DSS, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
DSS, Inc. reported unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Its activities span packaging and security printing, digital authentication, direct marketing, and biohealth, alongside investments and newer business initiatives. The company reported four operating segments: Packaging and Printing, Digital, Direct Marketing, and Biohealth.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $4.943 million | $4.221 million; up 17% |
| Gross profit and margin | $1.590 million; 32.2% | $1.580 million; 37.4% |
| Operating loss | $3.229 million | $0.917 million |
| Continuing-operations loss | $3.898 million | $0.920 million |
| Net loss | $4.012 million | $1.966 million |
| Cash used by operating activities | $7.793 million | $0.581 million |
| Cash and cash equivalents at quarter-end | $52.061 million | $5.226 million at Dec. 31, 2020 |
| Total assets / stockholders’ equity | $142.803 million / $133.616 million | $91.919 million / $76.545 million at Dec. 31, 2020 |
| Debt | $2.159 million of current and long-term debt, net | $2.254 million at Dec. 31, 2020 |
Revenue growth was led by printed products, up 21%; technology sales, services and licensing rose 2%, and direct marketing rose 6%. Cost of revenue grew 27%, faster than revenue, and reported gross margin declined. Selling, general and administrative expense, including stock compensation, rose to $4.301 million from $2.194 million. The quarter included a $1.076 million loss on investments, a $579,000 equity-method investment loss, a $116,000 gain on debt extinguishment, and an $838,000 income tax benefit.
Financing activities provided $61.089 million, principally from common-stock offerings. The company issued 21.834 million shares during the quarter; shares outstanding rose from 5.836 million at year-end 2020 to 27.670 million at March 31, 2021. Management said cash was sufficient for expected requirements for at least 12 months from the filing date and that it expected access to equity and debt financing. The reported current assets of $59.874 million and current liabilities of $4.340 million indicate substantial near-term balance-sheet liquidity.
Material changes, outlook, risks and unusual items
- Loss from continuing operations increased substantially year over year, reflecting higher operating costs and investment-related losses. Operating cash outflow also increased.
- The January and February 2021 offerings generated approximately $61 million in net proceeds in total, materially increasing cash and equity while substantially diluting existing common shareholders.
- Management reported that the COVID-19 pandemic affected business lines differently and warned estimates could be adversely affected, including through inventory losses and asset impairments. DSS Plastics was sold in 2020 and presented as discontinued operations.
- Two customers represented 40% of Q1 2021 revenue and 65% of trade receivables at March 31, 2021, creating customer-concentration exposure.
- Disclosure controls and procedures were deemed ineffective at quarter-end because previously reported material weaknesses remained. Remediation was underway but not complete.
- Material litigation includes the Apple patent case, in which the Federal Circuit affirmed the non-infringement judgment on April 30, 2021; the company was evaluating further proceedings. Other matters include disputes with a former CEO and a lawsuit alleging improper transfers related to RBC assets. Outcomes and potential financial exposure are uncertain.
- After quarter-end, DSS funded a $30 million convertible note to SHRG, under terms including 8% annual interest, a 10% origination fee, conversion rights, and warrants. It also sold DSS Digital on May 7, 2021 for stated consideration of $5 million, including $3 million cash, potential earn-out, and trade credits or license-fee rebates. These are subsequent events, not Q1 cash flows or completed Q1 transactions.
- Other announced subsequent events include a proposed $5 million convertible note to Puradigm, a new 12-year Premier Packaging facility lease, an agreement to sell Premier Packaging’s existing facility for $2.1 million, and a planned $3.2 million printing-press purchase.
No quantitative earnings or revenue guidance is provided. The filing’s MD&A contains an apparent net-loss figure of $34.012 million in one table, inconsistent with the financial statements and other MD&A discussion, which report $4.012 million; the filing text does not provide a clear explanation for the discrepancy.
Important facts for investors to verify
- Confirm the correct Q1 2021 net loss and whether the $34.012 million MD&A figure is a typographical error.
- Review the cash raised, share counts, offering terms, and potential dilution from common and convertible preferred securities.
- Assess the risks and terms of the $30 million SHRG note, including conversion, warrants, related-party governance, and repayment prospects.
- Track customer concentration, operating cash burn, margin pressure, and whether the company’s liquidity outlook remains achievable.
- Monitor litigation developments, control-remediation progress, and realization of the DSS Digital sale’s earn-out and other consideration.