DSS, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. DSS operates in printing, plastics, packaging, and digital services, including secure-document technologies, custom packaging, and cloud computing.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $3.843 million | $2.685 million |
| Gross profit / margin | $1.251 million / 33% | $0.934 million / 35% |
| Operating loss | $(0.771) million | $(0.704) million |
| Net loss | $(1.074) million; $(0.05) per share | $(0.398) million; $(0.02) per share |
| Cash used in operations | $(0.495) million | $(0.897) million |
Revenue rose 43%, led by packaging revenue up 102% to $2.095 million, reflecting higher volume from two large customers. Licensing and digital solutions rose 70% to $398,000, including about $250,000 from ExtraDev, acquired in 2011. Printing revenue declined 7% and plastics revenue declined 2%. Gross profit increased 34%, but gross margin fell about 2 percentage points as costs grew faster than revenue.
Operating expenses increased 24% to $2.022 million, including higher compensation and research and development. Operating loss widened despite higher gross profit. Net loss increased substantially, mainly because Q1 2012 included $227,000 of debt-discount amortization, while Q1 2011 included a $361,000 derivative fair-value gain. Excluding those items, management attributed the remaining deterioration primarily to higher R&D and administrative compensation, partly offset by improved gross profit.
Liquidity, debt, and capital
Cash was $2.769 million at March 31, up from $718,000 at year-end; the increase primarily reflected financing. Current assets were $5.330 million and current liabilities $3.927 million, for working capital of about $1.403 million. The company reported approximately $343,000 of unused revolving credit availability. Management said cash and credit resources were sufficient to fund operations and obligations for at least 12 months.
Cash used in investing was $49,000, mainly equipment purchases. Financing provided $2.596 million, including approximately $2.838 million net proceeds from stock issuance, offset by debt and lease payments. The company completed a $3 million private placement in February and issued 967,740 shares plus warrants. It also converted approximately $580,000 of note principal and accrued interest into 175,710 shares.
Reported debt included $793,000 on revolving facilities, $333,000 of current long-term debt, and $2.276 million of long-term debt; capital lease obligations were $81,000 current. The $150,000 related-party loan was repaid in March. The company reported compliance with Citizens Bank covenants at quarter-end. A $1 million packaging revolving facility matured May 31, 2012, shortly after quarter-end.
Outlook, risks, and notable matters
- No specific revenue or earnings guidance was provided. Management expected R&D spending to increase significantly over the following 12–18 months, with the goal of expanding security intellectual property and ultimately supporting product and licensing sales.
- Disclosure controls and procedures were reported ineffective due to a material weakness: insufficient qualified accounting personnel and segregation of duties, including limited review of financial reporting. Management planned to evaluate cost-effective remediation.
- One customer represented 33% of Q1 revenue and 29% of accounts receivable, creating customer-concentration exposure.
- The company’s Coupons.com suit seeks more than $10 million in damages; the outcome is uncertain. European patent litigation has largely resulted in invalidity rulings, and potential legal-cost obligations remain, including a requested Luxembourg amount of about $125,000 for which assessment had not begun.
- Other stated risks include financing needs, intellectual-property protection and infringement claims, market acceptance, technological change, competition, and execution of its growth and acquisition strategy.
- Shares outstanding increased; warrants and other potential securities could further dilute shareholders. The filing excluded potentially issuable shares from diluted EPS because they were anti-dilutive in the loss period.
Most important facts for investors to verify
- Whether the packaging volume gains from two major customers continue and whether customer concentration changes.
- Cash burn, available credit, and refinancing or repayment arrangements following the packaging credit line’s May 2012 maturity.
- Progress in remediating the disclosed financial-reporting control weakness.
- R&D spending, commercialization results, and any subsequent developments in the Coupons.com and patent matters.
- Actual and potential dilution from the private-placement warrants, consulting awards, and other equity-linked instruments.