DSS, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2014. DSS operates printing, packaging and plastic-card businesses, digital services, and an intellectual-property acquisition and monetization business. The July 2013 acquisition of DSS Technology Management materially expanded the IP business and affects year-over-year comparability.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $3.63 million | $3.77 million |
| Gross profit and margin | $1.43 million; 39.4% | $1.56 million; 41.4% |
| Operating loss | $2.94 million | $1.07 million |
| Net loss | $3.06 million | $1.13 million |
| Loss per share, basic and diluted | $0.07 | $0.05 |
| Cash used in operations | $488,000 | $347,000 |
Revenue declined 4%. Printed-products revenue fell 3%; technology sales, services and licensing fell 5%. Gross margin narrowed by about 2 percentage points. Operating costs rose 36%, with depreciation and amortization increasing to $1.31 million from $225,000, primarily due to amortization of acquired patent assets. Stock-based compensation also rose to $547,000 from $341,000.
Cash was $2.94 million at quarter-end, plus $500,000 restricted cash; the company reported $1 million available on its revolving credit line. Current assets were $6.58 million and current liabilities $3.29 million. Reported current and long-term debt, net, totaled approximately $7.28 million. Investing activities used $923,000, including $750,000 for investments and $134,000 for equipment and building improvements. Financing activities provided $2.38 million, including $2.69 million of new long-term borrowing.
Material changes, outlook and risks
- During Q1, DSS Technology Management invested $250,000 more in VirtualAgility and $500,000 in Express Mobile. At March 31, the VirtualAgility investment was carried at $11.5 million; DSS owned 68% of the investment vehicle.
- A February 2014 financing agreement provided up to $4.5 million against certain IP collateral. DSS received $3 million by quarter-end; $2.691 million was recorded as debt and $309,000 as other long-term liabilities. A further $1.5 million was conditional on a second milestone.
- Premier Packaging received a waiver for noncompliance with a fixed-charge coverage covenant at December 31, 2013 and reported compliance for Q1 2014. Its bank obligations are secured by its assets and supported by cross-guarantees.
- After quarter-end, an $850,000 note due May 2014 was extended to May 2015 in exchange for a warrant. DSS also contracted to acquire 115 patents for $1.15 million, expected to close in Q2.
- The filing provides no quantified revenue or earnings guidance. Management cautions that interim results may not indicate full-year results.
- Management reported disclosure controls and procedures were ineffective due to material weaknesses, including insufficient qualified accounting personnel and inadequate segregation of duties and review. The company was working with an outside consultant on remediation.
- IP-related litigation includes matters involving Coupons.com, Facebook and LinkedIn, Apple, and semiconductor defendants including Samsung and TSMC. Outcomes and potential recoveries are uncertain; management stated it did not believe existing proceedings would materially adversely affect the company.
- One customer represented 26% of Q1 2014 revenue, compared with 16% a year earlier. Patent monetization assumptions, litigation outcomes, customer concentration, debt obligations, and the control weaknesses are key risks.
Important facts for investors to verify
- Whether the second financing milestone was achieved and what obligations or collateral apply to the full financing agreement.
- Compliance with debt covenants, debt maturities and repayment capacity, including the post-quarter note extension.
- Progress and costs of remediating the disclosed material weaknesses in financial reporting controls.
- Cash requirements for the planned patent acquisition and other IP investments, and the commercial value ultimately realized from those assets.
- Developments in material litigation and any resulting contingent fees or proceeds-sharing obligations.