DSS, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023; filed November 14, 2023. DSS operates across nine business lines reported in five segments, including packaging, commercial lending, direct marketing, biotechnology, and securities and investment management.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $4.182 million | $11.862 million | $23.245 million | $35.927 million |
| Operating loss | $5.103 million | $14.748 million | $17.228 million | $34.047 million |
| Net loss | $6.681 million | $24.802 million | $53.039 million | $39.161 million |
| Net loss attributable to common shareholders | $4.342 million | $20.215 million | $50.303 million | $32.914 million |
| Loss per share, basic and diluted | $(0.03) | $(0.15) | $(0.36) | $(0.32) |
Derived gross margin was approximately negative 45% in Q3 and positive 16% for the nine-month period, based on reported revenue and cost of revenue. Operating margins were approximately negative 122% and negative 74%, respectively.
- Revenue fell 65% in Q3 and 35% year to date. Q3 declines included direct marketing, rental, and printed-product revenue. Year-to-date printed-product revenue rose 3%, while direct marketing revenue fell 66%.
- Cash and cash equivalents were $6.897 million at September 30, down from $19.290 million at December 31, 2022. Marketable securities were $11.064 million; their reported fair value was below cost.
- Current assets were $24.403 million and current liabilities $53.472 million. Total assets were $196.551 million, versus $248.916 million at year-end 2022.
- Current and long-term debt, net, totaled approximately $54.385 million ($46.638 million current and $7.747 million long-term). The filing lists $46.952 million of scheduled principal payments in 2024. Lease liabilities totaled $7.853 million.
- Net cash used in operating activities was $21.035 million; investing activities provided $11.885 million; financing activities used $3.243 million. Cash declined by $12.393 million over the nine months.
Material changes and unusual items
- DSS distributed most of its SHRG shares to DSS shareholders in May 2023 and deconsolidated SHRG effective May 1. The distribution reduced reported direct-marketing activity; DSS retained approximately 7% of SHRG. DSS recorded an approximately $29.2 million deconsolidation loss.
- Year-to-date investment losses were $30.490 million, including the SHRG deconsolidation loss. DSS also recorded $4.936 million of loan-loss provisions and $1.281 million of losses on asset sales.
- Rental income weakened as AMRE LifeCare tenants failed to make full monthly payments. Management reported approximately $3.4 million in rent-receivable reserves during the nine months.
- HWH-related asset and subsidiary sale arrangements generated a combined reported loss of approximately $1.256 million. DSS did not record receivables for the purchase prices because of uncertainty about the buyers’ ability to sell the inventory and pay.
- The $27 million Borrower 13 note, previously fully reserved, was exchanged in August for 26,000 Series D preferred shares; DSS assigned no value to the shares due to lack of liquidity.
Liquidity, outlook, and risks
Management said cash, potential proceeds from selling marketable securities, and expected principal and interest receipts on notes receivable of approximately $6.3 million through September 30, 2024 were expected to fund current and planned operations through that date, assuming no further acquisitions or investments. Management concluded substantial doubt about continuing as a going concern had been alleviated, while acknowledging operating losses and negative operating cash flow.
- The approximately $40.2 million AMRE LifeCare loan from Pinnacle Bank was in default, with maturity in November 2023. DSS said it was negotiating an extension through November 2024, expected to be completed in Q4 2023. The filing does not establish that an extension was completed.
- Management expected an Impact BioMedical IPO in Q4 2023, with DSS projecting to retain at least 55% ownership; proceeds were expected to reimburse DSS in part for Impact BioMedical expenses. This was an expectation, not a completed transaction as of the filing.
- Several borrower notes were past due, in default, being renegotiated, or reserved for credit concerns. The filing reports a $2.884 million reserve against Borrower 2’s approximately $5.544 million outstanding balance.
- Disclosure controls and procedures were deemed ineffective at September 30, 2023 because previously reported material weaknesses remained. The cover page also indicates DSS had not filed all required reports during the preceding 12 months.
- DSS reported no material change to previously disclosed risk factors. The filing refers to commitments and contingencies, but does not provide clear details of separate material litigation.
Important facts for investors to verify
- Whether Pinnacle Bank formally extended or otherwise resolved the defaulted LifeCare loan, and the effects on property cash flows and rent collections.
- Whether the Impact BioMedical IPO occurred, its proceeds and ownership impact, and how the October 2023 reverse split and preferred-share conversion affect DSS’s interest.
- Actual collections on delinquent or reserved notes receivable, including the expected $6.3 million of receipts used in management’s liquidity assessment.
- The liquidity and realizable value of marketable securities, and whether operating cash burn is consistent with management’s funding assumptions.
- Progress in remediating material weaknesses and the company’s reporting-compliance status.