DSS, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. DSS operates across nine business lines, reported in five segments. Results are significantly affected by the May 1 deconsolidation of Sharing Services Global Corporation (SHRG); Q2 2023 includes only April SHRG activity, while 2022 comparative results include SHRG on a consolidated basis.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $7.233 million | $11.771 million | $19.064 million | $24.064 million |
| Operating loss | $(6.450) million | $(11.182) million | $(12.125) million | $(17.860) million |
| Net loss | $(37.723) million | $(5.410) million | $(46.357) million | $(14.361) million |
| Net loss attributable to common stockholders | $(37.923) million | $(4.652) million | $(45.959) million | $(12.700) million |
| Loss per common share, basic and diluted | $(0.27) | $(0.05) | $(0.33) | $(0.15) |
The filing does not report gross or operating margins as headline measures. Revenue fell 39% in Q2 and 21% in the first half year over year. Printed-products revenue rose 27% for the first half, while direct-marketing revenue fell sharply, primarily because SHRG was deconsolidated. The Q2 net loss includes a $29.196 million loss on SHRG deconsolidation; investment losses totaled $27.922 million for Q2 and $30.790 million for the first half. DSS also recorded a $3.757 million provision for loan losses in the first half.
Cash, liquidity and debt
- Cash and cash equivalents were $10.033 million at June 30, down from $19.290 million at year-end. Marketable securities were $11.575 million, for cash and securities totaling about $21.608 million.
- First-half operating cash outflow was $19.715 million, including $18.083 million from continuing operations and $1.632 million from held-for-sale operations. Investing activities provided $13.376 million, including proceeds from marketable securities sales; financing activities used $2.918 million.
- Current assets were $29.793 million versus current liabilities of $55.490 million, a working-capital deficit of approximately $25.697 million. Total debt, current and long-term, was approximately $54.424 million; $47.206 million was classified as current.
- The approximately $40.380 million Pinnacle Bank LifeCare loan was in default at June 30 and classified as current. DSS said it was negotiating an extension through November 2024, with completion expected in Q3 2023. The filing does not establish that an extension was completed.
- Management cites cash, marketable securities, expected note collections, a planned Impact BioMedical IPO, and potential SHRG fundraising and loan repayments as liquidity sources. Management concluded substantial doubt about the company’s ability to continue as a going concern had been alleviated, while also acknowledging recurring losses and operating cash outflows.
Material changes and unusual items
- On May 4, DSS distributed approximately 280 million SHRG shares to its shareholders, reducing its ownership from about 81% to about 7%; SHRG was deconsolidated effective May 1. DSS reported a $29.196 million deconsolidation loss and subsequently carried its remaining SHRG shares at approximately $148,000.
- Receivables risk increased: the allowance for doubtful accounts was approximately $3.390 million at June 30 versus $29,000 at December 31, 2022. Approximately $3.361 million was recorded in Q2, and the filing attributes a material portion to rent receivables at the REIT subsidiary.
- HWH World was sold to SHRG on July 1, 2023. The sale price is stated as $711,000; HWH’s June 30 assets and liabilities were classified as held for sale.
- Assets declined to $204.861 million from $248.916 million at year-end; total stockholders’ equity declined to $134.429 million from $156.681 million. Common shares outstanding were 140,264,250 as of August 4, 2023.
Outlook, risks and controls
DSS provided no formal revenue or earnings guidance. Management cited cost controls and expense reductions as priorities. It expected an Impact BioMedical IPO in Q3 2023, with DSS projecting to retain at least 55% ownership, and referred to a possible SHRG up-listing and approximately $15 million fundraising; these are expectations, not completed transactions. Management also estimated available cash, securities and expected note receipts could fund operations through June 2024, subject to the assumptions described in the filing.
Key risks include the defaulted LifeCare loan and refinancing uncertainty, substantial operating losses and cash burn, collection risk in notes and receivables, and market-value losses on investments. The filing reports disclosure controls and procedures were not effective at June 30 because previously identified material weaknesses remained; remediation was underway but not fully implemented. The filing also describes related-party interests and transactions, including ties involving the company’s executive chairman.
Important facts for investors to verify
- Whether Pinnacle Bank extended or otherwise amended the defaulted LifeCare loan, and the resulting maturity, rate and covenant terms.
- Actual collections on notes receivable and rent receivables, particularly loans with overdue or renegotiated maturities and the borrower balances subject to reserves.
- Whether the Impact BioMedical IPO and SHRG fundraising/up-listing occurred, the proceeds received, and any resulting ownership dilution or repayment to DSS.
- The realized proceeds and cash-flow impact of the HWH World sale, and the ongoing financial impact of SHRG’s deconsolidation.
- Progress in remediating control weaknesses and whether subsequent filings report effective disclosure controls.