Sharing Services’ Q1 Spin-Off to Be Followed By Impact Biomedical

By Lisa Thompson

NYSE:DSS

READ THE FULL DSS RESEARCH REPORT

DSS (NYSE:DSS) continued to make progress in Q1 to reduce its cash burn by spinning off Sharing Services Global. Although Sharing has not year reported its March quarter we believe it contributed about $3 million in revenues and the same amount in operating expenses to DSS. In Q2 we expect one month of Sharing will be in DSS’ income statement and then it will revert to a marketable security. We have adjusted our model accordingly. To recap on May 4th, DSS distributed approximately 280 million shares of Sharing Services to holders of DSS common stock as of the record date of April 28, 2023. Each share of DSS entitled the holder to receive two SHRG shares. DSS now owns 7% of Sharing Services Global Corporation (or 25 million shares worth $190,000) which will now be found in marketable securities.

We expect the record date for the spin-off of Impact Biomedical to be on or near June 30th. On Monday it filed what we expect to be the final amendment to its S-1 which contains audited financials and a business plan. It plans an IPO to follow, probably in Q3. After the IPO DSS should still have 55% of Impact and its financials will still be consolidated with DSS. Impact hopes to raise $30-50 million in an IPO. Impact has many products already developed and it will be interesting to see how the market values the company and to monitor its progress toward generating revenues.

Q1 2023 Results

DSS reported Q1 revenues of $11.9 million, down 3% from the year ago’s $12.3 million. Printed product sales were up 72% year over year and up 15% sequentially. Most of that growth was driven by Premier’s new capacity and alleviation of the paper shortage. $3.0 million of the $5.8 million of Packaging Printing and Fabrication revenues were from Walgreens’ photo business which slipped into Q1 from Q4. Commercial and security printing had its best quarter since 2020 at $265,000 but we expect results there to continue to fluctuate. Direct marketing was down 42% year over year, but flat sequentially with Q4 2022. On April 5th, Sharing was dividended to shareholders with DSS retaining 7% of the shares. Next quarter Sharing will not be consolidated with DSS except for the first month and direct marketing revenues will decline significantly. In Q1 Sharing was most of the revenues and if Q4 is a guide that would be over $3 million of the $4 million.

The REIT contributed $1.7 million in revenues virtually the same as last quarter and Q1 2022. The bank and commodity broker revenues were combined this quarter and had revenues of $117,000 compared with revenues of $129,000 in Q1 2022. The brokerage business is expected to have variable results due to its trading business.

The table below shows segment reporting. Premier Packaging showed a profit of 11.4% while the rest of the businesses lost money. The majority of losses were caused by direct marketing which lost $3.2 million in the quarter. Next quarter those losses should be much lower as Sharing has been removed from the income statement.

Table 1. Segment P&L

Gross margin in the quarter was 28.5% versus a reclassified 27.8% last year, while gross margin dollars were $3.4 million. Costs of goods sold decreased year over year by 4% for Q1 2023. This decrease was primarily driven by a decrease in manufacturing costs associated with the products sold in the Direct Marketing, and Packaging and Printing segments, in particular, in freight, and paper.

Operating expenses were $9.0 million, a decrease from $10.7 million last year. The biggest decrease was in Sales and Marketing which declined by $2.1 million due to lower sales at Sharing. The operating loss was $5.6 million compared to $7.3 million last year.

Other expenses were $3.1 million, with $2.9 million being from unrealized losses on marketable securities.

Minority interest was a reversal of a $598,000 loss, versus $903,000 last year. Loss to common shareholders was $8.0 million, flat with last year. The GAAP loss per share was $0.06 versus $0.10 per share a year ago due to more shares outstanding. The average shares outstanding increased by 64% to 139 million shares.

Balance Sheet

On March 31, 2023, DSS had $13.7 million in cash, negative working capital of $32.2 million, and debt of $54.6 million. It also has $13.4 million in marketable securities it could convert to cash if needed and has a convertible promissory note of $5.5 million due on May 19th from Puradigm. At the quarter’s end, it owned $55 million in real estate. During the quarter, the company was cash flow negative by $4.5 million not including changes in working capital. It spent $594,000 million on capex primarily on two new machines—one that adds capacity and the other with clamshell capabilities. The primary shares outstanding as of May 3, 2023, were 140,264,250.

After the Quarter Ended

On May 4, 2023, the DSS distributed approximately 280 million shares of SHRG in the form of a dividend to the shareholders of DSS common stock. Upon completion of this distribution, DSS now owns approximately 7% of the company. As a result, SHRG will no longer be consolidated with DSS.

Other Potential Spin-offs

The spin-off of the REIT has been put on hold as DSS has plans to get it to a critical size before spinning it off, and lending in the REIT industry has become more difficult as interest rates rise and lenders become more cautious. As a result, the time required to achieve its size goals has been extended and we no longer think a spin-off is possible in 2023. The plan was for it to reach $200-250 million in assets before a spin-off.

American Pacific Bancorp, the bank, is the most IPO-ready of all DSS’s holdings and we still expect it to also be dividended to shareholders, possibly in 2023. This is expected to happen after Sharing and Impact. An S-1 is expected to be filed in late 2023 or early 2024. We expect it would be valued at the typical four to five times loans outstanding for commercial lenders, which currently stand at about $40 million thus valuing it at $144 million to $180 million. The most recent information is that it is earning approximately 10.6% on average on its loans.

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