DSS, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; financial statements are unaudited. DSS operates across packaging, direct marketing, commercial lending, securities and investment management, biotechnology, and other developing business lines. The company checked “No” in response to whether it had filed all required reports during the preceding 12 months.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.862 million | $4.566 million | $35.927 million | $13.218 million |
| Operating loss | $14.183 million | $5.545 million | $32.042 million | $15.991 million |
| Net loss | $24.801 million | $6.675 million | $39.161 million | $19.333 million |
| Net loss attributable to common stockholders | $20.214 million | $6.598 million | $32.914 million | $18.997 million |
| Basic and diluted loss per share | $(0.15) | $(0.19) | $(0.32) | $(0.78) |
Q3 gross profit was approximately $494,000, or 4.2% of revenue; nine-month gross profit was approximately $8.274 million, or 23.0%. These calculations use reported revenue less cost of revenue. The filing attributes higher costs to increased manufacturing, freight, paper and overhead costs, as well as depreciation and amortization.
- Revenue growth: Revenue rose 160% in Q3 and 172% for the nine-month period. Direct marketing was $4.937 million in Q3 and $17.939 million year to date; management cited Asian-market sales and consolidation of SHRG. Printed-products revenue grew 47% in Q3 and 19% year to date, with management citing recovery after Premier’s Q1 facility relocation. Rental income and net investment income also reflect newer business activities.
- Cash flow: Nine-month operating cash use was $23.251 million, compared with $12.448 million in 2021. Investing cash use was $17.816 million, versus $53.215 million. Financing provided $7.317 million, versus $126.760 million in 2021, which included substantially larger stock proceeds.
- Liquidity: Cash and equivalents were $22.845 million at September 30, down from $56.595 million at December 31, 2021. Current assets were $55.668 million and current liabilities $23.570 million. Marketable securities were $28.083 million.
- Debt and leases: Current and long-term debt, net, totaled approximately $56.843 million ($6.680 million current and $50.163 million long term). Lease liabilities totaled $8.810 million. Several sizable property loans and certain related-party borrowings are included in debt.
- Investments and unusual items: Q3 included a $14.302 million loss on investments; the nine-month investment loss was $10.479 million. Nine-month results also included $4.203 million in other income, $134,000 in equity-method gains, and a $405,000 gain on asset sales. Results were affected by investment valuation changes and impairments.
Changes, outlook and risks
- Results are not fully comparable year over year: SHRG was consolidated beginning at year-end 2021, and reporting segments and acquired businesses changed. The increased share count also reflects substantial equity issuances: common shares outstanding rose from about 79.7 million at year-end 2021 to 139.0 million at September 30, 2022.
- Management said it believed cash on hand would meet 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 cited a material investment in its broad portfolio of businesses and investments, and stated that investment performance drove increased losses. Risks include continued operating losses and cash use, market-value declines in investments, debt and refinancing needs, and customer/vendor concentration. One customer represented 13% of nine-month revenue and 35% of trade receivables at September 30.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Identified material weaknesses involved insufficient qualified accounting personnel and segregation of duties for complex transactions, and lack of systematic documentation of timely monthly reconciliations and close procedures. Remediation was underway but not yet complete.
- Maiden Biosciences’ remaining fraudulent-transfer claim was scheduled for trial in December 2022; DSS said it intended to defend the case. The Ronaldi litigation was settled and discontinued with prejudice on October 19, 2022. A potential Equivir license development-cost reimbursement of up to $1.25 million is contingent on development and was not recorded because development had not begun and the amount was not reasonably estimable.
- Significant related-party transactions include equity and asset exchanges with entities associated with Executive Chairman Heng Fai Ambrose Chan, related-party loans, and related-party investment activity. The filing also reports that a planned $17 million stock purchase by Alset EHome was amended to approximately $1.519 million.
Investor verification priorities
- Confirm the filing-status disclosure and review the company’s subsequent SEC filing history.
- Assess cash burn, debt maturities and refinancing, especially property-related and related-party obligations, against management’s 12-month liquidity assertion.
- Review the composition, valuation methods, concentration and subsequent performance of marketable securities and other investments, including the Q3 investment loss.
- Reconcile revenue growth and losses by segment, including the effects of SHRG consolidation and the comparability of prior-year results.
- Track remediation and independent assessment of the disclosed control weaknesses, and review the related-party transactions and remaining litigation developments.