DSS, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. DSS operates in security and commercial printing, packaging, plastic cards, digital authentication and services, and intellectual-property licensing and monetization.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $4.11 million | $4.09 million | $8.92 million | $8.46 million |
| Operating loss | $0.99 million | $0.82 million | $1.41 million | $1.15 million |
| Net income (loss) | ($1.03 million) | $2.68 million | ($1.48 million) | $2.27 million |
| Cash from operations | Not presented quarterly | Not presented quarterly | ($1.72 million) | ($0.45 million) |
- Q2 printed-products revenue fell 3% to $3.62 million; technology sales, services and licensing rose 34% to $0.48 million, primarily on increased AuthentiGuard sales. First-half revenue grew 5%, with packaging and technology contributing to growth.
- Gross profit was approximately $1.21 million in Q2, a margin of about 29%, versus $1.33 million and about 33% a year earlier. First-half gross profit was approximately $2.86 million, a margin of about 32%, versus $3.13 million and about 37% in 2018. Cost of revenue increased faster than revenue.
- At June 30, cash and cash equivalents were $5.32 million, restricted cash was $0.05 million, working capital was approximately $4.93 million, and stockholders’ equity was $11.66 million.
- Reported debt was approximately $2.31 million, excluding lease liabilities. Operating lease liabilities totaled $1.34 million. The packaging plant loans were refinanced in June with a $1.16 million fixed-rate note at 4.22%, maturing in 2029 with a $0.71 million balloon payment.
- First-half investing cash outflow was $0.61 million, including $0.35 million for an ACS licensing agreement and $0.26 million for equipment. Financing provided $5.26 million, including approximately $4.88 million net proceeds from the June equity offering and $0.50 million from a convertible note that was converted to shares.
Changes versus prior period and unusual items
- 2018 comparative-period net income included a $3.53 million gain on extinguishment of liabilities; there was no comparable gain in 2019. This substantially explains the shift from reported 2018 profit to 2019 loss.
- Operating losses increased, with management citing higher direct costs as a percentage of sales, higher professional fees, and costs associated with expansion in Asia. Professional fees rose 24% in the first half, largely due to patent litigation and outsourced corporate legal services.
- The June public offering issued 11.2 million shares at $0.50 per share. The underwriters exercised an option for another 519,186 shares on July 18, 2019. The filing reports approximately $5.2 million net proceeds including that later transaction.
- DSS adopted lease accounting standard ASC 842 on January 1, 2019, recording right-of-use assets and lease liabilities; the adoption did not affect reported operating results.
Outlook, risks and contingencies
- Management projected negative operating cash flow in 2019 but stated that approximately $5.7 million of cash and restricted cash at quarter-end, together with offering proceeds, was expected to fund current and planned operations through 2020. Management said substantial doubt about the company’s ability to continue as a going concern had been alleviated.
- Planned cash uses include operating losses, working capital, intellectual-property litigation, and the global rollout of AuthentiGuard. Management cited growth, international expansion, and cost control as priorities; the filing provides no quantified revenue or earnings guidance.
- Patent litigation remains material. In the Seoul Semiconductor matters, the PTAB found claims in three patents unpatentable in decisions issued in April, June and July 2019; DSS appealed one decision and was reviewing its options regarding another. Related cases and other patent suits remained pending or stayed. The filing warns that adverse litigation outcomes could materially affect results, cash flows or financial condition.
- Two customers represented approximately 36% and 12% of first-half 2019 revenue; they accounted for 55% and 5% of accounts receivable at June 30.
- Management reported that disclosure controls and procedures were not effective because previously identified material weaknesses remained. Remediation had begun but was not yet fully implemented and tested.
- The company reported no material changes to the risk factors in its 2018 Form 10-K. It stated that it had no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether operating cash burn, planned expenses and available capital track management’s expectation of funding operations through 2020.
- Whether AuthentiGuard and other technology revenue can grow enough to offset weaker printed-product margins and operating losses.
- Progress and potential outcomes of the LED patent proceedings, including appeals and stayed infringement cases, and the related legal-cost burden.
- The effect of the 11.2 million-share offering and subsequent over-allotment on share count, dilution and future financing needs.
- Customer concentration, collection of concentrated receivables, and remediation of the disclosed control weaknesses.
- The balance sheet reports cash and cash equivalents of $5,321,344, while MD&A states $5,321,444; verify the precise amount. The filing also describes net offering proceeds as approximately $5.2 million including the July option exercise, while the first-half cash-flow statement records $4.88 million of stock issuance proceeds.