DSS, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; filed November 14, 2011. Financial statements are unaudited. DSS develops and sells document-security printing, plastic cards, packaging, licensing and digital/IT services.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $3.616 million | $3.151 million | $9.177 million | $9.251 million |
| Gross profit / margin | $1.271 million / 35% | $0.885 million / 28% | $3.013 million / 33% | $2.609 million / 28% |
| Operating loss | $0.861 million | $0.709 million | $2.613 million | $2.657 million |
| Net loss | $0.757 million | $0.883 million | $2.267 million | $1.859 million |
| Loss per share, basic and diluted | $0.04 | $0.05 | $0.12 | $0.11 |
- Revenue mix: Q3 packaging grew 14%, plastics 34%, and licensing/digital 203%; printing fell 21%. For nine months, packaging rose 10%, plastics 15%, and licensing/digital 95%, while printing fell 33%.
- Profitability: Q3 gross profit increased 44%, helped by packaging and plastics product mix and lower plastics equipment lease costs. Nine-month gross profit rose 15%, but operating expenses increased 7%; the company remained loss-making.
- Cash flow: Nine-month operating cash use was $2.017 million, versus $1.261 million in 2010. Investing cash use was $0.462 million, compared with $2.530 million; financing cash use was $0.537 million, versus $3.751 million provided in 2010. Cash declined by $3.016 million to $1.071 million.
- Liquidity: Current assets were $4.018 million and current liabilities $4.315 million, producing a $297,000 working-capital deficit and a 0.93 current ratio.
- Debt: Debt excluding capital leases was approximately $4.475 million, up 24% from $3.569 million a year earlier. Balance-sheet debt included $842,000 in revolving credit, a $150,000 related-party short-term note, and $3.483 million of current and long-term debt. Capital lease obligations totaled about $114,000. Management reported compliance with debt covenants.
Material changes and unusual items
- DSS acquired ExtraDev in May 2011, adding digital and cloud-computing services. Since acquisition, ExtraDev contributed approximately $392,000 in revenue and recorded an approximately $4,000 net loss.
- In August, DSS acquired its packaging plant for $1.5 million, financed with a $150,000 cash down payment, a $150,000 subordinated related-party note, and a $1.2 million Citizens Bank loan. The prior lease was terminated.
- Fletcher-related warrant terms were amended to eliminate down-round provisions. DSS removed a $3.867 million derivative liability, recorded a $361,000 fair-value gain in the first nine months, and reclassified $3.506 million to additional paid-in capital. Fletcher did not make the contemplated additional investment.
- Q3 net loss improved year over year, partly due to lower other expense and a $169,000 deferred tax benefit. Nine-month net loss increased 22%, principally reflecting the smaller tax benefit compared with 2010.
- The 2010 comparative nine-month results were restated for acquisition-related deferred-tax accounting. Restated 2010 net loss was $1.859 million rather than $3.000 million; operating results and operating cash flow were unchanged.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management believed cash and available credit would fund operations and obligations for at least 12 months, assuming expected seasonal packaging sales in late 2011. If sales did not materialize or operations failed to generate sufficient cash, additional financing might be needed; availability was not assured.
- At September 30, management cited approximately $310,000 available on a revolving line and $397,000 on an equipment line, in addition to cash. The filing also reports a working-capital deficit and continued operating cash outflows.
- Disclosure controls and procedures were deemed ineffective. Material weaknesses included inadequate qualified accounting staff and segregation of duties, and ineffective controls over complex/non-routine accounting. The filing links the latter weakness to the deferred-tax restatement; remediation actions were planned and a staff accountant had been hired.
- DSS filed suit against Coupons.com in October 2011, alleging contract breach, trade-secret misappropriation and related claims, and seeking more than $10 million. This is a claim, not a reported recovery; DSS agreed to pay counsel one-third of any collected settlement or damages, plus expenses.
- The long-running European Central Bank patent dispute had multiple adverse patent-validity rulings; Spain was a favorable ruling under appeal. Certain legal-cost reimbursement obligations remained, including an ECB request for approximately €93,752 in Luxembourg fees whose assessment had not begun.
- Risks identified by management included financing needs, patent and intellectual-property disputes, market acceptance, competition, changing technology, and execution of acquisition and growth plans. One customer represented 15% of nine-month revenue and 20% of September receivables.
Important facts for investors to verify
- Whether seasonal packaging demand converts the elevated inventory into sales and cash, and whether liquidity remains adequate.
- Debt maturities, interest-rate swap terms, borrowing availability, and compliance with Citizens Bank financial covenants.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings report effective controls.
- Developments and potential costs or recoveries in the Coupons.com and ECB matters; no litigation recovery should be assumed.
- Whether ExtraDev and other digital offerings generate sustainable growth and profitability, and whether printing declines continue.
- Restated comparative figures and the accounting judgments behind acquisition-related deferred taxes, goodwill and equity-linked instruments.