DSS, Inc. — Q1 2017 Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; comparisons are to Q1 2016 unless noted. DSS operates security printing, packaging and plastics businesses, digital information services, and an intellectual-property (IP) monetization business.
Financial performance
- Revenue: $4.77 million, up 10%. Printed-products revenue rose 11% to $4.40 million, mainly on higher orders from the largest packaging customer. Technology sales, services and licensing were $368,000, up 1%.
- Profitability: Gross profit was approximately $1.98 million, or 41.5% of revenue, versus approximately $1.73 million, or 39.9%, in Q1 2016. Operating loss narrowed to $86,000 from $537,000; net loss narrowed to $184,000 from $624,000. Basic and diluted loss per share was $0.01 versus $0.05.
- Costs and expenses: Total costs and expenses were $4.86 million, essentially flat. Lower professional fees (down 62%) and research and development costs (down 47%) were partly offset by increased compensation, stock-based compensation, sales and marketing, and cost of revenue.
- Cash flow: Operating activities used $731,000, compared with $69,000 used in Q1 2016. Investing activities used $71,000 and financing activities used $204,000, primarily for debt principal payments. Cash declined by $1.01 million to $4.87 million; restricted cash was an additional $422,000.
- Debt and liquidity: Total reported debt was approximately $6.30 million, including $3.54 million classified as short-term, versus approximately $6.45 million at year-end 2016. Current liabilities exceeded current assets by approximately $1.72 million. DSS reported an undrawn $800,000 revolving line and said it believed available cash would meet requirements for at least 12 months from the filing date.
- Other metrics: Total assets were $17.59 million and stockholders’ equity was $3.24 million at March 31, 2017. Two customers generated 31% and 12% of quarterly revenue, respectively.
Material changes and management commentary
- Revenue growth was driven mainly by the largest packaging customer; management also cited higher sales of higher-margin products.
- Management attributed the smaller net loss principally to higher packaging and plastic product sales and lower professional fees and stock-based compensation costs. Professional fees fell significantly alongside lower legal and consulting costs for IP litigation.
- Operating cash use increased substantially, which management attributed to paying down accounts payable and accrued expenses, timing of receivable collections, and a $244,000 transfer to restricted cash.
- No quantified earnings or revenue guidance was provided. DSS expected to renew its revolving credit line before its May 31, 2017 maturity and expected to extend two subsidiary notes maturing May 31, 2017.
Risks, contingencies and unusual items
- IP financing and debt: A $3.54 million Fortress-related balance is classified as short-term and due in February 2018. The filing says it may be settled through assignment of patent assets if not paid from litigation proceeds. A related $459,000 equity-interest liability is also recorded. The arrangement includes a 25% share of certain Bluetooth patent monetization proceeds, subject to contractual recovery terms.
- Patent monetization funding: Under a $13.5 million agreement with Brickell Key Investments, DSS received $4.5 million for specified IP-defense costs and potential working capital; other amounts were directed to patent purchase and attorneys’ escrow. Approximately $4.07 million was recorded as other liabilities, including approximately $2.98 million classified as short-term. The filing describes restrictions on these funds and reductions of the liability as eligible costs are paid or amounts are amortized.
- Litigation: The Apple case remained on appeal after the patent review board ruled for Apple; other patent cases were stayed pending review proceedings, and the SK Hynix matter was settled. DSS cautioned that adverse decisions could materially affect results, cash flows or financial condition. No contingent legal fees had been accrued at quarter-end.
- Controls: Management concluded disclosure controls were ineffective at March 31, 2017 because a material weakness disclosed in the 2016 Form 10-K remained. Management planned to continue monitoring controls and evaluate cost-effective remediation.
- Other: The company reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements. Adoption of the stock-compensation accounting standard increased gross deferred tax assets by approximately $350,000 with an offsetting valuation allowance and no material financial-statement impact.
Important facts for investors to verify
- Whether the revolving credit line and the two notes due May 31, 2017 were renewed or extended, and on what terms.
- Cash availability and restricted-cash requirements, particularly the scheduled patent-litigation deposits and uses of IP-related financing.
- Progress and outcomes of the pending patent appeals, reviews and litigation, including any effect on patent values or expected proceeds.
- Customer concentration and whether the large packaging customer’s order levels are sustainable.
- Remediation progress for the material weakness and whether disclosure controls become effective.