DSS, INC. 10-K/A

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements contained herein this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Except for the historical information contained herein, this report contains forward-looking statements (identified by words such as “estimate”, “project”, “anticipate”, “plan”, “expect”, “intend”, “believe”, “hope”, “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties, and factors, that could cause actual results to differ materially from the results anticipated in the forward-looking statements. Overview The Company, which was incorporated in the state of New York in May 1984, previously conducted its business under the name of Document Security Systems, Inc On September 16, 2021, our board of directors approved an agreement and plan of merger with a wholly owned subsidiary, DSS, Inc. This subsidiary, incorporated in August 2020, was created for the sole purpose of facilitating a transformational name change from Document Security Systems, Inc. to DSS, Inc. This significant shift in our identity became official on September 30, 2021. With the name change, DSS, Inc. retained its trading symbol, “DSS,” and is currently trading under its CUSIP number to 26253C 201. This change reflects not only our evolution as a company but also our commitment to adapting and growing in an ever-changing business landscape. DSS, Inc. (referred to herein as “DSS,” “we,” “us,” or “our”) now operates across five distinct business lines, each with its own unique scope and presence on a global scale. These business lines encompass a wide range of industries and sectors, including: Product Packaging: Our involvement in product packaging represents our dedication to delivering innovative and sustainable packaging solutions that meet the evolving needs of various markets. Biotechnology: In the field of biotechnology, we are focused on pioneering scientific advancements and technologies that have the potential to transform human healthcare and wellness. 25 Direct Marketing: Our direct marketing endeavors involve strategic efforts to engage with customers and clients, providing tailored solutions and services that enhance their experiences. Commercial Lending: We are actively engaged in commercial lending, offering a suite of financial services that cater to the unique needs of businesses, ranging from commercial lines of credit to land development financing. Securities and Investment Management: In the world of securities and investment management, we aim to provide expertise and guidance to help our clients navigate the complexities of the financial markets and achieve their investment goals. Each of these business lines is at a different stage of development, growth, and income generation, reflecting the diversity of our operations. This multi-faceted approach allows us to adapt to changing market conditions and explore new opportunities for expansion and success. We are committed to our continued evolution and to delivering value to our stakeholders across these diverse business lines. The Company, initially incorporated in the state of New York in May 1984, had historically conducted its business under the name Document Security Systems, Inc. However, on September 16, 2021, our board of directors approved an agreement and plan of merger with a wholly owned subsidiary, DSS, Inc. (incorporated in August 2020). The primary purpose of this merger was to affect a name change from Document Security Systems, Inc. to DSS, Inc., which officially took effect on September 30, 2021. This change did not affect our trading symbol, which remained as “DSS,” and is currently trading under its CUSIP number to 26253C 201. Diverse Business Lines and Global Presence: Under the banner of DSS, Inc., we have diversified our operations into nine distinct business lines, each with its own unique scope and geographical footprint. These business lines include: Product Packaging: Led by Premier Packaging Corporation, Inc. (“Premier”), a New York corporation, this segment specializes in paperboard and fiber-based folding carton manufacturing, consumer product packaging, and document security printing. Premier is headquartered in its newly established facility in Rochester, NY, primarily serving the US market. Biotechnology: This business line is dedicated to investing in or acquiring companies in the BioHealth and BioMedical fields, focusing on drug discovery, prevention, treatment of various diseases, and open-air defense initiatives against infectious diseases. Direct Marketing: Operating under the umbrella of Decentralized Sharing Systems, Inc. (“Decentralized”), this division provides services to companies in the emerging growth “Gig” business model of peer-to-peer decentralized sharing marketplaces. It specializes in marketing and distributing products and services across North America, Asia Pacific, Middle East, and Eastern Europe. Commercial Lending: American Pacific Bancorp, Inc. (“APB”) represents our banking and financing business line. During 2023, APB issued more than $14 million in new loans, and over $4 million in renewal loan to customers with strong credit quality across a diverse portfolio of businesses. Looking ahead, to better meet the needs of the current financial market, the company is looking to transition away form certain industries like direct marketing and focus more on growing its inventory / equipment loan portfolio as well as engaging in more specialized areas of lending like broker/dealer loans. We will continue to monitor our managed loan portfolio of more than $6 million, which earns 1.25% annually in service charges, and explore future opportunities. Importantly, the equity portfolio as a bank holding company is anticipated to remain relatively stable, regardless of stock market fluctuations. Securities and Investment Management: This division focuses on acquiring assets in the securities trading and management arena, including broker-dealers and mutual funds management. It also oversees a real estate investment trust (REIT) that acquires hospitals and care centers. Alternative Trading: Established to acquire assets and investments in the securities trading and funds management arena, this segment, in partnership with recognized global leaders, intends to operate a blockchain-based Alternative Trading System (“ATS”) for digital asset securities, exempt from registration. The ATS aims to provide T+0 settlement and foster liquidity for middle-market companies. 26 Digital Transformation: This division serves as a Preferred Technology Partner and Application Development Solution for mid-cap brands, enhancing marketing, communications, and operational processes through custom software development. Digital Transformation was headquartered in Hong Kong until its discontinuation in 2023. Secure Living: Focused on creating fully sustainable, secure, connected, and healthy living communities, this division designs advanced technology-infused, energy-efficient homes for new construction and renovations, catering to single and multi-family residential housing. Secure Living was headquartered in Houston, Texas, until it was wound down in 2023. Alternative Energy: Alset Energy, Inc., our holding company for this group, and its subsidiary Alset Solar, Inc., pursue utility-scale solar farms to serve regional power grids and provide microgrids for independent energy. The group is dedicated to environmentally responsible and sustainable energy solutions. Alset Energy was headquarters in Houston, Texas until its discontinuation in 2023. RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, Revenue Year ended December 31, 2023 (as restated) Year ended December 31, 2022 (as restated) % Change Revenue Printed products $ 18,497,000 $ 17,973,000 3 % Rental income 3,647,000 6,287,000 -42 % Management fee income - 134,000 -100 % Net investment income 385,000 630,000 -39 % Commission Revenue 1,641,000 294,000 458 % Direct marketing 1,763,000 3,065,000 -42 % Total Revenue $ 25,933,000 $ 28,383,000 -9 % 27 Revenue - For the year ended December 31, 2023, revenue decreased 9% to approximately $25.9 million as compared to revenues of approximately $28.4 million for the year ended December 31, 2022. Printed products sales, which include sales of packaging and printing products, increased 3% in 2023 as compared to 2022. The increases in sales were due primarily to the addition of several new customers during 2023 as well as key customers returned to pre-Covid 19 pandemic numbers. Net investment income of $385,000 as of December 31, 2023 decreased 39% from $630,000 as of December 31, 2022 due to a number of notes receivable deemed uncollectible and impaired during 2023. Rental income decreased 42% due a tenant at our AMRE LifeCare subsidiary not making rent payments. The Company’s Direct Marketing revenues decreased 42% in 2023 as compared to 2022 primarily to due to decreased sales in our HWH products worldwide. Commission revenue, associated with Sentinel Brokers Company subsidiary, increase 458% due to consolidating a full year of result in 2023 versus 1 month in 2022. Costs and Expenses Year ended December 31, 2023 (as restated) Year ended December 31, 2022 (as restated) % Change Cost of revenue - printed products $ 15,282,000 $ 16,960,000 -10 % Cost of revenue - securities 8,003,000 11,784,000 -32 % Cost of revenue – biotechnology 77,000 - N/A Cost of revenue – commercial lending 1,139,000 1,041,000 9 % Cost of revenue – direct marketing 818,000 2,573,000 -68 % Cost of revenue – other 71,000 634,000 -89 % Sales, general and administrative compensation 5,662,000 6,592,000 -14 % Professional fees 3,708,000 9,186,000 -60 % Stock based compensation - 4,000 -100 % Sales and marketing 2,356,000 3,309,000 -29 % Rent and utilities 790,000 975,000 -19 % Research and development 1,147,000 1,256,000 -9 % Other operating expenses 6,680,000 4,047,000 65 % Total costs and expenses $ 45,733,000 $ 58,361,000 -22 % Costs of revenue includes all direct costs of the Company’s printed products, including its packaging and printing sales and its direct marketing sales, materials, direct labor, transportation, and manufacturing facility costs. In addition, this category includes all direct costs associated with the Company’s technology sales, services and licensing including hardware and software that are resold, third-party fees, and fees paid to inventors or others because of technology licenses or settlements, if any. Cost of revenue for our REIT line of business includes all direct cost associated with the maintenance and upkeep of the related facilities, depreciation, amortization and the costs to acquire the facilities. Our Commercial Lending operating segment has costs of revenue associated with the impairment of notes receivable for those amounts at risk of collection. Total costs of revenue decreased 23% in 2023 as compared to 2022, primarily due to a decrease in cost of revenue within our printed products division, in particular paper costs as well as cost associated with our REIT line of business, and the sale of our Asian direct marketing business line. Sales, general and administrative compensation costs, decreased 14% in 2023 as compared to 2022, primarily due to the reduction of head count within our Direct Marketing business segment. Professional fees decreased 60% in 2023 as compared to 2022, primarily due to a decrease in legal fees associated with the direct marketing segment, accounting fees, and due diligence fees related to potential acquisitions. Stock based compensation includes expense charges for all stock-based awards to employees, directors, and consultants. Such awards include option grants, warrant grants, and restricted stock awards. There was no stock based compensation during the year ended December 31, 2023. Sales and marketing costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses, decreased 29% during 2023 as compared to 2022, primarily due to decreased direct marketing distributor commissions within our direct marketing line of business as well as the sale of our HWH World Holdings subsidiary in June 2023. 28 Rent and utilities decreased 19% during the year ended December 31, 2023, as compared to the same period in 2022 respectively, primarily due to end of the lease in Tennessee for AMRE office space and California for the Company’s DSS Wealth Management subsidiary as well as the deconsolidation of SHRG. The Company rented additional space at our facility leased in Houston, Texas started during the 2022 as well as Premier Packaging’s leased facility beginning in March 2022. Research and development costs consist primarily of third-party research costs and consulting costs. During the year ended December 31, 2023, Research and development costs decreased 9% as compared to the same period in 2022 primarily due to decrease in such activities at our Impact Biomedical, Inc. subsidiary. Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, and insurance costs. During the year ended December 31, 2023, other operating expenses increased 65% as compared to the same period in 2022, due primarily to the reserves put against rent receivables at our AMRE subsidiary approximating $2.4 million. Other Income and Expense Year ended December 31, 2023 (as restated) Year ended December 31, 2022 (as restated) % Change Interest income $ 1,283,000 $ 629,000 104 % Interest expense (553,000 ) (126,000 ) 339 % Dividend Income 16,000 159,000 -90 % Other income 532,000 1,518,000 -65 % Loss on investments (4,967,000 ) (1,196,000 ) 315 % Impairment of assets upon deconsolidation (6,220,000 ) - N/A Loss from equity method investment (34,000 ) 129,000 -126 % Impairment of fixed assets - - N/A Impairment of real estate investments (8,230,000 ) - N/A Impairment of investment - (5,637,000 ) -100 % Litigation loss - (8,750,000 ) -100 % Impairment of goodwill (30,978,000 ) - N/A Provision for loan losses (3,794,000 ) - N/A Gain on extinguishment of debt - 110,000 -100 % Loss on sale of assets (1,300,000 ) 405,000 -421 % Total other expense $ (54,239,000 ) $ (12,759,000 ) -325 % Interest income is recognized on the Company’s money markets, and notes receivable identified in Note 5. Interest expense increased 339% year-over-year primarily due to the increase in debt at Premier Packaging during 2023 as well an increase in interest rate associated with the debt at LVAM. Dividend income for the years ended December 31, 2023 and 2022 represent dividends received on certain marketable securities owned by the Company. Other income decreased 65% during the year 2023 as compared to 2022 and is driven by normal business operations. Loss on investments consists of net realized and unrealized losses on marketable securities which are recognized as the difference between the purchase price and sale price of the common stock investment, and net unrealized losses on marketable securities which are recognized on the change in fair market value on our common stock investment. Impairment of assets upon deconsolidation is driven by the Company’s distribution of approximately 280 million shares of SHRG in May 2023 which resulted in a decrease in its ownership percentage of SHRG’s common stock from approximately 81% to 7%. Impairment of investments is driven by the Company impairment of its investment in Vivacitas approximately $4,100,000 as of December 31, 2022. Gain (loss) from equity method investment represents the Company’s prorated portion of earnings for its investments accounted for under the equity method for the year ended December 31, 2023, and 2022. Impairment of fixed assets as of December 31, 2022 is associated with the write down of fair value of SHRG’s Lindon, Utah property. Impairment of investments in real estate At December 31, 2023, the Company performed an assessment of the fair value of its AMRE LifeCare and AMRE Winter Haven properties and determined an impairment was necessary. 29 Litigation loss represents the Company’s cost to settle its litigation with Maiden Biosciences litigation, which was settled, and the Court’s December 20, 2022 judgment was vacated, and the case was dismissed with prejudice (see Note 18). Impairment of goodwill during the 4 th quarter of 2023, the Company performed qualitative and quantitative assessments of the goodwill value associated with its APB and Sentinel subsidiaries and determined that as of December 31, 2023 both assets required impairment. At December 31, 2023, the Company fully impaired the value of APB and Sentinel goodwill of approximately $29,744,000 and $1,234,000, respectively. Provision for loan losses during the year ended December 31, 2023, the Company reviewed the entire loan portfolio and determined specific loans required an allowance for credit losses. See Note 6. Gain on extinguishment of debt During the three months ended June 30, 2022, AAMI $110,000 SBA Paycheck Protection Program was forgiven in full. Loss on sale of assets is driven by the Company’s loss on the sale of equity of HWH Holdings Inc and loss on sale of assets of HWH World as identified in Note 8. Liquidity and Capital Resources The Company has historically met its liquidity and capital requirements primarily through the sale of its equity securities and debt financing. As of December 31, 2023, the Company had cash of approximately $6.6 million. As of December 31, 2023, the Company believes that it has sufficient cash to meet its cash requirements for at least the next 12 months from the filing date of this Annual Report. In addition, the Company believes that it will have access to sources of capital from the sale of its equity securities and debt financing. Cash Flow from Operating Activities Net cash used by operating activities was approximately $19.2 million for the year ended December 31, 2023 as compared to approximately $27.0 million for the year ended December 31, 2022. This decrease is driven by a decrease in net loss from operations with adjustments to reconcile net loss from operations to net cash used by operating activities of approximately $30.8 million year over year, offset by increase in payments of accrued expenses of approximately $20.1 million and accounts payable of $1.8 million year over year. Cash Flow from Investing Activities Net cash provided by investing activities was approximately $8.9 million for year ended December 31, 2023 as compared to net cash used approximately $18.0 million for the year ended December 31, 2022. During the year ended December 31, 2022, we purchased $2.3 million in property, plant, and equipment, $14.9 million of marketable securities, and issued $3.6 million in new notes receivable. In comparison, the Company sold $9.5 million in marketable securities and issued $1.0 million in new notes receivable for the year ended December 31, 2023. Cash Flow from Financing Activities Net cash used by financing activities was approximately $2.4 million for the year ended December 31, 2023 as compared to net cash provided $7.6 million for the year ended December 31, 2022. During the year ended December 31, 2022, we borrowed $9.6 million of long-term debt as compared to $1.8 million during the year ended December 31, 2023. Continuing Operations and Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. While the Company has approximately $6.6 million in cash, the Company has incurred operating losses as well as negative cash flows from operating and investing activities over the past two years. Aside from its $6.6 million in cash as of December 31, 2023, the Company believes it can continue as a going concern, due to its ability to generate operating cash through the sale of its $10.0 million of Marketable Securities, and the anticipated receipts of principal and interest on its Notes receivable of approximately $8.8 million through December 31, 2024. The Company has also taken steps to sell its real estate holdings in Utah, Texas, Pennsylvania, and Florida. These properties approximate $51.6 million in assets and are identified on the accompanying balance sheet as Held for sale. In addition, the Company has taken steps, and will continue to take measures, to materially reduce the expenses and cash burn at all corporate and business line levels. Although there are no assurances, we believe the above would allow us to fund our nine business lines current and planned operations for the twelve months from the filing date of this Annual Report. Based on this, the Company has concluded that substantial doubt of its ability to continue as a going concern has been alleviated. 30 Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses. Inflation Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during 2023 or 2022 as we are generally able to pass the increase in our material and labor costs to our customers or absorb them as we improve the efficiency of our operations. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. The financial statements as of December 31, 2023, describe the significant accounting policies and methods used in the preparation of the financial statements. There have been no material changes to such critical accounting policies as of the Annual Report on Form 10-K/A for the year ended December 31, 2022. Allowance For Loans and Lease Losses On January 1, 2022, the Company adopted amended accounting guidance “ ASU No.2016-13 – Credit Losses” which requires an allowance for credit losses to be deducted from the amortized cost basis of financial assets to present the net carrying value at the amount that is expected to be collected over the contractual term of the asset considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. Assumptions and judgment are applied to measure amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers’ abilities to repay obligations. After the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Prior to 2022, the allowance for credit losses represented the amount that in management’s judgment reflected incurred credit losses inherent in the loan and lease portfolio as of the balance sheet date. 31 Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets. ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The carrying amounts reported in the consolidated balance sheet of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities classify as a Level 1 fair value financial instrument. The fair value of notes receivable approximates their carrying value as the stated or discounted rates of the notes do not reflect recent market conditions. The fair value of revolving credit lines notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. The fair value of investments where the fair value is not considered readily determinable, are carried at cost. Investments Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at that value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings. For equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value below book value. If there is a decline that is other-than-temporary, the investment is written down to fair value. See Note 9 for further discussion on investments. Revenue The Company recognizes its revenue based on when the title passes to the customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. The Company recognizes rental income associated with its REIT, net of amortization of favorable/unfavorable lease terms relative to market and includes rental abatements and contractual fixed increases attributable to operating leases, where collection has been considered probable, on a straight-line basis over the term of the related lease. The Company recognizes net investment income from its investment banking line of business as interest owed to the Company occurs. The Company generates revenue from its direct marketing line of business primarily through internet sales and recognizes revenue as items are shipped. As of December 31, 2023, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less. Discontinued Operations On May 4, 2023, the Company distributed approximately 280 million shares of Sharing Service Global Corporation (“SHRG”), beneficially held by the Company, in the form of a dividend to the shareholders of the Company’s common stock. Upon completion of this distribution, the Company retained an ownership interest in SHRG of approximately 7%. Effective May 1, 2023, SHRG was deconsolidated from the consolidated financial statements (the “Deconsolidation”). The consolidated statement of operations does not include SHRG activity after April 30, 2023 and the assets and liabilities of SHRG are no longer included within the Company’s consolidated balance sheet. The deconsolidation of SHRG is a strategic shift, as a significant portion of the Direct Marketing line of business was eliminated. While the Decentralized Sharing Systems part of the business will continue to provide these services, SHRG was a significant portion of this segment as it made up approximately 47% and 20%, respectively, of the total DSS revenue in 2022 and 2023. Accordingly, the Company has applied discontinued operations treatment for this deconsolidation as required by Accounting Standards Codification 205—Discontinued Operations. The major classes of assets and liabilities of SHRG are classified as Discontinued Operations on the Consolidated Balance Sheets and the operating results of the discontinued operations is reflected on the Consolidated Statements of Operations as Loss from Discontinued Operations. See Note 19. Acquisitions Business combinations and non-controlling interests are recorded in accordance with FASB ASC 805 Business Combinations. Under the guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition and all acquisition costs are expensed as incurred. The excess of the purchase price over the estimated fair values is recorded as goodwill. If the fair value of the assets acquired exceeds the purchase price and the liabilities assumed, then a gain on acquisition is recorded. The application of business combination accounting requires the use of significant estimates and assumptions. Acquisition of assets are recorded at their relative fair value based on total accumulated costs of the acquisition. Direct acquisition-related costs are expensed as incurred. This includes all costs related to finding, analyzing and negotiating a transaction. The allocation of the purchase price is an area that requires judgment and significant estimates. Tangible and intangible assets include land, building and improvements, furniture, fixtures and equipment, acquired above market and below market leases, in-place lease value (if applicable). Acquisition-date fair values of assets and assumed liabilities are determined based on replacement costs, appraised values, and estimated fair values using methods like those used by independent appraisers and that use appropriate discount and/or capitalization rates and available market information. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 32