in Corporate Finance and Investment
Banking from the Options & Futures Institute. Mr. Escudero’s experience in merger
and acquisitions, corporate
trade along with his
education in economics and finance and investment banking qualifies him to serve
on the Company’s Board of Directors
finance, and
international
Sassuan Lee (also known as Samson Lee) has served as a director of the
Company since August 5, 2019. He co-founded STO Global X, a technology and
service provider for security token exchange solutions, in December 2017. He has
also served as the Chief Crypto-Economic Advisor for Gibraltar Stock Exchange
and Gibraltar Blockchain Exchange since September 2017. In November 2016, Mr.
Lee founded Coinstreet Partners, a consultancy firm focused on blockchain, fintech,
cryptocurrency and digital assets, and has served as its Chief Executive Officer
since inception. Mr. Lee previously served as Managing Director at uCast Global
Asia from December 2015 through November 2016. Mr. Lee also served as the
Executive Vice President of the Greater China region at Movideo from June 2015
through December 2015 and as Vice President and General Manager of the
Greater China and South Asia Pacific regions at NeuLion Inc. from July 2008
through June 2015. Mr. Lee received his Bachelor of Commerce degree from the
University of Toronto and his MBA and MS degrees from the Hong Kong University
of Science and Technology. Mr. Lee’s extensive experience and recognized expert
in the fields of technology, blockchain, cryptocurrency and fintech, combined with
his experience as Chief Executive Officer and Managing Director of successful
international businesses qualifies him to serve on the Company’s Board of
Directors and a member of the DSS Audit Committee
William Wu has served as a director of the Company since October 20, 2019. He
served as the managing director of Investment Banking at Glory Sun Securities
Limited since January 2019. Mr. Wu previously served as the executive director
and chief executive officer of Power Financial Group Limited from November 2017
to January 2019. Mr. Wu has served as a director of Asia Allied Infrastructure
Holdings Limited since February 2015. Mr. Wu previously served as a director and
chief executive officer of RHB Hong Kong Limited from April 2011 to October 2017.
Mr. Wu served as the chief executive officer of SW Kingsway Capital Holdings
Limited (now known as Sunwah Kingsway Capital Holdings Limited) from April
2006 to September 2010. Mr. Wu holds a Bachelor of Business Administration
degree and a Master of Business Administration degree of Simon Fraser University
in Canada. He was qualified as a chartered financial analyst of The Institute of
Chartered Financial Analysts in 1996.
M r . Wu previously worked for a number of international investment banks and
possesses over 26 years of experience in the investment banking, capital markets,
institutional broking and direct investment businesses. He is a registered license
holder to carry out Type 6 (advising on corporate finance) and Type 9 (asset
management) regulated activities under the Securities and Futures Ordinance
(Chapter 571 of the Laws of Hong Kong). Mr. Wu has served as a member of the
Guangxi Zhuang Autonomous Region Committee of the Chinese People’s Political
Consultative Conference in January 2013. Mr. Wu’s experience in banking, capital
markets, investment banking, Asian economic and banking dynamics, and
education in corporate finance and asset management qualifies him to serve on the
Company’s Board of Directors and a member of the DSS Audit Committee.
56
Jose Escudero
44
2019
Sassuan Lee
49
2019
William Wu
53
2019
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Lo Wah Wai
56
2019
Mr. Lo Wah Wai (also known as Lowell Lo) has served as a director of the
Company since April 12, 2019. Mr. Lo is currently Chairman and Managing Director
of the BMI Intelligence Group Limited, a leading corporate consulting and financial
services firm in the Asia Pacific Region he founded in 1995, and is responsible for
the overall management, strategic planning and development of the firm. Prior to
establishing BMI Intelligence Group Limited, Mr. Lo was the Audit Manager of
Deloitte Touche Tohmatsu for nine years, including two years of service in
Deloitte’s U.S. headquarters. Mr. Lo has extensive experience with initial public
offerings and has participated in the listings of several companies including Ajisen
Remen, 361 Degrees Group, Lilanz Group and IGG. Mr. Lo’s professional
qualifications include Hong Kong Certified Public Accountants (CPA), American
Institute of Certified Public Accountants (AICPA), Information Systems Auditor and
Control Association (ISACA) and Senior International Finance Manager (SIFM). Mr.
Lo is also currently and independent, non-executive board member of Chongqing
Machinery & Electric Co., Ltd. And Tenfu (Cayman) Holdings Company Limited,
both Hong Kong Exchange-listed companies. Mr. Lo received his bachelor’s degree
in Business Administration from the Chinese University of Hong Kong and a
master’s degree from the New Jersey Institute of Technology. Mr. Lo’s financial
expertise and experience in the management and strategic development of various
companies qualifies him to serve on the Company’s board of directors.
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Name
Age
Director
Since
Principal Occupation or
Occupations and Directorships
Heng Fai Ambrose Chan
75
2017
Heng Fai Ambrose Chan has served as a director of the Company since February
12, 2017 and became Chairman of the Board of Directors on March 27, 2019. He
has also served as an officer of the Company’s wholly-owned subsidiary, DSS
International Inc., since July of 2017. Mr. Chan is an expert in banking and
finance, with years of experience in the industry. Mr. Chan has restructured 35
companies in various industries and countries in the past 40 years. Mr. Chan
currently serves as the Chief Executive Officer of Singapore eDevelopment
Limited (SED), a publicly traded company on the Singapore Stock Exchange. He
also serves as a director of BMI Capital Partners International Ltd., a wholly-
owned subsidiary of SED. Mr. Chan also serves on the board of Holista CollTech
Limited, a publicly traded company listed on the Australian Securities Exchange.
Mr. Chan formerly served as (i) Managing Chairman of Heng Fai Enterprises
Limited (now known as ZH International Holdings Limited) which trades on the
Hong Kong Stock Exchange; (ii) the Managing Director of SGX Catalist-listed
SingHaiyi Group Ltd., which under his leadership, transformed from a failing store-
fixed business provider with net asset value of less than $10 million into a
property trading and investment company and finally to a property development
company with net asset value over $150 million before Mr. Chan ceded
controlling interest in late 2012; (iii) the Executive Chairman of China Gas
Holdings Limited, a formerly failing fashion retail company listed on the Hong
Kong Stock Exchange, which under his direction, was restructured to become one
of the few large participants in the investment in and operation of city gas pipeline
infrastructure in China; (iv) a director of Global Med Technologies, Inc., a medical
company listed on NASDAQ engaged in the design, development, marketing and
support information for management software products for healthcare-related
facilities; (v) a director of Skywest Limited, an ASX-listed airline company; and (vi)
the Chairman and Director of American Pacific Bank. In 1987, Mr. Chan acquired
American Pacific Bank, a full-service U.S. commercial bank, and brought it out of
bankruptcy. He recapitalized, refocused and grew the bank’s operations. Under
his guidance it became a NASDAQ-listed high asset quality bank with zero loan
losses for over five consecutive years before it was ultimately bought and merged
into Riverview Bancorp Inc. Mr. Chan’s international business contacts and
experience qualifies him to serve on our Board of Directors.
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Board of Directors and Committees
The Company has determined that each of Mr. John Thatch, Mr. William Wu, Mr. Sassuan Lee and Mr. Jose Escudero qualify as independent directors
(as defined under Section 803 of the NYSE American LLC Company Guide).
In fiscal 2019, each of the Company’s independent directors attended or participated in 62% or more of the aggregate of (i) the total number of
meetings of the Board of Directors held during the period in which each such director served as a director and (ii) the total number of meetings held by all
committees of the Board of Directors during the period in which each such director served on such committee. During the fiscal year ended December 31, 2019,
the Board held 13 meetings and acted by written consent on one occasion.
On December 9, 2019, the Board appointed Mr. Thatch as the Lead Independent Director, effective immediately. Mr. Thatch will serve as the Lead
Independent Director until his successor is duly appointed and qualified, or until his earlier removal or resignation or such time as he is no longer considered an
independent director under the New York Stock Exchange listing standards. Mr. Thatch’s authority, responsibilities, and duties as the Lead Independent Director
include the following: (i) preside at all meetings of the Board at which the Chairman of the Board is not present, at all meetings of the independent directors and
at all executive sessions of the independent directors, (ii) have a reasonable opportunity to review and comment on Board meeting agendas, (iii) serve as a
liaison between the Chairman of the Board and the other members of the Board, (iv) have the authority to call special meetings of the Board and of the
independent directors, and (v) perform such other duties as the Board may from time to time delegate.
Audit Committee
The Company has separately designated an Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). The Audit Committee held 7 meetings in 2019, and acted by written consent on 0 occasions. The Audit Committee is
responsible for, among other things, the appointment, compensation, removal and oversight of the work of the Company’s independent registered public
accounting firm, overseeing the accounting and financial reporting process of the Company, and reviewing related person transactions. As of December 1, 2019,
the Audit Committee is comprised of Mr. John Thatch, Mr. Wu and Mr. Sassuan Lee. Each of Mr. Wu, Mr. Thatch and Mr. Lee is qualified as a “financial expert”
as defined in Item 407 under Regulation S-K of the Securities Act of 1933, as amended. Each of the members of the Audit Committee is an independent director
(as defined under Section 803 of the NYSE American LLC Company Guide). Mr. Thatch serves as Chairman of the Audit Committee. The Audit Committee
operates under a written charter adopted by the Board of Directors, which can be found in the Investors/Corporate Governance section of our web site,
www.dsssecure.com.
Compensation and Management Resources Committee
The purpose of the Compensation and Management Resources Committee is to assist the Board in discharging its responsibilities relating to executive
compensation, succession planning for the Company’s executive team, and to review and make recommendations to the Board regarding employee benefit
policies and programs, incentive compensation plans and equity-based plans. The Compensation and Management Resources Committee held two meetings in
2019.
The Compensation and Management Resources Committee is responsible for, among other things, (a) reviewing all compensation arrangements for the
executive officers of the Company and (b) administering the Company’s stock option plans. The Compensation and Management Resources Committee consists
of Mr. Jose Escudero, Mr. William Wu and Mr. Sassuan Lee, with Mr. Lee as the Chairman. Each of the members of the Compensation and Management
Resources Committee is an independent director (as defined under Section 803 of the NYSE American Company Guide). The Compensation and Management
Resource Committee operates under a written charter adopted by the Board of Directors, which can be found in the Investors/Corporate Governance section of
our web site, www.dsssecure.com.
The duties and responsibilities of the Compensation and Management Resources Committee in accordance with its charter are to review and discuss
with management and the Board the objectives, philosophy, structure, cost and administration of the Company’s executive compensation and employee benefit
policies and programs; no less than annually, review and approve, with respect to the Chief Executive Officer and the other executive officers (a) all elements of
compensation, (b) incentive targets, (c) any employment agreements, severance agreements and change in control agreements or provisions, in each case as,
when and if appropriate, and (d) any special or supplemental benefits; make recommendations to the Board with respect to the Company’s major long-term
incentive plans applicable to directors, executives and/or non-executive employees of the Company and approve (a) individual annual or periodic equity-based
awards for the Chief Executive Officer and other executive officers and (b) an annual pool of awards for other employees with guidelines for the administration
and allocation of such awards; recommend to the Board for its approval a succession plan for the Chief Executive Officer, addressing the policies and principles
for selecting a successor to the Chief Executive Officer, both in an emergency situation and in the ordinary course of business; review programs created and
maintained by management for the development and succession of other executive officers and any other individuals identified by management or the
Compensation and Management Resources Committee; review the establishment, amendment and termination of employee benefits plans, review employee
benefit plan operations and administration; and any other duties or responsibilities expressly delegated to the Compensation and Management Resources
Committee by the Board from time to time relating to the Committee’s purpose.
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The Compensation and Management Resources Committee may request any officer or employee of the Company or the Company’s outside counsel to
attend a meeting of the Compensation and Management Resources Committee or to meet with any members of, or consultants to, the Compensation and
Management Resources Committee. The Company’s Chief Executive Officer does not attend any portion of a meeting where the Chief Executive Officer’s
performance or compensation is discussed, unless specifically invited by the Compensation and Management Resources Committee.
The Compensation and Management Resources Committee has the sole authority to retain and terminate any compensation consultant to be used to
assist in the evaluation of director, Chief Executive Officer or other executive officer compensation or employee benefit plans, and has sole authority to approve
the consultant’s fees and other retention terms. The Compensation and Management Resources Committee also has the authority to obtain advice and
assistance from internal or external legal, accounting or other experts, advisors and consultants to assist in carrying out its duties and responsibilities, and has
the authority to retain and approve the fees and other retention terms for any external experts, advisors or consultants.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for overseeing the appropriate and effective governance of the Company,
including, among other things, (a) nominations to the Board of Directors and making recommendations regarding the size and composition of the Board of
Directors and (b) the development and recommendation of appropriate corporate governance principles. The Nominating and Corporate Governance Committee
consists of Mr. John Thatch, the Chairman of the committee, Mr. Sassuan Lee and Mr. Jose Escudero, each of whom is an independent director (as defined
under Section 803 of the NYSE American LLC Company Guide). The Nominating and Corporate Governance Committee held 5 meetings in 2019, and did not
act by written consent. The Nominating and Corporate Governance Committee operates under a written charter adopted by the Board of Directors, which can be
found in the Investors/Corporate Governance section of our web site, www.dsssecure.com. The Nominating and Corporate Governance Committee adheres to
the Company’s By-Laws provisions and Securities and Exchange Commission rules relating to proposals by shareholders when considering director candidates
that might be recommended by stockholders, along with the requirements set forth in the committee’s Policy with Regard to Consideration of Candidates
Recommended for Election to the Board of Directors, also available on our website. The Nominating and Corporate Governance Committee of the Board of
Directors is responsible for identifying and selecting qualified candidates for election to the Board of Directors prior to each annual meeting of the Company’s
stockholders. In identifying and evaluating nominees for director, the Committee considers each candidate’s qualities, experience, background and skills, as well
as other factors, such as the individual’s ethics, integrity and values which the candidate may bring to the Board of Directors.
Code of Ethics
The Company has adopted a Code of Ethics that establishes the standards of ethical conduct applicable to all directors, officers and employees of the
Company. A copy of the Code of Ethics covering all of our employees, directors and officers, is available on the Corporate Governance section of our web site at
www.dsssecure.com.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Since April 17, 2019, Frank D. Heuszel has been serving as the Chief Executive Officer and interim Chief Financial Officer of the Company. The biography
for Mr. Heuszel is contained herein in the information disclosures relating to the Company’s directors above.
On July 11, 2019, the Board appointed Mr. Jason Grady as the Company’s Chief Operating Officer, effective July 15, 2019.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
At the close of 2018, the Company’s Named Executive Officers were Jeffrey Ronaldi, who served as the Company’s Chief Executive Officer, and Philip
Jones, who served as the Company’s Chief Financial Officer. On March 27, 2019, in anticipation of the departure of Jeffrey Ronaldi from his position as the
Company’s Chief Executive Officer, the Board of Directors of the Company determined to reassign Mr. Ronaldi’s responsibilities to Philip Jones, who was then
serving as the Company’s Chief Financial Officer. Mr. Ronaldi’s employment as Chief Executive Officer ended on April 10, 2019. On March 27, 2019, Philip
Jones assumed the role of interim Principal Executive Officer in addition to his duties as Chief Financial Officer of the Company. On April 9, 2019, Mr. Jones
tendered his resignation as Chief Financial Officer and interim Principal Executive Officer of the Company, with his departure from the Company effective April
17, 2019.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved in any legal proceedings in the past 10 years that would require disclosure under Item 401(f)
of Regulation S-K.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation earned by each of the persons serving as the Company’s Chief Executive Officer, Chief Financial Officer
and President, referred to herein collectively as the “Named Executive Officers”, or NEOs, for services rendered to us for the years ended December 31, 2019
and 2018:
Name and
principal position
Frank D. Heuszel, Chief Executive Officer
Jason Grady, Chief Operating Officer
Philip Jones, Chief Financial Officer
Jeffrey Ronaldi, Chief Financial Officer
Robert B. Bzdick, President (5)
Year
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Salary
$ 91,615
$
-
$ 84,615
$
-
$ 59,231
$ 199,038
$ 61,297
$ 200,000
$
-
$ 116,667
Bonus
61,103
-
61,103
-
-
-
-
-
-
-
Stock
Awards
(1)
31,403
-
31,403
-
-
-
-
67,263
-
-
Option
Awards
-
-
-
-
-
-
-
-
-
-
Non-Equity
Incentive Plan
Compensation
-
-
-
-
-
25,000
-
-
212,124
216,927
Nonqualified
Deferred
Compensation
Earnings
All Other
Compensation
(2)
-
-
-
-
-
-
-
-
-
-
15,843(3)
9,500(4)
7,170
-
2,073
-
-
5,086
-
18,580
Total
$ 199,964
$
9,500
$ 184,291
$
-
$ 61,304
$ 224,038
$ 61,297
$ 272,349
$ 212,124
$ 352,174
(1) Represents the total grant date fair value of restricted stock awards computed in accordance with FASB ASC 718. Our policy and assumptions made in
the valuation of share-based payments are contained in Note 10 to our financial statements for the year ended December 31, 2019.
(2) Includes health insurance premiums, retirement matching funds and automobile expenses paid by the Company.
(3) Includes $8,000 Mr. Heuszel received for his service as an independent director from January 1, 2019 through April 18, 2019, after which he no longer
served as an independent director as he became the Company’s Executive Officer and interim Chief Financial Officer.
(4) Includes $9,500 Mr. Heuszel received for his service as an independent director.
(5) Mr. Bzdick served as President of the Company and Chief Executive Officer of Premier Packaging Corporation, a wholly-owned subsidiary of the
Company, until August 1, 2018.
Employment and Severance Agreements
Frank D. Heuszel has served as the Company’s Chief Executive Officer since April 11, 2019, and also as the Company’s interim Chief Financial Officer
since April 17, 2019. Upon his appointment, the Company agreed to pay Mr. Heuszel cash compensation in the amount of $7,500 per month for his combined
services as interim Chief Executive Officer and Chief Financial Officer. On August 27, 2019, the Company entered into an executive employment agreement
with Mr. Heuszel. Pursuant to the agreement, Mr. Heuszel shall receive an annual base salary of $165,000, payable bi-weekly, and shall be eligible to an annual
performance bonus in an amount up to 100% of his base salary, upon the Company’s achievement of certain net income and gross revenue milestones. In the
event of a change in control of the Company or the termination of Mr. Heuszel’s employment without cause, Mr. Heuszel shall receive four-months’ salary,
payable monthly.
On September 5, 2019, the Company entered in an executive employment agreement with Mr. Jason Grady, the Company’s Chief Operating Officer.
Pursuant to the agreement, Mr. Grady shall receive an annual base salary of $200,000 and shall be eligible to receive an annual performance bonus, in an
amount up to 100% of his base salary, upon the Company’s achievement of certain net income and gross revenue milestones. In the event of a change in
control of the Company or the termination of Mr. Grady’s employment without cause, he shall be entitled to receive four-month’s base salary.
The Company’s previous Named Executive Officers, Robert Bzdick, Jeffrey Ronaldi and Philip Jones are no longer employed by the Company as of
August 1, 2018, April 10, 2019, and April 17, 2019, respectively.
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Mr. Jones was an at-will employee. If Mr. Jones’ employment had been involuntarily terminated by the Company, he would have been entitled to receive
severance payments in the amount of four months current base-salary.
On July 31, 2018, the Company and Robert Bzdick entered into a Non-Compete Letter Agreement (the “Agreement”) whereby the parties mutually
agreed that Mr. Bzdick’s employment as President of the Company and Chief Executive Officer of Premier Packaging Corporation, a wholly-owned subsidiary of
the Company, would terminate effective on August 1, 2018. The Agreement voided and replaced Mr. Bzdick’s previous employment agreement with the
Company, originally dated February 12, 2010, and amended on October 1, 2012, except for the non-competition and non-solicitation covenants contained
therein, which were carried forward in their entirety to the new Agreement.
Pursuant to the terms of the Agreement, Mr. Bzdick received his regular wages and contractual bonus sum accrued through the separation date, and
also receives the sum of $16,000 per month, for a period of 19 months, as consideration for the two-year non-competition and non-solicitation restrictive
covenants contained in the Agreement, which are identical to the restrictive covenants contained in Mr. Bzdick’s previous employment agreement, which are now
incorporated by reference into the Agreement. In addition, the Company agreed to continue to pay the cost of Mr. Bzdick’s health, dental and vision insurance
coverage for a period of 19 months or until he is eligible for such benefits from another employer, whichever is shorter. In the Agreement, Mr. Bzdick specifically
acknowledges that, among other remedies, the Company is entitled to cease all payments under the Agreement and recoup all payments previously made in the
event Mr. Bzdick revokes, violates or breaches the Agreement, or discontinues any promised act under the Agreement. Moreover, the Agreement further
provides that in the event Mr. Bzdick breaches the Agreement by bringing suit or filing a claim with an administrative agency, then he must, as a condition
precedent, repay to the Company in cash all consideration received pursuant to the Agreement. The Agreement also contains standard mutual release and
damages clauses, and a clause that provides that in any action for breach of the Agreement, the prevailing party shall be entitled to recover attorneys’ fees from
the opposing party.
Outstanding Equity Awards at Fiscal Year-End
As of December 31, 2019, there were no outstanding equity awards to our Named Executive Officers.
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Director Compensation
The following table sets forth cash compensation and the value of stock options awards granted to the Company’s non-employee independent directors,
who were not also named executive officers, for their service in 2019:
Name
Current Directors
Heng Fai Ambrose Chan
John Thatch
Lowell Wai Wah
Sassuan Lee
Jose Escudero
William Wu
Prior Directors
Pamella Avallone (3)
Joseph Sanders (2)
Clark Marcus (3)
Daniel DelGiorno (3)
Stanly Grisham (3)
Brett Scott (3)
Fees Earned
or Paid in
Cash
Stock
Awards (1)
All Other
Compensation
Total
$
$
$
$
$
$
$
$
$
$
$
$
- $
19,500 $
- $
11,500 $
10,000 $
2,000 $
21,500 $
28,000 $
13,500 $
- $
14,000 $
10,500 $
- $
12,842 $
17,122 $
12,842 $
12,842 $
- $
12,842 $
12,842 $
- $
17,122 $
12,842 $
12,842 $
31,403(4) $
$
-
$
-
$
-
$
-
$
-
-
-
-
-
-
-
$
$
$
$
$
$
31,403
32,342
17,122
24,342
22,842
2,000
34,342
40,842
13,500
17,122
26,842
23,342
(1) Represents the total grant date fair value of stock awards computed in accordance with FASB ASC 718. Our policy and assumptions made in the
valuation of share-based payments are contained in Note 10 to our consolidated financial statements for the year ended December 31, 2019.
(2) Such person did not stand for re-election at the 2019 Annual Shareholder meeting.
(3) Resigned as director of the Company during 2019.
(4) In connection with his employment contract as an officer of the Company’s subsidiary, Mr. Chan received $31,403 in fully vested restricted stock with a
two-year lock-up period.
Each independent director (as defined under Section 803 of the NYSE MKT LLC Company Guide) is entitled to receive base cash compensation of
$12,000 annually, provided such director attends at least 75% of all Board of Director meetings, and all scheduled committee meetings. Each independent
director is entitled to receive an additional $1,000 for each Board of Director meeting he attends, and an additional $500 for each committee meeting he attends,
provided such committee meeting falls on a date other than the date of a full Board of Directors meeting. Each of the independent directors is also eligible to
receive discretionary grants of options or restricted stock under the Company’s 2020 Equity Incentive Plan. Non-independent members of the Board of Directors
do not receive compensation in their capacity as directors, except for reimbursement of travel expenses.
On September 23, 2019, the Company entered in an executive employment agreement with Mr. Heng Fai Ambrose Chan, a director of the Company,
Chief Executive Officer of the Company’s wholly-owned subsidiary DSS International Inc. and Chief Executive Officer of DSS Asia, a wholly-owned subsidiary of
DSS International Inc. Pursuant to the agreement, Mr. Chan shall receive an annual base salary of $250,000, payable quarterly in either cash or common stock,
subject to availability of shares under a shareholder-approved stock plan. The calculation of each quarterly payment of common stock shall be the Company’s
average trading price for the last ten trading days of that quarter. Mr. Chan is also eligible to receive an annual performance bonus, in an amount up to 100% of
his base salary, upon the Company’s achievement of certain net income and gross revenue milestones. Mr. Chan has the option to have the bonus paid in
Company common stock. In the event of a change in control of the Company or the termination of Mr. Chan’s employment without cause, Mr. Chan shall receive
four-months’ salary, payable monthly. In connection with this agreement, Mr. Chan was awarded 74,770 shares of fully vested restricted stock with a two-year
lock-up period and had an aggregated grant date fair value of approximately $31,000.
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ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth beneficial ownership of Common Stock as of March 20, 2020 by each person known by the Company to beneficially own
more than 5% of the Common Stock, each director and each of the executive officers named in the Summary Compensation Table (see “Executive
Compensation” below), and by all of the Company’s directors and executive officers as a group. Each person has sole voting and dispositive power over the
shares listed opposite his name except as indicated in the footnotes to the table and each person’s address is c/o Document Security Systems, Inc., 200 Canal
View Boulevard, Suite 300, Rochester, New York 14623.
For purposes of this table, beneficial ownership is determined in accordance with the Securities and Exchange Commission rules, and includes investment
power with respect to shares owned and shares issuable pursuant to warrants or options exercisable within 60 days of March 20, 2020.
The percentages of shares beneficially owned are based on 62,086,099 shares of our Common Stock issued and outstanding as of March 20, 2020, and is
calculated by dividing the number of shares that person beneficially owns by the sum of (a) the total number of shares outstanding on March 20, 2020, plus (b)
the number of shares such person has the right to acquire within 60 days of March 20, 2020.
Name
Heng Fai Ambrose Chan (1)
John Thatch
Lowell Wai Wah
Sassuan Lee
Jose Escudero
Frank Heuszel
William Wu
Jason Grady
All officers and directors as a group (8 persons)
5% Shareholders
Heng Fai Ambrose Chan (1)
* Less than 1%.
* Less than1%.
Number of Shares
Beneficially Owned
Percentage of
Outstanding Share
Beneficially Owned
22,954,670
30,575
40,767
-
-
74,770
-
74,770
23,175,552
37%
*
*
*
*
*
*
*
37%
See Above
See Above
(1) Includes 2,427,599 individually owned shares of the Company’s Common Stock, 500,000 shares of the Company’s Common Stock owned by BMI
Capital Partners International Limited, 1,786,531 shares of the Company’s Common Stock owned by Heng Fai Holdings Limited, 17,557,540 shares of the
Company’s Common Stock owned by LiquidValue Development Pte Ltd, and 683,000 shares of the Company’s Common Stock owned by Hengfai Business
Development Pte. Ltd. Mr. Chan has dispositive power over all of these shares.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Equity Compensation Plans Information
The following table sets forth information about our equity compensation plans as of December 31, 2019.
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(b)
Weighted average
exercise price of
outstanding
options, warrants
and rights
(c)
Restricted stock to
be issued upon
vesting
(a)
-
577,917
$
5.01
Number of
securities
remaining
available for future
issuance (under
equity
compensation
Plans (excluding
securities reflected
in column (a & b))
(d)
-
-
-
-
-
1,220,304
$
1.12
0
0
7,236,125
1,798,221
$
2.37
7,236,125
Plan Category
Equity compensation plans approved by security holders
2013 Employee, Director and Consultant Equity
Incentive Plan - options
2013 Employee, Director and Consultant Equity
Incentive Plan - warrants
2020 Employee, Director and Consultant Equity
Incentive Plan
Total
2020 Employee Stock Option Plan
Following the Board’s approval of same, the Company’s shareholders approved the 2020 Employee, Director and Consultant Equity Incentive Plan (“2020
Incentive Plan”) at the shareholder meeting held on December 9, 2019. As of the date of this Report, 0 options have been issued pursuant to the Plan. Based on
its provisions, there are currently 7,236,125 shares of Common Stock available for issuable under the 2020 Incentive Plan.
Purpose of the Plan. The 2020 Incentive Plan was established by the Company to (i) promote the success and enhance the value of the Company by a) linking
the personal interests of participants of the 2020 Incentive Plan to those of Company stockholders and b) providing participants with an incentive for outstanding
performance; and (ii) provide flexibility to the Company in its ability to motivate, attract, and retain the services of participants upon whose judgment, interest and
special effort the successful conduct of its business is largely dependent.
The Board has the sole authority to implement, interpret, and/or administer the 2020 Incentive Plan unless the Board delegates (i) all or any portion of its
authority to implement, interpret, and/or administer the 2020 Incentive Plan to a committee of the Board consisting of non-employee directors (the “Committee”),
or (ii) the authority to grant and administer awards to non-executive employees of the Company under the 2020 Incentive Plan to an officer of the Company.
The 2020 Incentive Plan provides for the issuance of shares of Common Stock, including shares that may be issued related to the exercise of options awarded
under the 2020 Incentive Plan, in an amount up to twenty percent (20%) of the total issued and outstanding shares of Common Stock as of December 31, 2019
(with additional shares to be authorized every first day of the next fiscal year in accordance with the 2020 Incentive Plan’s evergreen provision). The 2020
Incentive Plan shall be effective for 10 years, unless earlier terminated.
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Employees, officers, directors, consultants and advisors of the Company or any affiliate of the Company (“Participants”) are eligible to receive an award under
the 2020 Incentive Plan. The 2020 Incentive Plan provides Participants the opportunity to participate in the enhancement of shareholder value by the award of
options and awards of Common Stock, granted as stock bonus awards, restricted stock awards, deferred share awards and performance-based awards, under
the 2020 Incentive Plan. The 2020 Incentive Plan further provides for the Company to make payment of bonuses and/or consulting fees to certain Participants
in options and Common Stock, or any combination thereof. While our directors and our executive officers may participate in the 2020 Incentive Plan, the
amounts and benefits that they may receive from the 2020 Incentive Plan (if any) has not been determined and is not currently determinable.
No single participant under the 2020 Incentive Plan may receive more than 20% of all options awarded in a single year.
In the event of a corporate transaction involving the Company (including, without limitation, any merger, reorganization, consolidation, recapitalization,
separation, liquidation, split-up, or share combination), the Committee shall adjust awards in any manner determined by the Committee to be an appropriate and
equitable means to prevent dilution or enlargement of rights.
Evergreen Provision
Under the 2020 Incentive Plan, the Company will initially reserve shares of Common Stock for issuance to eligible employees, officers, directors, consultants,
and advisors of the Company and its affiliates in amount equal to twenty percent (20%) of the then issued and outstanding shares of the Company’s Common
Stock as of December 31, 2019, subject to adjustment. The 2020 Incentive Plan provides that on the first day of each fiscal year of the Company during the
period beginning in fiscal year 2021 and ending on the second day of fiscal year 2029, the number of shares of Common Stock authorized to be issued under
the 2020 Incentive Plan will be increased by an amount equal to the lesser of (i) five percent (5%) of the total number of shares of Common Stock outstanding as
of December 31 of the preceding fiscal year and (ii) an amount to be determined by the Company’s Board of Directors.
Stock Options
The Board, or the Committee, shall have sole and absolute discretionary authority (i) to determine, authorize, and designate those persons who are to receive
options under the 2020 Incentive Plan, (ii) to determine the number of shares of Common Stock to be covered by such options and the terms thereof, (iii) to
determine the type of option granted (ISOs or Nonqualified Options), and (iv) to determine other such details concerning the vesting, termination, exercise,
transferability and payment of such options. The Board or Committee shall thereupon grant options in accordance with such determinations as evidenced by a
written option agreement.
The exercise price per share for Common Stock of options granted under the 2020 Incentive Plan shall be determined by the Board or Committee, but in no
case shall be less than one hundred percent (100%) of the fair market value of the Common Stock (determined in accordance with the 2020 Incentive Plan) at
the time the option is granted, provided that, with respect to ISOs granted to a person who holds ten percent (10%) or more of the total combined voting power
of all classes of stock of the Company, the exercise price per share for Common Stock shall not be less than 110% of the fair market value of the Common Stock
and the term of the ISO shall be no more than 5 years from date of grant. The fair market value of the Common Stock with respect to which ISOs may be
exercisable for the first time by any Participant during any calendar year under all such plans of the Company and its affiliates shall not exceed $100,000, or
such other amount provided in Section 422 of the Internal Revenue Code.
ISOs under the 2020 Incentive Plan may not be transferred except by will or laws of descent and, during the lifetime of the recipient of the ISO, only be
exercised by such recipient. Nonqualified Options may be transferred as a gift in accordance with the applicable securities laws and regulations and with any
stock option agreement. Shares issued pursuant to the exercise of options may be endorsed with a legend restricting their transfer or sale.
Each option shall terminate not more than ten years from the date of the grant or at such earlier time as the option agreement may provide. For those who own
more than 10% of the total combined voting power of all classes of stock of the Company or an affiliate of the Company, each ISO shall terminate not more than
five years from the date of the grant or at such earlier time as the option agreement may provide.
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Bonus, Deferred, and Restricted Stock Awards
The Board, or the Committee, may, in its sole discretion, grant awards of Common Stock in the form of bonus awards, deferred awards, and restricted stock
awards. Each stock award agreement shall be in such form and shall contain such terms and conditions as the Board, or the committee, deems appropriate. The
terms and conditions of each stock award agreement may change from time to time and need not be uniform with respect to Participants, and the terms and
conditions of separate stock award agreements need not be identical.
Performance Share Awards
The Board, or the Committee, may authorize grants of shares of Common Stock to be awarded upon the achievement of specified performance objectives, upon
such terms and conditions as the Board, or the Committee, may determine. Such awards shall be conferred upon the Participant upon the achievement of
specified performance objectives during a specified performance period, such objectives being set forth in the grant and including a minimum acceptable level of
achievement and, optionally, a formula for measuring and determining the number of performance shares to be issued. Each performance share award
agreement shall be in such form and shall contain such terms and conditions as the Board, or the Committee, deems appropriate. The terms and conditions of
each performance share award may change from time to time and need not be uniform with respect to Participants, and the terms and conditions of separate
performance share award agreements need not be identical.
Adjustments
If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction
of the number of shares of the Common Stock outstanding, without receiving consideration therefore in money, services or property, then (i) the number, class,
and per share price of shares of Common Stock subject to outstanding options and other awards under the 2020 Incentive Plan, and (ii) the number of and class
of shares then reserved for issuance under the 2020 Incentive Plan and the maximum number of shares for which awards may be granted to any Participant
during a specified time period shall be appropriately and proportionately adjusted. The Board, or the Committee, shall make such adjustments, and its
determinations shall be final, binding and conclusive.
Change in Control
If the Company is to be consolidated with or acquired by another entity in a merger, consolidation, or sale of all or substantially all of the Company’s assets
other than a transaction to merely change the state of incorporation (a “Corporate Transaction”), the administrator of the 2020 Incentive Plan (the
“Administrator”) or the board of directors of any entity assuming the obligations of the Company (the “Successor Board”), shall, as to outstanding options issued
under the 2020 Incentive Plan, either (i) make appropriate provision for the continuation of such options by substituting on an equitable basis for the shares then
subject to such options either A) the consideration payable with respect to the outstanding shares of common stock in connection with the Corporate
Transaction or B) securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that such options must be exercised
(either (A) to the extent then exercisable or, (B) at the discretion of the Administrator, any such options being made partially or fully exercisable), within a
specified number of days of the date of such notice, at the end of which period such options which have not been exercised shall terminate whether or not
vested; or (iii) terminate such options in exchange for payment of an amount equal to the consideration payable upon consummation of such Corporate
Transaction to a holder of the number of shares of common stock into which such option would have been exercisable (either (A) to the extent then exercisable
or, (B) at the discretion of the Administrator, any such options being made partially or fully exercisable) less the aggregate exercise price thereof. For purposes
of determining the payments to be made pursuant to clause (iii) above, in the case of a Corporate Transaction, the consideration for which, in whole or in part, is
other than cash, the consideration other than cash shall be valued at the fair value thereof as determined in good faith by the Board of Directors.
With respect to outstanding stock grants issued under the 2020 Incentive Plan, the Administrator or the Successor Board, shall make appropriate provision for
the continuation of such stock grants on the same terms and conditions by substituting on an equitable basis for the Shares then subject to such stock grants
either the consideration payable with respect to the outstanding shares of common stock in connection with the Corporate Transaction or securities of any
successor or acquiring entity. In lieu of the foregoing, in connection with any Corporate Transaction, the Administrator may provide that, upon consummation of
the Corporate Transaction, each outstanding stock grant shall be terminated in exchange for payment of an amount equal to the consideration payable upon
consummation of such Corporate Transaction to a holder of the number of shares of common stock comprising such stock grant (to the extent such stock grant
is no longer subject to any forfeiture or repurchase rights then in effect or, at the discretion of the Administrator, all forfeiture and repurchase rights being waived
upon such Corporate Transaction).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Plan Amendment or Termination
Our Board has the authority to amend, suspend, or terminate our equity incentive plans, provided that such action does not materially impair the existing rights of
any participant without such participant’s written consent. The 2020 Incentive Plan will terminate on December 9, 2029, except that awards that are granted
under the 2020 Incentive Plan prior to its termination will continue to be administered under the terms of the 2020 Incentive Plan until the awards terminate,
expire or are exercised.
Other Information
The 2020 Incentive Plan will be effective January 1, 2020, subject to stockholder approval, and, subject to the right of the Committee to amend or terminate the
2020 Incentive Plan, will remain in effect as long as any awards under it are outstanding; provided, however, that no awards may be granted under the 2020
Incentive Plan after January 1, 2030.
The Committee may, at any time, amend, suspend or terminate the Plan, and the Committee may amend any award agreement; provided that no amendment
may, in the absence of written consent to the change by the affected participant, materially alter or impair any rights or obligations under an award already
granted under the 2020 Incentive Plan.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
Except as disclosed herein, no director, executive officer, shareholder holding at least 5% of shares of our common stock, or any family member thereof, had any
material interest, direct or indirect, in any transaction, or proposed transaction since January 1, 2019, in which the amount involved in the transaction exceeds
the lesser of $120,000 or one percent of the average of our total assets at the year-end for the last two completed fiscal years.
Effective on February 18, 2019, the Company entered into a Convertible Promissory Note (the “Note”) with LiquidValue Development Pte Ltd (the
“Holder”) in the principal sum of $500,000 (the “Principal Amount”), of which up to $500,000 of the Principal Amount can be paid by the conversion of such
amount into the Company’s common stock up to a maximum of 446,428 shares of Common Stock, at a conversion price of $1.12 per share. The Note carried a
fixed interest rate of 8% per annum and had a term of 12-months. Accrued interest was payable in cash in arrears on the last day of each calendar quarter, with
the first interest payment due on June 30, 2019, and remained payable until the Principal Amount is paid in full. The Holder is a related party, owned by one of
the Company’s directors. Effective on March 25, 2019, the Holder exercised its conversion option to convert the Maximum Conversion Amount under the Note
and thereby received 446,428 shares of Common Stock. As a result of Holder’s election to exercise its full conversion rights under the Note, the Note was
cancelled effective on March 25, 2019.
On February 22, 2019, one of the Company’s foreign subsidiaries, DSS Cyber Security Pte Ltd. entered into a licensing and distribution agreement with
Advanced Cyber Security Corp. (“ACS”). As consideration for the licensing and distribution agreement, the Company paid ACS $350,000 cash and on March 5,
2019, issued ACS 130,435 shares of the Company’s common stock at $1.15 per share as additional consideration for the agreement. Daniel DelGiorno is the
Chief Executive Officer and owner of ACS. Mr. DelGiorno is a former director of the Company and a related party.
On May 31, 2019, the Company issued and sold an unsecured promissory note to LiquidValue Development Pte Ltd, an entity owned by Mr. Chan, in
the principal amount of $650,000. Proceeds from the note were used for general corporate purposes. This Note was paid in full on June 12, 2019.
On June 5, 2019 the Company completed an underwritten public offering (the “Offering”) with gross proceeds of $5.6 million before deducting
underwriting discounts and commissions and other estimated offering expenses. The Offering included 11,200,000 shares of the Company’s common stock and
1,680,000 additional shares from the exercise of the underwriter’s purchase option to cover over-allotments, at the public offering price of $0.50 per share. Mr.
Chan purchased 2,000,000 shares of Common Stock in the Offering, for an aggregate purchase price of $1,000,000.
On October 29, 2019 and subsequently October 30, 2019, the Audit Committee and the Board of Directors of the Company approved the issuance of
common stock, not to exceed 6,000,000 shares, via private placement with a related party. Pursuant to a Subscription Agreement, LiquidValue Development Pte
LTD, a company owned and controlled by Mr. Heng Fai Ambrose Chan, DSS’s Chairman, purchased from the Company, in a private placement, and aggregate
of 6,000,000 shares of common stock, for an above market purchase price equal to $0.30 per share for gross proceeds to the Company of $1,822,200 (before
deductions for placement agent fees and other expenses). This transaction was executed on November 1, 2019.
Subsequent to December 31, 2019 the Company has invested approximately $460,000 for less than 10% ownership of an entity over which one of the
Company’s directors serves as CEO.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of December 31, 2018, the Company owned 21,196,552 ordinary shares and an existing three-year warrant to purchase up to 105,982,759 ordinary
shares at an exercise price of SGD$0.040 (US$0.0298) per share of Singapore eDevelopment Limited (“SED”), a company incorporated in Singapore and
publicly listed on the Singapore Exchange Limited. The restriction on the sale of shares, and execution of the warrants expired on September 17, 2019. The
carrying value of the initial 21,196,552 ordinary shares investment as of December 31, 2019 was $324,930. On December 19, 2019, the Company exercised
the warrant, in part, pursuant to which the Company acquired 61,977,577 ordinary shares of SED. The total consideration paid by the Company for these
ordinary shares was SGD$2,479,103.08, or approximately $1,833,000 USD, the investment value at December 31, 2019. After giving effect to the warrant
exercise, the Company now owns 83,174,129 ordinary shares of SED, representing approximately 7.1% of the outstanding shares of SED, and the remaining
warrant to purchase 44,005,182 ordinary shares of SED. Mr. Chan is the Executive Director and Chief Executive Officer of SED.
On February 25, 2020, the Company completed an underwritten public offering (the “Offering”) with gross proceeds of $4.6 million before deducting
underwriting discounts and commissions and other estimated offering expenses. The Offering included 22,222,223 shares of the Company’s common stock and
3,333,333 additional shares from the exercise of the underwriter’s purchase option to cover over-allotments, at the public offering price of $0.18 per share. Mr.
Chan purchased 11,111,112 shares of Common Stock in the Offering, for an aggregate purchase price of $2,000,000.
On March 3, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with LiquidValue Asset Management Pte Ltd (“LVAM”), AMRE
Asset Management Inc. (“AAMI”) and American Medical REIT Inc. (“AMRE”), regarding a share subscription and loan arrangement. The Term Sheet sets out the
terms of a proposed joint venture to establish a medical real estate investment trust in the United States. Pursuant to the Term Sheet, the Company will
subscribe for 5,250 ordinary shares of AAMI at a purchase price of $0.01 per share for total consideration of $52.50. Concurrently, AAMI will issue 2,500 shares
to LVAM, and 1,250 shares to AMRE Tennessee, LLC, AMRE’s executive management’s holding company (collectively, the “Subscription Shares”). As a result,
the Company will hold 52.5% of the outstanding shares of AAMI, with LVAM and AMRE Tennessee, LLC, holding 35% and 12.5% of the remaining outstanding
shares of AAMI, respectively. Further, pursuant to and in connection with the Term Sheet, on March 3, 2020, the Company entered into a Promissory Note with
AMRE, pursuant to which AMRE will issue the Company a promissory note for the principal amount of $800,000.00 (the “Note”). The Note matures on March 3,
2022 and accrues interest at the rate of 8.0% per annum, and shall be payable in accordance with the terms set forth in the Note. The Note also provides the
Company an option to provide AMRE an additional $800,000 on the same terms and conditions as the Note, including the issuance of warrants as hereinafter
described. As further incentive to enter into the Note, AMRE issued the Company warrants to purchase 160,000 shares of AMRE common stock (the
“Warrants”). The Warrants have an exercise price of $5.00 per share, subject to adjustment as set forth in the Warrant, and expire on March 3, 2024. Pursuant to
the Warrants, if AMRE files a registration statement with the Securities and Exchange Commission for an initial public offering (“IPO”) of AMRE’s common stock
and the IPO price per share offered to the public is less than $10.00 per share, the exercise price of the Warrant shall be adjusted downward to 50% of the IPO
price. The Warrant also grants piggyback registration rights to the Company as set forth in the Warrant. The parties to the Term Sheet, including AMRE
Tennessee, LLC, also entered into a stockholders’ agreement dated as of March 3, 2020 (the “Stockholders’ Agreement”), regarding their ownership of AAMI’s
common stock to regulate certain aspects of the relationship between the stockholders and provide for certain rights and obligations with respect to such
ownership, as set forth in the Stockholders’ Agreement. LVAM is an 82% owned subsidiary of Singapore eDevelopment Limited whose Chief Executive Office
and largest shareholder is Mr. Chan. Following the consummation of the transactions contemplated by the Term Sheet, Mr. Chan and Mr. Heuszel will be
appointed to the board of directors of AAMI.
On March 12, 2020, the Company entered into a binding term sheet (the “Term Sheet”) with DSS BioHealth Security, Inc., a Delaware corporation and
wholly owned subsidiary of the Company (“DBHS”), Global BioMedical Pte Ltd, a Singapore corporation (“GBM”), and Impact BioMedical Inc., a Nevada
corporation and wholly owned subsidiary of GBM (“Impact”). Pursuant to the Term Sheet, the Company will acquire Impact, a company engaged in the
development and marketing of biohealth security technologies, in a proposed share exchange transaction with a purchase price capped at $50 million, subject to
completion of due diligence and an independent valuation. In consideration of 100% of Impact, the Company will issue GBM (i) up to 14,500,000 shares of its
common stock, par value $0.02 (the “Common Stock”), at a price of $0.216 per share (valued at $3,132,00), and (ii) perpetual convertible preferred stock
(“Convertible Preferred Stock”) for the remaining balance of the purchase price, as adjusted by the independent valuation and subject to a 19.9% blocker based
on the total issued outstanding shares of Common Stock held or to be held by GBM. Pursuant to the Term Sheet, in consideration for the Convertible Preferred
Stock, the Company will have certain rights, including appointing members of the Board of Directors of Impact, as set forth in the Term Sheet. GBM is a 100%
owned subsidiary of Singapore eDevelopment Limited whose Chief Executive Office and largest shareholder is Mr. Heng Fai Ambrose Chan, the Chairman of
the Board and largest shareholder of the Company. As such, the above transactions constitute related party transactions which have been duly approved by the
Company’s Board of Directors and Audit Committee.
Subsequent to December 31, 2019, the Company has invested approximately $460,000 for less than 10% ownership of an entity over which one of the
Company’s directors serves as CEO.
Review, Approval or Ratification of Transactions with Related Persons
The Board conducts an appropriate review of and oversees all related party transactions on a continuing basis and reviews potential conflict of interest
situations where appropriate. The Board has adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. In addition,
the Board applies the following standards to such reviews: (i) all related party transactions must be fair and reasonable and on terms comparable to those
reasonably expected to be agreed to with independent third parties for the same goods and/or services at the time they are authorized by the Board and (ii) all
related party transactions should be authorized, approved or ratified by the affirmative vote of a majority of the directors who have no interest, either directly or
indirectly, in any such related party transaction.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Audit fees consist of fees for professional services rendered for the audit of the Company’s consolidated financial statements included in the Company’s
Annual Report on Form 10-K, the review of financial statements included in the Company’s Quarterly Reports on Form 10-Q, and for services that are normally
provided by the auditor in connection with statutory and regulatory filings or engagements. The aggregate fees billed for professional services rendered by our
principal accountant, Freed Maxick CPAs, P.C., for audit and review services for the fiscal years ended December 31, 2019 and 2018 were approximately
$154,600 and $125,117, respectively.
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Audit Related Fees
The aggregate fees billed for audit related services by our principal accountant, Freed Maxick CPAs, P.C., pertaining to comfort letter related to our
registered offering during the years, consents for related registration statements and the audit of the Company’s employee benefit plan and review of the stand-
alone financial statements for one of the Company’s subsidiaries, for the years ended December 31, 2019 and 2018 were approximately $51,450 and $26,800,
respectively.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant, Freed Maxick CPAs, P.C., for tax compliance, tax advice and tax
planning during the years ended December 31, 2019 and 2018 were approximately $29,500 and $33,305,respectively.
All Other Fees
There were no fees billed for professional services rendered by our principal accountant, Freed Maxick CPAs, P.C., for other related services during the
years ended December 31, 2019 and 2018.
Administration of the Engagement; Pre-Approval of Audit and Permissible Non-Audit Services
The Company’s Audit Committee Charter requires that the Audit Committee establish policies and procedures for pre-approval of all audit or permissible non-
audit services provided by the Company’s independent auditors. Our Audit Committee, approved, in advance, all work performed by our principal accountant,
Freed Maxick CPAs, P.C. These services may include audit services, audit-related services, tax services and other services. The Audit Committee may
establish, either on an ongoing or case-by-case basis, pre-approval policies and procedures providing for delegated authority to approve the engagement of the
independent registered public accounting firm, provided that the policies and procedures are detailed as to the particular services to be provided, the Audit
Committee is informed about each service, and the policies and procedures do not result in the delegation of the Audit Committee’s authority to management. In
accordance with these procedures, the Audit Committee pre-approved all services performed by Freed Maxick CPAs, P.C.
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(b) Exhibits
Exhibit
Description
3.1 Certificate of Incorporation of Document Security Systems, Inc., as amended (incorporated by reference to exhibit 3.1 to Form 8-K dated August 25,
2016).
3.2 Fourth Amended and Restated By-laws of Document Security Systems, Inc. (incorporated by reference to exhibit 3.1 to Form 8-K dated June 22,
2018).
4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934*
10.1 Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Annex H to Proxy
Statement/Prospectus contained in the Registration Statement on Form S-4 originally filed with the SEC on November 26, 2012).
10.2 Investment Agreement dated as of February 13, 2014 by and among DSS Technology Management, Inc., Document Security Systems, Inc.,
Fortress Credit Co LLC and the Investors named therein (incorporated by reference to exhibit 10.1 to Form 8-K dated February 18, 2014).
10.3 Form of Securities Purchase Agreement for September 2015 Financing (incorporated by reference to exhibit 10.1 to Form 8-K dated September 17,
2015).
10.4 Form of Common Stock Purchase Warrant for September 2015 Financing (incorporated by reference to exhibit 10.2 to Form 8-K dated September
17, 2015).
10.5 Form of amended Securities Purchase Agreement for September 2015 Financing (incorporated by reference to exhibit 10.1 to Form 8-K dated
October 2, 2015).
10.6 Form of amended Securities Purchase Agreement (incorporated by reference to exhibit 10.1 to Form 8-K dated November 30, 2015).
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10.7 Patent Purchase Agreement between Document Security Systems, Inc. and Intellectual Discovery Co., Ltd. dated November 10, 2016 (incorporated
by reference to exhibit 10.28 to Form 10-K dated March 28, 2017).
10.8 Patent License Agreement between Document Security Systems, Inc. and Intellectual Discovery Co., Ltd. dated November 10, 2016 (incorporated
by reference to exhibit 10.29 to Form 10-K dated March 28, 2017).
10.9 Proceeds Investment Agreement between Document Security Systems, Inc. and Brickell Key Investments LP dated November 14, 2016
(incorporated by reference to exhibit 10.30 to Form 10-K dated March 28, 2017).
10.10 Common Stock Purchase Warrant between Document Security Systems, Inc. and Brickell Key Investments LP dated November 14, 2016
(incorporated by reference to exhibit 10.31 to Form 10-K dated March 28, 2017).
10.11 First Amendment to Investment Agreement and Certain Other Documents between DSS Technology Management, Inc., Document Security
Systems, Inc., Fortress Credit Co LLC and Investors dated December 2, 2016 (incorporated by reference to exhibit 10.32 to Form 10-K dated March
28, 2017).
10.12 Form of Loan Agreement between Premier Packaging Corporation and Citizens Bank, N.A. (incorporated by reference to exhibit 10.1 to Form 8-K
dated July 28, 2017).
10.13 Form of Term Note Non-Revolving Line of Credit Agreement between Premier Packaging Corporation and Citizens Bank, N.A. (incorporated by
reference to exhibit 10.2 to Form 8-K dated July 28, 2017).
10.14 Form of Security Agreement between Premier Packaging Corporation and Citizens Bank, N.A. (incorporated by reference to exhibit 10.3 to Form 8-
K dated July 28, 2017).
10.15 Form of Common Stock Purchase Warrant (incorporated by reference to exhibit 4.1 to Form 8-K dated September 6, 2017).
10.16 Form of Securities Purchase Agreement (incorporated by reference to exhibit 10.1 to Form 8-K dated September 6, 2017).
10.17 Securities Exchange Agreement, dated September 12, 2017, between Document Security Systems, Inc. and Hengfai Business Development Pte.
Ltd. (incorporated by reference to exhibit 10.1 to Form 8-K dated September 15, 2017).
10.18 Form of Loan Agreement between Plastic Printing Professionals, Inc. and Citizens Bank, N.A. (incorporated by reference to exhibit 10.1 to Form 8-K
dated December 6, 2017).
10.19 Form of Term Note Non-Revolving Line of Credit Agreement between Plastic Printing Professionals, Inc. and Citizens Bank, N.A. (incorporated by
reference to exhibit 10.2 to Form 8-K dated December 6, 2017).
10.20 Form of Security Agreement between Plastic Printing Professionals, Inc. and Citizens Bank, N.A. (incorporated by reference to exhibit 10.3 to Form
8-K dated December 6, 2017).
10.21 Executive Employment Agreement with Frank D. Heuszel (incorporated by reference to exhibit 10.1 to Form 10-Q dated November 13, 2019).
10.22 Executive Employment Agreement with Mr. Jason Grady (incorporated by reference to exhibit 10.2 to Form 10-Q dated November 13, 2019).
10.23 Executive Employment Agreement with Mr. Heng Fai Ambrose Chan (incorporated by reference to exhibit 10.3 to Form 10-Q dated November 13,
2019).
10.24 2020 Employee, Director and Consultant Equity Incentive Plan *
10.25 Term Sheet dated March 3, 2020 (incorporated by reference to exhibit 10.1 to Form 8-K dated March 6, 2020).
10.26 Promissory Note dated March 3, 2020 (incorporated by reference to exhibit 10.2 to Form 8-K dated March 6, 2020).
10.27 Form of Warrant (incorporated by reference to exhibit 10.3 to Form 8-K dated March 6, 2020).
10.28 Stockholder Agreement (incorporated by reference to exhibit 10.4 to Form 8-K dated March 6, 2020).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.29 Term Sheet dated March 12, 2020*
21.1 Subsidiaries of Document Security Systems, Inc.*
23.1 Consent of Freed Maxick CPAs, P.C.*
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
XBRL Instance Document*
101.INS
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL
101.DEF
101.LAB
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
XBRL Taxonomy Extension Calculation Linkbase Document*
XBRL Taxonomy Extension Definition Linkbase Document*
XBRL Taxonomy Extension Label Linkbase Document*
* Filed herewith
ITEM 16 – Form 10K SUMMARY
None.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 30, 2020
DOCUMENT SECURITY SYSTEMS, INC.
By:
/s/ Frank D. Heuszel
Frank D. Heuszel
Chief Executive Officer
Interim Chief Financial Officer
(Principal Executive Officer)
(Interim Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
By:
By:
By:
By:
By:
By:
By:
/s/ Frank D. Heuszel
Frank D. Heuszel
Chief Executive Officer
Interim Chief Financial Officer
(Principal Executive Officer)
(Interim Principal Accounting Officer)
/s/ Jason Grady
Jason Grady
Chief Operating Officer
/s/ Heng Fai Ambrose Chan
Heng Fai Ambrose Chan
Chairman of the Board and CEO of DSS International, Inc.
/s/ John Thatch
John Thatch
Director
/s/ Jose Escudero
Jose Escudero
Director
/s/ Sassuan Lee
Sassuan Lee
Director
/s/ Lowell Wai Wah
Lowell Wai Wah
Director
/s/ William Wu
By:
William Wu
Director
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-4.1 2 ex4-1.htm
General
Description of Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended
Exhibit 4.1
Our authorized capital stock consists of 200,000,000 shares of common stock, $0.02 par value per share, 62,086,099 of which were issued and outstanding as
of March 20, 2020.
The following description of our common stock summarizes the material terms and provisions of the common stock that we may offer under this prospectus but
is not complete. For the complete terms of our common stock, please refer to our certificate of incorporation, as amended, (the “Certificate of Incorporation”)
which may be further amended from time to time, and our fifth amended and restated by-laws, as further amended from time to time (the “By-laws”). The New
York Business Corporation Law (“NYBCL”) may also affect the terms of these securities.
Holders of our common stock: (i) have equal rights to dividends from funds legally available therefore, ratably when as and if declared by the Company’s board of
directors; (ii) are entitled to share ratably in all assets of the Company available for distribution to holders of common stock upon liquidation, dissolution, or
winding up of the affairs of the Company; (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions
applicable thereto; (iv) are entitled to one non-cumulative vote per share of common stock, on all matters which stockholders may vote on at all meetings of
stockholders; and (v) the holders of common stock have no conversion, preemptive or other subscription rights. There is no cumulative voting for the election of
directors. Each holder of our common stock is entitled to one vote for each share of our common stock held on all matters submitted to a vote of stockholders.
Anti-Takeover Effects of Certain Provisions of our Certificate of Incorporation, By-laws and the NYBCL
Section 912 of the NYBCL generally provides that a New York corporation may not engage in a business combination with an interested stockholder for a period
of five years following the interested stockholder’s becoming such. Such a business combination would be permitted where it is approved by the board of
directors before the interested stockholder’s becoming such. Covered business combinations include certain mergers and consolidations, dispositions of assets
or stock, plans for liquidation or dissolution, reclassifications of securities, recapitalizations and similar transactions. An interested stockholder is generally a
stockholder owning at least 20% of a corporation’s outstanding voting stock. In addition, New York corporations may not engage at any time with any interested
stockholder in a business combination other than: (i) a business combination approved by the board of directors before the stock acquisition, or where the
acquisition of the stock had been approved by the board of directors before the stock acquisition; (ii) a business combination approved by the affirmative vote of
the holders of a majority of the outstanding voting stock not beneficially owned by the interested stockholder at a meeting called for that purpose no earlier than
five years after the stock acquisition; or (iii) a business combination in which the interested stockholder pays a formula price designed to ensure that all other
stockholders receive at least the highest price per share that is paid by the interested stockholder and that meets certain other requirements.
A corporation may opt out of the interested stockholder provisions described in the preceding paragraph by expressly electing not to be governed by such
provisions in its by-laws, which must be approved by the affirmative vote of a majority of votes of the outstanding voting stock of such corporation and is subject
to further conditions. However, our By-laws do not contain any provisions electing not to be governed by Section 912 NYBCL. Under our By-laws, any corporate
action to be taken by vote of the shareholders, shall be authorized by a majority of votes cast at a meeting of shareholders by the holders of shares entitled to
vote thereon.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is American Stock Transfer and Trust Company, LLC, 6201 15th Ave., Brooklyn, NY 11219, USA, +1-
800-937-5449 or +1-718-921-8124.
Listing
Our Common Stock is listed on the New York Stock Exchange under the ticker symbols “DSS.”
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-10.24 3 ex10-24.htm
APPENDIX A
1. DEFINITIONS.
DOCUMENT SECURITY SYSTEMS, INC.
2020 EMPLOYEE, DIRECTOR AND CONSULTANT EQUITY INCENTIVE PLAN
Exhibit 10.24
Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this Document Security Systems, Inc. 2020 Employee,
Director and Consultant Equity Incentive Plan, have the following meanings:
Administrator means the Board of Directors, unless it has delegated power to act on its behalf to the Committee, in which case the Administrator means the
Committee.
Affiliate means a corporation which, for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, direct or indirect.
Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan and pertaining to a Stock Right, in such form as the
Administrator shall approve.
Board of Directors means the Board of Directors of the Company.
Cause means, with respect to a Participant (a) dishonesty with respect to the Company or any Affiliate, (b) insubordination, substantial malfeasance or non-
feasance of duty, (c) unauthorized disclosure of confidential information, (d) breach by a Participant of any provision of any employment, consulting, advisory,
nondisclosure, non-competition or similar agreement between the Participant and the Company or any Affiliate, and (e) conduct substantially prejudicial to the
business of the Company or any Affiliate; provided, however, that any provision in an agreement between a Participant and the Company or an Affiliate, which
contains a conflicting definition of Cause for termination and which is in effect at the time of such termination, shall supersede this definition with respect to that
Participant. The determination of the Administrator as to the existence of Cause will be conclusive on the Participant and the Company.
Code means the United States Internal Revenue Code of 1986, as amended including any successor statute, regulation and guidance thereto.
Committee means the committee of the Board of Directors to which the Board of Directors has delegated power to act under or pursuant to the provisions of the
Plan.
Common Stock means shares of the Company’s common stock, $0.02 par value per share.
Company means Document Security Systems, Inc., a New York corporation.
Consultant means any natural person who is an advisor or consultant that provides bona fide services to the Company or its Affiliates, provided that such
services are not in connection with the offer or sale of securities in a capital raising transaction, and do not directly or indirectly promote or maintain a market for
the Company’s or its Affiliates’ securities.
Disability or Disabled means permanent and total disability as defined in Section 22(e)(3) of the Code.
Employee means any employee of the Company or of an Affiliate (including, without limitation, an employee who is also serving as an officer or director of the
Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Stock Rights under the Plan.
Exchange Act means the Securities Exchange Act of 1934, as amended.
Fair Market Value of a Share of Common Stock means:
(1) If the Common Stock is listed on a national securities exchange or traded in the over-the-counter market and sales prices are regularly reported for the
Common Stock, the closing or, if not applicable, the last price of the Common Stock on the composite tape or other comparable reporting system for the trading
day on the applicable date and if such applicable date is not a trading day, the last market trading day prior to such date;
(2) If the Common Stock is not traded on a national securities exchange but is traded on the over-the-counter market, if sales prices are not regularly
reported for the Common Stock for the trading day referred to in clause (1), and if bid and asked prices for the Common Stock are regularly reported, the mean
between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market for the trading day on which Common Stock
was traded on the applicable date and if such applicable date is not a trading day, the last market trading day prior to such date; and
(3) If the Common Stock is neither listed on a national securities exchange nor traded in the over-the-counter market, such value as the Administrator, in
good faith, shall determine.
ISO means an option intended to qualify as an incentive stock option under Section 422 of the Code.
Non-Qualified Option means an option which is not intended to qualify as an ISO.
Option means an ISO or Non-Qualified Option granted under the Plan.
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Participant means an Employee, officer, director, Consultant or advisor of the Company or an Affiliate to whom one or more Stock Rights are granted under the
Plan. As used herein, “Participant” shall include “Participant’s Survivors” where the context requires.
Plan means this Document Security Systems, Inc. 2019 Employee, Director and Consultant Equity Incentive Plan.
Securities Act means the Securities Act of 1933, as amended.
Shares means shares of the Common Stock as to which Stock Rights have been or may be granted under the Plan or any shares of capital stock into which the
Shares are changed or for which they are exchanged within the provisions of Paragraph 3 of the Plan. The Shares issued under the Plan may be authorized and
unissued shares or shares held by the Company in its treasury, or both.
Stock-Based Award means a grant by the Company under the Plan of an equity award or an equity based award which is not an Option or a Stock Grant.
Stock Grant means a grant by the Company of Shares under the Plan.
Stock Right means a right to Shares or the value of Shares of the Company granted pursuant to the Plan — an ISO, a Non-Qualified Option, a Stock Grant or a
Stock-Based Award.
Survivor means a deceased Participant’s legal representatives and/or any person or persons who acquired the Participant’s rights to a Stock Right by will or by
the laws of descent and distribution.
2. PURPOSES OF THE PLAN.
The Plan is intended to encourage ownership of Shares by Employees and directors of and certain Consultants to the Company and its Affiliates in order to
attract and retain such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the
success of the Company or of an Affiliate. The Plan provides for the granting of ISOs, Non-Qualified Options, Stock Grants and Stock-Based Awards.
3. SHARES SUBJECT TO THE PLAN.
(a) The number of Shares which may be issued from time to time pursuant to this Plan shall be twenty percent (20%) of the total issued and outstanding
shares of Common Stock as of December 31, 2019, or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the
effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with Paragraph 24 of the Plan.
In addition, on the first day of each calendar year, for a period of not more than ten (10) years, commencing January 1, 2021, or the first business day of the
calendar year if the first day of the calendar year falls on a Saturday or Sunday, the Shares available under this Plan will automatically increase in an amount
equal to the lesser of (i) five percent (5%) of the total number of shares of Common Stock outstanding as of December 31 of the preceding fiscal year or (ii) such
number of shares of Common Stock as determined by the Board of Directors.
(b) If an Option ceases to be “outstanding”, in whole or in part (other than by exercise), or if the Company shall reacquire (at not more than its original
issuance price) any Shares issued pursuant to a Stock Grant or Stock-Based Award, or if any Stock Right expires or is forfeited, cancelled, or otherwise
terminated or results in any Shares not being issued, the unissued or reacquired Shares which were subject to such Stock Right shall again be available for
issuance from time to time pursuant to this Plan. Notwithstanding the foregoing, if a Stock Right is exercised, in whole or in part, by tender of Shares or if the
Company’s or an Affiliate’s tax withholding obligation is satisfied by withholding Shares, the number of Shares deemed to have been issued under the Plan for
purposes of the limitation set forth in Paragraph 3(a) above shall be the number of Shares that were subject to the Stock Right or portion thereof, and not the net
number of Shares actually issued. However, in the case of ISOs, the foregoing provisions shall be subject to any limitations under the Code.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. ADMINISTRATION OF THE PLAN.
The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to the Committee, in which
case the Committee shall be the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to:
(a) Interpret the provisions of the Plan and all Stock Rights and to make all rules and determinations which it deems necessary or advisable for the
administration of the Plan;
(b) Determine which Employees, directors and Consultants shall be granted Stock Rights;
(c) Determine the number of Shares for which a Stock Right or Stock Rights shall be granted, provided, however, that in no event shall Stock Rights with
respect to more than 20% of the total Shares available under this Plan in any fiscal year be granted to any Participant in such fiscal year;
(d) Specify the terms and conditions upon which a Stock Right or Stock Rights may be granted;
(e) Amend any term or condition of any outstanding Stock Right, including, without limitation, to accelerate the vesting schedule or extend the expiration date,
provided that (i) such term or condition as amended is permitted by the Plan; (ii) any such amendment shall not impair the rights of a Participant under any Stock
Right previously granted without such Participant’s consent or in the event of death of the Participant the Participant’s Survivors; and (iii) any such amendment
shall be made only after the Administrator determines whether such amendment would cause any adverse tax consequences to the Participant, including, but
not limited to, the annual vesting limitation contained in Section 422(d) of the Code and described in Paragraph 6(b)(iv) below with respect to ISOs and pursuant
to Section 409A of the Code; and
(f) Adopt any appendices applicable to residents of any specified jurisdiction as it deems necessary or appropriate in order to comply with or take advantage
of any tax or other laws applicable to the Company, any Affiliate or to Participants or to otherwise facilitate the administration of the Plan, which appendices may
include additional restrictions or conditions applicable to Stock Rights or Shares issuable pursuant to a Stock Right; provided, however, that all such
interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of not causing any adverse tax consequences under
Section 409A of the Code and preserving the tax status under Section 422 of the Code of those Options which are designated as ISOs. Subject to the foregoing,
the interpretation and construction by the Administrator of any provisions of the Plan or of any Stock Right granted under it shall be final, unless otherwise
determined by the Board of Directors, if the Administrator is the Committee. In addition, if the Administrator is the Committee, the Board of Directors may take
any action under the Plan that would otherwise be the responsibility of the Committee.
To the extent permitted under applicable law, the Board of Directors or the Committee may allocate all or any portion of its responsibilities and powers to any
one or more of its members and may delegate all or any portion of its responsibilities and powers to any other person selected by it. The Board of Directors or
the Committee may revoke any such allocation or delegation at any time. Notwithstanding the foregoing, only the Board of Directors or the Committee shall be
authorized to grant a Stock Right to any director of the Company or to any “officer” of the Company as defined by Rule 16a-1 under the Exchange Act.
5. ELIGIBILITY FOR PARTICIPATION.
The Administrator will, in its sole discretion, name the Participants in the Plan; provided, however, that each Participant must be an Employee, director or
Consultant of the Company or of an Affiliate at the time a Stock Right is granted. Notwithstanding the foregoing, the Administrator may authorize the grant of a
Stock Right to a person not then an Employee, director or Consultant of the Company or of an Affiliate; provided, however, that the actual grant of such Stock
Right shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Agreement evidencing such
Stock Right. ISOs may be granted only to Employees who are deemed to be residents of the United States for tax purposes. Non-Qualified Options, Stock
Grants and Stock-Based Awards may be granted to any Employee, director or Consultant of the Company or an Affiliate. The granting of any Stock Right to any
individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Stock Rights or any grant under any other
benefit plan established by the Company or any Affiliate for Employees, directors or Consultants.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
6. TERMS AND CONDITIONS OF OPTIONS.
Each Option shall be set forth in writing in an Option Agreement, duly executed by the Company and, to the extent required by law or requested by the
Company, by the Participant. The Administrator may provide that Options be granted subject to such terms and conditions, consistent with the terms and
conditions specifically required under this Plan, as the Administrator may deem appropriate including, without limitation, subsequent approval by the
shareholders of the Company of this Plan or any amendments thereto. The Option Agreements shall be subject to at least the following terms and conditions:
( a ) Non-Qualified Options: Each Option intended to be a Non-Qualified Option shall be subject to the terms and conditions which the Administrator
determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option:
(i) Exercise Price: Each Option Agreement shall state the exercise price (per share) of the Shares covered by each Option, which exercise price shall be
determined by the Administrator and shall be at least equal to the Fair Market Value per share of Common Stock on the date of grant of the Option provided, that
if the exercise price is less than Fair Market Value, the terms of such Option must comply with the requirements of Section 409A of the Code unless granted to a
Consultant to whom Section 409A of the Code does not apply.
(ii) Number of Shares : Each Option Agreement shall state the number of Shares to which it pertains.
(iii) Option Periods: Each Option Agreement shall state the date or dates on which it first is exercisable and the date after which it may no longer be
exercised, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the occurrence of
certain conditions or the attainment of stated goals or events.
(iv) Option Conditions: Exercise of any Option may be conditioned upon the Participant’s execution of a Share purchase agreement in form satisfactory to the
Administrator providing for certain protections for the Company and its other shareholders, including requirements that:
A. The Participant’s or the Participant’s Survivors’ right to sell or transfer the Shares may be restricted; and
B. The Participant or the Participant’s Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear
legends noting any applicable restrictions.
(v) Term of Option: Each Option shall terminate not more than ten years from the date of the grant or at such earlier time as the Option Agreement may
provide.
(b) ISOs: Each Option intended to be an ISO shall be issued only to an Employee who is deemed to be a resident of the United States for tax purposes, and
shall be subject to the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in
conflict with Section 422 of the Code and relevant regulations and rulings of the Internal Revenue Service:
(i) Minimum standards: The ISO shall meet the minimum standards required of Non-Qualified Options, as described in Paragraph 6(a) above, except clause
(i) and (v) thereunder.
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(ii) Exercise Price: Immediately before the ISO is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of
the Code:
A. 10% or less of the total combined voting power of all classes of stock of the Company or an Affiliate, the exercise price per share of the Shares covered by
each ISO shall not be less than 100% of the Fair Market Value per share of the Common Stock on the date of grant of the Option; or
B. More than 10% of the total combined voting power of all classes of stock of the Company or an Affiliate, the exercise price per share of the Shares
covered by each ISO shall not be less than 110% of the Fair Market Value per share of the Common Stock on the date of grant of the Option.
(iii) Term of Option: For Participants who own:
A. 10% or less of the total combined voting power of all classes of stock of the Company or an Affiliate, each ISO shall terminate not more than ten years
from the date of the grant or at such earlier time as the Option Agreement may provide; or
B. More than 10% of the total combined voting power of all classes of stock of the Company or an Affiliate, each ISO shall terminate not more than five years
from the date of the grant or at such earlier time as the Option Agreement may provide.
(iv) Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of ISOs which may become exercisable in any calendar year (under this
or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined on the date each ISO is granted) of the stock with
respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed $100,000.
7. TERMS AND CONDITIONS OF STOCK GRANTS.
Each Stock Grant to a Participant shall state the principal terms in an Agreement duly executed by the Company and, to the extent required by law or
requested by the Company, by the Participant. The Agreement shall be in a form approved by the Administrator and shall contain terms and conditions which the
Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards:
(a) Each Agreement shall state the purchase price per share, if any, of the Shares covered by each Stock Grant, which purchase price shall be determined by
the Administrator but shall not be less than the minimum consideration required by the Delaware General Corporation Law, if any, on the date of the grant of the
Stock Grant;
(b) Each Agreement shall state the number of Shares to which the Stock Grant pertains; and
(c) Each Agreement shall include the terms of any right of the Company to restrict or reacquire the Shares subject to the Stock Grant, including the time and
events upon which such rights shall accrue and the purchase price therefor, if any.
8. TERMS AND CONDITIONS OF OTHER STOCK-BASED AWARDS.
The Administrator shall have the right to grant other Stock-Based Awards based upon the Common Stock having such terms and conditions as the
Administrator may determine, including, without limitation, the grant of Shares based upon certain conditions, the grant of securities convertible into Shares and
the grant of stock appreciation rights, phantom stock awards or stock units. The principal terms of each Stock-Based Award shall be set forth in an Agreement,
duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Agreement shall be in a form approved
by the Administrator and shall contain terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company.
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The Company intends that the Plan and any Stock-Based Awards granted hereunder be exempt from the application of Section 409A of the Code or meet
the requirements of paragraphs (2), (3) and (4) of subsection (a) of Section 409A of the Code, to the extent applicable, and be operated in accordance with
Section 409A so that any compensation deferred under any Stock-Based Award (and applicable investment earnings) shall not be included in income under
Section 409A of the Code. Any ambiguities in the Plan shall be construed to affect the intent as described in this Paragraph 8.
9. EXERCISE OF OPTIONS AND ISSUE OF SHARES.
An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company or its designee (in a form acceptable to the
Administrator, which may include electronic notice), together with provision for payment of the aggregate exercise price in accordance with this Paragraph for the
Shares as to which the Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such notice shall be
signed by the person exercising the Option (which signature may be provided electronically in a form acceptable to the Administrator), shall state the number of
Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the
exercise price for the Shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of
the Administrator, through delivery of shares of Common Stock held for at least six months (if required to avoid negative accounting treatment) having a Fair
Market Value equal as of the date of the exercise to the aggregate cash exercise price for the number of Shares as to which the Option is being exercised, or (c)
at the discretion of the Administrator, by having the Company retain from the Shares otherwise issuable upon exercise of the Option, a number of Shares having
a Fair Market Value equal as of the date of exercise to the aggregate exercise price for the number of Shares as to which the Option is being exercised, or (d) at
the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the
Administrator, or (e) at the discretion of the Administrator, by any combination of (a), (b), (c), and (d) above or (f) at the discretion of the Administrator, by
payment of such other lawful consideration as the Administrator may determine. Notwithstanding the foregoing, the Administrator shall accept only such
payment on exercise of an ISO as is permitted by Section 422 of the Code.
The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant’s Survivors,
as the case may be). In determining what constitutes “reasonably promptly,” it is expressly understood that the issuance and delivery of the Shares may be
delayed by the Company in order to comply with any law or regulation (including, without limitation, state securities or “blue sky” laws) which requires the
Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be fully paid, non-assessable Shares.
10. PAYMENT IN CONNECTION WITH THE ISSUANCE OF STOCK GRANTS AND STOCK-BASED AWARDS AND ISSUE OF SHARES.
Any Stock Grant or Stock-Based Award requiring payment of a purchase price for the Shares as to which such Stock Grant or Stock-Based Award is being
granted shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock
held for at least six months (if required to avoid negative accounting treatment) and having a Fair Market Value equal as of the date of payment to the purchase
price of the Stock Grant or Stock-Based Award, or (c) at the discretion of the Administrator, by any combination of (a) and (b) above; or (d) at the discretion of
the Administrator, by payment of such other lawful consideration as the Administrator may determine.
The Company shall when required by the applicable Agreement, reasonably promptly deliver the Shares as to which such Stock Grant or Stock-Based Award
was made to the Participant (or to the Participant’s Survivors, as the case may be), subject to any escrow provision set forth in the applicable Agreement. In
determining what constitutes “reasonably promptly,” it is expressly understood that the issuance and delivery of the Shares may be delayed by the Company in
order to comply with any law or regulation (including, without limitation, state securities or “blue sky” laws) which requires the Company to take any action with
respect to the Shares prior to their issuance.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
11. RIGHTS AS A SHAREHOLDER.
No Participant to whom a Stock Right has been granted shall have rights as a shareholder with respect to any Shares covered by such Stock Right except
after due exercise of an Option or issuance of Shares as set forth in any Agreement, tender of the aggregate exercise or purchase price, if any, for the Shares
being purchased and registration of the Shares in the Company’s share register in the name of the Participant.
12. ASSIGNABILITY AND TRANSFERABILITY OF STOCK RIGHTS.
By its terms, a Stock Right granted to a Participant shall not be transferable by the Participant other than (i) by will or by the laws of descent and distribution,
or (ii) as approved by the Administrator in its discretion and set forth in the applicable Agreement provided that no Stock Right may be transferred by a
Participant for value. Notwithstanding the foregoing, an ISO transferred except in compliance with clause (i) above shall no longer qualify as an ISO. The
designation of a beneficiary of a Stock Right by a Participant, with the prior approval of the Administrator and in such form as the Administrator shall prescribe,
shall not be deemed a transfer prohibited by this Paragraph. Except as provided above during the Participant’s lifetime a Stock Right shall only be exercisable by
or issued to such Participant (or his or her legal representative) and shall not be assigned, pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition
of any Stock Right or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon a Stock
Right, shall be null and void.
13. EFFECT ON OPTIONS OF TERMINATION OF SERVICE OTHER THAN FOR CAUSE OR DEATH OR DISABILITY.
Except as otherwise provided in a Participant’s Option Agreement, in the event of a termination of service (whether as an Employee, director or Consultant)
with the Company or an Affiliate before the Participant has exercised an Option, the following rules apply:
(a) A Participant who ceases to be an Employee, director or Consultant of the Company or of an Affiliate (for any reason other than termination for Cause,
Disability, or death for which events there are special rules in Paragraphs 14, 15, and 16, respectively), may exercise any Option granted to him or her to the
extent that the Option is exercisable on the date of such termination of service, but only within such term as the Administrator has designated in a Participant’s
Option Agreement.
(b) Except as provided in Subparagraph (c) below, or Paragraph 15 or 16, in no event may an Option intended to be an ISO, be exercised later than three
months after the Participant’s termination of employment.
(c) The provisions of this Paragraph, and not the provisions of Paragraph 15 or 16, shall apply to a Participant who subsequently becomes Disabled or dies
after the termination of employment, director status or consultancy; provided, however, in the case of a Participant’s Disability or death within three months after
the termination of employment, director status or consultancy, the Participant or the Participant’s Survivors may exercise the Option within one year after the
date of the Participant’s termination of service, but in no event after the date of expiration of the term of the Option.
(d) Notwithstanding anything herein to the contrary, if subsequent to a Participant’s termination of employment, termination of director status or termination of
consultancy, but prior to the exercise of an Option, the Administrator determines that, either prior or subsequent to the Participant’s termination, the Participant
engaged in conduct which would constitute Cause, then such Participant shall forthwith cease to have any right to exercise any Option.
(e) A Participant to whom an Option has been granted under the Plan who is absent from the Company or an Affiliate because of temporary disability (any
disability other than a Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such
absence, be deemed, by virtue of such absence alone, to have terminated such Participant’s employment, director status or consultancy with the Company or
with an Affiliate, except as the Administrator may otherwise expressly provide; provided, however, that, for ISOs, any leave of absence granted by the
Administrator of greater than ninety days, unless pursuant to a contract or statute that guarantees the right to reemployment, shall cause such ISO to become a
Non-Qualified Option on the 181st day following such leave of absence.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(f) Except as required by law or as set forth in a Participant’s Option Agreement, Options granted under the Plan shall not be affected by any change of a
Participant’s status within or among the Company and any Affiliates, so long as the Participant continues to be an Employee, director or Consultant of the
Company or any Affiliate.
14. EFFECT ON OPTIONS OF TERMINATION OF SERVICE FOR CAUSE.
Except as otherwise provided in a Participant’s Option Agreement, the following rules apply if the Participant’s service (whether as an Employee, director or
Consultant) with the Company or an Affiliate is terminated for Cause prior to the time that all his or her outstanding Options have been exercised:
(a) All outstanding and unexercised Options as of the time the Participant is notified his or her service is terminated for Cause will immediately be forfeited.
(b) Cause is not limited to events which have occurred prior to a Participant’s termination of service, nor is it necessary that the Administrator’s finding of
Cause occur prior to termination. If the Administrator determines, subsequent to a Participant’s termination of service but prior to the exercise of an Option, that
either prior or subsequent to the Participant’s termination the Participant engaged in conduct which would constitute Cause, then the right to exercise any Option
is forfeited.
15. EFFECT ON OPTIONS OF TERMINATION OF SERVICE FOR DISABILITY.
Except as otherwise provided in a Participant’s Option Agreement:
(a) A Participant who ceases to be an Employee, director or Consultant of the Company or of an Affiliate by reason of Disability may exercise any Option
granted to such Participant:
(i) To the extent that the Option has become exercisable but has not been exercised on the date of the Participant’s termination of service due to Disability;
and
(ii) In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion through the date of the Participant’s termination of service
due to Disability of any additional vesting rights that would have accrued on the next vesting date had the Participant not become Disabled. The proration shall be
based upon the number of days accrued in the current vesting period prior to the date of the Participant’s termination of service due to Disability.
(b) A Disabled Participant may exercise the Option only within the period ending one year after the date of the Participant’s termination of service due to
Disability, notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if the Participant had
not been terminated due to Disability and had continued to be an Employee, director or Consultant or, if earlier, within the originally prescribed term of the Option.
(c) The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the
Company.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
16. EFFECT ON OPTIONS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
Except as otherwise provided in a Participant’s Option Agreement:
(a) In the event of the death of a Participant while the Participant is an Employee, director or Consultant of the Company or of an Affiliate, such Option may
be exercised by the Participant’s Survivors:
(i) To the extent that the Option has become exercisable but has not been exercised on the date of death; and
(ii) In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion through the date of death of any additional vesting rights
that would have accrued on the next vesting date had the Participant not died. The proration shall be based upon the number of days accrued in the current
vesting period prior to the Participant’s date of death.
(b) If the Participant’s Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one year after the date of death
of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she
had not died and had continued to be an Employee, director or Consultant or, if earlier, within the originally prescribed term of the Option.
17. EFFECT OF TERMINATION OF SERVICE ON STOCK GRANTS AND STOCK-BASED AWARDS.
In the event of a termination of service (whether as an Employee, director or Consultant) with the Company or an Affiliate for any reason before the
Participant has accepted a Stock Grant or a Stock-Based Award and paid the purchase price, if required, such grant shall terminate.
For purposes of this Paragraph 17 and Paragraph 18 below, a Participant to whom a Stock Grant has been issued under the Plan who is absent from work
with the Company or with an Affiliate because of temporary disability (any disability other than a Disability as defined in Paragraph 1 hereof), or who is on leave
of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant’s
employment, director status or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide.
In addition, for purposes of this Paragraph 17 and Paragraph 18 below, any change of employment or other service within or among the Company and any
Affiliates shall not be treated as a termination of employment, director status or consultancy so long as the Participant continues to be an Employee, director or
Consultant of the Company or any Affiliate.
18. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE OTHER THAN FOR CAUSE OR DEATH OR DISABILITY.
Except as otherwise provided in a Participant’s Stock Grant Agreement, in the event of a termination of service (whether as an Employee, director or
Consultant), other than termination for Cause, Disability, or death for which events there are special rules in Paragraphs 19, 20, and 21, respectively, before all
forfeiture provisions or Company rights of repurchase shall have lapsed, then the Company shall have the right to cancel or repurchase that number of Shares
subject to a Stock Grant as to which the Company’s forfeiture or repurchase rights have not lapsed.
19. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE FOR CAUSE.
Except as otherwise provided in a Participant’s Stock Grant Agreement, the following rules apply if the Participant’s service (whether as an Employee,
director or Consultant) with the Company or an Affiliate is terminated for Cause:
(a) All Shares subject to any Stock Grant whether or not then subject to forfeiture or repurchase shall be immediately subject to repurchase by the Company
at par value.
(b) Cause is not limited to events which have occurred prior to a Participant’s termination of service, nor is it necessary that the Administrator’s finding of
Cause occur prior to termination. If the Administrator determines, subsequent to a Participant’s termination of service, that either prior or subsequent to the
Participant’s termination the Participant engaged in conduct which would constitute Cause, then all Shares subject to any Stock Grant that remained subject to
forfeiture provisions or as to which the Company had a repurchase right on the date of termination shall be immediately forfeited to the Company.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
20. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE FOR DISABILITY.
Except as otherwise provided in a Participant’s Stock Grant Agreement, the following rules apply if a Participant ceases to be an Employee, director or
Consultant of the Company or of an Affiliate by reason of Disability: to the extent the forfeiture provisions or the Company’s rights of repurchase have not lapsed
on the date of Disability, they shall be exercisable; provided, however, that in the event such forfeiture provisions or rights of repurchase lapse periodically, such
provisions or rights shall lapse to the extent of a pro rata portion of the Shares subject to such Stock Grant through the date of Disability as would have lapsed
had the Participant not become Disabled. The proration shall be based upon the number of days accrued prior to the date of Disability.
The Administrator shall make the determination both as to whether Disability has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the
Company.
21. EFFECT ON STOCK GRANTS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
Except as otherwise provided in a Participant’s Stock Grant Agreement, the following rules apply in the event of the death of a Participant while the
Participant is an Employee, director or Consultant of the Company or of an Affiliate: to the extent the forfeiture provisions or the Company’s rights of repurchase
have not lapsed on the date of death, they shall be exercisable; provided, however, that in the event such forfeiture provisions or rights of repurchase lapse
periodically, such provisions or rights shall lapse to the extent of a pro rata portion of the Shares subject to such Stock Grant through the date of death as would
have lapsed had the Participant not died. The proration shall be based upon the number of days accrued prior to the Participant’s date of death.
22. PURCHASE FOR INVESTMENT.
Unless the offering and sale of the Shares shall have been effectively registered under the Securities Act, the Company shall be under no obligation to issue
Shares under the Plan unless and until the following conditions have been fulfilled:
(a) The person who receives a Stock Right shall warrant to the Company, prior to the receipt of Shares, that such person is acquiring such Shares for his or
her own account, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person acquiring
such Shares shall be bound by the provisions of the following legend (or a legend in substantially similar form) which shall be endorsed upon the certificate
evidencing the Shares issued pursuant to such exercise or such grant:
“The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee,
unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company
shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is then available, and (2) there shall have been
compliance with all applicable state securities laws.”
(b) At the discretion of the Administrator, the Company shall have received an opinion of its counsel that the Shares may be issued in compliance with the
Securities Act without registration thereunder.
23. DISSOLUTION OR LIQUIDATION OF THE COMPANY.
Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised and all Stock
Grants and Stock-Based Awards which have not been accepted, to the extent required under the applicable Agreement, will terminate and become null and void;
provided, however, that if the rights of a Participant or a Participant’s Survivors have not otherwise terminated and expired, the Participant or the Participant’s
Survivors will have the right immediately prior to such dissolution or liquidation to exercise or accept any Stock Right to the extent that the Stock Right is
exercisable or subject to acceptance as of the date immediately prior to such dissolution or liquidation. Upon the dissolution or liquidation of the Company, any
outstanding Stock-Based Awards shall immediately terminate unless otherwise determined by the Administrator or specifically provided in the applicable
Agreement.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
24. ADJUSTMENTS.
Upon the occurrence of any of the following events, a Participant’s rights with respect to any Stock Right granted to him or her hereunder shall be adjusted as
hereinafter provided, unless otherwise specifically provided in a Participant’s Agreement:
(a) Stock Dividends and Stock Splits . If (i) the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, or (ii) additional shares or new or different shares or
other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock, each Stock Right and the number of
shares of Common Stock deliverable thereunder shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made
including, in the exercise or purchase price per share, to reflect such events. The number of Shares subject to the limitations in Paragraph 3(a) and 4(c) shall
also be proportionately adjusted upon the occurrence of such events.
(b) Corporate Transactions. If the Company is to be consolidated with or acquired by another entity in a merger, consolidation, or sale of all or substantially
all of the Company’s assets other than a transaction to merely change the state of incorporation (a “Corporate Transaction”), the Administrator or the board of
directors of any entity assuming the obligations of the Company hereunder (the “Successor Board”), shall, as to outstanding Options, either (i) make appropriate
provision for the continuation of such Options by substituting on an equitable basis for the Shares then subject to such Options either the consideration payable
with respect to the outstanding shares of Common Stock in connection with the Corporate Transaction or securities of any successor or acquiring entity; or (ii)
upon written notice to the Participants, provide that such Options must be exercised (either (A) to the extent then exercisable or, (B) at the discretion of the
Administrator, any such Options being made partially or fully exercisable for purposes of this Subparagraph), within a specified number of days of the date of
such notice, at the end of which period such Options which have not been exercised shall terminate whether or not vested; or (iii) terminate such Options in
exchange for payment of an amount equal to the consideration payable upon consummation of such Corporate Transaction to a holder of the number of shares
of Common Stock into which such Option would have been exercisable (either (A) to the extent then exercisable or, (B) at the discretion of the Administrator, any
such Options being made partially or fully exercisable for purposes of this Subparagraph) less the aggregate exercise price thereof. For purposes of determining
the payments to be made pursuant to Subclause (iii) above, in the case of a Corporate Transaction the consideration for which, in whole or in part, is other than
cash, the consideration other than cash shall be valued at the fair value thereof as determined in good faith by the Board of Directors.
With respect to outstanding Stock Grants, the Administrator or the Successor Board, shall make appropriate provision for the continuation of such Stock
Grants on the same terms and conditions by substituting on an equitable basis for the Shares then subject to such Stock Grants either the consideration payable
with respect to the outstanding Shares of Common Stock in connection with the Corporate Transaction or securities of any successor or acquiring entity. In lieu
of the foregoing, in connection with any Corporate Transaction, the Administrator may provide that, upon consummation of the Corporate Transaction, each
outstanding Stock Grant shall be terminated in exchange for payment of an amount equal to the consideration payable upon consummation of such Corporate
Transaction to a holder of the number of shares of Common Stock comprising such Stock Grant (to the extent such Stock Grant is no longer subject to any
forfeiture or repurchase rights then in effect or, at the discretion of the Administrator, all forfeiture and repurchase rights being waived upon such Corporate
Transaction).
In taking any of the actions permitted under this Paragraph 24(b), the Administrator shall not be obligated by the Plan to treat all Stock Rights, all Stock
Rights held by a Participant, or all Stock Rights of the same type, identically.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c) Recapitalization or Reorganization. In the event of a recapitalization or reorganization of the Company other than a Corporate Transaction pursuant to
which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, a Participant upon exercising an
Option or accepting a Stock Grant after the recapitalization or reorganization shall be entitled to receive for the price paid upon such exercise or acceptance if
any, the number of replacement securities which would have been received if such Option had been exercised or Stock Grant accepted prior to such
recapitalization or reorganization.
(d) Adjustments to Stock-Based Awards. Upon the happening of any of the events described in Subparagraphs (a), (b) or (c) above, any outstanding Stock-
Based Award shall be appropriately adjusted to reflect the events described in such Subparagraphs. The Administrator or the Successor Board shall determine
the specific adjustments to be made under this Paragraph 24, including, but not limited to the effect of any, Corporate Transaction and, subject to Paragraph 4,
its determination shall be conclusive.
(e) Modification of Options. Notwithstanding the foregoing, any adjustments made pursuant to Subparagraph (a), (b) or (c) above with respect to Options
shall be made only after the Administrator determines whether such adjustments would (i) constitute a “modification” of any ISOs (as that term is defined in
Section 424(h) of the Code) or (ii) cause any adverse tax consequences for the holders of Options, including, but not limited to, pursuant to Section 409A of the
Code. If the Administrator determines that such adjustments made with respect to Options would constitute a modification or other adverse tax consequence, it
may refrain from making such adjustments, unless the holder of an Option specifically agrees in writing that such adjustment be made and such writing indicates
that the holder has full knowledge of the consequences of such “modification” on his or her income tax treatment with respect to the Option. This paragraph
shall not apply to the acceleration of the vesting of any ISO that would cause any portion of the ISO to violate the annual vesting limitation contained in Section
422(d) of the Code, as described in Paragraph 6(b)(iv).
25. ISSUANCES OF SECURITIES.
Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Stock Rights. Except as expressly
provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company prior to any
issuance of Shares pursuant to a Stock Right.
26. FRACTIONAL SHARES.
No fractional shares shall be issued under the Plan and the person exercising a Stock Right shall receive from the Company cash in lieu of such fractional
shares equal to the Fair Market Value thereof.
27. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs.
The Administrator, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant’s ISOs
(or any portions thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs,
regardless of whether the Participant is an Employee of the Company or an Affiliate at the time of such conversion. At the time of such conversion, the
Administrator (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Administrator in its
discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Participant the
right to have such Participant’s ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes
appropriate action. The Administrator, with the consent of the Participant, may also terminate any portion of any ISO that has not been exercised at the time of
such conversion.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
28. WITHHOLDING.
In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act (“F.I.C.A.”) withholdings or other amounts
are required by applicable law or governmental regulation to be withheld from the Participant’s salary, wages or other remuneration in connection with the
issuance of a Stock Right or Shares under the Plan or for any other reason required by law, the Company may withhold from the Participant’s compensation, if
any, or may require that the Participant advance in cash to the Company, or to any Affiliate of the Company which employs or employed the Participant, the
statutory minimum amount of such withholdings unless a different withholding arrangement, including the use of shares of the Company’s Common Stock or a
promissory note, is authorized by the Administrator (and permitted by law). For purposes hereof, the fair market value of the shares withheld for purposes of
payroll withholding shall be determined in the manner set forth under the definition of Fair Market Value provided in Paragraph 1 above, as of the most recent
practicable date prior to the date of exercise. If the Fair Market Value of the shares withheld is less than the amount of payroll withholdings required, the
Participant may be required to advance the difference in cash to the Company or the Affiliate employer. The Administrator in its discretion may condition the
exercise of an Option for less than the then Fair Market Value on the Participant’s payment of such additional withholding.
29. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
Each Employee who receives an ISO must agree to notify the Company in writing immediately after the Employee makes a Disqualifying Disposition of any
Shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is defined in Section 424(c) of the Code and includes any disposition (including
any sale or gift) of such Shares before the later of (a) two years after the date the Employee was granted the ISO, or (b) one year after the date the Employee
acquired Shares by exercising the ISO, except as otherwise provided in Section 424(c) of the Code. If the Employee has died before such Shares are sold, these
holding period requirements do not apply and no Disqualifying Disposition can occur thereafter.
30. TERMINATION OF THE PLAN.
The Plan will terminate on January 1, 2030, the date which is ten years from the earlier of the date of its adoption by the Board of Directors and the date of its
approval by the shareholders of the Company. The Plan may be terminated at an earlier date by vote of the shareholders or the Board of Directors of the
Company; provided, however, that any such earlier termination shall not affect any Agreements executed prior to the effective date of such termination.
Termination of the Plan shall not affect any Stock Rights theretofore granted.
31. AMENDMENT OF THE PLAN AND AGREEMENTS.
The Plan may be amended by the shareholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the
extent necessary to qualify any or all outstanding Stock Rights granted under the Plan or Stock Rights to be granted under the Plan for favorable federal income
tax treatment as may be afforded incentive stock options under Section 422 of the Code (including deferral of taxation upon exercise), and to the extent
necessary to qualify the Shares issuable under the Plan for listing on any national securities exchange or quotation in any national automated quotation system
of securities dealers. In addition, if NYSE Amex amends its corporate governance rules so that such rules no longer require stockholder approval of “material
amendments” of equity compensation plans, then, from and after the effective date of such an amendment to such rules, no amendment of the Plan which (i)
materially increases the number of shares to be issued under the Plan (other than to reflect a reorganization, stock split, merger, spin-off or similar transaction);
(ii) materially increases the benefits to Participants, including any material change to: (a) permit a repricing (or decrease in exercise price) of outstanding
Options, (b) reduce the price at which Shares or Options may be offered, or (c) extend the duration of the Plan; (iii) materially expands the class of Participants
eligible to participate in the Plan; or (iv) expands the types of awards provided under the Plan shall become effective unless stockholder approval is obtained.
Any amendment approved by the Administrator which the Administrator determines is of a scope that requires shareholder approval shall be subject to obtaining
such shareholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect his or her rights under a
Stock Right previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Agreements in a manner
which may be adverse to the Participant but which is not inconsistent with the Plan. In the discretion of the Administrator, outstanding Agreements may be
amended by the Administrator in a manner which is not adverse to the Participant.
32. EMPLOYMENT OR OTHER RELATIONSHIP.
Nothing in this Plan or any Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director
status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to
be retained in employment or other service by the Company or any Affiliate for any period of time.
33. GOVERNING LAW.
This Plan shall be construed and enforced in accordance with the law of the State of New York.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-10.29 4 ex10-29.htm
LEGALLY BINDING TERM SHEET ON SHARE EXCHANGE TRANSACTION AMONG
DSS SECURITY SYSTEMS INC., DSS BIOHEALTH SECURITY INC., GLOBAL BIOMEDICAL PTE LTD AND IMPACT BIOMEDICAL INC.
This term sheet sets out the legally binding terms for transactions among the Parties as defined hereunder (“Term Sheet”).
Exhibit 10.29
PRIVATE & CONFIDENTIAL
PARTIES
TRANSACTION OVERVIEW
1) Document Security Systems, Inc., a New York corporation, having its office
at 200 Canal View Blvd, Suite 300, Rochester, NY 14623. (hereinafter
referred to as “DSS”)
2) DSS BioHealth Security Inc., a Delaware corporation, having its office at 200
Canal View Blvd, Suite 300, Rochester, NY 14623. (hereinafter referred to as
“DBHS”)
3)
Global BioMedical Pte Ltd, a Singapore corporation, company no.
201707501G having its office at 7 Temasek Boulevard #29-01B, Suntec
Tower One, Singapore 038987. (hereinafter referred to as “GBM”)
4) Impact BioMedical Inc., a Nevada corporation, having its office at 4800
Montgomery Lane Suite 210 Bethesda, MD 20814. (hereinafter referred to as
“IMPACT”)
(DSS, DBHS and GBM, and IMPACT shall each be known as a “Party”, and
collectively the “Parties”.)
GBM
O w n s 100% of Impact Biomedical Inc. (“IMPACT”) Purchase Price: USD
50,000,000
Proposed Share Exchange Transaction (“Share Exchange”) Between DSS and
IMPACT
I n consideration of 100% of Impact, i.e. USD 50,000,000 (the “Consideration”,
DSS will issue a combination of shares and perpetual convertible bond (PCB) as
follows:
- USD 3,132,000
By way of issuing 14,500,000 shares at a price of USD 0.216 per share
to GBM
- Balance of USD 46,868,000
By way of PCB at 0% coupon rate per annum.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Perpetual Convertible Bond
- 0 % Coupon Rate
- Conversion rate is at USD 0.216 per share
- GBM has right to convert the balance amount in PCB into DSS shares in full
or partially, by giving 3 days written notice (at conversion rate of USD 0.216 in
PCB to 1 DSS share)
- DSS has right to require GBM to convert the balance amount in PCB into
DSS Shares in full or partially with 3 days written notice (at conversion rate of
USD 0.216 in PCB to 1 DSS Share)
The 100% of IMPACT will be held under DBHS after the Share Exchange.
It is agreed by Parties that GBM will not convert the PCB into DSS Shares to the
extent where at any one point in time, GBM owns more than 19.9% of DSS.
D S S will appoint Destum Partners (an independent third-party professional
valuation firm) to conduct an updated valuation report for IMPACT.
BLOCKER
VALUATION
The Parties agree that should the updated valuation report of IMPACT be higher
than
the
Consideration amount for IMPACT in the Share Exchange.
transaction value, GBM agrees to not
the agreed
increase
The Parties further agree that should the updated valuation report of IMPACT be
lower than the agreed transaction value, GBM agrees to lower the Consideration
amount for IMPACT accordingly and offer the same 87.16% discount given to
DSS for the Share Exchange.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
INITIAL PUBLIC OFFERING
It is the intention of IMPACT to pursue a public offering either on the New York
Stock Exchange (NYSE) or Nasdaq, after the Share Exchange transaction.
DIVIDEND OF IMPACT SHARES
U p o n the completion of the transaction, DBHS, which is a 100% owned
subsidiary of DSS, will own 100% of IMPACT.
It is the intention of DBHS, upon the completion of the Share Exchange, to offer
bonus of IMPACT shares to the shareholders of DSS (excluding the controlling
shareholders of DSS and the chairman’s group of companies). The proposed
bonus being, for every one (1) DSS share held, the shareholder will be entitled to
a bonus of two (2) shares of IMPACT as determined at the record date of the
filing. (“Bonus Shares”). (“Bonus Shares”)
RIGHT TO APPOINT THE BOARD OF DIRECTORS OF IMPACT
DSS shall have the right to appoint the board of IMPACT.
REPRESENTATION AND WARRANTIES
COUNTERPARTS
T h e Parties hereby represent and warrant that they have on behalf of their
respective companies, the full legal rights and capacities to enter into this Term
Sheet and to perform their respective obligations and that they are not in violation
of any laws or any courts.
The Parties acknowledge that there may be fluctuations in the Share Price of
DSS prior to the signing of this Term Sheet.
This Term Sheet and any amendments, if any, may be executed in counterparts
(including by facsimile), each of which shall be an original with the same effect as
if the signatures thereto and hereto were part of the same instrument and shall
become effective when one or more counterparts have been signed by each of
the Parties and delivered (by telecopy or otherwise) to the other Parties.
3│Page
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONFIDENTIALITY
BINDING EFFECT
DEFINITIVE AGREEMENT
COMPLETION
S a v e for any disclosure, filing or report made to any government agency,
regulatory body or exchange (including but not limited t o the NYSE and SGX-
ST), or disclosures made to accountants, advisors, legal counsel or consultants,
each Party shall keep strictly confidential the negotiations relating to this
transaction, the existence of this transaction and the contents of this Term Sheet
and shall not disclose the name to any other person with the prior written
consent of the other Parties.
This Term Sheet shall be legally binding and shall also be legally enforceable in
accordance with its terms in any court of competent jurisdiction.
The Parties, if mutually agreeable and as soon as practicable and in any event,
no later than three
( 3 ) months from date of signing of this Term Sheet, strive to obtain their
respective directors and shareholders’ approvals; and relevant stock exchanges
in which they are listed with, if required.
The Parties may elect not to enter into a Definitive Agreement, in which event,
the terms and conditions in this Term Sheet shall prevail and have full effects as
if a definitive agreement has been entered into.
Completion shall take place within three (3) months from the date of signing of
this Term Sheet and subject to both DSS and GBM having obtained approvals
from their respective shareholders and relevant stock exchanges in which they
are listed with, if required for the transactions contemplated herein.
COSTS AND EXPENSES
Each Party shall be responsible for its respective costs and expenses in relation
to the preparation of this Term Sheet and Definitive Agreement, if any.
GOVERNING LAW AND DISPUTE RESOLUTION
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York, without regard to such state’s choice of law
provisions which would require the application of the law of any other jurisdiction.
4│Page
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Dated:
March 12, 2020
We hereby accept the above terms and conditions.
SIGNED BY:
/s/ Frank Heuszel
Name: FRANK HEUSZEL
Title:
Chief Executive Officer
For and on behalf of DSS Securities Inc.
/s/ Frank Heuszel
Name: FRANK HEUSZEL
Title:
Chief Executive Officer
For and on behalf of DSS BioHealth Security Inc.
SIGNED BY:
/s/ Chan Heng Fai Ambrose
Name: CHAN HENG FAI AMBROSE
Title: Chief Executive Officer
For and on behalf of Global BioMedical Pte Ltd
/s/ Chan Heng Fai Ambrose
Name: CHAN HENG FAI AMBROSE
Title: Chief Executive Officer
For and on behalf of Impact Biomedical Inc.
5│Page
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-21.1 5 ex21-1.htm
Name
State of Incorporation
SUBSIDIARIES OF REGISTRANT
Exhibit 21.1
DSS Administrative Group, Inc.
Plastic Printing Professionals, Inc.
Secuprint Inc.
Premier Packaging Corporation
DSS Digital Inc.
DSS Technology Management, Inc.
DSS International Inc.
DSS Asia Limited
DSS Cyber Security Pte Ltd
DSS BioHealth Security, Inc.
Decentralized Sharing Systems, Inc.
DSS Blockchain Security, Inc.
DSS Securities, Inc.
HWH World, Inc.
RBC Life International Inc.
RBC Life World Inc.
(New York)
(New York)
(New York)
(New York)
(New York)
(Delaware)
(Nevada)
(Hong Kong)
(Singapore)
(Nevada)
(Nevada)
(Nevada)
(Nevada)
(Texas)
(Nevada)
(Nevada)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-23.1 6 ex23-1.htm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements of Document Security Systems, Inc.:
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
•
Registration Statement (Form S-8 No. 333-190870)
• Registration Statement (Form S-3 No. 333-230740)
• Registration Statement (Form S-8 No. 333-235745)
• Registration Statement (Form S-1 No. 333-236082)
of our report dated March 30, 2020, relating to the consolidated financial statements of Document Security Systems, Inc. and Subsidiaries, appearing in the
Annual Report on Form 10-K of Document Security Systems, Inc. for the year ended December 31, 2019.
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
March 30, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-31.1 7 ex31-1.htm
I, Frank D. Heuszel, certify that:
RULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 31.1
1. I have reviewed this annual report on Form 10-K of Document Security Systems, Inc. for the year ended December 31, 2019.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 30, 2020
/s/ Frank D. Heuszel
Frank D. Heuszel
Chief Executive Officer
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-31.2 8 ex31-2.htm
I, Frank D. Heuszel, certify that:
RULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 31.2
1. I have reviewed this annual report on Form 10-K of Document Security Systems, Inc. for the year ended December 31, 2019.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 30, 2020
/s/ Frank D. Heuszel
Frank D. Heuszel
Interim Chief Financial Officer
(Interim Principal Financial and Accounting Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-32.1 9 ex32-1.htm
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Document Security Systems, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frank D. Heuszel, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 30, 2020
/s/ Frank D. Heuszel
Frank D. Heuszel
Chief Executive Officer
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-32.2 10 ex32-2.htm
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Document Security Systems, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frank D. Heuszel, Interim Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 30, 2020
/s/ Frank D. Heuszel
Frank D. Heuszel
Interim Chief Financial Officer
(Interim Principal Financial and Accounting Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.