DSS(DSS) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents unaudited consolidated financial statements and management's analysis of financial condition Item 1 - Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including the balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining the company's accounting policies, significant transactions, and financial position Consolidated Balance Sheets This section presents the company's assets, liabilities, and equity at specific reporting dates Consolidated Balance Sheet Highlights (September 30, 2021 vs. December 31, 2020) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Cash and Cash Equivalents | $69,137,000 | $5,183,000 | | Total Current Assets | $96,981,000 | $12,450,000 | | Total Assets | $219,076,000 | $91,919,000 | | Total Current Liabilities | $12,538,000 | $8,872,000 | | Long-term Debt, net | $6,664,000 | $1,976,000 | | Total Stockholders' Equity | $199,292,000 | $76,545,000 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss over specific periods Consolidated Statements of Operations Highlights | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Total Revenue | $4,566,000 | $3,686,000 | 24% | $13,218,000 | $10,202,000 | 30% | | Operating Loss | $(5,545,000) | $(2,573,000) | 116% | $(15,991,000) | $(4,806,000) | 233% | | Net (Loss) Income Attributable to Common Stockholders | $(6,598,000) | $5,068,000 | -230% | $(18,997,000) | $2,376,000 | -900% | - The significant increase in net loss for both the three and nine months ended September 30, 2021, was primarily driven by increased operating losses and a shift from investment gains to losses[17] Consolidated Statements of Cash Flows This section outlines cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (9 Months Ended Sep 30) | Metric | 2021 | 2020 | | :------------------------------------ | :----------- | :----------- | | Net Cash Used by Operating Activities | $(12,448,000) | $(2,846,000) | | Net Cash Used by Investing Activities | $(53,215,000) | $(7,243,000) | | Net Cash Provided by Financing Activities | $126,760,000 | $20,777,000 | | Net Increase in Cash | $64,304,000 | $10,549,000 | - The substantial net increase in cash for the nine months ended September 30, 2021, was primarily due to significant cash provided by financing activities, largely from issuances of common stock[22] Consolidated Statement of Changes in Stockholders' Equity This section tracks changes in the company's equity accounts over a specified period Changes in Stockholders' Equity (December 31, 2020 to September 30, 2021) | Metric | Dec 31, 2020 | Sep 30, 2021 | | :-------------------------- | :----------- | :----------- | | Common Stock Shares | 5,836,000 | 79,746,000 | | Common Stock Amount | $116,000 | $1,594,000 | | Additional Paid-in Capital | $174,380,000 | $294,682,000 | | Noncontrolling Interest in Subsidiary | $3,430,000 | $23,395,000 | | Accumulated Deficit | $(101,382,000) | $(120,379,000) | | Total Stockholders' Equity | $76,545,000 | $199,292,000 | - The significant increase in total stockholders' equity was primarily driven by the issuance of common stock and the acquisition of American Pacific Bancorp, despite an increase in accumulated deficit due to net losses[25] Notes to Interim Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the interim financial statements Note 1. Basis of Presentation and Significant Accounting Policies This note outlines foundational principles and key accounting methods used in financial statements - The company changed its name from Document Security Systems, Inc. to DSS, Inc. effective September 30, 2021, maintaining the same trading symbol 'DSS'[26] - DSS operates nine distinct business lines: Premier Packaging, IP Monetization, Direct Marketing/Online Sales Group, Blockchain Technology, Securities and Fintech Group, BioHealth Group, Secure Living, Energy Group, and Investment Banking[27] - The company completed the acquisition of Impact BioMedical, Inc. on August 21, 2020, and became the majority owner of American Pacific Bancorp, Inc. (APB) on September 9, 2021[31][34] - The operations of Plastic Printing Professionals, Inc. (August 2020) and DSS Digital Inc. (May 2021) have been discontinued, reflecting significant strategic shifts[55][56] Note 2. Revenue This note details revenue recognition policies and significant customer concentrations - Revenue is recognized when title passes to the customer or service is completed and accepted. Rental income is recognized on a straight-line basis over the lease term[64] - Two customers accounted for 43% of consolidated revenue and 73% of consolidated trade accounts receivable as of September 30, 2021, indicating a concentration of credit risk[59] Note 3. Notes Receivable This note provides information on outstanding notes receivable, including terms and valuations - The company holds several notes receivable, including a $500,000 convertible promissory note with Century TBD Holdings, LLC, an $800,000 convertible promissory note with GSX Group Limited, and a $30,000,000 convertible promissory note with Sharing Services Global Corporation (SHRG)[71][73][76] - The SHRG Note included a $3,000,000 loan origination fee and 150,000,000 warrants, with the note valued at approximately $16,830,000 as of September 30, 2021[76] Note 4. Financial Instruments This note describes the company's financial instruments and their fair value measurements Financial Instruments Fair Value (September 30, 2021) | Category | Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | | :---------------------- | :------------ | :--------------------- | :----------- | | Cash and Cash Equivalents | $51,438,000 | $0 | $51,438,000 | | Restricted Cash | $350,000 | $0 | $350,000 | | Money Market Funds | $17,699,000 | $0 | $17,699,000 | | Marketable Securities | $6,608,000 | $2,599,000 | $9,207,000 | | Warrants | $15,657,000 | $(9,121,000) | $6,536,000 | | Total | $91,752,000 | $(6,522,000) | $85,230,000 | - The company's investment policy prioritizes highly rated, investment-grade securities to minimize principal loss risk[84] Note 5. Acquisitions This note details significant business acquisitions and their impact on operations and financial position - DSS acquired a 52.5% controlling interest in AMRE Asset Management Inc. (AAMI) in March 2020, which holds a 93% equity interest in American Medical REIT Inc. (AMRE), a REIT focused on medical real estate[85][87] - On June 18, 2021, AMRE Shelton, LLC, a subsidiary of AMRE, financed the purchase of a 40,000 sq ft medical office building in Shelton, Connecticut for $7,150,000[88] - The acquisition of Impact BioMedical, Inc. on August 21, 2020, for $50 million (total consideration) added assets and products to the BioHealth line of business[91] - On September 9, 2021, DSS became the majority owner of American Pacific Bancorp (APB) with a $40 million investment for 53% ownership, establishing the Investment Banking segment[92] Note 6. Investments This note provides information on the company's various equity and other investments - DSS owns approximately 7% of Alset International Limited, classified as a marketable security with a fair value of approximately $5,990,000 as of September 30, 2021[94][95] - The company holds a 46.8% ownership interest in Sharing Services Global Corp. (SHRG) as of September 30, 2021, accounted for using the equity method, and recognized a loss of approximately $1,645,000 from this investment for the three months ended September 30, 2021[96][99] - DSS increased its ownership in BMI Capital International LLC (BMIC) to 24.9% in January 2021, accounting for it under the equity method[101] - The company's equity position in Vivacitas Oncology Inc. increased to approximately 19% as of September 30, 2021, through multiple stock purchase agreements[108][110] Note 7. Short-Term and Long-Term Debt This note outlines the company's debt obligations, including credit lines and loan agreements - Premier Packaging's revolving credit line with Citizens Bank matured on May 31, 2021, and was not renewed. A Term Note for equipment acquisition was paid in full in July 2021[115][116] - Premier Packaging repaid its $1,100,000 consolidated promissory note for its Victor, New York plant in July 2021[118] - American Medical REIT, Inc. received $110,000 under the Paycheck Protection Program (PPP) in March 2021[123] - Premier Packaging entered into a master loan and security agreement with Bank of America for up to $3,200,000 to purchase a new printing press, with an outstanding principal of $1,855,000 as of September 30, 2021[124] - AMRE Shelton, LLC entered into a loan agreement with Patriot Bank for up to $6,155,000 to finance a medical office building purchase, with approximately $5,105,000 financed[125] Note 8. Lease Liability This note details the company's operating lease commitments and future minimum lease payments - The company has operating leases for facilities with remaining terms ranging from less than one to five years[126] Future Minimum Lease Payments (as of September 30, 2021) | Year | Amount | | :--- | :------- | | 2021 | $59,000 | | 2022 | $88,000 | | 2023 | $50,000 | | 2024 | $4,000 | | 2025 | $4,000 | | 2026 | $2,000 | | Total Lease Payments | $207,000 | | Less: Imputed Interest | $(10,000) | | Present Value of Remaining Lease Payments | $197,000 | | Current Portion | $122,000 | | Noncurrent Portion | $75,000 | | Weighted-average remaining lease term | 0.85 years | | Weighted-average discount rate | 5.4% | Note 9. Commitments and Contingencies This note discloses the company's legal proceedings and other potential future obligations - The Apple Litigation, a patent infringement suit, was deemed closed after the U.S. Court of Appeals for the Federal Circuit affirmed the District Court's judgment against DSSTM on April 30, 2021[129] - The Ronaldi Litigation involves claims by the former CEO, Jeffrey Ronaldi, for alleged unpaid wages, bonuses, and a performance bonus, with discovery ongoing and a motion for advancement of legal fees granted to Mr. Ronaldi[130][132] - The Maiden Biosciences Litigation asserts claims against DSS and its subsidiaries for unjust enrichment, fraudulent transfer, and RICO violations related to promissory notes and asset conveyances, with a motion to dismiss the amended complaint pending[133][134][135] Note 10. Stockholders' Equity This note provides details on changes in stockholders' equity, including stock issuances and compensation - The company issued 46,868 shares of Series A Convertible Preferred Stock in August 2020 as part of the Impact BioMedical acquisition, with a liquidation preference of $1,000 per share and convertibility into common stock[138][139] - Completed three underwritten public offerings in January, February, and May 2021, raising approximately $24.9 million, $36.14 million, and $45.75 million in net proceeds, respectively, through the issuance of common stock[140][141] - On September 3, 2021, DSS entered into a subscription agreement with Alset EHome International, Inc. (AEI) for an investment of up to $15,000,000 in exchange for 12,156,000 shares of common stock[142] - Stock-based compensation expense for the three and nine months ended September 30, 2021, approximated $13,000 and $42,000, respectively[143] Note 11. Discontinued Operations This note reports financial results and impact of business segments that have been discontinued - The company discontinued the operations of Plastic Printing Professionals, Inc. in August 2020, recognizing a net loss of $111,000 in Q3 2020 from asset disposal[146][147] - On May 7, 2021, DSS completed the sale of DSS Digital Inc. for $5,000,000, resulting in a net gain of $2,226,000 from discontinued operations[148][149] Discontinued Operations Revenue (9 Months Ended Sep 30) | Segment | 2021 | 2020 | | :-------------------------------- | :--------- | :--------- | | DSS Digital, Inc. (Technology sales, services and licensing) | $535,000 | $1,315,000 | | Plastic Printing Professionals, Inc. (Printed products) | N/A | $1,626,000 | Note 12. Income Taxes This note details income tax provisions, effective tax rates, and net operating loss carryforwards - The effective tax rate for continuing operations for the nine months ended September 30, 2021, was 17.3%[154] - As of December 31, 2020, the company had domestic net operating loss (NOL) carryforwards of approximately $56.7 million, with $2.1 million available for use after valuation allowance[155] Note 13. Supplemental Cash Flow Information This note provides additional non-cash and other supplemental details related to cash flow activities Supplemental Cash Flow Information (9 Months Ended Sep 30) | Item | 2021 | 2020 | | :------------------------------------------------ | :----------- | :----------- | | Cash paid for interest | $139,000 | $73,000 | | Termination of right of use lease asset | $(744,000) | $0 | | Termination of right of use lease liability | $744,000 | $0 | | Shares received for loan origination fee | $(3,000,000) | $0 | | Shares received for prepaid loan interest | $(2,440,000) | $0 | | Series A Preferred Shares issued for Impact BioMedical | $0 | $35,187,000 | | Common Shares issued for Impact BioMedical | $0 | $3,132,000 | | Acquisition of APB net assets | $38,765,000 | $0 | | Shares issued for marketing services | $0 | $210,000 | Note 14. Segment Information This note presents financial data broken down by the company's various operating segments - The company's five operating segments are Packaging and Printing, Investment Banking, BioHealth Group, Securities and Fintech Group, and Direct Marketing/Online Sales Group[162][197][198][199][201][202] Revenue by Segment (3 Months Ended Sep 30, 2021) | Segment | Revenue | | :---------------------- | :---------- | | Printing | $3,416,000 | | Direct Marketing | $966,000 | | Securities | $184,000 | | Investment Banking | $0 | | Biohealth Group | $0 | | Corporate | $0 | | Total | $4,566,000 | Revenue by Segment (9 Months Ended Sep 30, 2021) | Segment | Revenue | | :---------------------- | :----------- | | Printing | $10,652,000 | | Direct Marketing | $2,382,000 | | Securities | $184,000 | | Investment Banking | $0 | | Biohealth Group | $0 | | Corporate | $0 | | Total | $13,218,000 | Note 15. Subsequent Events This note discloses significant events occurring after the balance sheet date but before financial statements were issued - On October 13, 2021, DFMI entered into a loan agreement to lend LVAM a principal sum not to exceed $3,000,000[169] - On November 4, 2021, AMRE acquired three medical facilities in Fort Worth, Plano (Texas), and Pittsburgh (Pennsylvania) for $62,000,000, funded through multiple borrowing facilities including a $13,940,000 convertible promissory note from APB[170] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, detailing revenue and expense trends, liquidity, and capital resources. It highlights the company's diverse business lines and the impact of strategic acquisitions and investments on its financial results Overview This section summarizes the company's diverse business lines, strategic activities, and key investments - DSS operates nine distinct business lines: Premier Packaging, Direct Marketing/Online Sales Group, IP Monetization, BioHealth Group, Securities and Fintech Group, Energy Group, Secure Living, Blockchain Technology, and Investment Banking, all in various stages of development[173][174][175] - Key strategic activities include the acquisition of a 93% equity interest in American Medical REIT Inc. (AMRE), the acquisition of Impact BioMedical, Inc., and becoming the majority owner of American Pacific Bancorp (APB) to establish the Investment Banking segment[178][179][193] - The company increased its investment in Sharing Services Global Corporation (SHRG) through a $30 million convertible promissory note, resulting in a 46.8% ownership interest as of September 30, 2021[187] - DSS Securities, Inc. became the new registered investment advisor to the DSS AmericaFirst Quantitative Trust in September 2021, expanding into mutual funds and other investment platforms[195][196] Results of Operations This section analyzes revenue, cost, and expense trends, explaining drivers of financial performance Revenue Performance (3 & 9 Months Ended Sep 30) | Revenue Category | 3 Months 2021 | 3 Months 2020 | % Change | 9 Months 2021 | 9 Months 2020 | % Change | | :----------------- | :------------ | :------------ | :------- | :------------ | :------------ | :------- | | Printed products | $3,416,000 | $2,971,000 | 15% | $10,652,000 | $8,409,000 | 27% | | Rental income | $184,000 | $0 | N/A | $184,000 | $0 | N/A | | Direct marketing | $966,000 | $715,000 | 35% | $2,382,000 | $1,793,000 | 33% | | Total Revenue | $4,566,000 | $3,686,000 | 24% | $13,218,000 | $10,202,000 | 30% | - Costs of revenue increased by 24% and 38% for the three and nine months ended September 30, 2021, respectively, driven by higher manufacturing costs in Direct Marketing and Packaging and Printing segments[206][208] - Sales, general and administrative compensation costs surged by 379% and 451% for the three and nine months, respectively, due to increased headcount and performance bonus accruals of approximately $6.2 million[206][209] - Research and development costs increased significantly (414% for 3 months, 1,643% for 9 months) due to the acquisition of Impact BioMedical and related R&D for product formulations and new technologies[207][215] Net (Loss) Income from Continuing Operations (3 & 9 Months Ended Sep 30) | Metric | 3 Months 2021 | 3 Months 2020 | % Change | 9 Months 2021 | 9 Months 2020 | % Change | | :------------------------------------------------ | :------------ | :------------ | :------- | :------------ | :------------ | :------- | | Net (Loss) Income from Continuing Operations | $(6,675,000) | $5,182,000 | 229% | $(21,462,000) | $3,511,000 | 711% | | Net (Loss) Income | $(6,675,000) | $4,942,000 | 235% | $(19,333,000) | $2,069,000 | 1,034% | - The increased net loss was primarily due to unrealized losses on marketable securities and warrants, increased costs associated with new business lines, and higher performance-based compensation[222] Liquidity and Capital Resources This section discusses the company's ability to meet financial obligations and funding sources - As of September 30, 2021, the company had approximately $69.1 million in cash and believes it has sufficient liquidity for at least the next 12 months[225] - The company historically meets its liquidity and capital requirements through the sale of equity securities and debt financings[225] Off-Balance Sheet Arrangements This section discloses any material off-balance sheet transactions or obligations - The company does not have any material off-balance sheet arrangements that would significantly affect its financial condition or results[226] Critical Accounting Policies and Estimates This section highlights accounting policies and estimates requiring significant management judgment - There have been no material changes to the critical accounting policies and methods since the Annual Report on Form 10-K for the year ended December 31, 2020[227] Item 4 - Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2021, due to material weaknesses, and a remediation plan is underway Disclosure Controls and Procedures This section assesses the effectiveness of controls over financial reporting and disclosure - Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2021[228] - The ineffectiveness is attributed to material weaknesses previously disclosed in the Annual Report on Form 10-K for December 31, 2020, which remained as of September 30, 2021[228] Plan for Remediation of Material Weaknesses This section outlines the company's strategy to address identified material weaknesses in internal controls - The company is implementing a remediation plan to strengthen its internal control environment, but full integration and confirmation of effectiveness will take time[230] Changes in Internal Control over Financial Reporting This section reports any changes in internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2021, that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting, beyond the initial implementation of remediation steps[231] PART II - OTHER INFORMATION This section provides additional disclosures including legal, risk, and equity matters Item 1 - Legal Proceedings This section refers to Note 9 for detailed information regarding the company's legal proceedings and commitments - Legal proceedings are discussed in detail in Note 9, 'Commitments and Contingencies'[234] Item 1A - Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its most recent Annual Report on Form 10-K - No material changes to the discussion of risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[235] Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds This section details the unregistered sale of common stock to Alset EHome International, Inc. in September 2021 - On September 3, 2021, the company issued 12,155,591 shares of common stock to Alset EHome International, Inc. at $1.234 per share, for aggregate proceeds of up to $15,000,000[236] - The sale was exempt from registration requirements of the Securities Act pursuant to Section 4(a)(2) and Regulation D or S[236] Item 3 - Defaults upon Senior Securities The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[237] Item 4 - Mine Safety Disclosures This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable to the registrant[238] Item 5 - Other Information The company reported no other information to disclose under this item - No other information is reported under this item[239] Item 6 - Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various agreements, certifications, and XBRL documents - Exhibits include Securities Purchase Agreements, Convertible Promissory Notes, Underwriting Agreements, Subscription Agreements, and various certifications (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. 1350) and XBRL documents[240]