DSS, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. DSS operates in security and commercial printing and packaging, plastics, digital services, and intellectual-property (IP) monetization. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.96 million | $4.25 million | $13.48 million | $12.30 million |
| Operating loss | $13.70 million | $2.66 million | $18.86 million | $5.56 million |
| Net income (loss) attributable to common shareholders | $(8.07) million | $6.46 million | $(13.47) million | $3.40 million |
| Basic and diluted EPS | $(0.19) | $0.15 | $(0.32) | $0.12 |
- Revenue grew 17% in Q3 and 10% for the nine-month period. Printed-products revenue rose 22% and 12%, respectively; technology sales, services and licensing declined 18% and 7%.
- Calculated gross margin was approximately 37% for both 2014 periods, versus approximately 41% in the comparable 2013 periods. Higher materials costs and a greater packaging-sales mix contributed to increased cost of goods sold.
- Operating results included an $11.75 million impairment of the VirtualAgility investment. DSS reported the charge attributable to its interest as approximately $7.05 million after the 40% noncontrolling interest. Q3 2014 also included a roughly $1.00 million deferred tax benefit. The prior-year periods included a $9.205 million one-time deferred tax benefit. Management estimated net losses excluding the impairment at approximately $2.0 million for Q3 and $7.4 million for nine months; it estimated 2013 losses excluding the tax benefit at $2.7 million and $5.8 million, respectively. These are management’s non-GAAP comparisons, not substitutes for reported results.
- Depreciation and amortization for nine months was $3.92 million, up 136%, principally reflecting acquired patent assets. SG&A was $8.15 million for nine months, down from $8.43 million.
Cash, debt and liquidity
- At September 30, cash was $1.90 million and restricted cash was $391,000; current assets were $6.06 million and current liabilities $4.48 million. The current ratio was approximately 1.35.
- Cash used in operations was $1.58 million for the first nine months, compared with $1.92 million in 2013. Investing activities used $2.22 million; financing provided $3.73 million. Ending cash was $1.90 million.
- Total reported debt was approximately $8.34 million, including $850,000 short-term debt and $7.03 million long-term debt; the revolving credit line had no balance, with up to $1.0 million available. Debt was approximately $4.68 million at year-end 2013. The company received $4.04 million in advances under an IP-collateralized financing agreement; the agreement’s full $4.5 million had been advanced by September.
- Citizens Bank debt is secured by Premier Packaging assets and cross-guaranteed by subsidiaries and DSS. Premier Packaging received a waiver for a December 2013 fixed-charge-coverage covenant failure and was compliant for the first three quarters of 2014.
Material changes, outlook and risks
- The PTAB ruled on September 16, 2014 that the claims asserted by VirtualAgility against Salesforce.com were unpatentable, prompting the investment impairment. This highlights the uncertainty of DSS’s IP monetization strategy.
- Other patent cases include matters involving Facebook and LinkedIn, Apple, TSMC, Samsung, NEC and Lenovo. The filing describes pending proceedings and challenges, including patent-review and transfer motions. DSS warns that patents may be invalidated, narrowed or found not infringed, and litigation may be costly or delay or reduce proceeds.
- DSS’s Coupons.com case was dismissed on October 28, 2014; DSS said it might appeal. Apple’s case was transferred to the Northern District of California, according to information reported after quarter-end.
- The company disclosed that its share price had traded below $1.00 since September 23, 2014, creating NYSE MKT continued-listing risk. DSS identified no specific financial guidance or quantified outlook in the filing.
- Two customers represented 42% of consolidated revenue for the first nine months and 32% of trade receivables at quarter-end.
- Management said disclosure controls were effective after remediation measures, but the accounting-personnel and segregation-of-duties material weakness was not considered fully remediated until controls operate and are tested for a sufficient period.
Most important facts for investors to verify
- Whether subsequent legal, PTAB or appellate outcomes affect the value of DSS’s patent portfolio and remaining investments.
- Available liquidity, repayment terms and covenants associated with the IP-backed financing and bank debt.
- Progress on customer concentration, operating cash flow and the margins of printed-products operations.
- NYSE MKT listing compliance and the status of the disclosed internal-control remediation.
- The assumptions and remaining carrying values supporting patent and goodwill valuations; DSS planned its annual goodwill impairment review for Q4 2014.