|Shares Out. (in M):||21||P/E||0.0x||0.0x|
|Market Cap (in $M):||71||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
I think Document Security Systems is a short that will eventually grind to zero. I recently stumbled upon this company while doing a security by security sector scrub looking for long ideas.
DSS Printing Group -Provides secure and commercial printing services for end-user customers along with technical support for the Company’s technology licensees. The division produces a wide array of printed materials such as security paper, vital records, prescription paper, birth certificates, receipts, manuals, identification materials, entertainment tickets, secure coupons, parts tracking forms, brochures, direct mailing pieces, catalogs, business cards, etc. The division also provides the basis of research and development for its security printing technologies.
DSS Plastics Group -Manufactures laminated and surface printed cards which can include magnetic stripes, bar codes, holograms, signature panels, invisible ink, micro fine printing, guilloche patterns, Biometric, Radio Frequency Identification (RFID) and watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses.
DSS Packaging Group -Produces custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others. The division incorporates our security technologies into printed packaging to help companies prevent or deter brand and product counterfeiting.
DSS Digital Group -Provides data center centric solutions to businesses and governments delivered via the “cloud”. This division is also developing proprietary digital data security technologies based on the Company’s optical deterrent technologies.
DSS customer example:
“I think we have some extremely valuable customer relationships when you’re talking Proctor & Gamble, Boeing just to name a few - those are compelling clients– I don’t think they would be with us if we didn’t have what we said we have”
- CEO, Patrick White
The company is honest about the tough compeition:
And hints at the acquisition possibilities
Competitive landscape: Major companies with small brand protection segments: 3M, Eastman Kodak, JDS Uniphase, Illinois Tool Works, Inc., Dai Nippon Printing, Avery Dennison, Brady Corp, Checkpoint Systems
Public Companies concentrated counterfeit prevention: De La Rue, Op Sec, L-1 Identity Solutions, Zebra Technologies, Applied DNA, Hologram Indisturies, Gemalto NV
The PR Story - The Holy Superfecta
China/Apple/Cloud Computing/IP Licensing
"Finally, I don’t know if you were aware of this, but during the fourth quarter Kodak and DSS secured a high-end wine
label in China, where counterfeits in the wine industry are booming. This project is ongoing and from what we hear
the technology was a huge hit with the Chinese wine bottlers.
More importantly, this project is a great example as to the value-added DSS technologies. This is an example of a
Chinese brand owner that selected Kodak private-branded DSS technologies to protect its product in 1 of the most
notoriously counterfeiting countries in the world." - Q4 2011 Earnings Call
"I’m also pleased to inform you that our packaging division has had a rise in sales this quarter as it began making the
packaging for the Kogeto Dot camera attachment for the Apple iPhone. By the way, the Kogeto Dot camera is now in
Apple stores and we have received preorders in the first quarter. Also, I heard today that we are getting our first order
for the European introduction of the product for Apple.
Speaking of Apple, our plastics RFID division, which is now performing strongly, reports that Apple continues to give
DSS orders for secure access control products. This work has been recurring and continuously growing. Our business
development people are happy, since this work is allowing DSS to get face time as well as build our relationships with
key Apple buyers." - Q4 2011 Earnings Call
"Another opportunity which came to DSS through IP Capital is with a large cloud computing subsidiary of a major
global corporation that is seeking DSS data security software technology. This particular client seeks to distribute the
technology from its cloud to apply security to all forms of data, especially government and medical data.
Also, I am pleased to inform you that our digital division has completed and made available the first-ever cloud
produced variable secure document, or VSD as we call it. Briefly, DSS now has the ability to protect variable
information for printing in remote locations around the globe for our cloud computing servers. This is not, I repeat not,
a testing or development situation. The software product is finished and being marketed today by DSS." - Q4 2011 Earnings Call
"We expect this relationship to lead to substantial growth in licensable digital technology and patent assets in 2012 and
well into the future. It’s important to note that after review of our patent assets, IP Capital determined, #1, that DSS
is an overall leader in patent filings related to core enabling technologies for document security, #2, DSS is among the
top 20 patent assignees in the document security field, #3, most of DSS’s patent portfolio has been filed since 2005,
which makes it a young IP portfolio." - Q4 2011 Earnings Call
The story from a historical financial perspective:
For the Fiscal Period Ending
Growth Over Prior Year
Earnings from Cont. Ops.
Diluted EPS Excl. Extra Items³
Growth Over Prior Year
DSS highlights the top line growth as selling point to investors but the top line failed to grow in 2011 due to the printing division:
December 31, 2011 December 31, 2010 %change
Printing $3,227,000 $4,697,000 -31%
Packaging 5,940,000 5,753,000 3%
Plastic IDs and cards 2,769,000 2,291,000 21%
Licensing and digital solutions 1,447,000 641,000 126%
Total Revenue $13,383,000 $13,382,000 0%
Company predictions = Revenue from $13mm today to $78-102mm in 5 years, Gross margin from 26% to 54% in 5 years, SG&A from $4.2mm to $10-12.5mm in 5 years, and Operating Margin from -28% to 45% in 5 years
Recent proxy shows Robert Fageson and Fletcher Asset Management as only shareholders > 5%
According to 2/14 13G, Fletcher has reduced stake... why?
Meet Alphonse Fletcher Jr of Fletcher Asset Management:
"I don't want to sound arrogant, but I think you'd have to say we're pretty smart at what we do.”
- Alphonse Fletcher Jr.
Highflier Tells Clients to Wait
Withdrawal Delays Shine Light on Hedge Fund Boasting Long 'Win' Streak—and Unorthodox Methods
Last month, after two of the pension boards sought to withdraw some of their cash, Fletcher instead sent them promissory notes "in satisfaction of this redemption request" that pledged payment within two years.
Fletcher did "intense and compressed due diligence" on DSS:
Okay, I appreciate that. As far as Fletcher is concerned, and I presume they're on the call and so forth, is this strictly
a financial commitment on their part or do they have representation on the board? It seems strange to me that
they're willing to make ultimately a potential $16 million commitment and that's a great testament to you. But with a
company that was really just sort of floundering here to a great extent, they must have seen an awful lot that many
other people haven't seen, and I'm just wondering what that sort of decision process was.
Well I certainly don't like to speak for someone else, but it was a very intense and very compressed due diligence
process that took place over the last few weeks of the year but they had certainly identified us before that time.
Fletcher are pretty smart folks who take a look at industries, who take a look at companies and decide where they
think the future might bring the greatest chance to make strategic investments in areas that they think can be
I think that despite the fact that the past few years have been difficult, I think they see what you've seen over the
years and what your clients have seen, I mean all of us who have the ability to vote with our feet but have stayed on
board or increased our investments have done, which is, despite the lumbering pace at which things may happen in
this industry and for us, probably we've reached a strategic tipping point where if ever the value of the intellectual
property of this company is going to suddenly start showing commercial value to all of us who are shareholders, this is
probably the 12-24-month period where some of us would want to be investing if we first walking in for the first time.
So I say they are not activists and that they don't have representation on the board although we'd welcome that if
they chose to at some point. But I think they like the industry and they feel that the IP suite of the company is strong
enough that it's going to be very very valuable in the years to come. I certainly agree with them and I certainly hope
we're all right.
Chairman Robert B. Fageson:
Sampling of past director posts:
RBC Capital Markets Corp., Equity Station Inc., Fagenson & Co. Inc., Olympic Securities LLC, and Alpine Securities Corp. have consented to pay $385,000 to settle Financial Industry Regulatory Authority that they sold collectively over 7.5 billion in “unregistered” penny stock in Universal Express Inc. shares and made about $8.4 million as a result.
• Fagenson & Co. has agreed to a $165,000 fine and made $44,000 in commissions
Full background report:
SEC Obtains Judgment Against Florida Stockbroker Stephen Fayette
The Securities and Exchange Commission announced today that on Dec. 30, 2010, the United States District Court for the Northern District of Texas entered a Final Judgment against Stephen Fayette (Fayette), of Sarasota, Florida. The Commission's complaint alleged that Fayette was part of a scheme to pump and dump the stock of ConnectAJet.com, Inc. According to the complaint, ConnectAJet.com, Inc., of Austin, Texas, issued 30 million shares of stock in an illegal, unregistered offering to certain penny stock promoters. To pump up demand for the stock, ConnectAJet.com, Inc. and its chief executive, attorney Martin T. Cantu, launched a nationwide advertising campaign including false press releases. The complaint alleged that Fayette, a registered representative at Fagenson & Co., Inc. facilitated the scheme by liquidating ConnectAJet.com, Inc. shares shares on behalf of multiple customers, including the penny stock promoters.
"We have material weaknesses in our internal control over financial reporting structure, which, until remedied, may cause errors in our financial statements that could require restatements of our financial statements and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.
We have identified two material weaknesses in our internal control over financial reporting in our annual assessment of internal controls over financial reporting that management performed for the year ended December 31, 2011. Management has concluded that (i) we did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties; and (ii) we lack sufficient resources within the accounting department to have effective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles, and that the foregoing represented material weaknesses in our internal control over financial reporting. We are uncertain at this time of the costs to remediate all of the above listed material weaknesses, however, we anticipate the cost to be in the range of $200,000 to $400,000 (including the cost of hiring additional qualified accounting personnel to eliminate segregation of duties issues and using the services of accounting consultants for complex and non-routine transactions if and when they arise). We cannot guarantee that the actual costs to remediate these deficiencies will not exceed this amount. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements and in our disclosure that could require restatements. Investors may lose confidence in our reported financial information and in our disclosure, which could lead to a decline in our stock price.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected."
Convertible Note to a "Mayer Laufer" in recent 10-K:
"On December 30, 2011, we issued a convertible promissory note to Mayer Laufer (the “Lender”), in the principal amount of $575,000. The proceeds of the note were used to pay off a note previously entered into between one of our subsidiaries, Secuprint, and the Lender. Under the December 30, 2011 note, Lender may, at any time during the one year term of the note, convert up to $575,000 of the principal amount into shares of the Company’s common stock at a conversion price of $2.21 per share."
Google search on Mayer Laufer:
"MAYER LAUFER SANCTIONED. An order has been issued revoking the broker-dealer regis-tration of Mayer Laufer, doing business as Mayer..."
Low R&D spend for an IP Company:
On both an absolute basis and relative to other fees the company incurs
December 31, 2011
December 31, 2010
|Sales, general and administrative compensation||$||3,782,000||$||3,431,000||10||%|
|Sales and marketing||519,000||238,000||118||%|
|Research and development||285,000||265,000||8||%|
|Rent and utilities||693,000||659,000||5||%|
|Other Operating Expenses|
|Depreciation and software amortization||123,000||140,000||-12||%|
|Stock based compensation||399,000||423,000||-6||%|
|Impairment of patents||-||377,000||-100||%|
|Amortization of intangibles||284,000||803,000||-65||%|
|Total Operating Expenses||$||7,646,000||$||7,581,000||1||%|
Sales, general and administrative compensation costs were 10% higher during 2011 as compared to 2010 which reflect additions in sales and marketing personnel made during 2011 along with the addition of seven people from the Company’s digital division.
Professional fees increased 26% during 2011 primarily due to increases in consulting fees, investor relations costs and legal fees.
...Or relative to a sampling of private placement/PR fees:
"On February 13, 2012, we completed the sale of $3,000,000 of units to investors in a private placement (the “Offering”). Net proceeds to the Company from the Offering were approximately $2,800,000. The Offering consisted of the sale of common stock and warrants. A total of 967,740 shares of common stock were sold, and warrants to purchase up to an aggregate of 483,870 shares of common stock at a price of $3.10 per share were issued to the investors in the Offering. The net proceeds of the Offering will be used for working capital purposes, payment of debt, and for further development of the Company’s intellectual property portfolio." (implied $200K cost)
"Also, on February 20, 2012, the Company entered into consulting arrangement with Century Media Group for the provision of investor relations services. As compensation Century Media will receive a fee of $10,000 per month for the one year term, plus the Company issued Century Media a 14-month warrant (the “Century Media Warrant”) to purchase up to 250,000 shares of the Company’s common stock at exercise prices of $4.50, $4.75, $5.00, $5.25 and $6.00 for each 50,000 shares subject to the Century Media Warrant. The Century Media Warrant vested in full on the date of issuance. The Company calculated the fair value of the warrant at approximately $241,000, using the Black Scholes-Merton option pricing model, in the first quarter of 2012. Expense for consulting services will be recorded over the 14-month service term."
"Financing Cash Flows - The Company used a net of approximately $711,000 of cash for financing activities including payments under debt of $359,000 and capitalized lease obligations of $88,000. In addition, the Company paid $240,000 in accrued placement agent fees in January 2011 for the sale of equity which had occurred in December 2010. As noted above, the Company borrowed $1,200,000 under at 10-Year note for purchase of the Company’s Packaging division’s 40,000 square foot facility."
I have been an investor in this company for approximately 5 years. I’ve been following the company from when the
stock was $12 until the stock went down to $1.30, throughout all the swings. I’ve noticed, obviously, the company has
changed course in what the plan was originally to do to what the plan is to do today. One of my questions is why, 5
years ago, when I think the company was probably 10% of what it was, stock was at $12, today, the company sounds
like it’s got everything, the stock fluctuates anywhere between $3-5 on sometimes heavy volume, sometimes not,
sometimes almost a 1-day bingo. Down a buck, then up a buck. That’s 1 of my questions.
Chairman and Member of Compensation & Management Resources Committee
Dan, there was an entire group of investors who believed that we were going to have a tremendous success in our
lawsuits against the European Monetary Authority in terms of defense of our patents and infringement, and as a
result, people were doing extrapolations on what they thought the company would garner if we were even mildly
successful in those suits. The numbers were staggering. It proved to be an incorrect assumption. And as a result, the
company’s gone through almost a complete changeover of shareholder base, and a lot of people who unfortunately
paid high prices have left, and the company is now based more on in terms of what it’s doing than what is out there in
terms of expectations and extrapolations of what might happen if we had a supposed windfall. So I think we are more
rationally based in terms of both expectations and valuations now.
Now they are suing former client coupons.com:
Patrick J. White
Chief Executive Officer and Director
Thank you Phil. Before I begin, I would like to respond to numerous questions posed to me concerning our litigation
with Coupons.com. For those of you who are new to DSS, briefly, DSS filed a lawsuit against Coupons.com, which is a
private company that generates billions of consumer product coupons from a website on the internet.
DSS filed a suit in federal court here in Rochester, New York last fall for breach of contract on a trade secret issue. If it
makes it that far, the case will be a jury trial. It is DSS’s contention that Coupons.com has been utilizing trade secrets
they received from DSS under a signed nondisclosure agreement on billions of internet-generated coupons since 2006.
Based on media reports on Coupons.com’s coupon volume, along with our royalty rate, our amount of estimated
damages is more than $250 million. This is strictly an estimate, and will be confirmed when depositions begin. The
amount will likely be material, which would require disclosure by Coupons.com in the risk factors section of any
prospectus they may file in an initial public offering, which has been predicted by various media.
The other fact is that the next hearing is scheduled on October 9, 2012. DSS has engaged the law firm Nixon Peabody
to represent DSS in this matter. And finally, it’s important to note that Nixon Peabody took the matter nearly entirely
on contingency after performing their due diligence.
12/31/2011 Balance Sheet from Capital IQ:
Book Value/Share: $.28
Tangible Book Value/Share: $.01
Future Capital Needs:
"Future Capital Needs - As of December 31, 2011, we had cash of approximately $718,000. In addition, the Company had approximately $330,000 available to its Packaging division and $44,000 available to its Digital division under a revolving credit line with a financial institution. In February 2012, the Company raised approximately $2,800,000 in net proceeds from a private placement of its common stock and warrants to address the Company’s near term financing needs. The Company believes that its current cash resources and credit line resources provide it sufficient resources in order to fund its operations and meet its obligations for at least the next twelve months."