DSS, Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. DSS operated packaging and printing, digital products, technology management, and a newly launched direct-marketing business, alongside newer investment and development ventures.
Financial performance and position
- Revenue: Q3 revenue was $4.169 million, up 59% year over year; nine-month revenue was $11.517 million, up 17%. Q3 printed-products revenue rose 40%, which management attributed to customer activity returning after COVID-related reopening and new customers. Nine-month revenue growth included $1.793 million from direct marketing, which had no comparable 2019 revenue.
- Profitability: Q3 operating loss was $2.389 million versus $1.180 million a year earlier; nine-month operating loss was $4.546 million versus $2.291 million. Approximate gross margin, calculated from reported revenue less cost of revenue, was 36.7% in Q3 and 38.6% for the nine-month period. Net income was $4.942 million for Q3 and $2.069 million for nine months, but included unrealized investment gains of $7.782 million and $8.365 million, respectively. Continuing-operations income was $5.366 million for Q3 and $3.771 million for nine months; discontinued operations recorded losses of $424,000 and $1.702 million.
- Cash flow: Nine-month operating cash use was $2.795 million and investing cash use was $7.247 million; financing provided $20.777 million, primarily reflecting equity offerings. Cash increased $10.549 million to $11.645 million.
- Liquidity and debt: At September 30, cash was $11.645 million, current assets $17.766 million, and current liabilities $4.470 million, yielding working capital of approximately $13.3 million. Reported current and long-term debt totaled approximately $3.302 million; the $800,000 revolving line was undrawn. The company also had approximately $1.072 million of Paycheck Protection Program loans recorded as debt pending forgiveness applications.
- Balance sheet changes: Total assets rose to $81.993 million from $20.146 million at year-end 2019, principally reflecting acquisitions and investments. Other intangible assets increased to $39.475 million. Stockholders’ equity was $73.315 million, compared with $12.303 million at year-end.
Material changes versus the prior period
- DSS acquired Impact BioMedical on August 21, issuing common and Series A convertible preferred stock. The filing gives preliminary consideration of approximately $38.3 million after a valuation discount to the preferred shares; purchase-price allocation remained incomplete. The preferred shares carry an aggregate $46.868 million liquidation preference and are convertible into approximately 7.233 million common shares.
- DSS raised approximately $20.1 million net through public common-stock offerings during the first nine months. Common shares outstanding increased from 1.206 million at December 31, 2019 to 5.174 million at September 30, 2020. The preferred conversion feature creates further potential dilution.
- DSS’s SHRG holding exceeded 20% in July; it reported a 32.2% interest at quarter-end and began equity-method accounting. DSS also recognized fair-value gains on marketable securities, including gains tied to SHRG and Alset International. These noncash valuation gains materially drove reported earnings.
- DSS sold substantially all DSS Plastics assets on August 14 and classified the business as discontinued operations. The sale generated $683,000 cash and may qualify for up to $517,000 in earn-out payments, which had not been recognized as realizable. DSS recorded a $685,000 goodwill impairment in the first quarter.
Outlook, commentary, and risks
- Management said $11.6 million of cash at quarter-end was expected to fund current and planned operations through October 2021, assuming no further acquisitions or investments. It concluded substantial doubt about going concern had been alleviated, while noting past operating losses and negative operating and investing cash flows. Plans include cost controls, lower cash burn, and growth in operating segments. No specific revenue or earnings guidance was provided.
- Management said COVID-19 affected business lines differently and expected lasting pressure on DSS Plastics, citing reduced travel, events, and demand for physical access and identification cards. The sale and exit of that business followed these concerns.
- Disclosure controls and procedures were reported ineffective at September 30, 2020 due to previously disclosed material weaknesses. Remediation had begun but was not yet fully implemented and tested.
- Litigation remains a risk, including DSS’s appeal of the Apple non-infringement judgment, stayed LED patent cases and related patent-validity proceedings, and litigation with former CEO Jeffrey Ronaldi. His counterclaims include compensation and bonus demands; the filing does not establish that the claims will result in payment.
- Two customers accounted for approximately 37% of nine-month revenue combined and 48% of quarter-end accounts receivable combined. PPP loan forgiveness applications were pending. The filing also describes related-party transactions and board relationships involving Alset, SHRG, and the Impact BioMedical acquisition.
Important facts for investors to verify
- Whether operating performance and cash generation improve without relying on unrealized investment gains or repeated equity issuance.
- The final Impact BioMedical purchase-price allocation, value and useful lives of acquired intangible assets, and potential dilution from Series A preferred conversions.
- SHRG and other investment valuations, related-party governance and transaction terms, and the effect of equity-method accounting.
- Cash burn against management’s October 2021 funding estimate, future acquisition and investment spending, and the outcome of PPP forgiveness applications.
- Progress remediating material weaknesses, customer concentration, and developments in material litigation and the DSS Plastics earn-out.