DSS, INC. annual report, FY2016

DSS, Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter report. DSS operates packaging and printing, plastics, digital services, and intellectual-property monetization businesses.

Financial performance

Metric	2016	2015
Revenue	$19.18 million	$17.51 million
Gross profit	$8.06 million	$6.84 million
Gross margin	42.0%	39.1%
Operating loss	$0.66 million	$14.08 million
Net loss	$0.95 million	$14.31 million
Basic and diluted loss per share	$0.07	$1.20
Cash from (used in) operating activities	$5.47 million	$(0.98) million
Cash and cash equivalents at year-end	$5.87 million	$1.44 million

Revenue grew 10%: printed products rose 10% to $17.28 million, while technology sales, services and licensing increased 5% to $1.90 million.
Packaging and printing generated $12.93 million of revenue and $1.53 million of segment net income; plastics generated $4.34 million and $0.45 million. Technology reported a $1.27 million loss, while corporate costs were $1.66 million.
Operating results improved substantially, primarily because 2015 included a $9.59 million goodwill impairment and $0.50 million investment impairment, neither repeated in 2016. Lower professional fees and stock compensation and stronger printed-product sales also contributed.
Reported operating cash flow included $4.5 million received from a third-party funder for a patent program. Management said operating cash flow would have been approximately $1.0 million without that funding.
Year-end current assets were $9.50 million and current liabilities $7.70 million, compared with $5.08 million and $9.45 million, respectively, in 2015. Cash included $0.18 million of restricted cash.
Balance-sheet current and long-term debt, net, totaled approximately $6.45 million at year-end, versus approximately $7.78 million in 2015. The company paid about $1.39 million of long-term debt principal during 2016.

Material changes and significant items

In November, BKI financed a $13.5 million LED patent acquisition and monetization program. DSS received $4.5 million, substantially restricted to patent-defense costs with excess available for working capital; $4.209 million was recorded as other liabilities at year-end. BKI directed $6 million to attorneys, which DSS said it did not control and therefore did not include in its financial statements. The patent portfolio was acquired with third-party funding and recorded at zero net book value.
The Fortress financing default was vacated by a December amendment, extending the maturity to February 13, 2018. The amendment also requires deposits totaling $600,000 over two years; the first $300,000 deposit was made in March 2017. It grants investors 25% of specified Bluetooth-patent monetization proceeds until stated repayment thresholds are met and adds patent collateral.
DSS completed a 1-for-4 reverse stock split in August 2016. In December it sold 300,000 shares and issued warrants for up to 200,000 additional shares for an aggregate purchase price of $225,000. It also issued BKI a five-year warrant for up to 750,000 shares at $1.00 per share.
The company’s two largest customers accounted for 38% of 2016 revenue and 31% of year-end trade receivables, up from 35% and 27%, respectively, in 2015.

Outlook, risks and controls

No quantified revenue, earnings, or cash-flow guidance is provided. Management stated it believed available cash and expected resources were sufficient for at least 12 months from the filing date and concluded substantial doubt about going concern did not exist. The filing also identifies recurring losses, low cash/negative cash flow in its risk discussion, and potential need for additional capital; these disclosures should be considered together.
Patent monetization remains uncertain and dependent on costly, prolonged litigation and patent-review proceedings. Apple obtained favorable PTAB rulings in 2016, which DSS appealed; TSMC litigation ended adversely to DSS, and the company also disclosed pending Intel, Samsung, and Qualcomm-related proceedings. SK Hynix settled confidentially.
Debt is secured in part by operating assets and patents. Two Secuprint notes had balloon payments totaling $585,000 due May 31, 2017. Fortress debt and related interests were due in February 2018. The Citizens Bank credit line had no balance at year-end; packaging was reported in covenant compliance for all 2016 quarters.
NYSE MKT accepted a plan for DSS to regain stockholders’ equity listing compliance by October 2, 2017, subject to review; failure to meet requirements could lead to delisting. DSS had regained compliance with a separate minimum-share-price requirement after the reverse split.
Management reported ineffective disclosure controls and material weaknesses in accounting for complex/non-routine transactions, staffing of qualified accounting personnel, and segregation of duties. The auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
Other risks include reliance on concentrated customers, possible impairment of patent and goodwill assets, increasing paperboard costs, dilution from authorized shares and outstanding equity awards, and the uncertain commercial acceptance of newer digital products.

Key facts for investors to verify

Whether operating cash generation can be sustained without the one-time $4.5 million program funding and how restricted cash and BKI-related liabilities affect available liquidity.
Current debt maturities, required Fortress deposits, collateral exposure, and the status of the May 2017 Secuprint balloon payments.
Progress and cash costs of patent litigation and PTAB proceedings, and the potential proceeds DSS may retain after contractual investor and licensor returns.
Whether DSS met NYSE MKT stockholders’ equity requirements by October 2, 2017 and remediated reported control weaknesses.
Revenue and receivable exposure to the two largest customers, and any subsequent changes in customer concentration.