DSS, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. DSS operates across packaging and printing, direct marketing, BioHealth, and securities/fintech and real estate. Its reported revenue came from printed products and direct marketing; other newer businesses were largely investment or development-stage activities.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $4.185m | $2.778m | $8.653m | $6.516m |
| Operating loss | $(7.055)m | $(1.263)m | $(10.446)m | $(2.237)m |
| Continuing-operations loss | $(10.725)m | $(0.698)m | $(14.787)m | $(1.676)m |
| Net loss | $(8.646)m | $(0.906)m | $(12.658)m | $(2.873)m |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(10.248)m | $(1.475)m |
- Q2 revenue rose 51% year over year; six-month revenue increased 33%. Printed products grew 49% and 33%, respectively, while direct marketing grew 60% and 31%.
- Approximate gross margin, calculated as revenue less cost of revenue, fell to 27% in Q2 from 38% and to 27% for the first half from 34%.
- Q2 basic and diluted loss per share from continuing operations was $0.30; first-half loss per share was $0.53. Discontinued operations contributed income of $2.079m in Q2 and $2.129m for the first half.
- Higher SG&A, including performance bonus accruals of approximately $4.574m, and investment losses weighed on results. Six-month investment losses were $7.898m, including substantial warrant valuation losses; interest income was $1.537m.
- Cash and cash equivalents were $65.645m at June 30, versus $5.183m at December 31, 2020. Current assets were $88.350m and current liabilities $11.141m; working capital was approximately $77.2m.
- Six-month investing cash outflow was $45.330m, including $18.799m of note-receivable investments and purchases of investments and real estate. Financing cash inflow was $112.833m, principally from $106.772m of net common-stock issuance.
- Reported current and long-term debt totaled approximately $8.154m at June 30, excluding lease liabilities. Debt increased from approximately $2.254m at year-end, in part due to financing for the medical office property and printing equipment.
Changes, outlook, and risks
- The company completed three 2021 public stock offerings, raising approximately $24.9m, $36.14m, and $45.75m net, respectively. Common shares outstanding rose from 5.836m at December 31, 2020 to 67.590m at June 30, 2021; preferred-stock conversions also contributed to dilution.
- DSS sold DSS Digital in May for stated consideration of $5m: $3m cash, up to $1.5m contingent earn-out, and $0.5m in trade credit or license-fee rebates. It recorded a $2.226m net gain; the earn-out was not recognized as realizable by quarter-end. The sale of DSS Plastics had been completed in 2020.
- DSS invested in or expanded positions in several ventures, including a $30m convertible note to SHRG, a medical-office property acquisition, and investments in securities and BioHealth-related businesses. These investments expose results to valuation volatility and execution risk. SHRG and other investments involve significant related-party relationships disclosed in the filing.
- Management stated it believed available cash was sufficient for requirements for at least 12 months from the filing date and expected access to equity and debt financing. No quantified revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year results.
- COVID-19 effects varied across business lines; management noted potential adverse effects on sales, inventory, impairment assessments, and obligations. Two customers represented 45% of first-half revenue and 75% of trade receivables at June 30.
- Disclosure controls and procedures were deemed ineffective at June 30 due to continuing material weaknesses. Remediation had begun but was not yet fully implemented and tested.
- Legal matters include the Apple patent case, for which the appeal was affirmed against DSS on April 30 and the company elected not to pursue further appeals; ongoing former-CEO Ronaldi litigation; and Maiden Biosciences litigation. On August 9, 2021, the court dismissed some Maiden claims but allowed amendment and left a claim against a DSS affiliate pending.
- Premier Packaging planned to relocate to a larger facility by year-end 2021 and anticipated selling its existing facility, with closing expected January 2022. The filing also describes a possible $1.5m seller earn-out on the medical property acquisition; no liability was recorded at June 30.
Important facts for investors to verify
- Whether recurring operating revenue can grow enough to offset sharply higher operating expenses and continuing cash burn.
- The liquidity, collectability, valuation assumptions, and concentration risks of notes receivable, warrants, and equity-method and other investments—particularly the SHRG exposure.
- The terms and potential dilution from equity financing and preferred-stock conversions, and the extent to which future capital needs may require further issuance or borrowing.
- Progress on internal-control remediation, customer concentration, related-party transactions, and the outcomes of the pending litigation.
- The conditions and timing for the DSS Digital earn-out and trade credits, the Premier facility relocation and sale, and any contingent property-acquisition obligations.