DSS, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. DSS operates security and commercial printing, packaging, plastics, digital services, and intellectual-property monetization businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.20 million | $4.98 million | $12.83 million | $13.39 million |
| Gross profit and margin | $1.80 million; 42.8% | $2.10 million; 42.3% | $5.45 million; 42.5% | $5.58 million; 41.6% |
| Operating income (loss) | $(173,000) | $46,000 | $(428,000) | $(737,000) |
| Net income (loss) | $(277,000) | $(27,000) | $(726,000) | $(969,000) |
| Basic and diluted loss per share | $(0.02) | $(0.00) | $(0.05) | $(0.07) |
Margins are calculated from reported revenue and cost of revenue. Nine-month operating cash flow was negative $1.38 million, compared with positive $384,000 in 2016. Investing cash flow was negative $443,000 and financing cash flow positive $171,000. Cash declined by $1.65 million to $4.22 million.
At September 30, cash was $4.22 million and restricted cash was reported on the balance sheet as $336,172. Current assets were $8.58 million versus current liabilities of $10.04 million, a working-capital deficit of approximately $1.46 million and a current ratio of approximately 0.85. Reported short-term debt was $3.61 million, current long-term debt $752,000, and long-term debt $1.61 million. Total debt on these balance-sheet lines was approximately $5.97 million. Stockholders’ equity was $4.10 million.
Changes versus the prior period
- Q3 revenue fell 16%, principally because of lower printed-product orders from the largest packaging customer; technology revenue also declined, partly because the prior-year quarter included a one-time $150,000 license. DSS said technology revenue excluding that item would have risen about 13%, largely on AuthentiGuard sales.
- Nine-month revenue declined 4%: printed products fell 5%, while technology sales, services and licensing increased 3%.
- Q3 net loss widened to $277,000 from $27,000, mainly reflecting weaker packaging sales. Nine-month net loss improved from $969,000 to $726,000, attributed to technology-card and AuthentiGuard sales and lower operating costs.
- Nine-month gross margin improved to about 42.5% from 41.6%. Total costs and expenses declined 6%; selling, general and administrative compensation and professional fees were lower, while stock-based compensation increased.
- Cash used in operations increased from the prior-year period’s cash generation, reflecting payments of payables and accrued expenses, increased restricted cash, and inventory build-up ahead of expected fourth-quarter sales.
Liquidity, outlook, risks and unusual items
- Management said cash was sufficient for at least the next 12 months from the filing date and cited an $800,000 available packaging revolver and possible equity or debt financing. This outlook is set against negative working capital.
- Approximately $3.61 million of Fortress-related short-term debt and about $459,000 of associated fixed and contingent equity interests were due in February 2018. The filing says these amounts may be settled by transferring patent assets if not paid from litigation proceeds, rather than using cash. The debt includes accrued interest and unamortized financing costs.
- The Fortress agreement requires a further $300,000 deposit by March 2, 2018 for qualifying patent-litigation expenses. DSS reports having made the first $300,000 deposit in March 2017.
- Several patent cases remained pending or stayed, and adverse PTAB decisions had been issued against DSS in matters involving Apple, Intel/Qualcomm, and Samsung; appeals were pending or intended. The LED patent lawsuits were also pending. Litigation outcomes and monetization proceeds are uncertain and could affect results, cash flows, and financial condition.
- Customer concentration is material: two customers represented 25% and 15% of nine-month 2017 revenue, respectively.
- In August and September, DSS sold shares to related-party investors for an aggregate $1.0 million, with $300,000 still receivable at quarter-end from the August transaction. It also issued shares valued at approximately $485,000 in exchange for SED shares and a warrant; a DSS director was related to the counterparties.
- After quarter-end, DSS settled approximately $714,000 of billed and unbilled legal expenses owed to Nix, Patterson & Roach with 500,000 shares, a warrant for 125,000 shares, and $125,000 cash.
- Management concluded disclosure controls and procedures were ineffective as of September 30, 2017 because a material weakness disclosed in the 2016 Form 10-K remained unresolved. The company planned to continue monitoring controls and assess cost-effective remediation.
- No specific financial guidance was provided. DSS was evaluating new accounting standards, including revenue recognition, and said the effects had not yet been determined.
Important facts for investors to verify
- Whether fourth-quarter sales materialized as expected after the packaging inventory build-up, and whether dependence on major customers changed.
- Available liquidity, debt maturities and covenant compliance, and whether patent transfers or cash payments will satisfy the Fortress obligations and required deposit.
- Progress, costs, and outcomes of the patent litigation and appeals, including potential proceeds and obligations to funding partners.
- Related-party equity transactions, the SED investment valuation and liquidity, and subsequent share and warrant issuance to settle legal expenses.
- The filing gives conflicting restricted-cash figures: $336,172 on the balance sheet and $336,712 in a note and MD&A. Clarification is warranted.
- Remediation of the disclosed material weakness and the effectiveness of financial-reporting controls.