DSS, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparative figures are for FY 2017. This filing reports annual results, not a separate fourth-quarter income statement. DSS operates packaging and printing, plastic-card, digital, international, and intellectual-property monetization businesses.
Financial performance and position
| Metric | FY 2018 / Dec. 31, 2018 | FY 2017 / Dec. 31, 2017 |
|---|---|---|
| Revenue | $18.52 million | $18.66 million |
| Gross profit and gross margin, calculated from reported revenue and cost of revenue | $6.66 million; approximately 36.0% | $7.65 million; approximately 41.0% |
| Operating loss | $(1.71) million | $(0.23) million |
| Net income (loss) | $1.46 million | $(0.58) million |
| Net cash used in operations | $(1.38) million | $(1.29) million |
| Cash used in investing activities | $(1.10) million | $(0.97) million |
| Cash and restricted cash at year-end | $2.45 million, including $0.13 million restricted | $4.44 million, including $0.26 million restricted |
| Working capital; current ratio, calculated | Approximately $1.09 million; 1.20 | $(0.90) million; 0.90 |
| Debt carrying value, current and long-term | $2.44 million | $6.35 million |
Revenue declined about 1%. Printed-products revenue was $16.94 million, down 1%; technology sales, services and licensing were $1.57 million, down 4%. Packaging and printing revenue rose, while plastic-card revenue fell 11%. Digital authentication revenue increased by $260,000 to $772,000, but declines in royalties and recurring IT services more than offset that growth.
Cost of revenue increased 8%, including higher paperboard and outside-service costs. Total costs and expenses rose 7% to $20.22 million, and the calculated gross margin fell by about five percentage points. The company reported an operating loss despite positive net income: a $3.53 million net gain on extinguishment of liabilities drove the bottom line. Excluding that gain, reported net income would have been approximately a $2.07 million loss before any other adjustments.
Changes, liquidity, debt and outlook
- Cash and restricted cash decreased by about $2.00 million during 2018. Capital expenditures were approximately $1.00 million, and DSS paid about $1.19 million of long-term debt principal. It also raised approximately $1.18 million in gross equity proceeds during the year.
- Debt included secured bank loans and equipment credit lines, as well as a $100,000 non-interest-bearing note due in October 2020. A $300,000 balloon payment on a packaging-facility improvement loan was due in July 2019; scheduled principal payments on long-term debt for 2019 were $713,427. The company reported compliance with bank covenants at year-end.
- Management projected negative operating cash flow in 2019 and said additional capital would likely be needed. Its plan included seeking at least $2 million of additional cash resources by the end of the second quarter of 2019, controlling costs, and growing operations, including an international rollout of AuthentiGuard. Management stated that its cash, financing history and ability to adjust operations alleviated substantial doubt about continuing as a going concern, while also identifying the need to raise capital.
- After year-end, DSS entered into a $500,000, 8% convertible note due in 12 months, convertible at $1.12 per share. Proceeds were designated for an Asian anti-keylogging product license and launch costs.
- In June 2018, an agreement discharged approximately $3.71 million of obligations to an IP-monetization investor; DSS recorded a $3.53 million net gain after related items, including a patent write-off. The company also recorded a $160,000 impairment of its Singapore eDevelopment investment.
Risks, contingencies and other notable disclosures
- Two customers represented 44% of 2018 revenue and 38% of year-end trade receivables, creating material concentration risk.
- Patent monetization depends on uncertain, costly litigation and licensing. Several LED patent cases remained pending; defendants challenged patent validity through review proceedings. Several other disputes were settled or dismissed, with financial terms confidential. The company cautions that adverse outcomes could harm cash flow and operations.
- Paper and paperboard costs rose, and the company warned that further increases were expected. Its ability to pass cost increases to customers is not assured, particularly under certain packaging contracts.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing insufficient qualified accounting staff and inadequate segregation of duties. Remediation was underway; the auditor did not attest to internal-control effectiveness.
- Goodwill was approximately $2.45 million and was not impaired in the 2018 annual test. Net intangible assets were approximately $0.88 million. The filing highlights estimation and impairment risks, including for patent-related assets.
- The independent auditor issued an unqualified opinion on the financial statements. The filing provides no formal revenue or earnings guidance.
Investor verification priorities
- Track cash burn, restricted cash, upcoming debt maturities and whether the planned capital raise was completed on acceptable terms.
- Separate recurring operating performance from the one-time debt-extinguishment gain; assess the continued operating loss and gross-margin decline.
- Review customer concentration and the sustainability of packaging, printing, plastics and digital-authentication sales.
- Verify subsequent developments, financial terms and proceeds, if any, from settlements and pending patent cases.
- Monitor remediation and testing of the disclosed material weakness in financial-reporting controls.