DSS, Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. DSS operates packaging and printing, plastics, digital services, and intellectual-property monetization businesses. The company filed the report on August 13, 2015.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.20 million | $4.88 million | $7.63 million | $8.51 million |
| Gross profit / margin | $1.53 million / 36.5% | $1.69 million / 34.5% | $2.98 million / 39.0% | $3.12 million / 36.6% |
| Operating loss | $(1.09) million | $(2.22) million | $(2.64) million | $(5.17) million |
| Net loss | $(1.04) million | $(2.34) million | $(2.69) million | $(5.40) million |
| Basic and diluted loss per share | $(0.02) | $(0.06) | $(0.06) | $(0.13) |
| Operating cash flow | Not separately presented for the quarter | $(0.93) million | $(1.10) million |
Gross profit and margins are calculated from reported revenue and cost of goods sold. Q2 selling, general and administrative expense was $2.24 million, including stock compensation; depreciation and amortization was $0.39 million. Six-month depreciation and amortization was $0.77 million.
Balance sheet and debt at June 30, 2015
- Cash was $1.01 million, with an additional $0.31 million restricted for an IP monetization program. Cash was $2.34 million at December 31, 2014.
- Current assets were $4.54 million versus current liabilities of $4.63 million, a current ratio of approximately 0.98. The company also reported up to $0.80 million available on its packaging subsidiary’s revolving credit line, with no balance drawn.
- Reported current and long-term debt, net, totaled $8.35 million ($1.56 million current and $6.79 million long-term), versus $8.19 million at year-end. The company paid $0.39 million of long-term debt principal in the first half.
- Total assets were $25.95 million and stockholders’ equity was $13.85 million. Shares outstanding at June 30 were 46.30 million.
Material changes versus comparable periods
- Revenue declined 14% in Q2 and 10% for the first half. Printed-products revenue fell 16% and 11%, respectively, driven mainly by lower packaging and commercial printing sales. Technology sales, services and licensing rose 8% in Q2 but fell 2% for the half; increased one-time licensing revenue was offset by weaker digital product sales.
- Net loss narrowed 56% in Q2 and 50% for the first half. Management attributed the improvement primarily to lower amortization following prior patent-asset impairments, along with lower expenses across many categories. The improvement did not represent a return to profitability.
- Cost of goods sold declined faster than revenue, which management attributed in part to higher-margin license revenue. Reported gross margin accordingly improved year over year.
- First-half operating cash use improved by approximately 16% year over year, but cash still declined by $1.33 million, to $1.01 million.
- Depreciation and amortization fell approximately 70% year over year, reflecting lower patent carrying values after impairment charges recorded in 2014, including an approximately $22.3 million impairment of patents associated with the Bascom case. The company also recorded a $3.0 million goodwill impairment in 2014. In 2015, it reported no impairment of the tested patent portfolio or DSS Technology Management goodwill.
Outlook, risks, contingencies and unusual items
- Liquidity and outlook: Management said available cash and credit resources should fund operations and obligations for at least 12 months only if the company substantially achieves key business-plan targets: growing digital-product sales, reducing IP-business legal and professional expenses, and maintaining operating profits in packaging and plastics. It also said additional financing may be needed and is not assured. The risk-factor disclosure warns that insufficient operating cash or financing could require cost reductions and raise substantial doubt about continuing as a business.
- Legal proceedings: The company’s IP monetization strategy depends in part on litigation and licensing. A court ruling led to a proposed judgment of non-infringement for TSMC, subject to DSS’s appeal rights; Apple litigation was stayed pending patent review proceedings. Confidential settlements ended the NEC and Lenovo matters, and the Coupons.com case was settled. A shareholder derivative suit seeking unspecified damages was pending, with a motion to dismiss filed. Three additional semiconductor patent suits were filed after quarter-end, on July 16, 2015. Settlement terms and potential litigation recoveries or losses are not disclosed clearly.
- Unusual income: Q2 included $146,000 in gains from a printing-press sale and a distribution from an investment previously written down to zero. This helped reduce the reported loss and may not recur.
- Controls: Management concluded disclosure controls were not effective because of a continuing material weakness in accounting for complex and non-routine transactions, including goodwill impairment accounting. The company was evaluating remediation options. Its corporate staff accountant left in June 2015, and the impact was still being assessed.
- Concentration and dilution: One customer represented 22% of first-half 2015 revenue. Approximately 11.45 million potential common shares were excluded from diluted loss per share because they were anti-dilutive during the loss period.
- Other commitments: Citizens Bank facilities are secured by Premier Packaging assets and cross-guaranteed by the company and certain subsidiaries; Premier Packaging reported covenant compliance for both Q1 and Q2. IP-backed funding notes and related interests were also outstanding. The filing reports no contingent legal fees accrued at quarter-end.
Important facts for investors to verify
- Whether DSS generated sufficient operating cash and met the business-plan conditions underlying management’s conditional 12-month liquidity assessment.
- Subsequent cash, debt maturities and repayments, use of the revolving line, and any new equity or debt financing.
- Whether revenue weakness in packaging, commercial printing and digital products continued, and whether licensing revenue was repeatable.
- Developments in patent proceedings, appeals, settlements and potential legal costs or proceeds, including matters filed after quarter-end.
- Progress in remediating the material weakness and improving disclosure controls and financial reporting processes.
- The effect of customer concentration and potential dilution from outstanding share equivalents.