DSS(DSS) - 2018 Q4 - Annual Report

PART I ITEM 1 BUSINESS DSS specializes in fraud and counterfeit protection through five operating segments, including technology management and international operations - DSS specializes in fraud and counterfeit protection for printed documents and digital information, utilizing optical deterrent technologies and patents[11][21] - The company operates in five segments: DSS Packaging and Printing Group, DSS Plastics Group, DSS Digital Group, DSS International, and DSS Technology Management[15][16][17][19][20] - DSS Technology Management's primary mission since 2013 has been patent monetization through commercial litigation, often partnering with third-party funding groups[25][26] Research and Development Costs | Year | Amount ($) | |:-----|:-----------| | 2018 | 146,000 | | 2017 | 106,000 | - The company's primary anti-counterfeiting products and technologies are marketed under the AuthentiGuard® registered trademark, including a cloud-enabled iPhone application for brand authentication[24][30][31] Customer Concentration | Year | % of Consolidated Revenue (Two Customers) | % of Trade Accounts Receivable (Two Customers) | |:-----|:------------------------------------------|:-----------------------------------------------| | 2018 | 44% | 38% | | 2017 | 46% | 38% | ITEM 1A RISK FACTORS The company faces significant risks including going concern doubts, a history of losses, substantial debt, and uncertain litigation outcomes - Substantial doubt exists about the company's ability to continue as a going concern due to low cash balance and negative cash flow, requiring additional capital[49][50][51] - The company has a history of net losses, with profitability in 2018 primarily due to a one-time gain on extinguishment of liabilities[53] Outstanding Indebtedness as of December 31, 2018 | Debt Type | Amount ($) | |:----------------------------------------|:-----------| | Promissory note (packaging facility) | 869,865 | | Promissory note (production facility) | 315,000 | | Promissory note (HP Indigo 7800 press) | 149,542 | | Revolving line of credit (Plastics) | 684,554 | | Revolving line of credit (Premier Pkg) | 339,600 | | Zero-interest promissory note (DSS Asia)| 100,000 | - Patent monetization litigation is time-consuming, costly, and uncertain, with risks of patent invalidation or unfavorable outcomes, especially against larger defendants[66][67][68][70][71][72] - The company's operations in Asia are subject to unique risks, including tariffs, trade restrictions, changes in local regulations, and foreign currency fluctuations[102][103] - Material weaknesses in internal control over financial reporting were identified, specifically regarding qualified accounting personnel and segregation of duties, which could lead to financial statement errors[111][112] ITEM 2 PROPERTIES The company operates through a mix of owned and leased facilities in New York, California, and Hong Kong - Corporate and digital divisions lease 5,700 sq ft in Rochester, NY, until December 2020, at $6,100/month[143] - Plastics division leases 15,000 sq ft until January 2024, at $19,422/month[143] - DSS Asia division leases office space in Hong Kong until November 2020, at $3,382/month[143] - The company owns a 40,000 sq ft packaging and printing plant in Victor, NY[143] ITEM 3 LEGAL PROCEEDINGS The company is actively engaged in patent infringement litigation, with several cases settled and others ongoing against major technology firms - DSSTM filed a patent infringement suit against Apple, Inc in November 2013, related to low power wireless peripheral devices; after IPRs and appeals, the Federal Circuit reversed PTAB's unpatentability finding in March 2018, and litigation resumed[145][357] - DSSTM settled patent infringement lawsuits against Intel, Dell, GameStop, Wal-Mart, and AT&T in January 2019, leading to dismissals of the Federal Circuit appeal and District Court case[146][358] - Semiconductor patent infringement lawsuits against SK Hynix, Samsung, and Qualcomm were resolved through confidential settlement agreements in late 2018 and early 2019, resulting in dismissals of all related District Court cases and Federal Circuit appeals[147][360] - DSS filed LED patent infringement lawsuits against Seoul Semiconductor, Everlight, Cree, Osram, Lite-On, and Nichia in 2017; the Osram and Everlight cases settled, while cases against Seoul Semiconductor, Cree, Lite-On, and Nichia remain pending[149][150][151][152][153][154][361][362][363][365][366][367] ITEM 4 MINE SAFETY DISCLOSURES This item is not applicable to the company PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on the NYSE American, with no dividends paid and no share repurchases in 2018 - DSS common stock trades on the NYSE American LLC Exchange under the symbol "DSS"[159] Common Stock and Equity Compensation as of March 1, 2019 / December 31, 2018 | Metric | Value (as of March 1, 2019) | Value (as of Dec 31, 2018) | |:--------------------------------------------------------------------|:----------------------------|:---------------------------| | Shares outstanding | 17,425,858 | 17,425,858 | | Record holders | 251 | N/A | | Securities to be issued upon exercise of outstanding options, warrants and rights | N/A | 907,655 | | Weighted average exercise price of outstanding options, warrants and rights | N/A | $5.88 | | Securities remaining available for future issuance | N/A | 262,511 | - In December 2018, the Company sold 612,245 shares of common stock to an accredited investor for $0.98 per share, totaling $600,000[161][331] - The company did not pay dividends in 2018 or 2017 and plans to retain earnings for business investment[118][163] - No shares were purchased or repurchased by the registrant in the fiscal year ended December 31, 2018[165] ITEM 6 SELECTED FINANCIAL DATA This item is not applicable to the company ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income in 2018 was driven by a one-time gain, masking an operating loss and ongoing liquidity challenges requiring new capital Overview DSS specializes in anti-counterfeiting technologies and intellectual property monetization, with recent expansion into Asia - DSS specializes in fraud and counterfeit protection, operating production facilities and licensing anti-counterfeiting technologies[169] - The company's business includes a digital division for cloud computing services and DSS Technology Management for intellectual property monetization[169][171] - International operations commenced in January 2018 with DSS Asia Limited in Hong Kong, acquiring Guangzhou Hotapps Technology Ltd in December 2018 to enhance business in China[173] - DSS operates in five segments: packaging and printing, plastics, digital, technology management (IP monetization), and international[174] Results of Operations A 1% revenue decline and 7% expense increase led to an operating loss, though a significant one-time gain resulted in net income Revenue (Year Ended December 31) | Revenue Category | 2018 ($) | 2017 ($) | % Change | |:-------------------------------------|:------------|:------------|:---------| | Printed products | 16,940,000 | 17,026,000 | -1% | | Technology sales, services, licensing| 1,575,000 | 1,636,000 | -4% | | Total Revenue | 18,515,000| 18,662,000| -1% | - Printed products sales decreased 1% in 2018, with a 3% increase in printing and packaging offset by an 11% decrease in plastic card products[175] - Technology sales, services, and licensing decreased 4% in 2018, due to lower licensing royalties and recurring IT services, despite a $260,000 increase in digital authentication product sales[175] Costs and Expenses (Year Ended December 31) | Cost Category | 2018 ($) | 2017 ($) | % Change | |:--------------------------------------------------|:------------|:------------|:---------| | Costs of goods sold (exclusive of D&A) | 11,853,000 | 11,009,000 | 8% | | Sales, general and administrative compensation | 3,615,000 | 3,758,000 | -4% | | Depreciation and amortization | 1,282,000 | 1,414,000 | -9% | | Professional fees | 1,073,000 | 613,000 | 75% | | Stock based compensation | 132,000 | 215,000 | -39% | | Sales and marketing | 559,000 | 401,000 | 39% | | Rent and utilities | 655,000 | 634,000 | 3% | | Other operating expenses | 909,000 | 738,000 | 23% | | Research and development | 146,000 | 106,000 | 38% | | Total Costs and Expenses | 20,224,000| 18,888,000| 7% | - Cost of goods sold increased 8% due to higher paperboard costs and outside service costs in the packaging division[177] - Professional fees increased 75% due to higher legal fees for IP litigation and consulting costs for Asia Pacific market expansion[180] - Research and development costs increased 38% due to the development of proprietary blockchain solutions for the AuthentiGuard product line[185] Other Income and Expenses (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | % Change | |:------------------------------------------|:------------|:------------|:---------| | Interest income | 9,000 | 4,000 | 125% | | Interest expense | (145,000) | (223,000) | -35% | | Amortization of deferred financing costs | (47,000) | (154,000) | -69% | | Impairment of investment | (160,000) | - | 100% | | Gain on extinguishment of liabilities, net| 3,533,000 | - | 100% | | Total Other Income and Expense | 3,190,000| (373,000)| 955% | - A net gain of $3.5 million from the extinguishment of liabilities in June 2018 significantly impacted other income, reflecting the discharge of notes and write-off of underlying patents[189] - An impairment of $160,000 was recognized on the investment in Singapore eDevelopment (SED) due to a decline in share price, influenced by the U.S.-China tariff dispute[188] Net Income (Loss) Per Share (Year Ended December 31) | Metric | 2018 | 2017 | % Change | |:-------------------------------------|:------------|:------------|:---------| | Net income (loss) | $1,465,000 | $(578,000) | 353% | | Basic income (loss) per common share | $0.09 | $(0.04) | 325% | | Diluted income (loss) per common share| $0.09 | $(0.04) | 325% | | Basic shares outstanding | 16,724,376 | 14,424,344 | 16% | | Diluted shares outstanding | 16,930,805 | 14,424,344 | 17% | - Net income of $1.5 million in 2018 was primarily driven by the $3.5 million gain on extinguishment of liabilities, offsetting operating losses[191] Liquidity and Capital Resources Negative operating cash flows necessitate raising additional capital in 2019 to ensure going concern status Cash and Working Capital (as of December 31, 2018) | Metric | Amount ($) | |:-------------------|:-----------| | Cash | 2,400,000 | | Working Capital | 1,100,000 | - The company had negative cash flows from operating and investing activities for the past two years and expects continued negative operating cash flows in 2019, indicating a need for additional capital[197] - Management plans to raise at least $2 million by the end of Q2 2019, continue growth in operating segments, and expand the AuthentiGuard product line internationally to address going concern concerns[199] Net Cash Flows (Year Ended December 31) | Activity | 2018 ($) | 2017 ($) | |:---------------------|:--------------|:--------------| | Operating Activities | (1,382,921) | (1,289,134) | | Investing Activities | (1,103,551) | (970,371) | | Financing Activities | 489,829 | 654,786 | Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements that could materially affect its financial condition - The company has no off-balance sheet arrangements with a material effect on its financial condition[201] Inflation Inflation did not have a material effect on the company's results of operations in 2018 or 2017 - Inflation did not materially affect results in 2018 or 2017, as cost increases were generally passed to customers or absorbed through efficiency[202] Critical Accounting Policies Significant judgments and estimates are required for asset valuations, revenue recognition, and tax accounting - Key estimates include accounts receivable, fair values of intangible assets and goodwill, useful lives of assets, stock-based awards, deferred revenue, and income taxes[204][243] - The company adopted ASC 2014-09 (Topic 606) for revenue recognition effective January 1, 2018, with no material impact on financial statements[205][258] - Revenue from products and services is recognized when title passes or service is completed/accepted; license revenue is recognized when reported by licensee or upon litigation settlement execution[206][207][259] - Goodwill and other intangible assets (patents, customer lists, non-compete agreements) are subject to annual impairment testing and amortized over their useful lives[209][210][250][251] - Contingent legal fees are expensed when related revenues are recognized; unamortized patent acquisition costs are expensed if enforcement actions do not yield future royalties[211][265] - Share-based payments are measured at fair value using the Black-Scholes-Merton model and recognized over the service period[212][257] - Income taxes are recognized for current and deferred tax effects, with deferred tax assets reduced by a valuation allowance[213][269] ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not applicable to the company ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited financial statements show a net income in 2018 due to a one-time gain, despite an operating loss and negative cash flows - The financial statements were audited by Freed Maxick CPAs, P.C, who issued an unqualified opinion[219][223][224] - The consolidated financial statements include Balance Sheets, Statements of Operations and Comprehensive Income (Loss), Statements of Cash Flows, and Statements of Changes in Stockholders' Equity[218] Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2018 ($) | 2017 ($) | |:-----------------------------|:-------------|:-------------| | Cash | 2,317,659 | 4,188,623 | | Total Current Assets | 6,515,035 | 8,382,482 | | Total Assets | 15,279,786 | 17,430,777 | | Total Current Liabilities | 5,423,206 | 9,283,701 | | Total Liabilities | 7,690,453 | 12,645,018 | | Total Stockholders' Equity | 7,574,333 | 4,785,859 | Consolidated Statements of Operations Highlights (Year Ended December 31) | Metric | 2018 ($) | 2017 ($) | |:----------------------------------------|:-------------|:-------------| | Total Revenue | 18,515,082 | 18,661,872 | | Total Costs and Expenses | 20,223,743 | 18,887,736 | | Operating Loss | (1,708,661) | (225,864) | | Gain on extinguishment of liabilities, net| 3,532,659 | - | | Net Income (Loss) | 1,464,969 | (578,156) | | Basic Income (Loss) Per Common Share | 0.09 | (0.04) | Consolidated Statements of Cash Flows Highlights (Year Ended December 31) | Activity | 2018 ($) | 2017 ($) | |:---------------------------------------|:--------------|:--------------| | Net cash used by operating activities | (1,382,921) | (1,289,134) | | Net cash used by investing activities | (1,103,551) | (970,371) | | Net cash provided by financing activities| 489,829 | 654,786 | | Net decrease in cash | (1,996,643) | (1,604,719) | | Cash and restricted cash at end of year| 2,447,985 | 4,444,628 | NOTE 1 - DESCRIPTION OF BUSINESS The company operates in security printing and packaging, digital services, and intellectual property monetization - The Company operates in security/commercial printing, packaging, and plastic ID markets, focusing on fraud and counterfeit protection[241] - DSS Digital Inc provides digital information services, and DSS Technology Management, Inc monetizes intellectual property[241] - International operations commenced in 2018 through DSS Asia Limited in the Asia Pacific market[241] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details key accounting policies, including the use of estimates, asset valuation, and revenue recognition under Topic 606 - Consolidated financial statements include DSS and its subsidiaries, with intercompany balances eliminated[242] - The preparation of financial statements requires significant estimates and assumptions, including for accounts receivable, inventory, intangible assets, goodwill, and income taxes[243] Cash and Restricted Cash (as of December 31) | Category | 2018 ($) | 2017 ($) | |:----------------|:------------|:------------| | Cash | 2,317,659 | 4,188,623 | | Restricted Cash | 130,326 | 256,005 | | Total | 2,447,985| 4,444,628| - Accounts receivable are carried at invoice amount less a $50,000 allowance for doubtful accounts[245] - Inventory is stated at the lower of cost or net realizable value using the FIFO method[246] - Property, plant, and equipment are recorded at cost and depreciated using the straight-line method[247] - Investment in Singapore eDevelopment Limited is recorded at cost less impairment, as fair value is not readily determinable[249] - Goodwill and other intangible assets (patents, customer lists, non-compete agreements) are tested for impairment annually and amortized over their estimated useful lives[250][251] - Derivative instruments, specifically an interest rate swap, are recorded at fair value as cash flow hedges[256] - The company adopted Topic 606 for revenue recognition effective January 1, 2018, with no material impact[258] - Research and development costs are expensed as incurred, totaling $146,000 in 2018 and $106,000 in 2017[267] - The company adopted ASU 2016-18 (Restricted Cash) retrospectively as of January 1, 2018, and ASU 2016-15, 2017-09, and 2018-03 with no material impact[282][283][284][285] - ASU 2016-02 (Leases) will be adopted January 1, 2019, impacting the balance sheet with right-to-use assets and lease liabilities[279] - ASU 2017-04 (Goodwill Impairment) will be effective for fiscal years beginning after December 15, 2019[281] NOTE 3 – INVENTORY Total inventory decreased in 2018, with a notable shift from raw materials to finished goods Inventory Composition (as of December 31) | Category | 2018 ($) | 2017 ($) | |:----------------|:------------|:------------| | Finished Goods | 1,144,695 | 965,757 | | WIP | 339,091 | 383,270 | | Raw Materials | 79,807 | 302,219 | | Total | 1,563,593| 1,651,246| NOTE 4 - INVESTMENT The company recognized a $160,000 impairment on its investment in Singapore eDevelopment Limited in Q4 2018 - In September 2017, DSS acquired SED shares and warrants for $484,930 in exchange for its common stock[288] - The investment is carried at cost less impairment due to the lack of a readily determinable fair value and liquidity restrictions[288] - An impairment of approximately $160,000 was recognized in Q4 2018 due to a decline in SED's share price, influenced by the U.S.-China tariff dispute[288] NOTE 5 - PROPERTY PLANT AND EQUIPMENT Net property, plant, and equipment increased slightly in 2018, with machinery and equipment being the largest component Property, Plant and Equipment (as of December 31) | Category | Estimated Useful Life | 2018 Cost ($) | 2017 Cost ($) | |:--------------------------|:----------------------|:--------------|:--------------| | Machinery and equipment | 5-10 years | 7,723,763 | 6,796,617 | | Building and improvements | 39 years | 1,923,027 | 1,923,027 | | Land | N/A | 185,000 | 185,000 | | Leasehold improvements | 3-10 years | 760,286 | 722,984 | | Furniture and fixtures | 7 years | 94,364 | 71,903 | | Software and websites | 3 years | 187,511 | 171,007 | | Total Cost | | 10,873,951| 9,870,538 | | Less: Accumulated Depreciation | | 5,859,457 | 5,064,898 | | Net Property, Plant, and Equipment | | 5,014,494 | 4,805,640 | - Approximately $550,000 in equipment in process will be placed into service in 2019[290] NOTE 6 - INTANGIBLE ASSETS AND GOODWILL Net intangible assets decreased due to a patent write-off, while goodwill remained unchanged with no impairment found Intangible Assets (as of December 31) | Category | 2018 Net Carrying Amount ($) | 2017 Net Carrying Amount ($) | |:------------------------------------------|:-----------------------------|:-----------------------------| | Acquired intangibles (customer lists, licenses, non-compete agreements) | 460,181 | 186,550 | | Acquired intangibles (patents and patent rights) | - | 551,058 | | Patent application costs | 421,230 | 483,144 | | Total Net Carrying Amount | 881,411 | 1,220,752 | - In June 2018, the company wrote off semiconductor-related patents with a net unamortized carrying amount of $295,470 due to an agreement with Fortress Credit Co LLC[292] - A $304,000 intangible asset was recorded for a two-year non-compete agreement in July 2018[293] - Acquired a $85,734 license to do business in China through the acquisition of Guangzhou Hotapps Technology Ltd in October 2018[294] Amortization Expense and Future Projections | Year | Amortization Expense ($) | |:-----|:-------------------------| | 2018 | 487,000 | | 2017 | 687,000 | | Expected Future Amortization: || | 2019 | 345,100 | | 2020 | 209,800 | | 2021 | 100,100 | | 2022 | 101,500 | | 2023 | 42,700 | - Goodwill remained unchanged at $2,453,597 in 2018 and 2017, with no impairment indicated for the Packaging and Plastics reporting units[300][302] NOTE 7 – SHORT TERM AND LONG-TERM DEBT The company managed its debt through credit lines and promissory notes, with a significant liability extinguishment in June 2018 - Premier Packaging has a revolving credit line of up to $800,000 with Citizens Bank, with $0 outstanding as of December 31, 2018[303] - Premier Packaging utilized an equipment acquisition line of credit with Citizens Bank, with a balance of $339,600 as of December 31, 2018[304] - Plastic Printing Professionals had an equipment acquisition line of credit with Citizens Bank, with a balance of $684,554 as of December 31, 2018, not yet converted to a term note[305] Long-Term Debt Balances (as of December 31) | Debt Type | 2018 Balance ($) | 2017 Balance ($) | |:----------------------------------------|:-----------------|:-----------------| | Convertible Note (Secuprint) | 0 | 50,000 | | Promissory Note (Secuprint presses) | 0 | 325,000 | | Equipment Loan (Peoples Capital) | 0 | 286,560 | | Term Note (HP Indigo 7800 Digital press)| 149,542 | 257,007 | | Promissory Note (packaging plant) | 869,865 | 915,107 | | Promissory Note (building improvements) | 315,000 | 345,000 | | Unsecured Promissory Note (Guangzhou Hotapps) | 100,000 | 0 | | Other Debt (Fortress Investment Agreement) | 0 | 3,702,129 | - In June 2018, an agreement with Fortress Credit Co LLC discharged $3,714,129 in liabilities, resulting in a net gain on extinguishment of liabilities of $3,532,659[322] Scheduled Principal Payments of Long-Term Debt (Subsequent to December 31, 2018) | Year | Amount ($) | |:-----|:-----------| | 2019 | 713,427 | | 2020 | 427,069 | | 2021 | 959,343 | | 2022 | 221,811 | | 2023 | 136,911 | | Total | 2,458,561| NOTE 8 – OTHER LIABILITIES Other liabilities primarily consist of funding agreements for the company's patent monetization programs - Approximately $2,054,000 (with $1,780,000 short-term) in other liabilities relates to the BKI Proceeds Investment Agreement for the LED Patent Portfolio[325] - This BKI liability includes $1,500,000 for estimated future Inter Partes Review costs and $955,350 for working capital, amortized against SG&A[325] - Approximately $476,000 (from $750,000 received) is in other liabilities from a Proceed Right Agreement for Bluetooth patents, used for 50% of litigation expenses[326] - Contingent equity interests of $459,000 under the Fortress agreement were eliminated in June 2018[327] NOTE 9 - STOCKHOLDERS' EQUITY Stockholders' equity increased significantly in 2018, driven by net income and the issuance of common stock - Stockholders' equity increased to $7,574,333 in 2018 from $4,785,859 in 2017[238] - A one-for-four reverse stock split was effected on August 26, 2016[328] - In 2018, the company sold 826,531 shares of common stock, generating $1,175,755 in net proceeds, including the collection of a $300,000 subscription receivable[238][329][331] Stock Warrants Activity (Year Ended December 31) | Metric | 2018 Warrants | 2017 Warrants | |:-------------------------------------|:--------------|:--------------| | Outstanding at January 1 | 2,645,090 | 2,812,515 | | Granted during the year | - | 391,667 | | Lapsed/terminated | (1,214,974) | (559,092) | | Outstanding at December 31 | 1,430,116 | 2,645,090 | | Weighted average exercise price (Dec 31) | $4.00 | $10.98 | Stock Options Activity (Year Ended December 31) | Metric | 2018 Options | 2017 Options | |:-------------------------------------|:--------------|:--------------| | Outstanding at January 1 | 482,667 | 635,597 | | Granted | 405,000 | - | | Lapsed/terminated | (105,012) | (152,930) | | Outstanding at December 31 | 782,655 | 482,667 | | Weighted average exercise price (Dec 31) | $6.66 | $10.72 | - Stock-based compensation expense was $132,000 in 2018 and $215,000 in 2017[342] NOTE 10 - INCOME TAXES The company reported a small tax provision in 2018, with a valuation allowance limiting the benefit of its significant NOL carryforwards Income Tax Provision (Benefit) (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | |:-----------------------------|:------------|:------------| | Currently payable | 6,920 | (8,122) | | Deferred | 9,673 | (12,840) | | Total Income Tax Provision (Benefit) | 16,593 | (20,962)| - The Tax Cuts and Jobs Act of 2017 reduced the U.S. federal corporate tax rate from 35% to 21%[344] - The valuation allowance for deferred tax assets decreased by approximately $424,000 in 2018 due to taxable income[347] - The company has approximately $46.6 million in federal net operating loss carryforwards (NOLs) expiring from 2022 through 2037, subject to annual limitations[347] Effective Tax Rate Reconciliation (Year Ended December 31) | Factor | 2018 (%) | 2017 (%) | |:-------------------------------------|:---------|:---------| | Statutory United States federal rate | 21.0% | 34.0% | | State income taxes net of federal benefit | 4.0 | 5.5 | | Permanent differences | 2.2 | 0.8 | | Other | 0.7 | - | | Foreign taxes | 1.7 | - | | Tax rate change | - | 11.5 | | Change in valuation reserves | (28.5) | (48.3) | | Effective tax rate | 1.1% | 3.5% | NOTE 11 - DEFINED CONTRIBUTION PENSION PLAN The company increased its 401(k) matching contributions in 2018 following a change in its matching formula - The company maintains a 401(k) Plan for eligible employees[351] 401(k) Matching Contributions | Year | Amount ($) | |:-----|:-----------| | 2018 | 136,000 | | 2017 | 103,000 | - Effective January 1, 2018, the matching formula changed to 100% of the first 1% and 50% of additional contributions up to a 3.5% maximum[351] NOTE 12 – COMMITMENTS AND CONTINGENCIES The company has significant future lease commitments and is involved in ongoing patent infringement litigation - The company leases office space for its corporate, digital, plastics, and Asia divisions, and owns a packaging/printing plant[352] Future Minimum Lease Commitments (as of December 31, 2018) | Year | Equipment Leases ($) | Facilities Operating Leases ($) | Total ($) | |:----------|:---------------------|:--------------------------------|:----------| | 2019 | 23,370 | 347,116 | 370,486 | | 2020 | 12,555 | 343,963 | 356,518 | | 2021 | 7,751 | 265,630 | 273,381 | | 2022 | 1,176 | 254,682 | 255,858 | | Thereafter| - | 262,322 | 262,322 | | Total | 44,852 | 1,473,713 | 1,518,565| - Minimum severance payments under employment agreements for five management team members aggregate to approximately $510,000[356] - Ongoing patent infringement lawsuits include those against Apple (wireless peripheral patents) and Seoul Semiconductor, Cree, Lite-On, and Nichia (LED patents)[357][361][363][366][367] - Settled patent infringement lawsuits include those against Intel, Dell, Samsung, Qualcomm, Osram, and Everlight[358][360][362][365] - The company accrues for potential litigation losses when probable and estimable; contingent legal fees are expensed when related revenues are recognized[368][369] NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION The company disclosed cash paid for interest and several non-cash investing and financing activities for 2018 Supplemental Cash Flow Information (Year Ended December 31) | Item | 2018 ($) | 2017 ($) | |:----------------------------------------------|:---------|:---------| | Cash paid for interest | 133,000 | 127,000 | | Non-cash investing and financing activities: | | | | Gain from change in fair value of interest rate swap derivatives | 16,000 | 10,000 | | Common Stock issued for investment | - | 485,000 | | Elimination of contingent liabilities through agreement | 459,000 | - | | Purchase of intangible assets to be paid in installments | 304,000 | - | | Purchase of intangible assets with term note inclusive of tax | 119,065 | - | NOTE 14 - SEGMENT INFORMATION The company operates two reportable segments, Printed Products and Technology, with Printed Products generating the vast majority of revenue - DSS's businesses are organized into two reportable segments: Printed Products (Packaging and Printing, Plastics) and Technology (DSS Digital Group, DSS Technology Management, DSS International)[372] Revenue by Reportable Segment (Year Ended December 31) | Segment | 2018 Revenue ($) | 2017 Revenue ($) | |:--------------------|:-----------------|:-----------------| | Packaging and Printing | 12,957,000 | 12,556,000 | | Plastics | 3,983,000 | 4,470,000 | | Technology | 1,575,000 | 1,636,000 | | Corporate | - | - | | Total Revenue | 18,515,000 | 18,662,000 | Printed Products Revenue Information (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | |:------------------------------------------|:------------|:------------| | Packaging Printing and Fabrication | 11,741,000 | 11,450,000 | | Commercial and Security Printing | 1,241,000 | 1,105,000 | | Technology Integrated Plastic Cards and Badges | 1,354,000 | 1,902,000 | | Plastic Cards, Badges and Accessories | 2,604,000 | 2,569,000 | | Total Printed Products | 16,940,000| 17,026,000| Technology Sales, Services and Licensing Revenue Information (Year Ended December 31) | Category | 2018 ($) | 2017 ($) | |:------------------------------------------|:------------|:------------| | Information Technology Sales and Services | 345,000 | 458,000 | | Digital Authentication Products and Services | 772,000 | 512,000 | | Royalties from Licensees | 458,000 | 666,000 | | Total Technology Sales, Services and Licensing | 1,575,000| 1,636,000| - International revenue comprised 3.4% of total revenue in 2018 (3.2% in 2017)[373] NOTE 15 – SUBSEQUENT EVENTS In February 2019, the company entered into a $500,000 convertible note to fund expansion in Asia - On February 18, 2019, DSS entered a $500,000 Convertible Promissory Note with LiquidValue Development Pte Ltd[377] - The note is convertible into common stock at $1.12 per share, carries an 8% interest rate, and has a 12-month term[377] - Proceeds were used to purchase a license for anti-keylogging spyware in Asia and fund its marketing/distribution setup[377] ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with the company's accountants - No changes in or disagreements with accountants on accounting and financial disclosure[378] ITEM 9A CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal controls were not effective due to a material weakness - Disclosure controls and procedures were not effective as of December 31, 2018[380] - Internal control over financial reporting was not effective as of December 31, 2018, based on COSO criteria[381] - A material weakness was identified: insufficient qualified accounting personnel and inadequate segregation of duties[382] - Remediation plans include hiring a VP of Finance, engaging an accounting firm for internal control evaluation, and enhancing financial statement preparation/review processes and controls[385] ITEM 9B OTHER INFORMATION The company plans to hold its 2019 Annual Meeting of Stockholders in May or June 2019 - The 2019 Annual Meeting of Stockholders is planned for May or June 2019[389] PART III ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE This information is incorporated by reference from the company's 2019 Annual Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement[391] - The company has codes of business conduct and ethics for all employees and directors, available on www.dsssecure.com[392](index=392&type=chunk) ITEM 11 EXECUTIVE COMPENSATION This information is incorporated by reference from the company's Proxy Statement - Executive compensation information is incorporated by reference from the Proxy Statement[393] ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference from the company's Proxy Statement - Security ownership information is incorporated by reference from the Proxy Statement[393] ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE This information is incorporated by reference from the company's Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[394] ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES This information is incorporated by reference from the company's Proxy Statement - Principal accountant fees and services information is incorporated by reference from the Proxy Statement[395] PART IV ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists all exhibits filed with the Form 10-K, including governance documents, agreements, and certifications - Exhibits include corporate governance documents (Certificate of Incorporation, By-laws), equity plans, and various agreements related to investments, loans, and patent transactions[397][398] - Certifications from the Chief Executive Officer and Chief Financial Officer (Rule 13a-14(a)/15d-14(a) and 18 U.S.C 1350) are filed[398] - XBRL (eXtensible Business Reporting Language) documents are included for financial data tagging[398] SIGNATURES The report was duly signed by the company's executive officers and directors on March 15, 2019 - The report was signed on March 15, 2019, by the Chief Executive Officer, Chief Financial Officer, and other directors[399][401][402]