DSS, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 16, 2016. DSS operates in secure printing and packaging, plastic cards, digital services, and intellectual-property monetization.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $4.339 million | $3.430 million | +27% |
| Operating loss | $542,000 | $1.544 million | Loss narrowed |
| Net loss | $624,000 | $1.647 million | Loss narrowed 62% |
| Loss per share, basic and diluted | $0.01 | $0.04 | Improved |
| Operating cash flow | $(69,000) | $(529,000) | Cash use reduced 87% |
- Printed-products revenue rose 32% to $3.975 million, reflecting higher packaging and plastic-card sales. Technology sales, services and licensing fell 11% to $364,000, mainly due to lower digital hardware and software resales; licensing revenue increased approximately 6%.
- Cost of revenue, excluding depreciation and amortization, was $2.611 million. On that basis, gross profit was approximately $1.728 million, or 39.8% of revenue, versus approximately $1.443 million, or 42.1%, in Q1 2015.
- Expenses declined overall 2% to $4.881 million. SG&A compensation fell 15%, professional fees 41%, and stock-based compensation 77%. Higher cost of revenue and other operating expenses partly offset these savings.
- Cash and restricted cash totaled $1.332 million at quarter-end, including $283,000 restricted for an IP monetization program. Current assets were $4.672 million versus current liabilities of $8.812 million; working capital was negative approximately $4.140 million and the current ratio approximately 0.53.
- Total debt was approximately $7.600 million, including $4.009 million of short-term debt, $820,000 of current long-term debt, and $2.772 million of long-term debt. The company used $202,000 for debt principal payments and ended the quarter with $1.050 million of unrestricted cash. Up to $800,000 remained available on the packaging subsidiary’s revolving line, which had no balance outstanding.
- Investing cash use was $120,000, including $52,000 for equipment and $68,000 for patent applications. Financing cash use was $202,000; cash declined $391,000 during the quarter.
Changes, outlook, and material risks
- Management attributed the smaller loss to revenue growth and reductions in several expense categories, including lower IP-litigation professional fees and reduced compensation costs. Packaging and Printing and Plastics reported segment net income of approximately $244,000 and $111,000, respectively; Technology and Corporate reported losses of approximately $565,000 and $414,000.
- Debt default: DSS Technology Management failed to repay investors by February 13, 2016 under a patent-backed funding agreement. Approximately $4.043 million of remaining note amounts was classified as short-term debt, and the unpaid amount’s interest rate increased to 2% annually. Investors’ specified recourse is to the pledged patents and related proceeds; DSS was discussing a possible amendment or other resolution, with no assurance of success.
- Management said existing cash and credit resources should fund operations and obligations for at least 12 months only if the company achieves or substantially achieves its plan: increase digital-product sales, reduce IP monetization legal and professional expenses, and maintain operating profits in packaging and plastics. Otherwise, additional capital may be needed; future financing is not assured.
- Subsequent events: on April 1, 2016, DSS reached a confidential settlement with TSMC that included transfer of certain patent assets. On April 12, two notes were extended to May 31, 2017, with revised balloon payments. The Apple patent-review decision was expected by the end of June 2016; other patent cases faced reviews, stays, or invalidated claims. Settlement proceeds and financial effects are not quantified in the filing text.
- Management reported that Premier Packaging complied with Citizens Bank credit-facility covenants at March 31, 2016. The filing identifies no material changes to previously reported risk factors, but highlights ongoing losses, financing needs, dependence on planned operating improvements, and patent-litigation uncertainty.
- Disclosure controls were deemed ineffective because of a continuing material weakness involving complex and non-routine transaction accounting, insufficient qualified accounting personnel, and segregation of duties. Management planned to assess cost-effective remediation. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and terms of negotiations with the Fortress investors, the status of the default, and any consequences for pledged patents or monetization proceeds.
- Cash runway, availability and covenant terms of the revolving line, debt maturities and balloon payments, and the company’s ability to raise additional capital.
- Whether packaging and plastics can sustain profitability, and whether digital revenue and IP licensing or litigation proceeds can meet management’s assumptions.
- Financial and strategic effects of the TSMC settlement and patent-asset transfer, and outcomes of the Apple, Intel, Samsung, SK Hynix, and Qualcomm proceedings.
- Remediation of the disclosed control weakness and the reliability of accounting estimates and reporting for complex transactions.
- Customer concentration: one customer represented 27% of Q1 2016 revenue and 24% of quarter-end receivables; another represented 12% of revenue.