UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to_______ . 001-32146 Commission file number DOCUMENT SECURITY SYSTEMS, INC. (Exact name of registrant as specified in its charter) | --- | --- | |--------------- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 New York 16-1229730 (State or other jurisdiction of incorporation or organization) (I.R.S.Employer Identification No.) 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 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 SE ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________. 001-32146 Commission file number DOCUMENT SECURITY SYSTEMS, INC. (Exact name of registrant as specified in its charter) New York 16- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . 001-32146 Commission file number DOCUMENT SECURITY SYSTEMS, INC. (Exact name of registrant as specified in its charter) New York 16-1229730 (State or other Jurisdi ...

PART I [ITEM 1 BUSINESS](index=4&type=section&id=ITEM%201%20BUSINESS) DSS specializes in fraud and counterfeit protection through five operating segments, including technology management and international operations - DSS specializes in fraud and counterfeit protection for printed documents and digital information, utilizing optical deterrent technologies and patents[11](index=11&type=chunk)[21](index=21&type=chunk) - The company operates in five segments: DSS Packaging and Printing Group, DSS Plastics Group, DSS Digital Group, DSS International, and DSS Technology Management[15](index=15&type=chunk)[16](index=16&type=chunk)[17](index=17&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk) - DSS Technology Management's primary mission since 2013 has been patent monetization through commercial litigation, often partnering with third-party funding groups[25](index=25&type=chunk)[26](index=26&type=chunk) Research and Development Costs | Year | Amount ($) | |:-----|:-----------| | 2018 | 146,000 | | 2017 | 106,000 | - The company's primary anti-counterfeiting products and technologies are marketed under the AuthentiGuard® registered trademark, including a cloud-enabled iPhone application for brand authentication[24](index=24&type=chunk)[30](index=30&type=chunk)[31](index=31&type=chunk) Customer Concentration | Year | % of Consolidated Revenue (Two Customers) | % of Trade Accounts Receivable (Two Customers) | |:-----|:------------------------------------------|:-----------------------------------------------| | 2018 | 44% | 38% | | 2017 | 46% | 38% | [ITEM 1A RISK FACTORS](index=8&type=section&id=ITEM%201A%20RISK%20FACTORS) The company faces significant risks including going concern doubts, a history of losses, substantial debt, and uncertain litigation outcomes - **Substantial doubt exists about the company's ability to continue as a going concern** due to low cash balance and negative cash flow, requiring additional capital[49](index=49&type=chunk)[50](index=50&type=chunk)[51](index=51&type=chunk) - The company has a history of net losses, with **profitability in 2018 primarily due to a one-time gain** on extinguishment of liabilities[53](index=53&type=chunk) Outstanding Indebtedness as of December 31, 2018 | Debt Type | Amount ($) | |:----------------------------------------|:-----------| | Promissory note (packaging facility) | 869,865 | | Promissory note (production facility) | 315,000 | | Promissory note (HP Indigo 7800 press) | 149,542 | | Revolving line of credit (Plastics) | 684,554 | | Revolving line of credit (Premier Pkg) | 339,600 | | Zero-interest promissory note (DSS Asia)| 100,000 | - Patent monetization litigation is time-consuming, costly, and uncertain, with risks of patent invalidation or unfavorable outcomes, especially against larger defendants[66](index=66&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk)[70](index=70&type=chunk)[71](index=71&type=chunk)[72](index=72&type=chunk) - The company's operations in Asia are subject to unique risks, including tariffs, trade restrictions, changes in local regulations, and foreign currency fluctuations[102](index=102&type=chunk)[103](index=103&type=chunk) - **Material weaknesses in internal control over financial reporting were identified**, specifically regarding qualified accounting personnel and segregation of duties, which could lead to financial statement errors[111](index=111&type=chunk)[112](index=112&type=chunk) [ITEM 2 PROPERTIES](index=20&type=section&id=ITEM%202%20PROPERTIES) The company operates through a mix of owned and leased facilities in New York, California, and Hong Kong - Corporate and digital divisions lease 5,700 sq ft in Rochester, NY, until December 2020, at $6,100/month[143](index=143&type=chunk) - Plastics division leases 15,000 sq ft until January 2024, at $19,422/month[143](index=143&type=chunk) - DSS Asia division leases office space in Hong Kong until November 2020, at $3,382/month[143](index=143&type=chunk) - The company owns a 40,000 sq ft packaging and printing plant in Victor, NY[143](index=143&type=chunk) [ITEM 3 LEGAL PROCEEDINGS](index=21&type=section&id=ITEM%203%20LEGAL%20PROCEEDINGS) The company is actively engaged in patent infringement litigation, with several cases settled and others ongoing against major technology firms - DSSTM filed a patent infringement suit against Apple, Inc in November 2013, related to low power wireless peripheral devices; after IPRs and appeals, the Federal Circuit reversed PTAB's unpatentability finding in March 2018, and litigation resumed[145](index=145&type=chunk)[357](index=357&type=chunk) - DSSTM **settled patent infringement lawsuits against Intel, Dell, GameStop, Wal-Mart, and AT&T** in January 2019, leading to dismissals of the Federal Circuit appeal and District Court case[146](index=146&type=chunk)[358](index=358&type=chunk) - Semiconductor patent infringement lawsuits against SK Hynix, Samsung, and Qualcomm were **resolved through confidential settlement agreements** in late 2018 and early 2019, resulting in dismissals of all related District Court cases and Federal Circuit appeals[147](index=147&type=chunk)[360](index=360&type=chunk) - DSS filed LED patent infringement lawsuits against Seoul Semiconductor, Everlight, Cree, Osram, Lite-On, and Nichia in 2017; the Osram and Everlight cases settled, while cases against Seoul Semiconductor, Cree, Lite-On, and Nichia remain pending[149](index=149&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk)[361](index=361&type=chunk)[362](index=362&type=chunk)[363](index=363&type=chunk)[365](index=365&type=chunk)[366](index=366&type=chunk)[367](index=367&type=chunk) [ITEM 4 MINE SAFETY DISCLOSURES](index=22&type=section&id=ITEM%204%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company PART II [ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=24&type=section&id=ITEM%205%20MARKET%20FOR%20THE%20REGISTRANT'S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) The company's common stock trades on the NYSE American, with no dividends paid and no share repurchases in 2018 - DSS common stock trades on the NYSE American LLC Exchange under the symbol "DSS"[159](index=159&type=chunk) Common Stock and Equity Compensation as of March 1, 2019 / December 31, 2018 | Metric | Value (as of March 1, 2019) | Value (as of Dec 31, 2018) | |:--------------------------------------------------------------------|:----------------------------|:---------------------------| | Shares outstanding | 17,425,858 | 17,425,858 | | Record holders | 251 | N/A | | Securities to be issued upon exercise of outstanding options, warrants and rights | N/A | 907,655 | | Weighted average exercise price of outstanding options, warrants and rights | N/A | $5.88 | | Securities remaining available for future issuance | N/A | 262,511 | - In December 2018, the Company sold **612,245 shares of common stock** to an accredited investor for $0.98 per share, totaling **$600,000**[161](index=161&type=chunk)[331](index=331&type=chunk) - The company did not pay dividends in 2018 or 2017 and plans to retain earnings for business investment[118](index=118&type=chunk)[163](index=163&type=chunk) - No shares were purchased or repurchased by the registrant in the fiscal year ended December 31, 2018[165](index=165&type=chunk) [ITEM 6 SELECTED FINANCIAL DATA](index=25&type=section&id=ITEM%206%20SELECTED%20FINANCIAL%20DATA) This item is not applicable to the company [ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=ITEM%207%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Net income in 2018 was driven by a one-time gain, masking an operating loss and ongoing liquidity challenges requiring new capital [Overview](index=25&type=section&id=Overview) DSS specializes in anti-counterfeiting technologies and intellectual property monetization, with recent expansion into Asia - DSS specializes in fraud and counterfeit protection, operating production facilities and licensing anti-counterfeiting technologies[169](index=169&type=chunk) - The company's business includes a digital division for cloud computing services and DSS Technology Management for intellectual property monetization[169](index=169&type=chunk)[171](index=171&type=chunk) - International operations commenced in January 2018 with DSS Asia Limited in Hong Kong, acquiring Guangzhou Hotapps Technology Ltd in December 2018 to enhance business in China[173](index=173&type=chunk) - DSS operates in five segments: packaging and printing, plastics, digital, technology management (IP monetization), and international[174](index=174&type=chunk) [Results of Operations](index=26&type=section&id=RESULTS%20OF%20OPERATIONS%20FOR%20THE%20FISCAL%20YEARS%20ENDED%20DECEMBER%2031%2C%202018%20AND%202017) A 1% revenue decline and 7% expense increase led to an operating loss, though a significant one-time gain resulted in net income Revenue (Year Ended December 31) | Revenue Category | 2018 ($) | 2017 ($) | % Change | |:-------------------------------------|:------------|:------------|:---------| | Printed products | 16,940,000 | 17,026,000 | -1% | | Technology sales, services, licensing| 1,575,000 | 1,636,000 | -4% | | **Total Revenue** | **18,515,000**| **18,662,000**| **-1%** | - Printed products sales decreased 1% in 2018, with a 3% increase in printing and packaging offset by an **11% decrease in plastic card products**[175](index=175&type=chunk) - Technology sales, services, and licensing decreased 4% in 2018, due to lower licensing royalties and recurring IT services, despite a **$260,000 increase in digital authentication product sales**[175](index=175&type=chunk) Costs and Expenses (Year Ended December 31) | Cost Category | 2018 ($) | 2017 ($) | % Change | |:--------------------------------------------------|:------------|:------------|:---------| | Costs of goods sold (exclusive of D&A) | 11,853,000 | 11,009,000 | 8% | | Sales, general and administrative compensation | 3,615,000 | 3,758,000 | -4% | | Depreciation and amortization | 1,282,000 | 1,414,000 | -9% | | Professional fees | 1,073,000 | 613,000 | 75% | | Stock based compensation | 132,000 | 215,000 | -39% | | Sales and marketing | 559,000 | 401,000 | 39% | | Rent and utilities | 655,000 | 634,000 | 3% | | Other operating expenses | 909,000 | 738,000 | 23% | | Research and development | 146,000 | 106,000 | 38% | | **Total Costs and Expenses** | **20,224,000**| **18,888,000**| **7%** | - Cost of goods sold **increased 8%** due to higher paperboard costs and outside service costs in the packaging division[177](index=177&type=chunk) - Professional fees **increased 75%** due to higher legal fees for IP litigation and consulting costs for Asia Pacific market expansion[180](index=180&type=chunk) - Research and development costs **increased 38%** due to the development of proprietary blockchain solutions for the AuthentiGuard product line[185](index=185&type=chunk) Other Income and Expenses (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | % Change | |:------------------------------------------|:------------|:------------|:---------| | Interest income | 9,000 | 4,000 | 125% | | Interest expense | (145,000) | (223,000) | -35% | | Amortization of deferred financing costs | (47,000) | (154,000) | -69% | | Impairment of investment | (160,000) | - | 100% | | Gain on extinguishment of liabilities, net| 3,533,000 | - | 100% | | **Total Other Income and Expense** | **3,190,000**| **(373,000)**| **955%** | - A **net gain of $3.5 million from the extinguishment of liabilities** in June 2018 significantly impacted other income, reflecting the discharge of notes and write-off of underlying patents[189](index=189&type=chunk) - An **impairment of $160,000** was recognized on the investment in Singapore eDevelopment (SED) due to a decline in share price, influenced by the U.S.-China tariff dispute[188](index=188&type=chunk) Net Income (Loss) Per Share (Year Ended December 31) | Metric | 2018 | 2017 | % Change | |:-------------------------------------|:------------|:------------|:---------| | Net income (loss) | $1,465,000 | $(578,000) | 353% | | Basic income (loss) per common share | $0.09 | $(0.04) | 325% | | Diluted income (loss) per common share| $0.09 | $(0.04) | 325% | | Basic shares outstanding | 16,724,376 | 14,424,344 | 16% | | Diluted shares outstanding | 16,930,805 | 14,424,344 | 17% | - **Net income of $1.5 million in 2018** was primarily driven by the **$3.5 million gain on extinguishment of liabilities**, offsetting operating losses[191](index=191&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) Negative operating cash flows necessitate raising additional capital in 2019 to ensure going concern status Cash and Working Capital (as of December 31, 2018) | Metric | Amount ($) | |:-------------------|:-----------| | Cash | 2,400,000 | | Working Capital | 1,100,000 | - The company had **negative cash flows from operating and investing activities** for the past two years and expects continued negative operating cash flows in 2019, indicating a need for additional capital[197](index=197&type=chunk) - Management plans to **raise at least $2 million by the end of Q2 2019**, continue growth in operating segments, and expand the AuthentiGuard product line internationally to address going concern concerns[199](index=199&type=chunk) Net Cash Flows (Year Ended December 31) | Activity | 2018 ($) | 2017 ($) | |:---------------------|:--------------|:--------------| | Operating Activities | (1,382,921) | (1,289,134) | | Investing Activities | (1,103,551) | (970,371) | | Financing Activities | 489,829 | 654,786 | [Off-Balance Sheet Arrangements](index=30&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has no off-balance sheet arrangements that could materially affect its financial condition - The company has no off-balance sheet arrangements with a material effect on its financial condition[201](index=201&type=chunk) [Inflation](index=30&type=section&id=Inflation) Inflation did not have a material effect on the company's results of operations in 2018 or 2017 - Inflation did not materially affect results in 2018 or 2017, as cost increases were generally passed to customers or absorbed through efficiency[202](index=202&type=chunk) [Critical Accounting Policies](index=30&type=section&id=Critical%20Accounting%20Policies) Significant judgments and estimates are required for asset valuations, revenue recognition, and tax accounting - Key estimates include accounts receivable, fair values of intangible assets and goodwill, useful lives of assets, stock-based awards, deferred revenue, and income taxes[204](index=204&type=chunk)[243](index=243&type=chunk) - The company adopted ASC 2014-09 (Topic 606) for revenue recognition effective January 1, 2018, with **no material impact** on financial statements[205](index=205&type=chunk)[258](index=258&type=chunk) - Revenue from products and services is recognized when title passes or service is completed/accepted; license revenue is recognized when reported by licensee or upon litigation settlement execution[206](index=206&type=chunk)[207](index=207&type=chunk)[259](index=259&type=chunk) - Goodwill and other intangible assets (patents, customer lists, non-compete agreements) are subject to annual impairment testing and amortized over their useful lives[209](index=209&type=chunk)[210](index=210&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk) - Contingent legal fees are expensed when related revenues are recognized; unamortized patent acquisition costs are expensed if enforcement actions do not yield future royalties[211](index=211&type=chunk)[265](index=265&type=chunk) - Share-based payments are measured at fair value using the Black-Scholes-Merton model and recognized over the service period[212](index=212&type=chunk)[257](index=257&type=chunk) - Income taxes are recognized for current and deferred tax effects, with deferred tax assets reduced by a valuation allowance[213](index=213&type=chunk)[269](index=269&type=chunk) [ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=32&type=section&id=ITEM%207A%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This item is not applicable to the company [ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=34&type=section&id=ITEM%208%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) The audited financial statements show a net income in 2018 due to a one-time gain, despite an operating loss and negative cash flows - The financial statements were audited by Freed Maxick CPAs, P.C, who issued an unqualified opinion[219](index=219&type=chunk)[223](index=223&type=chunk)[224](index=224&type=chunk) - The consolidated financial statements include Balance Sheets, Statements of Operations and Comprehensive Income (Loss), Statements of Cash Flows, and Statements of Changes in Stockholders' Equity[218](index=218&type=chunk) Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2018 ($) | 2017 ($) | |:-----------------------------|:-------------|:-------------| | Cash | 2,317,659 | 4,188,623 | | Total Current Assets | 6,515,035 | 8,382,482 | | Total Assets | 15,279,786 | 17,430,777 | | Total Current Liabilities | 5,423,206 | 9,283,701 | | Total Liabilities | 7,690,453 | 12,645,018 | | Total Stockholders' Equity | 7,574,333 | 4,785,859 | Consolidated Statements of Operations Highlights (Year Ended December 31) | Metric | 2018 ($) | 2017 ($) | |:----------------------------------------|:-------------|:-------------| | Total Revenue | 18,515,082 | 18,661,872 | | Total Costs and Expenses | 20,223,743 | 18,887,736 | | Operating Loss | (1,708,661) | (225,864) | | Gain on extinguishment of liabilities, net| 3,532,659 | - | | Net Income (Loss) | 1,464,969 | (578,156) | | Basic Income (Loss) Per Common Share | 0.09 | (0.04) | Consolidated Statements of Cash Flows Highlights (Year Ended December 31) | Activity | 2018 ($) | 2017 ($) | |:---------------------------------------|:--------------|:--------------| | Net cash used by operating activities | (1,382,921) | (1,289,134) | | Net cash used by investing activities | (1,103,551) | (970,371) | | Net cash provided by financing activities| 489,829 | 654,786 | | Net decrease in cash | (1,996,643) | (1,604,719) | | Cash and restricted cash at end of year| 2,447,985 | 4,444,628 | [NOTE 1 - DESCRIPTION OF BUSINESS](index=40&type=section&id=NOTE%201%20-%20DESCRIPTION%20OF%20BUSINESS) The company operates in security printing and packaging, digital services, and intellectual property monetization - The Company operates in security/commercial printing, packaging, and plastic ID markets, focusing on fraud and counterfeit protection[241](index=241&type=chunk) - DSS Digital Inc provides digital information services, and DSS Technology Management, Inc monetizes intellectual property[241](index=241&type=chunk) - International operations commenced in 2018 through DSS Asia Limited in the Asia Pacific market[241](index=241&type=chunk) [NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=40&type=section&id=NOTE%202%20-%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note details key accounting policies, including the use of estimates, asset valuation, and revenue recognition under Topic 606 - Consolidated financial statements include DSS and its subsidiaries, with intercompany balances eliminated[242](index=242&type=chunk) - The preparation of financial statements requires significant estimates and assumptions, including for accounts receivable, inventory, intangible assets, goodwill, and income taxes[243](index=243&type=chunk) Cash and Restricted Cash (as of December 31) | Category | 2018 ($) | 2017 ($) | |:----------------|:------------|:------------| | Cash | 2,317,659 | 4,188,623 | | Restricted Cash | 130,326 | 256,005 | | **Total** | **2,447,985**| **4,444,628**| - Accounts receivable are carried at invoice amount less a **$50,000 allowance for doubtful accounts**[245](index=245&type=chunk) - Inventory is stated at the lower of cost or net realizable value using the FIFO method[246](index=246&type=chunk) - Property, plant, and equipment are recorded at cost and depreciated using the straight-line method[247](index=247&type=chunk) - Investment in Singapore eDevelopment Limited is recorded at cost less impairment, as fair value is not readily determinable[249](index=249&type=chunk) - Goodwill and other intangible assets (patents, customer lists, non-compete agreements) are tested for impairment annually and amortized over their estimated useful lives[250](index=250&type=chunk)[251](index=251&type=chunk) - Derivative instruments, specifically an interest rate swap, are recorded at fair value as cash flow hedges[256](index=256&type=chunk) - The company adopted **Topic 606 for revenue recognition** effective January 1, 2018, with no material impact[258](index=258&type=chunk) - Research and development costs are expensed as incurred, totaling **$146,000 in 2018** and **$106,000 in 2017**[267](index=267&type=chunk) - The company adopted ASU 2016-18 (Restricted Cash) retrospectively as of January 1, 2018, and ASU 2016-15, 2017-09, and 2018-03 with no material impact[282](index=282&type=chunk)[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk) - ASU 2016-02 (Leases) will be adopted January 1, 2019, impacting the balance sheet with right-to-use assets and lease liabilities[279](index=279&type=chunk) - ASU 2017-04 (Goodwill Impairment) will be effective for fiscal years beginning after December 15, 2019[281](index=281&type=chunk) [NOTE 3 – INVENTORY](index=47&type=section&id=NOTE%203%20%E2%80%93%20INVENTORY) Total inventory decreased in 2018, with a notable shift from raw materials to finished goods Inventory Composition (as of December 31) | Category | 2018 ($) | 2017 ($) | |:----------------|:------------|:------------| | Finished Goods | 1,144,695 | 965,757 | | WIP | 339,091 | 383,270 | | Raw Materials | 79,807 | 302,219 | | **Total** | **1,563,593**| **1,651,246**| [NOTE 4 - INVESTMENT](index=47&type=section&id=NOTE%204%20-%20INVESTMENT) The company recognized a $160,000 impairment on its investment in Singapore eDevelopment Limited in Q4 2018 - In September 2017, DSS acquired SED shares and warrants for **$484,930** in exchange for its common stock[288](index=288&type=chunk) - The investment is carried at cost less impairment due to the lack of a readily determinable fair value and liquidity restrictions[288](index=288&type=chunk) - An **impairment of approximately $160,000** was recognized in Q4 2018 due to a decline in SED's share price, influenced by the U.S.-China tariff dispute[288](index=288&type=chunk) [NOTE 5 - PROPERTY PLANT AND EQUIPMENT](index=48&type=section&id=NOTE%205%20-%20PROPERTY%20PLANT%20AND%20EQUIPMENT) Net property, plant, and equipment increased slightly in 2018, with machinery and equipment being the largest component Property, Plant and Equipment (as of December 31) | Category | Estimated Useful Life | 2018 Cost ($) | 2017 Cost ($) | |:--------------------------|:----------------------|:--------------|:--------------| | Machinery and equipment | 5-10 years | 7,723,763 | 6,796,617 | | Building and improvements | 39 years | 1,923,027 | 1,923,027 | | Land | N/A | 185,000 | 185,000 | | Leasehold improvements | 3-10 years | 760,286 | 722,984 | | Furniture and fixtures | 7 years | 94,364 | 71,903 | | Software and websites | 3 years | 187,511 | 171,007 | | **Total Cost** | | **10,873,951**| **9,870,538** | | Less: Accumulated Depreciation | | 5,859,457 | 5,064,898 | | **Net Property, Plant, and Equipment** | | **5,014,494** | **4,805,640** | - Approximately **$550,000 in equipment in process** will be placed into service in 2019[290](index=290&type=chunk) [NOTE 6 - INTANGIBLE ASSETS AND GOODWILL](index=48&type=section&id=NOTE%206%20-%20INTANGIBLE%20ASSETS%20AND%20GOODWILL) Net intangible assets decreased due to a patent write-off, while goodwill remained unchanged with no impairment found Intangible Assets (as of December 31) | Category | 2018 Net Carrying Amount ($) | 2017 Net Carrying Amount ($) | |:------------------------------------------|:-----------------------------|:-----------------------------| | Acquired intangibles (customer lists, licenses, non-compete agreements) | 460,181 | 186,550 | | Acquired intangibles (patents and patent rights) | - | 551,058 | | Patent application costs | 421,230 | 483,144 | | **Total Net Carrying Amount** | **881,411** | **1,220,752** | - In June 2018, the company **wrote off semiconductor-related patents** with a net unamortized carrying amount of **$295,470** due to an agreement with Fortress Credit Co LLC[292](index=292&type=chunk) - A **$304,000 intangible asset** was recorded for a two-year non-compete agreement in July 2018[293](index=293&type=chunk) - Acquired a **$85,734 license** to do business in China through the acquisition of Guangzhou Hotapps Technology Ltd in October 2018[294](index=294&type=chunk) Amortization Expense and Future Projections | Year | Amortization Expense ($) | |:-----|:-------------------------| | 2018 | 487,000 | | 2017 | 687,000 | | **Expected Future Amortization:** || | 2019 | 345,100 | | 2020 | 209,800 | | 2021 | 100,100 | | 2022 | 101,500 | | 2023 | 42,700 | - **Goodwill remained unchanged at $2,453,597** in 2018 and 2017, with no impairment indicated for the Packaging and Plastics reporting units[300](index=300&type=chunk)[302](index=302&type=chunk) [NOTE 7 – SHORT TERM AND LONG-TERM DEBT](index=51&type=section&id=NOTE%207%20%E2%80%93%20SHORT%20TERM%20AND%20LONG-TERM%20DEBT) The company managed its debt through credit lines and promissory notes, with a significant liability extinguishment in June 2018 - Premier Packaging has a revolving credit line of up to $800,000 with Citizens Bank, with **$0 outstanding** as of December 31, 2018[303](index=303&type=chunk) - Premier Packaging utilized an equipment acquisition line of credit with Citizens Bank, with a balance of **$339,600** as of December 31, 2018[304](index=304&type=chunk) - Plastic Printing Professionals had an equipment acquisition line of credit with Citizens Bank, with a balance of **$684,554** as of December 31, 2018, not yet converted to a term note[305](index=305&type=chunk) Long-Term Debt Balances (as of December 31) | Debt Type | 2018 Balance ($) | 2017 Balance ($) | |:----------------------------------------|:-----------------|:-----------------| | Convertible Note (Secuprint) | 0 | 50,000 | | Promissory Note (Secuprint presses) | 0 | 325,000 | | Equipment Loan (Peoples Capital) | 0 | 286,560 | | Term Note (HP Indigo 7800 Digital press)| 149,542 | 257,007 | | Promissory Note (packaging plant) | 869,865 | 915,107 | | Promissory Note (building improvements) | 315,000 | 345,000 | | Unsecured Promissory Note (Guangzhou Hotapps) | 100,000 | 0 | | Other Debt (Fortress Investment Agreement) | 0 | 3,702,129 | - In June 2018, an agreement with Fortress Credit Co LLC **discharged $3,714,129 in liabilities**, resulting in a **net gain on extinguishment of liabilities of $3,532,659**[322](index=322&type=chunk) Scheduled Principal Payments of Long-Term Debt (Subsequent to December 31, 2018) | Year | Amount ($) | |:-----|:-----------| | 2019 | 713,427 | | 2020 | 427,069 | | 2021 | 959,343 | | 2022 | 221,811 | | 2023 | 136,911 | | **Total** | **2,458,561**| [NOTE 8 – OTHER LIABILITIES](index=56&type=section&id=NOTE%208%20%E2%80%93%20OTHER%20LIABILITIES) Other liabilities primarily consist of funding agreements for the company's patent monetization programs - Approximately **$2,054,000** (with $1,780,000 short-term) in other liabilities relates to the BKI Proceeds Investment Agreement for the LED Patent Portfolio[325](index=325&type=chunk) - This BKI liability includes **$1,500,000 for estimated future Inter Partes Review costs** and $955,350 for working capital, amortized against SG&A[325](index=325&type=chunk) - Approximately **$476,000** (from $750,000 received) is in other liabilities from a Proceed Right Agreement for Bluetooth patents, used for 50% of litigation expenses[326](index=326&type=chunk) - Contingent equity interests of **$459,000** under the Fortress agreement were eliminated in June 2018[327](index=327&type=chunk) [NOTE 9 - STOCKHOLDERS' EQUITY](index=56&type=section&id=NOTE%209%20-%20STOCKHOLDERS'%20EQUITY) Stockholders' equity increased significantly in 2018, driven by net income and the issuance of common stock - **Stockholders' equity increased to $7,574,333** in 2018 from $4,785,859 in 2017[238](index=238&type=chunk) - A one-for-four reverse stock split was effected on August 26, 2016[328](index=328&type=chunk) - In 2018, the company sold **826,531 shares of common stock**, generating **$1,175,755 in net proceeds**, including the collection of a $300,000 subscription receivable[238](index=238&type=chunk)[329](index=329&type=chunk)[331](index=331&type=chunk) Stock Warrants Activity (Year Ended December 31) | Metric | 2018 Warrants | 2017 Warrants | |:-------------------------------------|:--------------|:--------------| | Outstanding at January 1 | 2,645,090 | 2,812,515 | | Granted during the year | - | 391,667 | | Lapsed/terminated | (1,214,974) | (559,092) | | **Outstanding at December 31** | **1,430,116** | **2,645,090** | | Weighted average exercise price (Dec 31) | $4.00 | $10.98 | Stock Options Activity (Year Ended December 31) | Metric | 2018 Options | 2017 Options | |:-------------------------------------|:--------------|:--------------| | Outstanding at January 1 | 482,667 | 635,597 | | Granted | 405,000 | - | | Lapsed/terminated | (105,012) | (152,930) | | **Outstanding at December 31** | **782,655** | **482,667** | | Weighted average exercise price (Dec 31) | $6.66 | $10.72 | - Stock-based compensation expense was **$132,000 in 2018** and **$215,000 in 2017**[342](index=342&type=chunk) [NOTE 10 - INCOME TAXES](index=60&type=section&id=NOTE%2010%20-%20INCOME%20TAXES) The company reported a small tax provision in 2018, with a valuation allowance limiting the benefit of its significant NOL carryforwards Income Tax Provision (Benefit) (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | |:-----------------------------|:------------|:------------| | Currently payable | 6,920 | (8,122) | | Deferred | 9,673 | (12,840) | | **Total Income Tax Provision (Benefit)** | **16,593** | **(20,962)**| - The Tax Cuts and Jobs Act of 2017 reduced the U.S. federal corporate tax rate from 35% to 21%[344](index=344&type=chunk) - The valuation allowance for deferred tax assets **decreased by approximately $424,000** in 2018 due to taxable income[347](index=347&type=chunk) - The company has approximately **$46.6 million in federal net operating loss carryforwards (NOLs)** expiring from 2022 through 2037, subject to annual limitations[347](index=347&type=chunk) Effective Tax Rate Reconciliation (Year Ended December 31) | Factor | 2018 (%) | 2017 (%) | |:-------------------------------------|:---------|:---------| | Statutory United States federal rate | 21.0% | 34.0% | | State income taxes net of federal benefit | 4.0 | 5.5 | | Permanent differences | 2.2 | 0.8 | | Other | 0.7 | - | | Foreign taxes | 1.7 | - | | Tax rate change | - | 11.5 | | Change in valuation reserves | (28.5) | (48.3) | | **Effective tax rate** | **1.1%** | **3.5%** | [NOTE 11 - DEFINED CONTRIBUTION PENSION PLAN](index=61&type=section&id=NOTE%2011%20-%20DEFINED%20CONTRIBUTION%20PENSION%20PLAN) The company increased its 401(k) matching contributions in 2018 following a change in its matching formula - The company maintains a 401(k) Plan for eligible employees[351](index=351&type=chunk) 401(k) Matching Contributions | Year | Amount ($) | |:-----|:-----------| | 2018 | 136,000 | | 2017 | 103,000 | - Effective January 1, 2018, the matching formula changed to 100% of the first 1% and 50% of additional contributions up to a 3.5% maximum[351](index=351&type=chunk) [NOTE 12 – COMMITMENTS AND CONTINGENCIES](index=61&type=section&id=NOTE%2012%20%E2%80%93%20COMMITMENTS%20AND%20CONTINGENCIES) The company has significant future lease commitments and is involved in ongoing patent infringement litigation - The company leases office space for its corporate, digital, plastics, and Asia divisions, and owns a packaging/printing plant[352](index=352&type=chunk) Future Minimum Lease Commitments (as of December 31, 2018) | Year | Equipment Leases ($) | Facilities Operating Leases ($) | Total ($) | |:----------|:---------------------|:--------------------------------|:----------| | 2019 | 23,370 | 347,116 | 370,486 | | 2020 | 12,555 | 343,963 | 356,518 | | 2021 | 7,751 | 265,630 | 273,381 | | 2022 | 1,176 | 254,682 | 255,858 | | Thereafter| - | 262,322 | 262,322 | | **Total** | **44,852** | **1,473,713** | **1,518,565**| - Minimum severance payments under employment agreements for five management team members aggregate to approximately **$510,000**[356](index=356&type=chunk) - Ongoing patent infringement lawsuits include those against **Apple** (wireless peripheral patents) and **Seoul Semiconductor, Cree, Lite-On, and Nichia** (LED patents)[357](index=357&type=chunk)[361](index=361&type=chunk)[363](index=363&type=chunk)[366](index=366&type=chunk)[367](index=367&type=chunk) - **Settled patent infringement lawsuits** include those against Intel, Dell, Samsung, Qualcomm, Osram, and Everlight[358](index=358&type=chunk)[360](index=360&type=chunk)[362](index=362&type=chunk)[365](index=365&type=chunk) - The company accrues for potential litigation losses when probable and estimable; contingent legal fees are expensed when related revenues are recognized[368](index=368&type=chunk)[369](index=369&type=chunk) [NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION](index=65&type=section&id=NOTE%2013%20-%20SUPPLEMENTAL%20CASH%20FLOW%20INFORMATION) The company disclosed cash paid for interest and several non-cash investing and financing activities for 2018 Supplemental Cash Flow Information (Year Ended December 31) | Item | 2018 ($) | 2017 ($) | |:----------------------------------------------|:---------|:---------| | Cash paid for interest | 133,000 | 127,000 | | Non-cash investing and financing activities: | | | | Gain from change in fair value of interest rate swap derivatives | 16,000 | 10,000 | | Common Stock issued for investment | - | 485,000 | | Elimination of contingent liabilities through agreement | 459,000 | - | | Purchase of intangible assets to be paid in installments | 304,000 | - | | Purchase of intangible assets with term note inclusive of tax | 119,065 | - | [NOTE 14 - SEGMENT INFORMATION](index=65&type=section&id=NOTE%2014%20-%20SEGMENT%20INFORMATION) The company operates two reportable segments, Printed Products and Technology, with Printed Products generating the vast majority of revenue - DSS's businesses are organized into two reportable segments: **Printed Products** (Packaging and Printing, Plastics) and **Technology** (DSS Digital Group, DSS Technology Management, DSS International)[372](index=372&type=chunk) Revenue by Reportable Segment (Year Ended December 31) | Segment | 2018 Revenue ($) | 2017 Revenue ($) | |:--------------------|:-----------------|:-----------------| | Packaging and Printing | 12,957,000 | 12,556,000 | | Plastics | 3,983,000 | 4,470,000 | | Technology | 1,575,000 | 1,636,000 | | Corporate | - | - | | **Total Revenue** | **18,515,000** | **18,662,000** | Printed Products Revenue Information (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | |:------------------------------------------|:------------|:------------| | Packaging Printing and Fabrication | 11,741,000 | 11,450,000 | | Commercial and Security Printing | 1,241,000 | 1,105,000 | | Technology Integrated Plastic Cards and Badges | 1,354,000 | 1,902,000 | | Plastic Cards, Badges and Accessories | 2,604,000 | 2,569,000 | | **Total Printed Products** | **16,940,000**| **17,026,000**| Technology Sales, Services and Licensing Revenue Information (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | |:------------------------------------------|:------------|:------------| | Information Technology Sales and Services | 345,000 | 458,000 | | Digital Authentication Products and Services | 772,000 | 512,000 | | Royalties from Licensees | 458,000 | 666,000 | | **Total Technology Sales, Services and Licensing** | **1,575,000**| **1,636,000**| - International revenue comprised **3.4% of total revenue** in 2018 (3.2% in 2017)[373](index=373&type=chunk) [NOTE 15 – SUBSEQUENT EVENTS](index=66&type=section&id=NOTE%2015%20%E2%80%93%20SUBSEQUENT%20EVENTS) In February 2019, the company entered into a $500,000 convertible note to fund expansion in Asia - On February 18, 2019, DSS entered a **$500,000 Convertible Promissory Note** with LiquidValue Development Pte Ltd[377](index=377&type=chunk) - The note is convertible into common stock at **$1.12 per share**, carries an **8% interest rate**, and has a 12-month term[377](index=377&type=chunk) - Proceeds were used to purchase a license for anti-keylogging spyware in Asia and fund its marketing/distribution setup[377](index=377&type=chunk) [ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=66&type=section&id=ITEM%209%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) There were no changes in or disagreements with the company's accountants - No changes in or disagreements with accountants on accounting and financial disclosure[378](index=378&type=chunk) [ITEM 9A CONTROLS AND PROCEDURES](index=67&type=section&id=ITEM%209A%20CONTROLS%20AND%20PROCEDURES) Management concluded that disclosure controls and internal controls were not effective due to a material weakness - Disclosure controls and procedures were **not effective** as of December 31, 2018[380](index=380&type=chunk) - Internal control over financial reporting was **not effective** as of December 31, 2018, based on COSO criteria[381](index=381&type=chunk) - A **material weakness** was identified: insufficient qualified accounting personnel and inadequate segregation of duties[382](index=382&type=chunk) - Remediation plans include hiring a VP of Finance, engaging an accounting firm for internal control evaluation, and enhancing financial statement preparation/review processes and controls[385](index=385&type=chunk) [ITEM 9B OTHER INFORMATION](index=67&type=section&id=ITEM%209B%20OTHER%20INFORMATION) The company plans to hold its 2019 Annual Meeting of Stockholders in May or June 2019 - The 2019 Annual Meeting of Stockholders is planned for May or June 2019[389](index=389&type=chunk) PART III [ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=69&type=section&id=ITEM%2010%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) This information is incorporated by reference from the company's 2019 Annual Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement[391](index=391&type=chunk) - The company has codes of business conduct and ethics for all employees and directors, available on www.dsssecure.com[392](index=392&type=chunk) [ITEM 11 EXECUTIVE COMPENSATION](index=69&type=section&id=ITEM%2011%20EXECUTIVE%20COMPENSATION) This information is incorporated by reference from the company's Proxy Statement - Executive compensation information is incorporated by reference from the Proxy Statement[393](index=393&type=chunk) [ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=69&type=section&id=ITEM%2012%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) This information is incorporated by reference from the company's Proxy Statement - Security ownership information is incorporated by reference from the Proxy Statement[393](index=393&type=chunk) [ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=69&type=section&id=ITEM%2013%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) This information is incorporated by reference from the company's Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[394](index=394&type=chunk) [ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES](index=69&type=section&id=ITEM%2014%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) This information is incorporated by reference from the company's Proxy Statement - Principal accountant fees and services information is incorporated by reference from the Proxy Statement[395](index=395&type=chunk) PART IV [ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](index=70&type=section&id=ITEM%2015%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists all exhibits filed with the Form 10-K, including governance documents, agreements, and certifications - Exhibits include corporate governance documents (Certificate of Incorporation, By-laws), equity plans, and various agreements related to investments, loans, and patent transactions[397](index=397&type=chunk)[398](index=398&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer (Rule 13a-14(a)/15d-14(a) and 18 U.S.C 1350) are filed[398](index=398&type=chunk) - XBRL (eXtensible Business Reporting Language) documents are included for financial data tagging[398](index=398&type=chunk) [SIGNATURES](index=72&type=section&id=SIGNATURES) The report was duly signed by the company's executive officers and directors on March 15, 2019 - The report was signed on March 15, 2019, by the Chief Executive Officer, Chief Financial Officer, and other directors[399](index=399&type=chunk)[401](index=401&type=chunk)[402](index=402&type=chunk)