DSS, Inc. — Q3 2019 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. DSS operates printing, packaging, plastics, digital services and intellectual-property licensing businesses.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.53 million | $4.09 million | $12.45 million | $12.56 million |
| Operating loss | $1.20 million | $0.38 million | $2.61 million | $1.53 million |
| Net income (loss) | $(1.25) million | $(0.41) million | $(2.73) million | $1.86 million |
| Basic and diluted EPS | $(0.05) | $(0.02) | $(0.12) | $0.11 |
| Operating cash flow | Not separately reported for the quarter | $(3.29) million | $(1.52) million |
- Q3 gross profit was approximately $1.32 million, or 37% of revenue, versus $1.54 million, or 38%, in Q3 2018. For the first nine months, gross profit was approximately $4.17 million (34% of revenue), compared with $4.67 million (37%) a year earlier. These are calculated from reported revenue and cost of revenue.
- Cash and cash equivalents were $3.92 million at September 30, 2019, compared with $2.45 million at year-end 2018. Working capital was approximately $4.3 million; current assets were $8.17 million and current liabilities $3.89 million.
- Debt, excluding lease liabilities, totaled approximately $2.83 million: $0.47 million current and $2.36 million long-term. Lease liabilities totaled $1.37 million, including $0.36 million current. The filing reports $1.51 million of undiscounted remaining lease payments.
- Investing activities used $1.18 million in the first nine months, including equipment purchases and intangible-asset costs. Financing activities provided $5.93 million, principally from the public stock offering and equipment-line borrowings.
Changes versus the comparable period
- Q3 revenue fell 14%, as printed-products revenue declined 20%; technology sales, services and licensing rose 61%, primarily on higher AuthentiGuard sales. Nine-month revenue was nearly flat, with printed products down 4% and technology revenue up 26%.
- Q3 costs and expenses rose 6%; nine-month costs and expenses rose 7%. Professional fees increased 124% in Q3 and 53% year to date, largely due to patent litigation and outsourced corporate legal services. Year-to-date cost of revenue rose 5%, reflecting paper, freight and machine-maintenance costs.
- The nine-month comparison shifted from $1.86 million net income in 2018 to a $2.73 million loss in 2019. The 2018 result included a $3.53 million gain on extinguishment of liabilities; no such gain was recorded in 2019.
- Shares outstanding increased materially: the June 2019 offering sold 11.2 million shares, with another 519,186 shares sold through the over-allotment. The company reported 30.18 million shares outstanding at September 30 and 36.18 million as of November 12.
Outlook, risks and unusual items
- Management said September-end cash was expected to fund current and planned operations through 2020, while acknowledging likely negative operating cash flow in 2019 and the possibility of seeking additional capital. Management concluded that substantial doubt about continued operations had been alleviated, citing cash, the June offering and a subsequent related-party placement.
- On November 1, 2019, a company controlled by Chairman Heng Fai Ambrose Chan purchased 6 million shares at $0.3037 per share, for gross proceeds of approximately $1.82 million and reported net proceeds of approximately $1.5 million. This was a subsequent event, not included in September 30 cash or shares.
- Patent litigation remains a significant risk. In the Seoul Semiconductor and Nichia matters, the PTAB found claims of several DSS patents unpatentable; DSS appealed certain decisions. Other LED patent cases remained pending or stayed, and DSS filed additional infringement suits in September 2019. The filing says adverse decisions could materially affect results, cash flows or financial condition.
- Two customers generated approximately 44% of nine-month revenue combined. DSS also reported dependence on litigation monetization, with many prior proceeds remitted to third-party funders.
- Disclosure controls and procedures were deemed ineffective as of September 30 because previously disclosed material weaknesses remained. Remediation was underway but not yet fully implemented and tested.
- No quantified revenue or earnings guidance was provided. Management described plans to expand AuthentiGuard internationally, control costs, improve manufacturing capacity and diversify revenue. The filing also describes four newly formed exploratory subsidiaries with no employees.
- The company adopted lease accounting (ASC 842) in 2019, recording right-of-use assets and lease liabilities; it reported no impact on operating results. The interest-rate swap was settled in September, with a $22,483 loss recorded in interest expense.
Important facts for investors to verify
- Cash runway assumptions versus ongoing operating cash burn, planned capital spending, legal costs and any need for further financing.
- Final proceeds, terms and dilution from the November related-party stock placement, and the resulting share count.
- Progress and outcomes in patent appeals and litigation, related funding arrangements, and potential legal expenses or recoveries.
- Whether the customer concentration and recent printed-products declines persist, and whether technology and AuthentiGuard growth can offset them.
- Remediation and independent assessment of the disclosed material weaknesses in internal controls.