DSS, INC. quarterly report, Q2 FY2022

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DSS, Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Unaudited results for the three and six months ended June 30, 2022. DSS operates across nine business lines, reported in five segments. Results include Sharing Services Global Corp. (SHRG), consolidated from December 31, 2021, and reflect newer commercial lending and medical real estate activities; therefore, comparisons with 2021 are affected by changes in the business and consolidation scope.

Financial performance and liquidity

  • Revenue: Q2 revenue was $11.771 million, up 181% from $4.185 million; first-half revenue was $24.064 million, up 178% from $8.653 million. First-half direct marketing revenue was $13.002 million, printed products $7.617 million, rental income $3.171 million, and net investment income $274,000.
  • Profitability: Q2 operating loss was $11.182 million and net loss $5.410 million, compared with operating loss of $7.055 million and net loss of $8.646 million in Q2 2021. First-half operating loss was $17.860 million and net loss $14.361 million, versus $10.446 million and $12.658 million, respectively, in 2021. First-half loss attributable to common stockholders was $12.700 million, or $0.15 per share, versus $12.399 million, or $0.53 per share. Lower loss per share reflects a substantially higher weighted-average share count as well as results.
  • Margins and expenses: Based on the statements, revenue less cost of revenue was $4.101 million in Q2 (about 34.8% of revenue) and $7.779 million in the first half (about 32.3%). First-half total costs and expenses rose 120% to $41.924 million, including higher direct costs, compensation, marketing, and depreciation and amortization.
  • Cash flow: First-half operating cash use was $13.947 million, versus $10.248 million in 2021; investing cash use was $6.412 million, versus $45.330 million; financing provided $7.709 million, versus $112.833 million. Cash declined $12.650 million from year-end to $43.945 million.
  • Liquidity and debt: At June 30, current assets were $74.809 million and current liabilities $61.708 million (working capital about $13.1 million; current ratio about 1.21). Cash was $43.945 million. Current and long-term debt, net, totaled $66.278 million, including $46.711 million classified as current. Total liabilities were $91.385 million.

Material changes versus the prior comparable period

  • Revenue growth principally reflects SHRG consolidation and increased direct marketing sales, particularly in Asian markets, plus new rental and investment income streams. Printed-products sales were affected by production downtime during Premier Packaging’s facility relocation.
  • Cost of revenue increased 145% in the first half; management cited higher freight, paper and overhead costs, and depreciation and amortization related to acquired real estate assets. Sales and marketing expense rose 336%, and compensation expense rose 81%.
  • Other investment results were volatile: the company recorded a $3.823 million first-half gain on investments, compared with a $7.898 million loss in 2021. It also reported $1.745 million of impairment on notes receivable and other investments. In Q2, the $3.399 million investment gain included a disclosed $4.865 million unrealized gain related to Stemtech investments.
  • Common shares issued and outstanding rose from about 79.7 million at December 31, 2021 to 100.1 million at June 30, 2022. The filing reports 139.0 million shares outstanding as of August 30, 2022.

Outlook, risks, contingencies and unusual items

  • Management stated it believed available cash and access to equity or debt financing would meet cash requirements for at least 12 months from the filing date. No specific revenue or earnings guidance was provided.
  • AMRE’s $40.047 million LifeCare debt was classified as current. AMRE had not completed an audit of its December 31, 2021 financial results and was in violation of a debt covenant; it was seeking a waiver. The filing also says AMRE was seeking a waiver on covenants for a separate loan and believed it would obtain one. Premier reported compliance with its loan covenants.
  • Management concluded disclosure controls and internal control over financial reporting were not effective at June 30, 2022. The stated material weaknesses involved insufficient qualified accounting personnel and segregation of duties for complex transactions, and inadequate systematic documentation of timely monthly reconciliations and closing procedures. Remediation had begun but was not complete.
  • Legal matters include the ongoing Ronaldi disputes, including claims for compensation and advancement of legal fees, and the Maiden Biosciences action, then scheduled for trial beginning December 5, 2022. The company said adverse decisions could materially affect results, cash flows or financial condition.
  • Related-party transactions and governance warrant attention, including equity and debt dealings involving Executive Chairman Heng Fai Ambrose Chan-affiliated entities. Subsequent events included July 2022 related-party share transactions, including the acquisition of True Partners shares for DSS stock, and the exchange of DSS shares for an $8.35 million AMRE note.
  • The Equivir license provides for a 5.5% royalty on net sales and potential reimbursement of 50% of development costs, capped at $1.25 million; development had not begun and no liability was recorded because the amount was not estimable.

Most important facts for investors to verify

  • Reconcile the cash disclosure: the balance sheet reports $43.945 million at June 30, while MD&A states approximately $42.4 million.
  • Reconcile net investment income: the statements report $145,000 for Q2 and $274,000 for the first half, while portions of MD&A report $166,000 and $295,000; the filing text does not provide a clear reconciliation.
  • Monitor the LifeCare covenant breach, audit completion, waiver status, and refinancing or repayment of the substantial current debt balance.
  • Assess whether operating cash use, rising expenses, and management’s stated 12-month liquidity outlook remain consistent with subsequent cash needs and access to financing.
  • Review the effect of additional share issuance and related-party transactions on dilution, valuation, and governance, and track progress remediating the disclosed control weaknesses.
  • Track outcomes and potential costs of the Ronaldi and Maiden litigation, as well as investment valuations, impairment exposure, and performance of newly consolidated businesses.