DSS, Inc. (Document Security Systems) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Filed August 14, 2017. DSS operates in security and commercial printing, packaging and plastic cards, digital services, and intellectual-property acquisition and monetization.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.86 million | $4.07 million | $8.63 million | $8.41 million |
| Operating loss | $168,000 | $235,000 | $254,000 | $772,000 |
| Net loss | $265,000 | $318,000 | $449,000 | $942,000 |
| Loss per share, basic and diluted | $0.02 | $0.02 | $0.03 | $0.07 |
| Operating cash flow | Not separately provided for the quarter | $(1.02) million | $(67,000) |
- Q2 revenue fell 5% year over year as printed-products revenue declined 9%, primarily because of lower orders from the largest packaging customer. Technology sales, services and licensing rose 37%, reflecting AuthentiGuard growth.
- Six-month revenue increased 3%: printed products rose 1% and technology revenue rose 19%. DSS attributed lower losses in both comparison periods to technology-card and AuthentiGuard sales and lower operating costs.
- Gross profit, calculated as revenue less cost of revenue before depreciation and amortization, was approximately $1.67 million in Q2 (43.2% margin), versus $1.74 million (42.8%) a year earlier. For six months, it was $3.65 million (42.3%), versus $3.47 million (41.3%).
- Six-month operating cash use increased to $1.02 million, mainly from paying down accounts payable and accrued expenses, timing of receivable collections, and a $225,000 increase in restricted cash. Investing used $371,000, primarily for equipment; financing used $408,000 for debt principal payments.
Balance sheet, debt and liquidity
- At June 30, 2017, cash was $4.07 million and restricted cash was $403,000, compared with cash of $5.87 million and restricted cash of $178,000 at year-end 2016. Total assets were $16.82 million, down from $18.47 million.
- Current assets of $8.17 million were below current liabilities of $10.08 million, implying negative working capital of about $1.91 million. Stockholders’ equity was $3.06 million.
- Reported debt comprised $3.55 million of short-term debt, $834,000 current long-term debt, and $1.73 million long-term debt. The $3.55 million Fortress balance includes accrued interest and is due in February 2018; the filing says it may be settled by transferring certain patent assets if litigation proceeds are insufficient. A separate $459,000 of Fortress fixed and contingent equity interests is recorded in other current liabilities.
- Management said DSS believed it had sufficient cash for at least 12 months from the filing date and noted an $800,000 unused revolving credit line. Premier Packaging was in compliance with its Citizens Bank covenants at both March 31 and June 30. On July 26, 2017, it entered into a separate equipment financing facility of up to $1.2 million; no amount had been drawn as of the report date.
Material changes, outlook and risks
- Two notes were extended on May 31, 2017: a $140,000 note to April 2018 and a $415,000 note to December 2018. DSS issued 18,000 shares to the lender for each extension.
- DSS reported adverse 2017 PTAB decisions on challenged patent claims in the Intel/Qualcomm matters and appealed one decision; the Apple-related appeal was pending. Samsung’s IPR remained pending. These cases were stayed or otherwise subject to proceedings, and adverse outcomes could materially affect results, cash flows or financial condition.
- DSS filed LED patent suits against Seoul Semiconductor, Everlight and Cree in 2017; it also filed suit against Osram in July 2017. These cases were pending. Potential recoveries are uncertain and are not presented as forecast revenue.
- Management provided no specific revenue or earnings forecast. It cautioned that interim results are not necessarily indicative of full-year results. Risks include litigation outcomes, dependence on major customers, liquidity and debt obligations, and the disclosed ineffective disclosure controls.
- Disclosure controls and procedures were deemed ineffective at June 30, 2017 because a material weakness disclosed in the 2016 Form 10-K remained. Management planned to continue evaluating cost-effective remediation. DSS reported no material change to risk factors from its latest Form 10-K.
Investor verification priorities
- Track operating cash use, unrestricted cash, and the assumptions behind management’s 12-month liquidity assessment.
- Confirm the repayment or patent-transfer resolution of the Fortress obligation and the terms and use of BKI-funded liabilities.
- Monitor customer concentration: two customers generated 23% and 14% of six-month 2017 revenue.
- Review developments in patent appeals, IPR proceedings, and LED litigation, including potential costs and the uncertainty of monetization proceeds.
- Assess progress addressing the material weakness in disclosure controls and the potential effect of forthcoming accounting standards.