DSS, Inc. — 2020 Form 10-K Summary
Business context and reporting period. This Form 10-K covers the fiscal year ended December 31, 2020. DSS operated a diverse portfolio of businesses, but reported four segments: Premier Packaging, Digital, IP Technology, and Direct Marketing/Online Sales. The company was winding down IP monetization, sold DSS Plastics in 2020, and invested in newer areas including biohealth, securities and fintech, and real estate. The Impact BioMedical acquisition and key investment arrangements involved related parties.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $17.411 million | $15.550 million |
| Gross profit and margin | $6.204 million; 35.6% | $5.208 million; 33.5% |
| Operating loss | $(10.747) million | $(2.617) million |
| Net income (loss) | $1.418 million | $(2.889) million |
| Net income (loss) attributable to common stockholders | $1.899 million | $(2.889) million |
| Net cash used in operating activities | $(5.683) million | $(5.450) million |
| Cash and cash equivalents at year-end | $5.226 million | $1.096 million |
| Total assets / stockholders’ equity | $91.919 million / $76.545 million | $20.146 million / $12.303 million |
- Revenue rose 12%. Printed products revenue fell 2% to $13.000 million; technology sales, services and licensing fell 3% to $2.085 million. Direct marketing revenue grew from $172,000 to $2.326 million, reflecting that the business began late in 2019.
- Operating expenses increased substantially, including selling, general and administrative expense, professional fees, and sales and marketing. Management attributed much of the compensation increase to approximately $4.3 million accrued under an executive employment contract.
- The company reported $10.609 million of unrealized investment gains, $604,000 of equity-method income, a $969,000 gain on forgiveness of PPP loans, and a $1.774 million income tax benefit. These items materially affected reported earnings; the operating loss remained $10.747 million.
- Investing activities used $10.690 million, including $9.791 million for investments. Financing activities provided $20.669 million, including $20.195 million of net common-stock proceeds. Year-end working capital was approximately $3.6 million.
- Year-end long-term debt was approximately $2.254 million, including current maturities; no balance was drawn on the revolving credit line. Premier Packaging was in compliance with its bank covenants. PPP loans of approximately $969,000 were forgiven in 2020; AAMI’s $115,000 loan was forgiven in January 2021.
Material changes versus 2019
- Total assets increased to $91.919 million, mainly reflecting acquisitions, investments, and the Impact BioMedical transaction. Intangible assets reached $23.456 million and goodwill $26.862 million.
- DSS acquired Impact BioMedical in August for accounting consideration of approximately $38.3 million, including common and preferred shares. The acquired company had not generated revenue as of the filing; approximately $22.3 million of developed technology was not yet in service.
- DSS sold the primary assets of DSS Plastics in August for $683,000 plus a contingent earnout. The discontinued operation recorded a $1.668 million loss, including a $685,000 goodwill impairment; $390,000 of the earnout was recognized in 2020.
- Common shares issued and outstanding rose from 1.206 million at year-end 2019 to 5.836 million at year-end 2020, following offerings and other issuances. The filing also reports a 1-for-30 reverse split in May 2020; share figures are presented retrospectively for the split.
Outlook, risks, contingencies, and unusual items
- Management’s 2021 priorities include growing Premier Packaging, investing in Direct Marketing, Securities and BioHealth, and improving revenue and profitability. It expressed an aspiration to double top-line revenue and bottom-line profitability, but provided no formal financial guidance.
- Management said year-end cash plus approximately $61 million of net proceeds from two first-quarter 2021 public offerings was expected to fund current and planned operations through March 2022, assuming no further acquisitions or investments. The company had experienced operating losses and negative operating and investing cash flows; its going-concern conclusion depends in part on financing and execution of its plans.
- COVID-19 affected sales and contributed to the DSS Plastics exit. Management noted possible further effects on inventory, goodwill, other long-lived assets, and obligations. Paper and paperboard prices rose in 2020.
- Two customers represented 38% of 2020 revenue and 60% of year-end trade receivables. Investment valuations, particularly for related-party holdings, and the Impact BioMedical acquisition’s valuation rely on estimates and judgment.
- Related-party matters include the Impact BioMedical acquisition, investments in Alset International and Sharing Services Global, and transactions involving entities associated with Chairman Heng Fai Ambrose Chan. The company recorded a $4.3 million executive-contract accrual; investors should review the terms, approval process, and accounting.
- Legal matters include the Apple patent appeal, multiple LED patent disputes, litigation brought by former CEO Jeffrey Ronaldi, and a 2021 Maiden Biosciences lawsuit challenging RBC-related asset foreclosures. Outcomes and potential financial effects are uncertain; the filing does not provide a clear estimate of exposure for these matters.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing staffing and segregation-of-duties gaps, incomplete documentation of close and reconciliation procedures, and weaknesses in income-tax controls. The auditor issued an unqualified opinion on the financial statements but did not audit or opine on internal control effectiveness.
Important facts for investors to verify
- How much of 2020 earnings depended on unrealized investment gains, PPP forgiveness, and the tax benefit, and whether operating losses and cash use improve.
- Whether the $61 million raised in early 2021 is sufficient after planned acquisitions, investments, and the proposed $30 million convertible note to Sharing Services Global; review the note’s conversion and warrant terms.
- The valuation, commercialization prospects, and impairment risk of Impact BioMedical’s acquired technology and goodwill, given the business had not generated revenue.
- Related-party transaction terms, governance safeguards, the $4.3 million executive accrual, and the valuation and liquidity of Alset and Sharing Services investments.
- Developments in the disclosed litigation, customer concentration, internal-control remediation, and any further share issuance or dilution.