Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 1 of 35 Page ID
` #:1000
`
`Exhibit B
`
`

`

`U ISSUER DIRECT
`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 2 of 35 Page ID
` #:1001
`SECURITIES & EXCHANGE COMMISSION EDGAR FILING
`
`DOCUMENT SECURITY SYSTEMS INC
`
`Form: 10-Q
`
`Date Filed: 2017-11-14
`
`Corporate Issuer CIK: 771999
`
`© Copyright 2017, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
`
`ss 02 00002934
`
`Exhibit B, Page 12
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 3 of 35 Page ID
` #:1002
`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, 2017
`
`[ ] 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
`(State or other Jurisdiction of
`incorporation- or Organization)
`
`16-1229730
`(IRS Employer
`Identification No.)
`
`200 Canal View Boulevard, Suite 300
`Rochester, NY 14623
`(Address of principal executive offices)
`
`(585) 325-3610
`(Registrant's telephone number, including area code)
`
`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 and posted on its corporate Web site, if any, every Interactive Date 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 [ ]
`emerging growth company [ ]
`
`Accelerated filer [
`
`Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [X]
`
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
`Yes [] No [X]
`
`As of November 14, 2017, there were 16,439,327 shares of the registrant's common stock, $0.02 par value, outstanding.
`
`ss 02 00002935
`
`Exhibit B, Page 13
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 4 of 35 Page ID
`DOCUMENT SECURITY SYSTEMS, INC.
` #:1003
`FORM 10-Q
`TABLE OF CONTENTS
`
`PART I
`Item 1
`
`Item 2
`Item 4
`
`FINANCIAL INFORMATION
`Financial Statements
`Condensed Consolidated Balance Sheets as of September 30, 20 17 {Unaudited) and December 31, 2016
`Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and
`2016 {Unaudited)
`Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20 17 and 20 16 {Unaudited)
`Notes to Interim Condensed Consolidated Financial Statements {Unaudited)
`Management's Discussion and Analysis of Financial Condition and Resu lts of Operations
`Contro ls and Procedures
`
`PART II OTHER INFORMATION
`Item 1
`Legal Proceedi ngs
`Item 1A Risk Factors
`Item 2
`Unregistered Sales of Equity Securities and Use of Proceeds
`Item 3
`Defaults upon Senior Secu rities
`Mine Safety Disclosu res
`Item 4
`Item 5
`Other Information
`Item 6
`Exhibits
`Signatures
`
`2
`
`3
`3
`
`4
`5
`6
`17
`22
`
`22
`22
`22
`22
`23
`23
`23
`23
`24
`
`ss 02 00002936
`
`Exhibit B, Page 14
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 5 of 35 Page ID
`PART I - FINANCIAL INFORMATION
` #:1004
`ITEM 1 - FINANCIAL STATEMENTS
`
`DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
`Consolidated Balance Sheets
`As of
`
`September 30, 2017
`(Unaudited)
`
`December 31, 2016
`
`ASSETS
`Current assets:
`Cash
`Restricted cash
`Accounts receivable, net of $50,000 allowance for uncollectible accounts
`Inventory
`Prepaid expenses and other current assets
`
`Total current assets
`
`Property, plant and equipment, net
`Investment
`Other assets
`Goodwill
`Other intangible assets, net
`
`Total assets
`
`LIABILITIES AND STOCKHOLDERS' EQUITY
`
`Current liabilities:
`Accounts payable
`Accrued expenses and deferred revenue
`Other current liabilities
`Short-term debt
`Current portion of long-term debt, net
`
`Total current liabilities
`
`Long-term debt, net
`Other long-term liabilities
`Deferred tax liability, net
`
`Commitments and contingencies (Note 7)
`
`$
`
`$
`
`$
`
`$
`
`4,223,005
`336,172
`1,799,005
`1,913,111
`308,223
`
`8,579,516
`
`4,484,284
`484,930
`45,821
`2,453,597
`1,387,039
`
`5,871,738
`177,609
`1,890,981
`1,206,377
`350,289
`
`9,496,994
`
`4,573,841
`
`45,821
`2,453,349
`1,896,018
`
`17,435,187
`
`$
`
`18,466,023
`
`$
`
`1,706,607
`1,012,719
`2,957,033
`3,611,560
`752,180
`
`10,040,099
`
`1,607,752
`1,624,500
`59,830
`
`2,212,653
`1,290,593
`2,996,310
`
`1,202,335
`
`7,701,891
`
`5,249,569
`2,184,843
`45,619
`
`Stockholders' equity
`Common stock, $.02 par value; 200,000,000 shares authorized, 15,939,327 shares issued
`and outstanding (13,502,653 on December 31, 2016)
`Additional paid-in capital
`Subscriptions receivable from related party
`Accumulated other comprehensive loss
`Accumulated deficit
`Total stockholders' equity
`
`318,787
`106,123,997
`(300,000)
`(35,551)
`(102,004,227)
`4,103,006
`
`270,053
`104,338,002
`
`(45,343)
`(101,278,611)
`3,284,101
`
`Total liabilities and stockholders' equity
`
`$
`
`17,435,187
`
`$
`
`18,466,023
`
`See accompanying notes to the condensed consolidated financial statements.
`
`3
`
`ss 02 00002937
`
`Exhibit B, Page 15
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 6 of 35 Page ID
`DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
` #:1005
`Consolidated Statements of Operations and Comprehensive Loss
`(Unaudited)
`
`For the Three Months Ended September 30,
`2017
`2016
`
`For the Nine Months Ended September 30,
`2017
`2016
`
`Revenue:
`Printed products
`Technology sales, services and licensing
`
`$
`
`3,767,334
`431,356
`
`$
`
`4,448,509
`530,979
`
`$
`
`11,552,955
`1,276,489
`
`$
`
`12,147,796
`1,243,158
`
`Total revenue
`
`4,198,690
`
`4,979,488
`
`12,829,444
`
`13,390,954
`
`Costs and expenses:
`Cost of revenue, exclusive of depreciation and
`amortization
`Selling, general and administrative (including stock
`based compensation)
`Depreciation and amortization
`
`2,400,883
`
`1,619,066
`352,040
`
`2,874,508
`
`1,710,099
`349,143
`
`7,380,134
`
`4,835,079
`1,041,789
`
`7,815,658
`
`5,262,618
`1,049,387
`
`Total costs and expenses
`
`4,371,989
`
`4,933,750
`
`13,257,002
`
`14,127,663
`
`Operating (loss) income
`
`Other expense:
`Interest expense
`Amortized debt discount
`Loss before income taxes
`
`Income tax expense
`
`Net loss
`
`Other comprehensive loss:
`Interest rate swap gain (loss)
`
`Comprehensive loss:
`
`Loss per common share:
`Basic and diluted
`
`(173,299)
`
`45,738
`
`(427,558)
`
`(736,709)
`
`(58,164)
`(40,854)
`(272,317)
`
`4,734
`
`(67,739)
`
`(22,001)
`
`4,737
`
`(170,565)
`(113,286)
`(711,409)
`
`14,208
`
`(217,665)
`
`(954,374)
`
`14,211
`
`(277,051)
`
`$
`
`(26,738)
`
`$
`
`(725,617)
`
`$
`
`(968,585)
`
`3,943
`
`11,843
`
`9,792
`
`(22,451)
`
`(273,108)
`
`$
`
`(14,895)
`
`$
`
`(715,825)
`
`$
`
`(991,036)
`
`(0.02)
`
`$
`
`(0.00)
`
`$
`
`(0.05)
`
`$
`
`(0.07)
`
`$
`
`$
`
`$
`
`Shares used in computing loss per common share:
`Basic and diluted
`
`14,087,849
`
`12,977,903
`
`13,793,946
`
`12,975,053
`
`See accompanying notes to condensed consolidated financial statements.
`
`4
`
`ss 02 00002938
`
`Exhibit B, Page 16
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 7 of 35 Page ID
`DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
` #:1006
`Consolidated Statements of Cash Flows
`For the Nine Months Ended September 30:
`(Unaudited)
`
`Cash flows from operating activities:
`Net loss
`Adjustments to reconcile net loss to net cash from (used by) operating activities:
`Depreciation and amortization
`Stock based compensation
`Paid in-kind interest
`Change in deferred tax provision
`Amortization of deferred financing costs
`Decrease (increase) in assets:
`Accounts receivable
`Inventory
`Prepaid expenses and other current assets
`Restricted cash
`Increase (decrease) in liabilities:
`Accounts payable
`Accrued expenses and other liabilities
`Net cash (used) provided by operating activities
`
`Cash flows from investing activities:
`Purchase of property, plant and equipment
`Proceeds from sale of intangibles
`Purchase of intangible assets
`Net cash (used) provided by investing activities
`
`Cash flows from financing activities:
`Payments of long-term debt
`Issuances of common stock, net of issuance costs
`Net cash provided (used) by financing activities
`
`Net decrease in cash
`Cash at beginning of period
`
`Cash at end of period
`
`2017
`
`2016
`
`$
`
`(725,617)
`
`$
`
`(968,585)
`
`1,041,789
`203,111
`54,000
`14,211
`113,286
`
`91,976
`(706,735)
`70,838
`(158,563)
`
`(506,749)
`(867,702)
`(1,376,155)
`
`(438,350)
`
`(4,903)
`(443,253)
`
`(612,419)
`783,094
`170,675
`
`(1,648,733)
`5,871,738
`
`1,049,387
`87,738
`58,000
`14,211
`15,863
`
`19,501
`(250,529)
`(24,683)
`105,316
`
`169,394
`108,138
`383,751
`
`(192,614)
`495,000
`(72,953)
`229,433
`
`(1,229,902)
`(92)
`(1,229,994)
`
`(616,810)
`1,440,256
`
`$
`
`4,223,005
`
`$
`
`823,446
`
`See accompanying notes to the condensed consolidated financial statements.
`
`5
`
`ss 02 00002939
`
`Exhibit B, Page 17
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 8 of 35 Page ID
`DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
` #:1007
`NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
`September 30, 2017
`(Unaudited)
`
`1. Basis of Presentation and Significant Accounting Policies
`
`Document Security Systems, Inc. (the "Company"), through two of its subsidiaries, Premier Packaging Corporation and Plastic Printing Professionals,
`Inc., which operates under the assumed 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 operates under the assumed name of DSS Digital Group, develops, markets and sells
`digital information services, including data hosting, disaster recovery and data back-up and security services. The Company's subsidiary, DSS Technology
`Management, Inc., acquires intellectual property ("IP") assets and interests in companies owning intellectual property assets, or assists others in managing their
`intellectual property monetization efforts, 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.
`
`The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted
`accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting
`companies. Accordingly, these statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the
`opinion of management, the accompanying balance sheets and related interim statements of operations and comprehensive loss and cash flows include all
`adjustments considered necessary for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in
`consolidation.
`
`Interim results are not necessarily indicative of results expected for the full year. For further information regarding the Company's accounting policies,
`refer to the audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2016.
`
`Principles of Consolidation - The consolidated financial statements include the accounts of Document Security Systems and its subsidiaries. All
`intercompany balances and transactions have been eliminated in consolidation.
`
`Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
`that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
`amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In preparing these
`financial statements, the Company has evaluated events and transactions for potential recognition or disclosure.
`
`Restricted Cash - As of September 30, 2017, cash of $336,712 ($177,609 - December 31, 2016) is restricted for payments of costs and expenses
`associated with one of the Company's IP monetization programs.
`
`Investment- In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment Limited at cost as the
`fair market value of the investment is not readily determinable. The Company evaluates investment for indications of impairment at least annually.
`
`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.
`
`6
`
`ss 02 00002940
`
`Exhibit B, Page 18
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 9 of 35 Page ID
`The carrying amounts reported in the balance sheet of cash, accounts receivable, prepaids, accounts payable and accrued expenses approximate fair
` #:1008
`value because of the immediate or short-term maturity of these financial instruments. 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.
`
`Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap
`contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company has two interest rate swaps that change variable
`rates into fixed rates on two term loans. These swaps qualify as Level 2 fair value financial instruments. These swap agreements are not held for trading
`purposes and the Company does not intend to sell the derivative swap financial instruments. The Company records the interest swap agreements on the
`balance sheet at fair value because the agreements qualify as a cash flow hedges 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 is realized, gains or losses are reclassified from accumulated other comprehensive loss ("AOCI") to the consolidated statement of operations on the
`same line item as the underlying transaction. The valuations of the interest rate swaps have been derived from proprietary models of Citizens Bank, N.A. 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 swaps decrease over the life of the agreements. The Company is
`exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreements. However, the Company does not anticipate
`non-performance by the counter parties. The cumulative net loss attributable to this cash flow hedge recorded in accumulated other comprehensive loss and
`other liabilities as of September 30, 2017 was approximately $36,000 ($45,000 - December 31, 2016).
`
`As of September 30, 2017 the Company has an interest rate swap agreement for its debt with RBS Citizens, N.A. ("Citizens Bank") (see Note 4) which
`changes a variable rate into a fixed rate on a term loan as follows:
`
`Notional
`Amount
`
`Variable
`Rate
`
`Fixed Cost
`
`$
`
`927,753
`
`4.38%
`
`5.87%
`
`Maturity Date
`August 30, 2021
`
`Impairment of Long Lived Assets and Goodwill - Long-lived and intangible assets and goodwill are assessed for potential impairment whenever
`events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Goodwill and indefinite-lived
`intangible assets are assessed at least annually, but also whenever events or changes in circumstances indicate the carrying values may not be recoverable .
`Factors that could trigger an impairment review, include (a) significant underperformance relative to historical or projected future operating results; (b) significant
`changes in the manner of or use of the acquired assets or the strategy for the Company's overall business; (c) significant negative industry or economic trends;
`(d) significant decline in the Company's stock price for a sustained period; and (e) a decline in the Company's market capitalization below net book value.
`
`Contingent Legal Expenses - Contingent legal fees associated with our commercial litigation involving our IP 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 in which a conclusion
`is reached in an enforcement action that does not yield future royalties potential.
`
`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. In a loss period, the calculation for basic and diluted earnings per share is considered to be the
`same, as the impact of potential common shares is anti-dilutive.
`
`On August 26, 2016, the Company affected a one-for-four reverse stock split of the Company's common stock. No fractional shares of the Company's
`common stock were issued as a result of the reverse stock split. Instead, stockholders of record who otherwise would have been entitled to receive fractional
`shares were entitled to a rounding up of their fractional share to the nearest whole share, except in the case of any stockholder that owned less than four shares
`of the Company's common stock immediately preceding the reverse stock split. In such case, such stockholder received cash for such fractional share in an
`amount equal to the product obtained by multiplying: (x) the closing sale price of the common stock on August 25, 2016 as reported on the NYSE MKT, by (y)
`the amount of the fractional share. As a result, the Company issued 1,166 common shares for shares due as a result of the rounding up feature and paid $92 to
`buy-out the fractional shares of holders with less than four shares immediately preceding the reverse stock split.
`
`7
`
`ss 02 00002941
`
`Exhibit B, Page 19
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 10 of 35 Page ID
`As of September 30, 2017 and 2016, there were 3,297,759 and 2,498,128 respectively, of common stock share equivalents potentially issuable options,
` #:1009
`warrants, and restricted stock agreements, that could potentially dilute basic earnings per share in the future. These shares are excluded from the calculation of
`diluted earnings per share in periods in which the Company had a net loss because their inclusion would be anti-dilutive to the Company's losses in the
`respective periods.
`
`Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The
`Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.
`
`During the nine months ended September 30, 2017, two customers accounted for 25% and 15%, respectively, of the Company's consolidated revenue
`and accounted for 17% and 11 %, respectively, of the Company's accounts receivable balance as of September 30, 2017. During the nine months ended
`September 30, 2016, one customer accounted for 25% of the Company's consolidated revenue and accounted for 7% of the Company's accounts receivable
`balance as of September 30, 2016. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers, the
`short duration of its payment terms for the significant majority of its customer contracts and by the diversification of its customer base.
`
`Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation. All common share and per share
`figures are presented on a post one for four reverse stock split basis.
`
`Recent Accounting Pronouncements -
`In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)
`2014-9 "Revenue from Contracts with Customers". The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for
`the transfer of promised goods or services to customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-
`08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations" ("ASU 2016-08"); ASU No. 2016-10, "Revenue from Contracts
`with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10"); and ASU No. 2016-12, "Revenue from Contracts with
`Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"). The Company must adopt ASU 2016-08, ASU 2016-10 and
`ASU 2016-12 with ASU 2014-09 (collectively, the "new revenue standards"). The revenue standards will replace most existing revenue recognition guidance in
`U.S. GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal
`years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has not yet selected a transition method and is currently
`evaluating the effect that the revenue standards will have on its consolidated financial statements and related disclosures.
`
`In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01
`requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. Entities will no longer be able
`to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values, entities may elect a
`measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Upon
`adoption, entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is
`adopted. The guidance on equity securities without readily determinable fair values will be applied prospectively to all equity investments that exist as of the date
`of the adoption of the standand. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure
`requirements for financial instruments. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15,
`2017, and early adoption is not permitted. The Company has not yet evaluated nor has it determined the effect the standard will have on its consolidated
`financial statements and related disclosures.
`
`In February 2016, the FASB issued ASU 2016-02, "Leases", which requires that lease arrangements longer than 12 months result in an entity
`recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted.
`The Company has not yet evaluated nor has it determined the effect the standard will have on its consolidated financial statements and related disclosures.
`
`Stock Compensation: Improvements to Employee Share-Based Payment
`In March 2016, the FASB issued ASU 2016-09, "Compensation -
`Accounting." The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact,
`classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company on January 1, 2017. The adoption of this standard did
`not have a material impact on our consolidated financial statements.
`
`In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", which clarifies the treatment of several
`types of cash receipts and payments for which there was diversity in practice. This update is effective for annual periods beginning after December 15, 2017,
`and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. We anticipate that the adoption of this
`guidance will not have a material impact on our consolidated financial statements.
`
`8
`
`ss 02 00002942
`
`Exhibit B, Page 20
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 11 of 35 Page ID
` #:1010
`In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows", regarding the presentation of restricted cash on the statement of cash
`flows. The standards update requires that the reconciliation of the beginning and end of period cash amounts shown in the statement of cash flows include
`restricted cash. When restricted cash is presented separately from cash and cash equivalents on the balance sheet, a reconciliation is required between the
`amounts presented on the statement of cash flows and the balance sheet. Also, the new guidance requires the disclosure of information about the nature of the
`restrictions. The standards update is effective retrospectively for fiscal years and interim periods beginning after December 15, 2017, with early adoption
`permitted. We anticipate that the adoption of this guidance will not have a material impact on our consolidated financial statements.
`
`2. Inventory
`
`Inventory consisted of the following:
`
`Finished Goods
`WIP
`Raw Materials
`
`3. Investment
`
`September 30, 2017
`
`December 31, 2016
`
`$
`
`$
`
`$
`
`1,315,421
`385,998
`211,692
`
`736,987
`314,353
`155,037
`
`1,913,111
`
`$
`
`1,206,377
`
`On September 12, 2017, the Company and Hengfai Business Development Pte Ltd. ("HBO") entered into a Securities Exchange Agreement whereby
`the Company agreed to issue and sell to HBO 683,000 shares of its common stock, which had a market value on that date of $484,930, in exchange for
`21,196,552 ordinary shares and an existing three-year warrant to purchase up to 105,982,759 of common shares at an exercise price of SGD$0.040 per share of
`Singapore eDevelopment Limited ("SEO"), a company incorporated in Singapore and publicly-listed on the Singapore Exchange Limited. The SEO shares and
`warrants were owned by HBO. One of the directors of the Company, Mr. Heng Fai Ambrose Chan, is a related party to each of HBO and SEO. 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. As of September 30, 2017, the investment is carried at cost of approximately $485,000.
`
`9
`
`ss 02 00002943
`
`Exhibit B, Page 21
`
`

`

`Case 8:17-cv-00981-JVS-JCG Document 57-3 Filed 02/26/18 Page 12 of 35 Page ID
`4. Intangible Assets
` #:1011
`
`Intangible assets are comprised of the following:
`
`September 30, 2017
`
`December 31, 2016
`
`Useful Life
`
`Gross Carrying
`Amount
`
`Accumulated
`Amortization
`
`Net Carrying
`Amount
`
`Gross
`Carrying
`Amount
`
`Accumulated
`Amortization
`
`Net Carrying
`Amount
`
`Acquired intangibles - customer lists and non-
`compete agreements
`Acquired intangibles - patents and patent rights
`Patent application costs
`
`5-10 years
`Varied (1)
`Varied (2)
`
`1,997,300
`3,155,000
`1,141,368
`6,293,668
`
`$
`
`1,785,932
`2,476,149
`644,548
`4,906,629
`
`$
`
`211,368
`678,851
`496,820
`1,387,039
`
`$
`
`1,997,300
`3,155,000
`1,136,465
`6,288,765
`
`$
`
`1,721,357
`2,092,767
`578,623
`4,392,747
`
`$
`
`275,943
`1,062,233
`557,842
`1,896,018
`
`$
`
`(1) Acquired patents and patent rights are amortized over their expected useful life which is generally the remaining legal life of the patent. As of
`September 30, 2017, the weighted average remaining useful life of these assets in service was approximately 1.84 years.
`
`(2) Patent application costs are amortized over their expected useful life which is generally the remaining legal life of the patent. As of September 30,
`2017, the weighted average remaining useful life of these assets in service was approximately 6.3 years.
`
`Intangible asset amortization expense for the nine months ended September 30, 2017 amounted to $513,881 ($530,015 - September 30, 2016).
`
`5. 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 of up to $800,000 that bears interest at 1 Month LIBOR plus 3.75% (4.98% as of September 30, 2017) and expires on July 26, 2018. As of September 30,
`2017 and December 31, 2016, the revolving line had a balance of $0 .
`
`On July 26, 2017, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with
`Citizens Bank pursuant to which Citizens agrees to lend up to $1,200,000 for the purpose of enabling Premier Packaging to purchase equipment from time to
`time that it may need for use in its business. As of the date of this report, the revolving line had a balance of $0.
`
`Long-Term Debt- On December