DSS, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. DSS operates packaging and printing, plastics, digital services, and intellectual-property monetization businesses.
Financial performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $3.430 million | $3.628 million; down 5% |
| Gross profit and margin | $1.443 million; 42.1% | $1.429 million; 39.4% |
| Operating loss | $1.544 million | $2.958 million |
| Net loss | $1.647 million | $3.055 million |
| Loss per share, basic and diluted | $0.04 | $0.07 |
| Cash used in operations | $529,000 | $488,000 |
Printed-products revenue fell 5% to $3.020 million; technology sales, services and licensing fell 12% to $410,000. Management attributed the revenue decline to lower packaging/commercial printing sales and lower licensing revenue, partly offset by growth in security printing, plastic cards, and digital products. Digital-product revenue increased 8%; licensing revenue declined 17%.
Costs and expenses declined 24% to $4.974 million. Cost of goods sold fell 10%; selling, general and administrative compensation fell 22%; depreciation and amortization fell 71%, principally because prior-year patent impairments reduced the asset base. Professional fees rose 33%, mainly from intellectual-property legal costs. The lower net loss primarily reflected approximately $910,000 less intangible amortization and reductions in other expense categories.
Cash, liquidity and debt
- At March 31, cash was $1.592 million; restricted cash was $337,000. Current assets were $4.958 million and current liabilities $3.683 million. The company reported $800,000 of unused availability under its packaging subsidiary’s revolving credit line.
- Cash decreased $752,000 during the quarter. Investing activities used $28,000; financing activities used $195,000, principally for debt payments.
- Reported current and long-term debt, net, totaled approximately $7.989 million. The filing also reports $459,000 of fixed-return and contingent equity interests in other long-term liabilities.
- Management said available resources were expected to fund operations and obligations for at least twelve months only if key business-plan assumptions were substantially achieved. It cautioned that cash and credit availability might not cover future working-capital needs and that further financing might be required.
Segments, changes and unusual items
- Q1 2015 segment revenue was approximately $2.082 million for Packaging and Printing, $938,000 for Plastics, and $410,000 for Technology. Packaging and Printing and Plastics reported net income of approximately $41,000 and $87,000, respectively; Technology reported a $1.055 million loss and Corporate a $720,000 loss.
- Debt amendments in February extended maturities and established monthly principal payments; one note’s conversion feature was eliminated. DSS issued 100,000 shares in connection with the amendments. Board compensation reductions were exchanged for restricted shares and options.
- The Q1 results include a $19,000 net loss on debt modification and extinguishment. No Q1 impairment charge was reported. The company had recorded a $22.285 million patent-asset impairment and a $3 million goodwill impairment in 2014.
- After quarter-end, Citizens Bank extended the revolving-line maturity to May 31, 2016, reduced its maximum from $1 million to $800,000, and amended covenants. Premier Packaging also obtained a $525,000 term loan to purchase a digital press.
Outlook, risks and contingencies
No quantitative revenue or earnings guidance was provided. Management identified growth in digital-product sales, lower legal and professional costs in IP monetization, and continued operating profits in packaging and plastics as important to liquidity. It stated that financing may be needed and that funding availability is not assured.
- IP litigation outcomes are material uncertainties. Facebook/LinkedIn received summary judgment in January 2015; DSS agreed not to appeal. In May, DSS and TSMC stipulated to proposed non-infringement judgment, subject to DSS’s appeal rights. Apple litigation was stayed pending patent-review proceedings. NEC settlements and a confidential Coupons.com settlement were also disclosed.
- A shareholder derivative suit filed in April 2015 alleges fiduciary-duty and related claims. DSS intends to defend it but said it cannot estimate a possible loss range.
- The company disclosed that its common stock had traded below $1 since September 2014, creating a risk of NYSE MKT delisting.
- Disclosure controls were deemed ineffective because of a continuing material weakness in controls over complex and non-routine GAAP transactions, including goodwill impairment accounting.
- One customer represented 14% of Q1 2015 consolidated revenue, compared with 26% in Q1 2014.
Important facts for investors to verify
- Whether operating cash flow, digital sales, and packaging/plastics profitability improve enough to meet working-capital needs.
- Current availability and covenant compliance under the amended credit facilities, and the repayment terms and total cost of outstanding debt.
- Developments and potential financial effects of patent litigation, settlements, and the shareholder derivative suit.
- Progress remediating the material weakness and whether controls over complex transactions become effective.
- NYSE MKT continued-listing status and any subsequent financing or dilution.