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DI

DSS, INC. (DSS)·Q1 2018 Earnings Summary

Executive Summary

  • Q1 2018 revenue fell 8% year over year to $4.38M, driven by an 11% decline in Printed Products; Technology sales grew 23% with AuthentiGuard revenue up 172% YoY to $0.18M .
  • EPS was -$0.02 vs -$0.01 in Q1 2017; Adjusted EBITDA remained positive at ~$0.02M, down sharply from ~$0.39M in Q1 2017 due to Printed Products softness and Hong Kong expansion costs .
  • Management expects a non-cash extinguishment of short-term debt via patent transfer, producing an estimated ~$3.3M gain and improving net working capital; execution is “as soon as possible” .
  • Strategic catalysts: rapid AuthentiGuard adoption, Asia-Pacific build-out (Hong Kong office, blockchain R&D), and anticipated working capital improvement from debt resolution, which together could reset sentiment despite near-term margin pressure .

What Went Well and What Went Wrong

What Went Well

  • AuthentiGuard momentum: Technology sales +23% YoY; AuthentiGuard revenue ~$0.18M, +172% YoY; CEO: “strength of sales of AuthentiGuard product” .
  • Asia-Pacific strategic expansion: Hong Kong office opened; early sales calls across APAC; R&D collaboration with Hong Kong Logistics/Supply Chain Centre to integrate blockchain into AuthentiGuard .
  • Non-cash debt resolution expected: patent transfer to settle matured obligation; anticipated ~$3.3M gain on extinguishment to materially improve working capital .

What Went Wrong

  • Printed Products weakness: revenue down 11% YoY to $3.92M; quarterly variability after record Q4 2017 affected mix and gross profit .
  • Profitability compression: Net loss widened to ~$0.41M; Adjusted EBITDA dropped to ~$0.02M due to sales shortfall and Hong Kong ramp costs .
  • Operating cost mix: Professional fees +45% YoY on litigation activity; R&D +65% YoY for blockchain project; these investments weighed on near-term results .

Financial Results

Income Statement and Profitability vs prior quarters

MetricQ3 2017Q4 2017Q1 2018
Total Revenue ($USD Millions)$4.20 $5.83 $4.38
Operating Income (Loss) ($USD Millions)$(0.17) $0.20 $(0.33)
Net Income (Loss) ($USD Millions)$(0.28) $0.15 $(0.41)
Diluted EPS ($USD)$(0.02) $0.01 $(0.02)
Total Costs & Expenses ($USD Millions)$4.37 $5.63 $4.71
Adjusted EBITDA ($USD Millions)$0.19 $0.59 $0.02

Segment Revenue Breakdown

Segment Revenue ($USD Millions)Q3 2017Q4 2017Q1 2018
Printed Products$3.77 $5.47 $3.92
Technology Sales, Services & Licensing$0.43 $0.36 $0.45
Total$4.20 $5.83 $4.38

Q1 2018 vs Q1 2017 Selected Line Items

Metric ($USD Millions unless noted)Q1 2017Q1 2018
Total Revenue$4.77 $4.38
Printed Products Revenue$4.40 $3.92
Technology Revenue$0.37 $0.45
COGS (excl. D&A)$2.79 $2.58
Professional Fees$0.16 $0.23
R&D Expense$0.06 $0.10
Net Loss$(0.18) $(0.41)
Diluted EPS ($)$(0.01) $(0.02)
Adjusted EBITDA$0.39 $0.02

Liquidity Snapshot

MetricQ3 2017Q4 2017Q1 2018
Cash & Restricted Cash End of Period ($USD Millions)$4.56 $4.44 $4.28
Short-term Debt ($USD Millions)$3.61 $3.65 $3.71

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2018 trajectoryNo formal quantitative guidanceManagement expects Printed Products to strengthen during remainder of 2018 Maintained qualitative positive outlook
Technology (AuthentiGuard)FY 2018No formal quantitative guidanceContinued growth; global implementation ramp, APAC expansion Maintained qualitative positive outlook
OpEx (Professional Fees, R&D)Q2–Q4 2018N/AHigher near term due to litigation activity and blockchain R&D (Hong Kong partnership) Raised (qualitative)
Balance Sheet—Short-term Debt2018 resolutionN/AExpected non-cash extinguishment via patent transfer; ~$3.3M gain anticipated New positive item

Note: No formal revenue/EPS guidance ranges were provided in Q1 2018 materials .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2017)Previous Mentions (Q4 2017)Current Period (Q1 2018)Trend
AuthentiGuard adoptionSignificant growth; discovery of counterfeits at major customer; pipeline building Commercialization progressed; 150M+ marks printed; global vendor coverage expanding +172% YoY revenue; global implementation advancing Accelerating
Asia-Pacific expansionInitiated; building Hong Kong presence and staffing Hong Kong office opened; DSS International formed Active sales calls across APAC; five developers supporting app; blockchain R&D partnership Building capabilities
Blockchain integrationNot discussedIn R&D exploration Formal R&D project with Hong Kong Centre to integrate blockchain into AuthentiGuard Moving from concept to project
Printed Products cadenceTiming shifts hurt Q3; 4Q typically strongest Record 4Q revenues; segment strength Q1 softness after record Q4; expectation of strengthening later in 2018 Seasonal volatility; stable core
Legal/Litigation costsProfessional fees mixed; IP monetization efforts ongoing Legal cost settlement helped Q4 Professional fees +45% YoY from litigation activity Higher near term
Balance sheet/debtShort-term limited-recourse debt maturing Feb-2018; planned non-cash settlement Same; expected ~$3.2M gain Expected ~$3.3M gain upon extinguishment; improve working capital Resolution imminent

Management Commentary

  • CEO on Q1 focus: “the two big stories of the quarter were the strength of sales of AuthentiGuard product and the initial phase of our expansion into Asia-Pacific market.”
  • CFO on segment dynamics: “aggregated revenues…decreased 8%…11% decrease in printed products…Technology sales…strong…AuthentiGuard were $177,000 up 172%” .
  • CEO on APAC build-out: “sales calls in Hong Kong, China, Malaysia, Philippines, India and Australia…five developers…continual improvement of the AuthentiGuard app” .
  • CFO on debt resolution: “nonpayment default…sole remedy…transfer of certain patents…will result in a net gain…approximately $3.3 million” .
  • Press release stance: “Technology sales experienced significant revenue growth…increase in costs associated with the expansion into the Asia Pacific market…blockchain technology for product authentication” .

Q&A Highlights

  • Asia expansion status (prior quarter): Hong Kong office leadership, APAC pipeline, revenue timing 3–6 months to ramp .
  • Blockchain roadmap (prior quarter): natural fit with AuthentiGuard; in R&D; discussions with customers .
  • Q1 call Q&A was minimal; IR reiterated management diligence and concluded the call without additional analyst questioning .

Estimates Context

  • Wall Street consensus estimates from S&P Global were unavailable at time of request due to data access limits; therefore, explicit beat/miss vs consensus cannot be assessed for Q1 2018. Values retrieved from S&P Global were unavailable; comparisons to estimates are not provided.*

Key Takeaways for Investors

  • Near-term softness in Printed Products following a record Q4 is seasonal/variable; management expects re-acceleration in 2018, while Technology growth offsets mix over time .
  • AuthentiGuard adoption and APAC expansion are the structural growth levers; ongoing blockchain integration could strengthen differentiation and pricing power .
  • Watch for the formalization of the non-cash debt extinguishment and recognition of the ~$3.3M gain—this is a tangible balance sheet catalyst and potential sentiment driver .
  • Investment phase implies higher near-term OpEx (professional fees, R&D) as DSS builds litigation/IP and technology capabilities; margin normalization hinges on revenue scale-up .
  • Liquidity remains adequate (cash and restricted cash ~$4.28M), and consistent positive Adjusted EBITDA streak continued, albeit at a much lower level in Q1 .
  • Monitor customer rollout milestones (global vendors, additional SKUs, geographies) and any new AuthentiGuard wins, as these will be key to medium-term thesis validation .
  • Stock reaction catalysts: confirmation of debt extinguishment and working capital improvement; additional AuthentiGuard deployments; concrete APAC customer wins and blockchain feature commercialization .