DSS, Inc. — Q1 2018 Form 10-Q
Business context and period. Document Security Systems, Inc. (DSS) reported for the three months ended March 31, 2018. Its businesses include packaging and security/commercial printing, plastic cards, digital authentication and services, and intellectual-property acquisition and monetization. The company began international operations through its Hong Kong subsidiary in 2018.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $4.38 million | $4.77 million; down 8% |
| Printed-products revenue | $3.92 million | $4.40 million; down 11% |
| Technology sales, services and licensing | $454,275 | $367,533; up 23% |
| Gross profit, approximate | $1.80 million; 41.0% margin | $1.98 million; 41.5% margin |
| Operating loss | $332,296 | $86,414 |
| Net loss | $406,091; $0.02 per share | $184,039; $0.01 per share |
| Operating cash flow | $(93,452) | $(486,804) |
At March 31, 2018, cash was $3.73 million and restricted cash was $556,000. Current assets were $8.13 million versus current liabilities of $9.38 million, a working-capital deficit of approximately $1.24 million. Total debt, including current and long-term portions, was approximately $6.18 million. Total assets were $16.98 million and stockholders’ equity was $4.68 million.
Cash and restricted cash declined by $161,000 during the quarter. Investing activities used $149,000, primarily for equipment and patent applications; financing activities provided $81,000, including collection of a $288,000 stock subscription receivable, partly offset by debt payments.
Material changes and management commentary
- Printed-products revenue fell primarily from lower packaging, printing, and plastic-card sales. Technology revenue grew, helped by a 172% increase in AuthentiGuard sales, partly offset by lower licensing revenue.
- Despite a 3% reduction in total costs and expenses, operating loss increased substantially as revenue declined. SG&A compensation rose 8%, professional fees rose 45% (including consulting and patent-litigation costs), and R&D rose 65%, mainly for blockchain development at DSS International.
- Management said available cash was sufficient for at least 12 months from the filing date and that equity or debt financing could be available if needed. The filing provides no specific revenue or earnings guidance. Interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Fortress debt default: DSS Technology Management failed to pay amounts due at the February 13, 2018 maturity under its investment agreement. The company recorded $3.71 million as short-term debt, including accrued interest and net of unamortized costs, and $459,000 of related fixed and contingent equity interests in other current liabilities. The filing says investors’ sole recourse is to specified patents, monetization payments and the remaining deposit—not other company assets. Investors had not transferred the patents or reached another arrangement as of the report date.
- Patent litigation: On March 23, 2018, the Federal Circuit reversed a PTAB ruling adverse to DSS in the Apple matter; DSS was seeking to resume the stayed trial-court case. Other patent cases and challenges remained pending. DSS and Osram settled their litigation in February 2018 on confidential terms. The filing cautions that adverse litigation outcomes could materially affect results, cash flows or financial condition.
- Other obligations and funding: DSS reported approximately $3.18 million of liabilities associated with the BKI LED-patent monetization financing, including estimated future review costs and working-capital amounts. A further $432,000 liability relates to funding for Bluetooth-patent litigation expenses.
- Concentration and controls: Two customers represented 24% and 15% of Q1 revenue. Management concluded disclosure controls were not effective at March 31, 2018 because a previously reported material weakness remained; remediation efforts were ongoing.
- The company reported no material changes to the risk factors in its latest Form 10-K and no off-balance-sheet arrangements considered likely to affect its financial condition or results.
Important facts for investors to verify
- Current status, potential resolution and collateral implications of the Fortress default, including any patent transfer or revised agreement.
- Cash availability and liquidity needs, distinguishing unrestricted cash from the $556,000 restricted for IP-program expenses; also monitor debt maturities and covenant compliance.
- Progress and potential financial impact of the Apple, LED and other patent proceedings, including costs, recoveries and obligations to funding partners.
- Whether the sales decline in printed products stabilizes, and whether technology revenue growth and blockchain investment generate sustainable results.
- Management’s remediation of the material weakness and the effectiveness of disclosure controls in subsequent filings.