DSS, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited consolidated results cover a diversified group of nine business lines, reported in five operating segments. The filing was signed May 15, 2023.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $11.926 million | $12.304 million |
| Operating loss | $5.580 million | $7.319 million |
| Net loss | $8.633 million | $8.951 million |
| Net loss attributable to common stockholders | $8.035 million; $0.06 per share | $8.048 million; $0.10 per share |
| Net cash used in operating activities | $14.199 million | $6.070 million |
- Revenue declined 3%. Printed-products revenue rose 72% to $6.130 million, while direct-marketing revenue fell 42% to $3.994 million, primarily due to weaker Asian-market sales. Rental income was $1.685 million.
- Total costs and expenses fell 11% to $17.506 million. Lower professional fees and sales and marketing costs contributed to the improvement in operating loss. Gross profit, calculated as revenue less cost of revenue, was $3.393 million, or about 28% of revenue, versus $3.426 million, or about 28%, in Q1 2022.
- Net loss attributable to common stockholders was nearly unchanged year over year, despite a smaller operating loss. A $2.869 million loss on investments, compared with investment income of $424,000 a year earlier, offset much of the operating improvement. Interest expense decreased to $249,000 from $802,000 in the statement of operations.
- Cash and cash equivalents were $13.732 million at March 31, down from $19.290 million at December 31, 2022. Current assets were $41.454 million and current liabilities were $64.606 million.
- Net long-term debt, including its current portion, totaled $54.551 million ($48.773 million current and $5.778 million long-term). The company also reported $8.573 million in lease liabilities at present value.
- Operating cash outflow increased, mainly because the company paid $9.551 million of accrued liabilities. Investing activities provided $11.537 million, including $11.330 million from sales of marketable securities. Financing activities used $2.896 million, reflecting debt repayments net of new borrowings.
Changes, outlook, and risks
- Management said cost reductions helped narrow the operating loss. It reported plans to continue controlling costs and reducing cash burn; the filing gives no formal revenue or earnings guidance.
- Management concluded that substantial doubt about the company’s ability to continue as a going concern had been alleviated. Its stated liquidity basis includes $13.7 million of cash, $13.4 million of marketable securities, and approximately $12 million of expected principal and interest receipts on notes receivable through March 2024. The company nevertheless reported continuing operating losses and negative operating cash flow.
- Management cited a proposed Impact BioMedical IPO, expected to raise $30–$50 million and targeted to close in early Q3 2023, and a proposed SHRG Nasdaq up-listing with an estimated $15 million raise. These were plans and estimates, not completed financings. The company was also negotiating to extend its approximately $40.2 million Pinnacle Bank facility, which matures November 2023, through November 2024.
- Subsequent event: on May 4, 2023, DSS distributed approximately 280 million SHRG shares to DSS shareholders and expected to retain about 7% of SHRG. At March 31, DSS reported approximately 80% ownership of SHRG. The distribution materially changes the ownership position after the reporting date.
- Credit and valuation risks include a single customer representing approximately 23% of Q1 revenue and 47% of trade receivables at March 31. The loan portfolio included a $896,000 specific reserve for a borrower with repayment weaknesses; another borrower note was in default at year-end and remained reserved. Marketable securities had $6.804 million of unrealized losses relative to adjusted cost at March 31.
- The filing identifies related-party holdings and transactions, including ties involving the executive chairman and Alset entities. An Equivir license agreement could require reimbursement of 50% of development costs, capped at $1.25 million; no liability was recorded because development had not begun and the amount was not estimable.
- Disclosure controls and procedures were reported ineffective, with previously identified material weaknesses still being remediated. The controls discussion refers to an evaluation as of March 31, 2022, although this is the Q1 2023 filing; investors should verify the applicable evaluation date and status.
- The filing says there were no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements. It does not provide a clear detailed account of any legal proceedings beyond its reference to the commitments and contingencies note.
Most important facts to verify
- Whether the Pinnacle Bank maturity was extended and how the $40.2 million facility will be repaid or refinanced.
- Whether the proposed Impact BioMedical and SHRG financings occurred, on what terms, and how much proceeds DSS or its subsidiaries received.
- The cash-conversion and collection timing of notes receivable, including past-due or defaulted loans, and the realizable value of marketable securities.
- The financial and governance consequences of the May 4 SHRG share distribution, including DSS’s resulting ownership, control, and consolidation treatment.
- Progress in remediating material weaknesses and clarification of the controls evaluation date misstated or inconsistently described in the filing.