DSS, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars. DSS operates packaging and printing, plastics, digital authentication, IP monetization, and direct marketing businesses, alongside newer ventures that were mostly in start-up or organizational stages. The quarter included the consolidation of AMRE Asset Management Inc. (AAMI), in which DSS acquired a 52.5% controlling interest.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $5.001 million | $4.809 million |
| Gross profit, calculated as revenue less cost of revenue | $1.730 million; 34.6% margin | $1.649 million; 34.3% margin |
| Operating loss | $(1.956) million | $(0.422) million |
| Net loss | $(1.967) million | $(0.451) million |
| Loss per share, basic and diluted | $(1.23) | $(0.77) |
| Cash used in operating activities | $(0.469) million | $(0.876) million |
- Revenue rose 4%. Printed-products revenue fell 10% to $3.949 million; technology, services and licensing revenue increased 8% to $479,000; direct marketing contributed $573,000, with no comparable 2019 revenue.
- Total costs and expenses increased 33% to $6.957 million. Key increases included professional fees, sales and marketing, compensation, and a $685,000 goodwill impairment charge.
- At March 31, cash was $3.802 million, up from $1.096 million at year-end. Current assets were $9.641 million and current liabilities $4.157 million, representing approximately $5.484 million of working capital. The current ratio was approximately 2.3.
- Investing activities used $1.133 million, including $566,000 for marketable securities, $462,000 for notes receivable, and $105,000 for equipment. Financing provided $4.308 million, primarily from approximately $4.0 million of net common-stock offering proceeds.
- Reported current and long-term debt, including the revolving line, totaled approximately $3.630 million; lease liabilities were another $1.119 million. The $800,000 revolving credit line matured May 31, 2020 and was renewable annually. Plastic Printing Professionals had received a one-time waiver for a 2019 covenant violation.
Changes, outlook, and risks
- Printed-products revenue declined mainly due to lower packaging and technology-card sales. Management attributed higher technology revenue primarily to AuthentiGuard sales; direct marketing was a new revenue source.
- The $685,000 goodwill impairment related to DSS Plastics Group and reflected factors identified after quarter-end, including COVID-19. The company warned that pandemic-related disruption could affect supply, operations, inventory values, goodwill, and other estimates; it could not reasonably estimate the overall impact. Manufacturing facilities in California and New York remained operational as essential businesses.
- Management expected 2020 cash use to support working capital, investments and acquisitions, AuthentiGuard research and development and marketing, and manufacturing improvements. It cited international AuthentiGuard expansion, expense controls, and lower IP monetization spending as plans to improve performance. There was no specific revenue or earnings guidance.
- Although management reported negative operating and investing cash flows over the prior two years, it stated that $3.8 million of cash at quarter-end was expected to fund current and planned operations through May 2021 and concluded that substantial doubt about going concern had been alleviated. This depends on operating assumptions and planned cost controls.
- Significant legal matters included DSS’s appeal of a non-infringement judgment in its Apple patent case, patent disputes with LED companies, litigation brought by Intel and Apple alleging antitrust and unfair-competition violations, and disputes with a former CEO. The filing says adverse decisions could materially affect results, cash flows, or financial condition.
- Disclosure controls and procedures were reported as ineffective at March 31, 2020 because previously identified material weaknesses remained; remediation was underway but not yet fully implemented and tested.
Other material transactions and subsequent events
- DSS raised approximately $4.0 million net in a February 2020 underwritten stock offering; the chairman purchased $2.0 million of shares. Share issuance increased the quarter-end share count substantially.
- DSS acquired a 52.5% interest in AAMI, which held a 93% interest in American Medical REIT Inc. (AMRE). DSS also made an $800,000, 8% note to AMRE, due in 2022, with warrants; the note is eliminated in consolidation. AMRE had not yet acquired medical real estate at quarter-end.
- In April 2020 DSS received approximately $963,000 in Paycheck Protection Program loan proceeds; forgiveness was subject to program conditions.
- On May 7, 2020, DSS effected a 1-for-30 reverse stock split, retroactively reflected in the financial statements. A proposed exchange for Impact BioMedical, valued at $50 million in stock and convertible preferred stock, remained subject to approvals and other closing conditions.
Key facts for investors to verify
- Whether COVID-19 effects, customer concentration, and supply or demand disruption materially change revenue, margins, cash needs, or further impairment estimates.
- Whether operating cash burn declines enough to support management’s stated funding horizon, and whether the revolving credit line was renewed or replaced after its May 2020 maturity.
- Progress and performance of direct marketing, AuthentiGuard, the AAMI/AMRE investment, and assets obtained through RBC note enforcement; valuations of acquired collateral were pending.
- Developments in material litigation, including the Apple appeal and Intel/Apple claims, and the potential financial exposure from the former-CEO disputes.
- Implementation and testing of remediation for the material weaknesses, and the closing status and dilution or redemption implications of the proposed Impact BioMedical transaction.