DSS, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Quarter and six months ended June 30, 2020. DSS operates businesses spanning packaging and printing, digital authentication, intellectual-property monetization, and direct marketing, alongside newer start-up ventures. In March, DSS acquired a 52.5% controlling interest in AMRE Asset Management Inc. (AAMI); AAMI held a 93% interest in American Medical REIT (AMRE), which had not yet acquired medical real estate by quarter-end.
DSS classified its plastics business as discontinued operations and began pursuing a sale of substantially all its assets. A 1-for-30 reverse stock split took effect May 7, 2020; share and per-share figures are presented on a split-adjusted basis.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.129 million | $3.484 million | $7.348 million | $7.241 million |
| Operating loss | $1.237 million | $0.703 million | $2.156 million | $1.112 million |
| Loss from continuing operations | $0.672 million | $0.732 million | $1.595 million | $1.164 million |
| Loss from discontinued operations | $0.232 million | $0.299 million | $1.278 million | $0.316 million |
| Net loss | $0.904 million | $1.031 million | $2.873 million | $1.480 million |
| Continuing-operations loss per share | $0.27 | $1.00 | $0.76 | $1.75 |
- Q2 revenue declined 10%, as printed-products revenue fell 24% and technology sales, services and licensing fell 26%; direct marketing contributed $506,000. First-half revenue increased 1%, including $1.078 million from the new direct-marketing business.
- Calculated gross margin on continuing operations was approximately 42.5% in Q2 versus 31.6% a year earlier, and 39.6% for the first half versus 32.1%. Operating losses widened in both periods as costs and expenses increased, including higher professional fees, compensation, and sales and marketing.
- Q2 included a $580,000 gain on marketable securities; first-half gain was $584,000. This non-operating gain partly offset operating losses and reflected the fair-value increase in DSS’s Sharing Services Global Corp. (SHRG) shares.
- Cash was $7.176 million at June 30, up from $1.096 million at year-end. Working capital was approximately $9.3 million. For the first half, operating cash flow was negative $1.381 million, investing cash flow negative $3.333 million, and financing cash flow positive $10.850 million.
- Balance-sheet debt, including current and long-term portions, was approximately $3.814 million, compared with $2.751 million at year-end; the revolving credit line was undrawn. DSS also recorded approximately $1.072 million of PPP loans as debt; forgiveness applications for Premier Packaging and DSS Digital were pending as of August 4.
- Common-stock offerings generated approximately $10.2 million net during the first half. Stockholders’ equity was $19.964 million at quarter-end, versus $12.303 million at December 31, 2019.
Material changes, outlook, risks and unusual items
- COVID-19 and plastics exit: Management attributed lower packaging and licensing demand partly to COVID-19-related cancellations, postponements, and reduced use of licensed products. It believed the pandemic could permanently reduce demand for plastics products such as hotel access cards. DSS recorded a $685,000 goodwill impairment in discontinued operations and was winding down plastics production and staffing.
- Going concern: Despite negative operating and investing cash flows over the preceding two years, management stated that quarter-end cash plus approximately $9.9 million raised after quarter-end should fund current and planned operations through August 2021, assuming no further acquisitions or investments. Management said substantial doubt about continuing as a going concern had been alleviated. It planned to pursue growth, control costs, and reduce IP-monetization spending. No formal earnings or revenue guidance was provided.
- Post-quarter capital and investments: Additional July offerings raised approximately $6.7 million and $3.3 million net. DSS also made substantial additional SHRG purchases, including a transaction with board-chairman Ambrose Chan; it reported beneficial ownership of approximately 37.6% of SHRG’s Class A shares as of July 30, potentially 41.1% if warrants were exercised. These are related-party and concentration considerations.
- Other transactions: Shareholders approved the proposed acquisition of Impact BioMedical Inc.; the company expected the transaction to close in Q3 2020. DSS also reported post-quarter approval for a new equipment credit line of up to $900,000. Its July purchase of additional SHRG shares and warrants totaled $3.88 million across two disclosed transactions.
- Legal and operational risks: DSS’s Apple patent case ended in a non-infringement judgment, which DSS appealed. Other patent cases remain pending or stayed during patent-review proceedings. Intel and Apple’s amended complaint no longer named DSS, which the company believed closed the matter as to DSS. Litigation involving a former CEO also remained ongoing. The filing states that adverse legal decisions could materially affect results, cash flows, or financial condition.
- Controls: Management concluded disclosure controls and procedures were not effective at June 30 because previously reported material weaknesses remained; remediation was underway but not complete.
Most important facts for investors to verify
- Whether post-quarter financing and actual cash use support the stated runway through August 2021, particularly if DSS makes further investments or acquisitions.
- Actual operating performance and cash burn after the plastics exit, and whether direct marketing and other newer business lines become sustainable sources of revenue.
- The status and terms of the Impact BioMedical transaction, PPP loan forgiveness, and the proposed equipment borrowing.
- The valuation, related-party terms, and marketability of DSS’s SHRG investment and warrants, as well as the status of its SED investment.
- Progress in remediating the disclosed material weaknesses and developments in material litigation.