DSS, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Document Security Systems, Inc. (DSS) develops and sells anti-counterfeiting and document-security technologies, printed and plastic products, custom packaging, and cloud and data-security services. Its four reported operating segments are Printing, Plastics, Packaging, and Digital. This filing covers the fiscal year ended December 31, 2011; it does not provide a standalone fourth-quarter financial summary.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $13.384 million | $13.382 million |
| Gross profit / margin | $4.172 million / 31% | $3.685 million / 28% |
| Operating loss | $(3.474) million | $(3.896) million |
| Net loss | $(3.222) million | $(3.463) million |
| Basic and diluted loss per share | $(0.17) | $(0.20) |
| Cash used in operations | $2.125 million | $1.759 million |
Revenue was essentially unchanged. Printing revenue fell 31% to $3.227 million, primarily following the loss of a large direct-mail customer and a deliberate reduction in lower-margin work. Packaging revenue rose 3% to $5.940 million; Plastics increased 21% to $2.769 million; licensing and digital solutions increased 126% to $1.447 million, including $666,000 from ExtraDev after its May acquisition. Gross margin improved, reflecting product mix and lower costs, while Printing gross profit declined 67% to $299,000. The Digital segment recorded a $34,000 net loss; Printing, Plastics, and Packaging recorded net results of losses of $1.636 million, $126,000, and profit of $92,000, respectively. Corporate net loss was $1.518 million.
Operating expenses were $7.646 million, up 1%. The operating loss narrowed, but the net loss improvement also reflects a $361,000 gain from eliminating a derivative liability. The income-tax benefit declined to $150,000 from $1.122 million in 2010. FY2010 included a $377,000 patent impairment and $420,000 of note-discount amortization, among other differing items.
Cash declined to $718,000 from $4.087 million. Operating activities used $2.125 million; investing activities used $534,000; financing activities used $711,000. Cash spending included $524,000 for property and equipment and $72,000 for intangible assets. At year-end, current assets were $3.192 million and current liabilities were $4.272 million, a working-capital deficit of approximately $1.080 million. Reported assets totaled $12.822 million and stockholders’ equity was $5.500 million.
Debt included $2.820 million of long-term debt, net of discount, plus $461,000 current long-term debt, $764,000 of revolving credit lines, and a $150,000 related-party loan. Key obligations included a $575,000 secured convertible note at 10%, a $599,000 equipment-secured term note at 6.5%, and Citizens Bank borrowing secured by subsidiary assets. Citizens facilities carry financial covenants and cross-guarantees. Interest-rate swaps fixed rates on two Citizens loans at 5.70% and 5.865%. The revolving line for Packaging, with approximately $670,000 drawn, was scheduled to mature May 31, 2012.
Material changes, outlook, and risks
- DSS acquired ExtraDev in May 2011, adding cloud and IT services; the company reported approximately $666,000 of post-acquisition revenue from the business.
- DSS purchased its Packaging facility for $1.5 million, financed with a Citizens loan, a $150,000 related-party note, and $150,000 cash. Management said the purchase reduced monthly net cash outflow by about $5,000.
- After year-end, DSS completed a $3.0 million private placement, with approximately $2.8 million net proceeds, intended for working capital, debt repayment, and intellectual-property development. Management said year-end cash, available credit, and this financing were expected to fund operations and obligations for at least the next 12 months.
- No quantified revenue or earnings guidance is provided. Management described plans to develop digital products and intellectual property, expand marketing and sales, and pursue growth; success and commercial acceptance are uncertain.
- Management identified two material weaknesses in internal financial controls: insufficient qualified accounting staff and segregation of duties, and inadequate controls for complex or non-routine GAAP transactions. Management estimated remediation at $200,000–$400,000, but stated disclosure controls were not effective. The independent auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- One customer accounted for 19% of 2011 revenue and 18% of year-end receivables. DSS also reported a history of losses, significant secured debt and covenant obligations, limited liquidity, potential equity dilution, and uncertainty about commercial acceptance of newer digital and packaging products.
- The European Central Bank patent litigation had largely unfavorable validity rulings; the Netherlands infringement case was terminated. DSS disclosed potential legal-cost liabilities, including amounts related to Germany and the Netherlands and an ECB request for Luxembourg fees. Separately, DSS sued Coupons.com, alleging contract breach and trade-secret misuse and seeking more than $10 million; recovery is uncertain.
- Paper and paperboard prices rose in 2011, and DSS expected further increases. Management said it had historically passed most material-cost changes to customers, with exceptions including certain packaging contracts.
Important facts for investors to verify
- Whether the February 2012 financing and available credit were sufficient to address cash burn, near-term maturities, and covenant requirements.
- Progress in remediating the disclosed internal-control weaknesses and whether later filings report effective controls.
- Revenue, margins, and customer concentration trends by segment, particularly Printing’s decline and Digital’s post-acquisition performance.
- The terms, repayment or conversion status, and dilution impact of debt, warrants, and securities issued after year-end.
- Subsequent developments in the Coupons.com case, ECB-related costs, and any resulting cash or accounting effects.