By Lisa Thompson
NYSE:DSS
READ THE FULL DSS RESEARCH REPORT
Shareholders can look forward to three potential spin-offs at DSS (NYSE:DSS) in the next nine months. Investors are aware of the imminent spin-off of Impact Biomedical, as its red herring has been filed, and it is in the comments phase with the SEC. However, a spin-off of American Pacific Bancorp could actually happen more quickly as it is a far less complicated entity and the spin-off could be executed sooner than Impact. Management believes the bank could file and be spun off by the end of the 2022. We expect it would be valued at the typical four to five times loans outstanding for commercial lenders, which currently stand at $40 million thus valuing it at $160 million to $200 million. We believe it is earning approximately 10% on average on its loans. DSS’s current enterprise value is now $65 million.
Impact Biomedical is expected to file an amended S-1 and have a record date set in Q4. It could IPO in the beginning of 2023. Its valuation will be determined by the bankers by market forces.
The REIT has an 8% cap rate. It is still growing and it is expected to reach $200 million to $250 million in assets before IPOing which could happen in Q2 or Q3 of 2023.
In all three cases, and in any others going forward, DSS plans to keep at least 50% of each entity. Shareholders will get a certain percentage and a number of shares will be newly issued to raise capital to support growth of each newly public company.
Q2 2022 Results
After a delay in reporting due to a correction in its inventory number, DSS reported revenues of $11.8 million, up 181% from a year ago’s $4.2 million. Direct marketing contributes more than half the revenues and reported $6.1 million, down sequentially from Q1 2022’s $6.9 million. While disappointing, it looks that sales have stabilized and we are expecting that the Q3 results could show sequential improvement. This quarter is the second reported with the consolidation of Sharing Global Services to the income statement. In Q2 2022, Sharing contributed $5.3 million in revenues to direct marketing (down 53% year over year) and had a $1.5 million loss despite a $4.9 million unrealized gain on investments due to its investments in Stemtek (STEK-$0.78). In the March quarter, Sharing reported $6.2 million in revenues and a $3.8 million loss.
Premier Packaging reported revenues of $4.0 million (up 20%), better than the Q1 $3.5 million and Q2 2021’s $3.4 million. It has had the supply of paper improved and has moved to rolled paper making a larger pool of potential sources. Demand continues strong into the important Christmas quarter which is seasonally strong for Walgreens and Shutterfly.
The REIT contributed $1.5 million in revenues down sequentially from $1.7 million in Q1 2022 as revenues were reclassified. We expect revenue to increase sequentially going forward. It did not start generating revenues until Q3 of 2021. The bank also added $145,000 in revenues.
Gross margins were 35% versus last year’s 27%, as Sharing Global Services, the REIT and investment income added millions of dollars of higher margin revenues; gross margin dollars were $4.1 million up from $1.2 million last year. Premier Packaging has been experiencing margin compression due to paper costs but will be able to pass some of the cost increases to customers going forward.
Operating expenses were $15.3 million, an increase from $11.2 million last year, mostly from adding costs from Sharing. The biggest increase was sales and marketing, rising $2.1 million followed by a $2.3 million in depreciation and amortization from all the acquisitions, a $1.2 million increase in SG&A and an additional $1.0 million from professional fees. The operating loss was $11.2 million compared to $7.1 million last year.
Other expenses included $2.3 million in other income driven by the increase in the value of warrants owned by Sharing, and an unrealized gain of $3.4 million on marketable securities mostly from the $4.9 million gain from Stemtek, when its stock was at $5.00. The percent net income from minority holdings DSS does not own produced a loss of $99,000 compared to a loss of $1.6 million in last year’s quarter. This year did not have Sharing in it, while last year it was all Sharing. Minority interest was a reversal of $748,000 loss, versus $228,000 last year.
Loss to common shareholders was $4.7 million versus a loss of $8.4 million last year. The GAAP loss per share was $0.05 versus $0.24 per share a year ago. Non-GAAP it was a loss per share of $0.12 versus a loss of $0.04 last year. The average shares outstanding increased 160% to 91 million primary shares.
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