DSS, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. DSS develops and sells secure printing, packaging, plastic-card and digital authentication products, and acquires and monetizes intellectual property. The filing compares results with Q1 2018.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $4.809 million | $4.378 million | Up 10%; printed products rose 11%, while technology sales, services and licensing declined 2%. |
| Gross profit and margin | $1.649 million; 34.3% | $1.796 million; 41.0% | Gross profit fell as cost of revenue increased 22%, faster than sales. |
| Operating loss | $422,000 | $332,000 | Operating margin was approximately (8.8%) versus (7.6%). |
| Net loss | $450,450 | $406,091 | Loss per share was $0.03 versus $0.02. |
| Operating cash flow | $(876,292) | $(93,452) | Higher cash use reflected lower accrued liabilities and timing of receivables and payables. |
| Investing cash flow | $(560,945) | $(148,717) | Included $210,945 of equipment purchases and $350,000 for the ACS agreement. |
| Financing cash flow | $435,898 | $81,458 | Included a $500,000 convertible-note borrowing, later converted to equity, and $57,309 of debt payments. |
Cash and restricted cash totaled $1.447 million at quarter-end, down from $2.448 million at December 31, 2018. Cash alone was $1.337 million. Working capital was approximately $479,000. Current assets were $5.597 million versus current liabilities of $5.118 million.
Long-term debt, including its current portion, was approximately $2.379 million; operating lease liabilities were $1.421 million. The $800,000 revolving credit line was undrawn and matured May 31, 2019. A separate $300,000 balloon payment was due in July 2019. The filing reports compliance with annual debt covenants for 2018.
Changes and notable items
- Packaging and printing revenue increased, while higher materials costs and outside packaging services reduced gross margin. Printed-products revenue was $4.366 million versus $3.923 million.
- Technology sales, services and licensing were $443,000 versus $454,000. Technology segment revenue included $230,000 from digital authentication, $74,000 from IT services and $139,000 of royalties.
- Management attributed lower interest expense and debt-discount amortization to reduced debt and lower financing-cost amortization. Professional fees rose 25%, while research and development expense fell to approximately $1,000 from $99,000.
- DSS adopted lease-accounting guidance on January 1, 2019, recognizing right-of-use assets and lease liabilities; the filing says adoption did not affect the income statement.
- In March, DSS entered a master distributor agreement for ACS’s EndpointLockV cybersecurity software. The agreement’s $494,783 total consideration, comprising $350,000 cash and 130,435 shares valued at approximately $145,000, was recorded as an intangible asset and is to be amortized over 36 months.
- The related-party holder of a $500,000, 8% convertible note converted the maximum amount in March at $1.12 per share; the note was cancelled. The conversion added up to 446,428 shares.
Outlook, risks and contingencies
- Funding and going concern: DSS reported negative operating and investing cash flows over the prior two years and expected negative operating cash flow in 2019. Management said it would likely need to raise capital to continue as a going concern and planned to seek at least $2 million in additional cash resources. The notes specify a target by the end of Q3 2019, while MD&A refers to the end of the fiscal year. Management concluded that substantial doubt had been alleviated based on cash on hand, historical fundraising ability and planned cost controls; this conclusion depends on execution of those plans.
- Operations and liquidity: Management expected cash needs for operating losses, working capital, IP-litigation expenses and the global AuthentiGuard rollout. The quarter’s cash burn, near-term debt maturities and reliance on external financing are important liquidity considerations. No revenue or earnings guidance was provided.
- IP litigation: Several earlier patent cases were settled or dismissed, including matters involving Intel and related defendants, Qualcomm, Samsung and Everlight. LED patent cases remained pending, including litigation involving Seoul Semiconductor, Cree, Lite-On and Nichia. After quarter-end, on April 18, 2019, the PTAB found claims 1–9 of one DSS patent unpatentable in the Seoul Semiconductor matter; DSS said it was reviewing its options. Adverse litigation or patent decisions could affect results and cash flows.
- Customer concentration: Two customers represented approximately 35% and 10% of Q1 2019 revenue; they represented 43% and 3% of quarter-end receivables, respectively.
- Controls: Management concluded disclosure controls and procedures were ineffective at March 31, 2019 because previously reported material weaknesses remained. Remediation had begun but was not yet fully implemented and tested.
Key facts for investors to verify
- Whether DSS raised the planned additional capital, on what terms, and whether proceeds supported ongoing operations.
- Cash burn, collections, working-capital movements, and the status of the May 2019 credit-line maturity and July 2019 balloon payment.
- Whether revenue growth can be sustained while restoring gross margin, particularly given rising cost of revenue and customer concentration.
- Commercial uptake and economics of AuthentiGuard and the ACS EndpointLockV distribution agreement.
- Developments in remaining patent litigation and the consequences of the PTAB decision disclosed after quarter-end.
- Progress in remediating the material weaknesses in disclosure controls and procedures.