DSS, Inc. — Q2 2012 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. DSS operates printing, plastics, packaging, and digital businesses, including secure-document technologies, custom packaging, plastic cards, and cloud services. Interim results are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3.66 million | $2.88 million | $7.50 million | $5.56 million |
| Gross profit / margin | $1.33 million / 36% | $0.81 million / 28% | $2.59 million / 34% | $1.74 million / 31% |
| Operating loss | $(0.92) million | $(1.05) million | $(1.70) million | $(1.75) million |
| Net loss | $(0.99) million | $(1.11) million | $(2.07) million | $(1.51) million |
| Net loss per share | $(0.05) | $(0.06) | $(0.10) | $(0.08) |
| Operating cash flow | — | — | $(1.43) million | $(1.89) million |
- Q2 revenue rose 27%, led by packaging (+33%), plastics (+25%), and licensing/digital (+63%). Six-month revenue increased 35%; packaging grew 65% and licensing/digital 66%. Management attributed part of digital growth to a full quarter of ExtraDev revenue versus a partial period in 2011.
- Q2 gross profit increased 65%; management cited improved printing product mix and lower costs, along with higher packaging, plastics, and digital contribution. Operating expenses rose 22%, including higher R&D and compensation.
- Six-month net loss widened 37%, affected by $237,700 of note-discount amortization in 2012 and $360,922 of one-time derivative fair-value income in 2011. Management said that excluding these items, the six-month loss would have decreased about 2%.
Financial position and liquidity
- At June 30, cash was $1.52 million, versus $0.72 million at year-end 2011. Current assets were $4.26 million and current liabilities $3.72 million, implying working capital of about $543,000.
- Total assets were $13.70 million and stockholders’ equity $7.53 million. Reported revolving credit balances were $767,894; current and long-term debt totaled approximately $2.54 million, net of unamortized discount. Capital lease obligations were $44,077, all current.
- Six-month operating cash use was $1.43 million; investing cash use was $213,000. Financing provided $2.44 million, including $2.83 million of net equity proceeds, offset partly by debt and lease payments. Cash increased by $800,237.
- The February private placement raised $3.0 million gross through units of common stock and warrants. The company also issued 175,710 shares to convert approximately $580,000 of debt and accrued interest. Shares outstanding were 20,711,026 at June 30. In July, warrant exercises generated $500,000 and 161,290 additional shares.
Debt, outlook, and notable developments
- Premier Packaging had failed certain Citizens Bank financial covenants at December 31, 2011 and March 31, 2012. The bank granted a waiver in August 2012; Premier was reported in compliance at June 30, 2012. The credit facilities are secured by Premier assets and supported by cross-guarantees.
- Management said available cash, working capital, credit-line availability, and the subsequent $500,000 warrant proceeds were expected to fund operations and obligations for at least 12 months. It cautioned that weaker-than-expected second-half 2012 revenue or insufficient operating cash generation could require additional financing, which might not be available. No specific revenue or earnings guidance was provided.
- Management planned significantly higher R&D spending over the next 12–18 months to expand security-related intellectual property, with the aim of supporting future product and licensing sales. Results are uncertain.
- Material risks cited include limited operating history with the business model, intellectual-property protection and litigation risks, product-market acceptance, technology changes, competition, and execution of acquisition and growth plans.
- Litigation includes a Coupons.com suit seeking more than $10 million; the filing provides no outcome. European patent proceedings had resulted in invalidity rulings in several jurisdictions, while other proceedings remained. Accrued European legal fees included approximately $383,750 for Germany and the Netherlands; a further Luxembourg fee request of about $117,000 had not yet been assessed for accrual.
- Disclosure controls were deemed ineffective because of material weaknesses, including inadequate accounting staffing and segregation of duties and insufficient review of financial statement preparation. Management planned to evaluate cost-effective remediation.
- A July 2012 amended office lease was scheduled to commence October 1, with payments of approximately $39,000 in 2012, $157,000 in 2013, $169,000 in 2014, and $133,000 in 2015.
Key facts for investors to verify
- Whether revenue growth—particularly packaging and licensing/digital—continues and converts into improved operating results and cash generation.
- Cash burn, remaining credit availability, debt maturities and terms, and continued compliance with Citizens Bank covenants after the waiver.
- The potential dilution and expense effects of equity placements, warrants, stock awards, and convertible instruments.
- Progress and costs of the Coupons.com and European patent matters, including possible legal-fee obligations and any recoveries.
- Remediation of the disclosed material weaknesses and effectiveness of financial reporting controls.
- The filing’s MD&A describes six-month note-discount amortization as approximately $227,000, while the financial statements report $237,700; confirm the correct amount and reconciliation.