DSS, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 6, 2018. DSS develops and sells secure printed products, packaging and plastic cards; provides digital services; and seeks to monetize intellectual property through licensing and litigation.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $18.66 million | $19.18 million |
| Operating loss | $226,000 | $660,000 |
| Net loss | $578,000 | $950,000 |
| Loss per share, basic and diluted | $0.04 | $0.07 |
| Operating cash flow | $(1.37) million | $5.47 million |
| Capital expenditures | $959,000 | $270,000 |
- Printed-products revenue was $17.03 million, down 1%; technology sales, services and licensing revenue was $1.64 million, down 14%. Total revenue declined 3%.
- Gross profit, calculated as revenue less cost of revenue, was approximately $7.65 million, or 41.0% of revenue. Operating margin was approximately negative 1.2%.
- Cash and cash equivalents were $4.19 million at year-end, plus $256,000 of restricted cash. Total current assets were $8.38 million versus current liabilities of $9.40 million.
- Balance-sheet debt totaled approximately $6.35 million, including $3.65 million classified as short-term debt, $967,000 of current long-term debt and $1.73 million of long-term debt. Other current liabilities were $2.95 million.
- Stockholders’ equity was $4.79 million. Shares outstanding increased from 13.50 million to 16.60 million during 2017. Two customers generated 46% of revenue and represented 38% of trade receivables.
Changes versus 2016
- Net loss narrowed by 39%, primarily because of lower operating expenses, despite lower revenue. Total costs and expenses fell 5%.
- Technology revenue fell 14%, reflecting lower licensing royalties and recurring IT-services revenue; AuthentiGuard revenue increased.
- Operating cash flow shifted from $5.47 million provided in 2016 to $1.37 million used in 2017, mainly amid payments of accounts payable and reductions in deferred expenses related to the patent program.
- Cash declined by $1.68 million. DSS spent $959,000 on equipment, paid $818,000 of long-term debt principal and received approximately $951,000 net from common-stock issuance.
- Research and development spending declined to approximately $106,000 from $435,000, as some staff moved to customer program support.
Outlook, risks and unusual items
- Management said year-end cash and expected access to equity or debt financing would be sufficient for at least 12 months from the filing date. This outlook depends partly on financing access; the filing provides no revenue or earnings guidance.
- Fortress debt default after year-end: DSS Technology Management failed to meet the February 13, 2018 maturity payment obligation. At December 31, 2017, approximately $3.70 million was recorded as short-term debt, with $459,000 of fixed and contingent equity interests in other short-term liabilities. Under the amended agreement, investors’ stated sole recourse is specified patent collateral, monetization payments and remaining deposit; the filing says they had not taken ownership of collateral as of the report date.
- Patent litigation and funding: Several patent cases remained pending, and adverse IPR decisions in matters involving Apple, Intel, Samsung and Qualcomm were under appeal. DSS’s LED patent cases also faced validity challenges. DSS settled its Osram litigation on February 21, 2018; settlement terms were confidential. The BKI-funded LED patent program assigns specified proceeds to BKI and carries related recorded liabilities.
- Management identified material weaknesses in internal control over financial reporting due to insufficient qualified accounting personnel and segregation-of-duties controls; disclosure controls and procedures were also deemed ineffective. An accountant hired in 2017 helped remediate some, but not all, segregation-of-duties issues.
- Other significant risks include recurring losses, customer concentration, secured debt and financing needs, possible dilution, patent enforcement costs and outcomes, and potential impairment of patent-related intangible assets. DSS reported approximately $3.7 million of net intangible assets, including goodwill; no goodwill impairment was identified in the 2017 annual test.
- Paper and paperboard costs increased in 2017, with further increases expected; DSS said it has historically passed most changes through to customers except for certain contracted packaging work. The filing also notes that the company regained NYSE American listing compliance in October 2017 but may not maintain it.
Important facts for investors to verify
- Current status and consequences of the Fortress default, including whether collateral or monetization rights have been transferred.
- Cash runway and available borrowing capacity: reconcile management’s liquidity statement with year-end current liabilities, restricted cash and debt maturities.
- Progress, legal costs and potential proceeds from LED patent litigation, appeals and the Osram settlement, including the BKI proceeds-sharing terms.
- Whether DSS remediates its material weakness and improves financial reporting controls.
- Revenue trends and customer dependence, particularly the two customers responsible for 46% of 2017 revenue, and the ability to return to profitability without additional dilution.