DSS, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing. The filing was signed March 30, 2016 and includes certain subsequent events through that date.
Business context
DSS develops and sells anti-counterfeiting and document-security products and services, including packaging and printing, plastic cards, cloud-based digital services, and intellectual-property (IP) monetization through licensing and litigation. Its four operating segments are Packaging and Printing, Plastics, Digital, and Technology Management; Digital and Technology Management are grouped as the reportable Technology segment.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $17.51 million | $18.29 million |
| Gross profit and margin | $6.84 million; 39.1% | $6.60 million; 36.1% |
| Operating loss | $14.08 million | $46.48 million |
| Net loss to common shareholders | $14.31 million | $41.16 million |
| Loss per share, basic and diluted | $0.30 | $0.98 |
| Cash used in operating activities | $0.98 million | $2.39 million |
- Revenue declined 4%. Printed-products revenue fell 5% to $15.70 million; technology sales, services, and licensing were essentially flat at $1.80 million.
- Cost of revenue fell 9%, faster than revenue, and gross margin increased by about 3 percentage points. Packaging and Printing generated $1.07 million of segment net income and Plastics $0.17 million; Technology reported a $12.94 million loss.
- The 2015 loss included a $9.59 million goodwill impairment and a $0.50 million impairment of the Express Mobile investment. The 2014 loss included substantial patent and investment impairments, including $22.29 million related to the Bascom patents and $7.05 million net related to the VirtualAgility investment. Lower impairment charges and amortization helped reduce the reported year-over-year loss.
- Cash from operations improved, but remained negative. DSS attributed the improvement partly to noncash expenses and a $0.91 million increase in accounts payable, including reduced periodic payments to professional-services vendors.
- At year-end, cash was $1.44 million, restricted cash $0.29 million, and accounts receivable $2.10 million. Current assets were $5.08 million versus current liabilities of $9.49 million, a working-capital deficit of approximately $4.40 million.
- Reported short-term debt was $4.02 million and current maturities of long-term debt were $1.55 million; long-term debt was $2.26 million. The $0.80 million revolving credit line was undrawn at year-end. Several obligations are secured by company or subsidiary assets; scheduled 2016 principal payments were $1.55 million, excluding the separately classified Fortress amount.
- Stockholders’ equity declined to $3.69 million from $15.86 million. DSS issued about 5.45 million shares in 2015 for net proceeds of $1.13 million; shares outstanding were 51.88 million at year-end. The company paid no dividends.
Changes, outlook, risks, and unusual items
- Operating trends: Commercial printing and packaging sales declined 9%, partly offset by increases in security printing (8%) and plastic-card sales (10%); technology-embedded card sales rose 27%. Management cited limited sales of AuthentiGuard products and little meaningful revenue from IP monetization.
- Liquidity outlook: Management said available cash and credit resources were expected to fund operations and obligations for at least 12 months, conditional on growing digital-product sales, reducing IP-related legal and professional costs, and maintaining operating profits in packaging and plastics. It also anticipated access to equity or debt financing, but gave no assurance that financing would be available. Elsewhere, the filing warns that low cash and negative operating cash flow could require further cost cuts and raise substantial doubt about continued operations.
- Fortress default: On February 13, 2016, DSS failed to repay advances under the Fortress agreement; the filing describes approximately $4.35 million outstanding at default. Fortress has collateral rights over specified semiconductor patents and may seek to transfer them to a special-purpose entity, subject to the contractual license-back and recourse limitations described in the filing. DSS said it was discussing an amendment or other remedy; the outcome was uncertain. The default also temporarily restricted use of Form S-3 to raise capital.
- Patent litigation: In November 2015, the PTAB invalidated claims in the semiconductor-patent dispute involving TSMC and Samsung; on March 22, 2016, the Federal Circuit ruled in favor of TSMC. DSS reported an appeal pending in the Apple patent IPRs after March 15, 2016 oral arguments, with a PTAB decision then expected by June. The Intel-related case was stayed pending IPR proceedings; other semiconductor cases remained active, with additional IPR petitions filed. Patent litigation outcomes, costs, and timing remain uncertain.
- Listing risk: NYSE MKT notified DSS on March 15, 2016 that its share price did not meet the exchange’s continued-listing standard. The notice cited a 30-day average price of $0.16 and provided six months to regain compliance; delisting could reduce liquidity and complicate future capital raising.
- Controls: Management concluded disclosure controls were ineffective and reported material weaknesses involving complex and non-routine transactions, insufficient qualified accounting personnel, and segregation of duties. Remediation was ongoing. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Other exposures: Two customers represented 35% of 2015 revenue and 27% of year-end trade receivables. Paper and paperboard prices increased, and some customer contracts require DSS to absorb price changes. The filing also notes potential dilution from equity awards and warrants; approximately 11.87 million potential common-share equivalents were outstanding at year-end.
Investor verification checklist
- Confirm the current status and terms of the Fortress default, patent collateral, and any amendment or refinancing.
- Review subsequent cash burn, working-capital needs, scheduled debt payments, and the availability of new financing.
- Check NYSE MKT listing compliance and current share price, and assess potential dilution from equity financing and outstanding securities.
- Track PTAB, appellate, and district-court outcomes in DSS’s patent cases, including any effect on patent values or monetization prospects.
- Assess whether Digital sales and IP licensing improve, whether professional and legal expenses decline, and whether packaging and plastics sustain operating profits.
- Review remediation of the disclosed material weaknesses and the concentration of revenue among two customers.