DSS, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
DSS, Inc. operates packaging and printing, plastics, digital services, and intellectual-property monetization businesses. This unaudited report covers the quarter and six months ended June 30, 2016, compared with the same periods in 2015.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $4.072 million | $4.196 million | $8.411 million | $7.626 million |
| Gross profit | $1.742 million | $1.533 million | $3.470 million | $2.976 million |
| Gross margin | 42.8% | 36.5% | 41.3% | 39.0% |
| Operating loss | $240,000 | $1.095 million | $782,000 | $2.639 million |
| Net loss | $318,000 | $1.043 million | $942,000 | $2.690 million |
| Loss per share, basic and diluted | $0.01 | $0.02 | $0.02 | $0.06 |
- Six-month operating cash use improved to $67,000 from $928,000 in 2015. Investing activities provided $298,000, including $495,000 from a patent-asset sale; financing activities used $901,000, including debt principal payments. Cash declined by $669,000 to $771,000. Restricted cash was $218,000.
- At June 30, current assets were $4.594 million and current liabilities were $9.027 million. Total debt carrying amounts were approximately $6.927 million, including $3.537 million classified as short-term. Stockholders’ equity was $2.798 million.
- The company had an undrawn $800,000 revolving credit line available to its packaging subsidiary, maturing May 2017.
Material changes versus prior periods
- Q2 revenue fell 3%; six-month revenue rose 10%. Six-month printed-products revenue increased 15%, while technology sales, services and licensing declined 23%. Management attributed the technology decline to lower digital hardware and software resales and a $150,000 licensing settlement fee recorded in 2015.
- Net loss narrowed 70% in Q2 and 65% for the first half. Management cited lower professional fees and stock compensation, plus improved margins in packaging and plastics. Six-month professional fees fell 47% and stock-based compensation fell 87%.
- Technology reported a six-month segment loss of approximately $1.053 million; packaging and printing and plastics reported segment income of approximately $532,000 and $253,000, respectively.
Outlook, risks, contingencies and unusual items
- Management said current cash and credit resources should fund operations and obligations for at least 12 months only if key business-plan targets are achieved, including growth in digital sales, lower IP-related legal and professional costs, and continued operating profits in packaging and plastics. Otherwise, it estimated a need to raise approximately $500,000 to $1 million through June 2017; future financing is not assured.
- DSS Technology Management failed to meet a February 13, 2016 payment requirement under its Fortress funding agreement. The resulting default made approximately $3.567 million of remaining note amounts short-term. The agreement limits investor recourse principally to specified patents and related proceeds, but discussions to amend or remedy the default had no assured outcome.
- In June 2016, the PTAB ruled for Apple in two patent reviews; DSS planned to appeal. Other patent cases faced reviews, stays, adverse decisions, or settlements. Potential litigation costs or awards could materially affect results, cash flows, or financial condition.
- Disclosure controls were deemed ineffective at June 30, 2016 because a previously reported material weakness remained. Management planned to continue monitoring controls and evaluating cost-effective remediation.
- Subsequent event: shareholders approved a 1-for-4 reverse stock split, scheduled to take effect August 25, 2016.
Most important facts for investors to verify
- Whether the Fortress default is amended or otherwise resolved, and how the patent collateral and proceeds are treated.
- Whether operating cash generation improves and the company avoids the stated potential $500,000–$1 million financing need.
- Whether packaging and plastics remain profitable as digital revenue and IP monetization remain uncertain.
- Developments in patent reviews, appeals, litigation stays, and settlements, including the Apple matter.
- Progress remediating the material weakness in disclosure controls.