DSS, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. DSS operates printing, packaging and plastic-card businesses, digital authentication and services, and intellectual-property monetization activities. The company also began international operations in Hong Kong in 2018.
Financial performance and position
- Third-quarter revenue: $4.09 million, down 3% year over year. Printed-products revenue was nearly flat at $3.78 million; technology sales, services and licensing fell 28% to $311,000.
- Nine-month revenue: $12.56 million, down 2%. Printed products declined 1% to $11.43 million; technology revenue declined 12% to $1.13 million.
- Profit and margins: Q3 operating loss was $379,000 versus $173,000 in the prior-year quarter; net loss was $412,000 versus $277,000, or $0.02 per share in both periods. Nine-month operating loss was $1.53 million versus $428,000. Nine-month net income of $1.86 million, or $0.11 per share, included a $3.53 million net gain on extinguishment of liabilities; the comparable period had a $726,000 net loss. Gross margin, calculated from revenue less cost of revenue before depreciation and amortization, was approximately 37.7% in Q3 versus 42.8%, and 37.2% for nine months versus 42.5%.
- Cash flow: Operating activities used $1.52 million in the first nine months, compared with $1.22 million used in 2017. Investing activities used $572,000, primarily for equipment; financing activities used $290,000. Cash and restricted cash fell $2.39 million to $2.06 million.
- Liquidity and debt: At September 30, cash was $2.05 million and current assets were $6.23 million against current liabilities of $5.42 million, a current ratio of about 1.15. Total reported debt was about $2.15 million, down from about $6.35 million at December 31, 2017. The company had an $800,000 revolving credit line available to its packaging division.
- Other balance-sheet items: Total assets were $14.84 million versus $17.43 million at year-end 2017; stockholders’ equity was $7.36 million versus $4.79 million. The company had approximately $42.3 million of federal net operating loss carryforwards, subject to a full valuation allowance.
Material changes and management commentary
- Management attributed weaker operating results to lower technology revenue, which carries higher gross margins, increased material and outside-service costs, higher professional fees, and costs associated with expansion in Asia. Lower senior-management compensation and reduced interest expense partly offset these pressures.
- On June 26, 2018, an agreement with Fortress discharged approximately $3.71 million of debt obligations, subject to payment of $345,000 in restricted funds and continuing rights to certain future patent-monetization proceeds. The transaction generated the reported $3.53 million net gain. DSS also wrote off related patents.
- Management said available cash and credit resources were expected to fund operations and obligations for at least 12 months only if key business-plan assumptions were substantially achieved, including digital-product sales growth, lower IP-related legal and professional costs, and continued operating profits in packaging and plastics. Otherwise, DSS estimated it might need to raise $500,000–$1 million; future financing was not assured.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. The company’s liquidity outlook is conditional on execution of its business plan and its ability to obtain additional financing if needed.
- Patent litigation remains a significant uncertainty. Apple litigation resumed after a Federal Circuit ruling favorable to DSS on one patent; other cases faced pending appeals, inter partes review challenges, or ongoing litigation. The company cautioned that adverse decisions could materially affect results, cash flows or financial condition.
- Two customers accounted for 24.8% and 14.7% of nine-month revenue, respectively, creating customer concentration exposure.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2018 because a previously reported material weakness remained. Management planned to continue evaluating remediation options; no material changes to internal control over financial reporting were reported during Q3.
- Subsequent to quarter-end, DSS agreed to acquire 51% of Hong Kong-based Global eMacMall Limited for 3.2 million DSS shares plus $1.121 million in cash or promissory notes, subject to conditions including due diligence and exchange approval. The purchase price may be adjusted based on GEMM’s 2018 earnings; closing was anticipated within 60 days of the October 24 agreement.
- DSS adopted the new revenue-recognition standard effective January 1, 2018, with no material financial-statement impact. It expected lease accounting adoption in 2019 to add assets and liabilities but had not quantified the effect.
Investor verification priorities
- Separate recurring operating performance and cash generation from the one-time $3.53 million debt-extinguishment gain.
- Track cash burn, debt maturities, covenant compliance, credit-line availability, and the potential $500,000–$1 million financing need.
- Monitor revenue trends, gross margins, technology licensing and digital-product sales, and dependence on the two largest customers.
- Assess outcomes and potential costs of patent litigation and any continuing investor claims to future monetization proceeds.
- Verify remediation of the material weakness and the closing terms, dilution, and earnings contribution of the proposed GEMM acquisition.