DSS, INC. quarterly report, Q3 FY2021

DSS, Inc. — Q3 2021 Form 10-Q Summary

Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2021. The company changed its name from Document Security Systems, Inc. to DSS, Inc. effective September 30. DSS reported five operating segments across packaging and printing, direct marketing, biohealth, securities and fintech, and investment banking; many of its newer business lines remained in early development. Results include acquisitions and discontinued operations, so comparisons may not reflect a consistent business mix.

Financial performance and liquidity

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Revenue	$4.566 million	$3.686 million	$13.218 million	$10.202 million
Operating loss	$(5.545) million	$(2.573) million	$(15.991) million	$(4.806) million
Net income (loss), continuing operations	$(6.675) million	$5.182 million	$(21.462) million	$3.511 million
Net income (loss), including discontinued operations	$(6.675) million	$4.942 million	$(19.333) million	$2.069 million
Cash used in operating activities	Not presented quarterly	Not presented quarterly	$(12.448) million	$(2.846) million

Revenue rose 24% in Q3 and 30% year to date. Printed-products revenue increased 15% and 27%, respectively; direct-marketing revenue increased 35% and 33%. Management attributed packaging growth to new customers and customers returning toward pre-pandemic operations.
Gross margin, calculated from reported revenue and cost of revenue, was approximately 30.3% in Q3 versus 30.4% a year earlier, and 28.0% year to date versus 32.7%. Higher paper, freight, manufacturing and overhead costs weighed on the year-to-date margin.
Operating costs increased faster than revenue. Management cited higher headcount and approximately $6.2 million of performance-bonus accruals; depreciation and amortization also rose with acquired intangible assets. Q3 investment losses and a $1.645 million equity-method investment loss contributed to the swing from prior-year profit to loss.
At September 30, cash and cash equivalents were $69.137 million, with another $0.350 million of restricted cash. Current assets were $96.981 million and current liabilities $12.538 million. Notes receivable, including the large SHRG loan, are a significant component of current assets.
Total debt, net, was approximately $7.162 million ($0.498 million current and $6.664 million long-term), compared with approximately $2.254 million at year-end 2020. Lease liabilities totaled $0.197 million. The company repaid certain Citizens Bank loans in July and added financing for equipment and medical real estate.
Cash increased by $64.304 million over the nine months, primarily reflecting $121.737 million of net common-stock issuance proceeds and $7.102 million of long-term borrowings. Investing activities used $53.215 million, including $24.048 million invested in notes receivable, $19.026 million in investments, and purchases of real estate and equipment.

Material changes and notable transactions

DSS raised substantial equity through three 2021 public offerings and a September subscription by related-party Alset EHome International. Common shares outstanding increased from approximately 5.836 million at December 31, 2020 to 79.746 million at September 30, 2021, a major dilution factor.
In April, DSS made a $30 million convertible loan to Sharing Services Global Corporation (SHRG). The arrangement included a $3 million origination fee, prepaid interest in shares, and 150 million warrants. DSS reported an approximately 46.8% SHRG ownership interest and a $1.645 million equity-method loss for the quarter; changes in investment and warrant values contributed materially to reported losses.
DSS acquired majority control of American Pacific Bancorp (APB) in September for approximately $40 million, creating its investment-banking segment. Purchase-price accounting was preliminary; the company allocated $16.945 million to goodwill and $20.301 million to non-controlling interest pending final valuations.
DSS sold DSS Digital in May for stated consideration of $5 million, including $3 million cash, contingent earn-out and trade credits. The sale produced a reported net gain of $2.226 million; the earn-out was not recognized as realizable by quarter-end.
Management reported that DSS completed a transfer to become registered investment advisor to four mutual funds in September for $0.6 million, recorded as an indefinite-lived intangible asset. A planned relocation of Premier Packaging to a larger facility was also disclosed.

Outlook, risks and unusual items

No quantitative revenue, earnings or margin guidance was provided. Management stated it believed available cash and expected access to capital would fund requirements for at least 12 months from the filing date.
Management cautioned that COVID-19 effects could continue to affect business lines differently and could adversely affect inventory, goodwill and other long-lived assets, and obligations. The company also noted that results are affected by estimates and that interim results are not necessarily indicative of full-year results.
Customer concentration is significant: two customers generated 43% of nine-month revenue and represented 73% of trade receivables at September 30, 2021.
Investment results are volatile: DSS reported a $10.894 million loss on investments for the first nine months, versus an $8.366 million gain in the prior-year period. The filing attributes much of the 2021 loss to warrant and marketable-security valuation changes.
Legal matters include the Ronaldi disputes and the Maiden Biosciences case. DSS stated it intended to defend its position; the Apple patent litigation was closed after DSS elected not to pursue further appeals. The filing does not quantify a probable loss for the ongoing cases.
Disclosure controls and procedures were deemed ineffective at September 30 due to material weaknesses previously reported. Remediation had begun but was not yet fully implemented and tested.
After quarter-end, AMRE acquired three medical facilities for $62 million, financed in part through related-party borrowings. This is a significant subsequent transaction and financing commitment, not a September 30 balance-sheet amount.

Important facts for investors to verify

Review the cash-flow outlook and liquidity needs alongside continuing operating cash outflows, planned investments, and post-quarter AMRE financing.
Assess the extent of dilution from 2021 equity offerings and any further share issuance or conversion of preferred securities.
Verify the collectability, repayment terms and valuation of the SHRG and other notes receivable, and the assumptions behind warrant and investment valuations.
Track final APB purchase-price accounting, acquired-asset valuations, and the economics and funding of the medical-property portfolio.
Monitor whether operating costs, incentive compensation and cost of revenue improve relative to revenue growth, and whether newer business lines generate material revenue.
Follow customer concentration, litigation developments, COVID-related impairment risks, and progress in remediating internal-control weaknesses.