DSS, Inc. — Q3 2015 Form 10-Q
Business and period. DSS operates packaging and printing, plastics, digital services, and intellectual-property (IP) monetization businesses. This filing covers the quarter and nine months ended September 30, 2015; interim results are not necessarily indicative of full-year results.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.42 million | $4.96 million | $12.05 million | $13.48 million |
| Gross profit / margin | $1.86 million / 42.2% | $1.85 million / 37.3% | $4.84 million / 40.2% | $4.97 million / 36.9% |
| Operating loss | $0.77 million | $13.68 million | $3.41 million | $18.85 million |
| Net loss to common shareholders | $0.86 million | $8.07 million | $3.55 million | $13.47 million |
| Loss per share, basic and diluted | $0.02 | $0.19 | $0.08 | $0.32 |
Revenue declined 11% in both comparative periods. Printed-products revenue fell 11% in the quarter and nine months; technology revenue declined 6% and 3%, respectively. Gross margin improved, which management attributed to product mix, including higher-margin products and licensing revenue. Nine-month operating cash flow was negative $1.17 million, versus negative $1.58 million in 2014. Investing cash flow was negative $0.07 million; financing cash flow was positive $0.14 million. Cash fell by $1.10 million to $1.24 million.
Balance sheet and liquidity
At September 30, 2015, total assets were $26.37 million and stockholders’ equity was $14.05 million. Current assets of $5.30 million compared with current liabilities of $4.93 million. Debt was approximately $8.02 million, including $1.33 million current and $6.69 million long-term, versus approximately $8.19 million at year-end 2014. The packaging subsidiary had no borrowings on its $800,000 revolving credit facility. Restricted cash was $293,000.
DSS raised $950,000 gross from a September stock sale and reported an additional $250,000 equity sale in October. Management said available cash and credit resources were expected to fund operations and obligations for at least 12 months only if key business-plan factors were substantially achieved; it cautioned that resources might not cover future working-capital needs and that future financing was not assured.
Changes, outlook, and risks
- The substantially smaller reported losses versus 2014 largely reflect the absence of the prior-year $11.75 million impairment charge, lower amortization following earlier patent-asset impairments, and lower expenses. DSS still reported operating and net losses.
- Packaging and printing and plastics reported segment income for the first nine months; the technology and corporate segments reported losses. Technology’s nine-month segment loss was approximately $2.17 million.
- Management identified increased digital-product sales, lower IP-related legal and professional expenses, and continued operating profits in packaging and plastics as important to liquidity. No numerical revenue or earnings guidance was provided.
- IP litigation remains a material uncertainty. Patent cases include proceedings involving Apple, TSMC/Samsung and other defendants; certain cases were settled or ended, and outcomes of pending matters cannot be predicted. The filing reported no accrued contingent legal fees at quarter-end and stated that possible loss in a shareholder derivative suit could not be reasonably estimated.
- Disclosure controls were deemed ineffective because a material weakness remained in controls for identifying and accounting for complex, non-routine transactions under GAAP. Management said it would continue evaluating remediation. The company also reported the departure of its corporate staff accountant in June.
- One customer represented 23% of nine-month revenue. A five-year office lease signed in October provides for rent of $6,122 per month.
Key facts for investors to verify
- Whether operating cash use, revenue trends, and the stated liquidity assumptions support management’s conditional 12-month funding outlook.
- Progress and outcomes in pending patent litigation and related IP asset valuations, including any subsequent impairment indicators.
- Whether the company remediates the material weakness in accounting for complex, non-routine transactions.
- The proceeds, warrant terms, and potential dilution from the ongoing equity offering; September and October sales included warrants and added common shares.