DSS, Inc. — FY 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed March 6, 2013. This is an annual report, not a standalone fourth-quarter report. DSS develops and manufactures anti-counterfeiting print, packaging and plastic-card products, licenses security technologies, and provides digital/cloud services through four operating segments.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $17.12 million | $13.38 million |
| Gross profit / gross margin | $5.73 million / 33% | $4.17 million / 31% |
| Operating loss | $3.77 million | $3.47 million |
| Net loss | $4.28 million | $3.22 million |
| Basic and diluted loss per share | $0.21 | $0.17 |
| Cash used in operations | $3.16 million | $2.12 million |
Revenue increased 28%. Packaging rose 59% to $9.43 million, plastics increased 7% to $2.97 million, and licensing and digital solutions increased 26% to $1.83 million; printing declined 10% to $2.89 million. Packaging generated $431,000 in segment net profit, while printing, plastics and digital reported segment losses. One customer contributed 29% of consolidated revenue, up from 19% in 2011.
Gross profit grew 37%, with margin improving to approximately 33% from 31%. Operating expenses rose 24% to $9.50 million, including higher professional fees, research and development, and stock-based compensation. The net loss worsened 33%; management attributed the change principally to $768,000 of merger-related professional fees, $216,000 of accelerated note-discount amortization, and the absence of $361,000 of derivative-related income recorded in 2011. Excluding those items, management said the net loss would have fallen approximately 9%.
At year-end, cash was $1.89 million, current assets $5.12 million and current liabilities $3.79 million. Notes payable and long-term debt totaled approximately $2.39 million on the balance sheet; revolving credit lines added approximately $238,000. The filing describes a $575,000, 10% convertible note due December 2013, Citizens Bank term debt, and a packaging-facility mortgage with a 2021 maturity and a balloon payment. Much of the Citizens Bank debt is secured and subject to financial covenants and cross-guarantees. Scheduled principal payments on notes and long-term debt were $909,000 in 2013. DSS raised approximately $5.8 million from 2012 equity placements and warrant exercises. No cash dividends were paid.
Material changes and developments
- The packaging business was the main growth driver; printing sales declined as DSS reduced lower-margin commercial work to emphasize security printing.
- Operating cash use increased 49%, which management linked to the larger net loss and timing of receivables. Year-end cash nevertheless increased from $718,000 in 2011, largely following equity financing.
- DSS introduced an iPhone-based AuthentiGuard authentication application in October 2012, combining covert print features with cloud-enabled product verification.
- Research and development spending increased to $491,000 from $285,000. No goodwill or long-lived-asset impairment was recorded for 2012.
Outlook, merger, risks and contingencies
DSS expected its cash and available credit resources to fund operations and obligations for at least the following 12 months. The proposed Lexington Technology Group merger remained subject to stockholder approval and other closing conditions; DSS estimated a first-half 2013 closing. The transaction was expected to issue substantial DSS shares, warrants and options, with Lexington holders projected to own approximately 56% of the combined company on a fully diluted basis including escrow shares. DSS warned that failure or delay could affect its business and share price, and identified potential termination fees, transaction costs, dilution, integration challenges and NYSE MKT listing uncertainty.
For the combined company, management estimated available resources would support planned operations into the fourth quarter of 2014, but anticipated a need to raise additional funds around then; weaker-than-expected revenue or higher expenses could bring that need forward. The merger was intended to add Lexington’s patent monetization business and litigation, including Bascom Research cases against five defendants, among them Facebook and LinkedIn. Outcomes and related recoveries are uncertain.
Other key risks include DSS’s continuing losses, customer concentration, competition, intellectual-property protection and commercialization risks, secured debt and covenant compliance, and possible financing dilution. Paper and paperboard costs increased in 2012; passing future cost increases through to customers is not assured. The company also disclosed two material weaknesses in internal control over financial reporting: inadequate segregation of duties and insufficient controls for complex or non-routine transactions. Management estimated remediation could cost $200,000–$400,000, but did not assure that amount would be sufficient. Disclosure controls were deemed ineffective; the independent auditor expressed an opinion on the financial statements, not internal-control effectiveness.
Legal matters include European Central Bank proceedings concerning a patent largely invalidated in eight European jurisdictions, related recorded fee liabilities of approximately $467,000 plus a separate Luxembourg fee request, and a Coupons.com suit in which breach-of-contract and trade-secret claims remained after two other claims were dismissed. DSS sought more than $10 million in the Coupons.com action; recovery is uncertain.
Investor verification priorities
- Verify merger status, final consideration, ownership dilution, closing conditions, termination provisions and any NYSE MKT listing requirements.
- Assess whether operating cash burn, the 2013 debt maturities and available credit leave adequate liquidity; confirm covenant compliance and collateral exposure.
- Track customer concentration and whether packaging-led revenue growth and improved gross margins persist.
- Review remediation progress and cost for the two disclosed material weaknesses, and whether financial reporting controls improve.
- Confirm the status and potential financial impact of the ECB and Coupons.com matters, and avoid assuming litigation proceeds or merger-related patent revenue.