DSS, INC. 10-K

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 four 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. 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. 21 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. Diverse Business Lines and Global Presence: Under the banner of DSS, Inc., we have diversified our operations into four 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. Commercial Lending: American Pacific Financial, Inc. (“APF”) represents our financing business line. 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, 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. It also oversees a real estate investment trust (REIT) that acquires hospitals and care centers. RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, Revenue 2025 2024 % Change Printed products $ 18,085,000 $ 16,107,000 12 % Rental 1,236,000 1,792,000 -31 % Commercial lending 45,000 226,000 -80 % Commission 1,353,000 972,000 39 % Biotechnology 38,000 - N/A Total Revenue $ 20,757,000 $ 19,097,000 9 % 22 Revenue - For the year ended December 31, 2025, revenue increased 9% to approximately $20.8 million as compared to revenues of approximately $19.1 million for the year ended December 31, 2024. The increase in Printed Product revenue of approximately 12% is driven by new customer orders as well as existing customer orders exceeding their forecasts. The decreases in Rental income of approximately 31% is driven by a tenant at our AMRE LifeCare subsidiary as our Pittsburgh, PA location had significant vacancy during 2025. The decreases in Net investment income approximating 80% is due to a number of loans made going on non-accrual as borrowers have struggled to make expect payments. Commission revenue associated with our Sentinel Brokers subsidiary increased 39% year over year as commissions on equity trading was reestablished during 2025 as a result of the completion of our clearing house change took place in December 2024 as well as commissions earned as part of its underwriting activities in 2025 as compared to none in 2024. Biotechnology revenue is driven by sales of the Company’s air purification Celios brand. Costs and Expenses 2025 2024 % Change Cost of revenue Printed products $ 16,619,000 $ 15,230,000 9 % Securities 5,844,000 7,550,000 -23 % Biotechnology 424,000 42,000 910 % Commercial lending 20,000 712,000 -97 % Direct marketing - 5,000 -100 % Other 19,000 - N/A Sales, general and administrative compensation 5,104,000 4,574,000 12 % Professional fees 2,587,000 2,668,000 -3 % Stock based compensation 13,000 19,000 -32 % Sales and marketing 1,948,000 2,427,000 -20 % Rent and utilities 531,000 682,000 -22 % Research and development 340,000 278,000 22 % Impairment of goodwill - 25,093,000 -100 % Impairment of fixed assets - 264,000 -100 % Other operating expenses 1,742,000 2,149,000 -18 % Total costs and expenses $ 35,191,000 $ 61,693,000 -43 % Costs of revenue includes all direct costs of the Company’s printed products, including its packaging and printing 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 3% in 2025 as compared to 2024. Cost of revenue at our Printed products business line increased driven by an increase in revenue. Cost of revenue at our Securities business segment decreased year over year driven by the disposal of the Company’s AMRE Plano, Tx., Ft Worth, Tx., and Winter Haven, Fl. Facilities during 2025 and the elimination of related cost to operate and maintain those locations. In addition, This our Pittsburgh, PA facility housed a new tenant for part of 2025 paying related cost previously paid for by the Company as well as decreases in our Commercial lending business unit driven by decreases on loans reserved for year over year. Sales, general and administrative compensation costs, increased 12% in 2025 as compared to 2024, primarily due to stock awarded to Heng Fai Holdings Limited (“HFHL”), a Hong Kong Company, which is beneficially owned by Mr. Heng Fai Ambrose Chan, Director of DSS, Inc. The issuance was approved by the board of directors on January 31, 2025. Professional fees decreased 3% in 2025 as compared to 2024, due primarily to efforts taken to control these costs as the Company continues to drive savings in non-essential areas. 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. Stock based compensation during the year ended December 31, 2025, is associated with such awards given to officers, directors and consultants of Impact BioMedical. Sales and marketing costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses, decreased 20% during 2025 as compared to 2024, primarily due decreases in marketing efforts at our Biotechnology business segments offset by increased sales persons within our Printed Products business segment. 23 Rent and utilities decreased 22% in 2025, as compared to 2024 primarily due to end of the lease in office space in California for the Company’s DSS Wealth Management subsidiary. Research and development costs represent costs consisting primarily of independent, third-party testing of the various properties of each technology the Company owns possesses as well as research on new technologies. During the year ended December 31, 2025, Research and development costs increased 22% as compared to the same period in 2024 due to cost incurred to file, perfect or update existing and potential patents on technologies owned by Impact BioMedical. Impairment of goodwill during 2024, the Company performed qualitative and quantitative assessments of the goodwill value associated with its Impact BioMedical subsidiary and determined that as of December 31, 2024 the assets required impairment. At December 31, 2024 the Company deemed a full impairment of the Impact BioMedical goodwill was necessary in the amount of $25,093,000. Impairment of fixed assets is the impairment of marketing assets in development that the Company decided to forego completion. Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, and insurance costs. During the year ended December 31, 2025, other operating expenses decreased 19% compared to the same period in 2024, due primarily the Company released certain legal fee accruals approximating $897,000 deemed no longer necessary, offset by increases in Impact BioMedical’s directors and officers insurance obtained post IPO. Other Income and (Expense) 2025 2024 % Change Interest Income $ 19,000 $ 238,000 -92 % Interest income on note receivable, related party 32,000 102,000 -69 % Dividend Income 20,000 - N/A Other 11,000 218,000 -95 % Interest Expense (266,000 ) (283,000 ) -6 % Foreign currency translation adjustment - (6,000 ) -100 % Gain on extinguishment of debt 595,000 - N/A (Loss)/gain on equity method investment (16,000 ) 1,000 -1700 % (Loss)/gain on investments (807,000 ) 224,000 -460 % Provision for loan loss - (3,691,000 ) -100 % Impairment of real estate (2,420,000 ) (7,288,000 ) -67 % Impairment of investment - (782,000 ) -100 % Impairment of intangibles 600,000 - N/A (Loss)/gain on sale of assets (9,622,000 ) 165,000 -5932 % Total other expense $ (13,054,000 ) $ (11,102,000 ) 18 % Interest income is recognized on the Company’s money markets, and notes receivable identified in Note 4. The decrease of 92% year over year in interest income is driven by several notes being put on non-accrual as the related borrowers have shown an inability to pay timely. Interest income on notes receivable, related party is recognized on the Company’s notes receivable with related parties identified in Note 4. The decrease of 69% year over year in interest income is driven by several notes being put on non-accrual as the related borrowers have shown an inability to pay timely. Dividend income for 2025 represent dividends received on certain investments owned by the Company. No such dividends were received in 2024. Other income decreased 95% during the year 2025 as compared to 2024 due primarily to Releases of accruals no longer deemed necessary associated with normal business operations. Interest expense decreased 6% year-over-year primarily due to the decreasing debt balances driven by the sale of the Company’s Plano, Texas facility. Gain on extinguishment of debt represents insurance proceeds received for claims on AMRE Lifecare’s Plano, Tx facility which was applied to the outstanding principle on a note for this location. 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, 2025, and 2024. The transition from a gain of $1,000 in 2024 to a loss of $16,000 in 2025 is indicative of the related companies financial performance year over year. Gain/(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. The 2025 loss in our marketable securities as compared to 2024 is driven by the performance in our True Partners Capital Holdings Limited investment which incurred an approximate loss in fair value of $609,000 in 2025 as compared to gain in fair value of approximately $591,000 in 2024. Impairment of investments in real estate represents a write-down of real estate assets associated with our AMRE LifeCare properties during 2025 and 2024 based on a fair value analysis performed as of December 31, 2025 and 2024. At December 31, 2025, the Company performed an assessment of the fair value of its AMRE LifeCare properties and determined an impairment of its Pittsburg, Pa. facility in the amount of $2,420,000 was necessary, not such impairment was identified for the Company’s AMRE Shelton property. A fair value analysis was performed during 2024 which resulted in a $2,973,000 impairment of the AMRE LifeCare Pittsburgh and Fort Worth locations. Further, the Company executed a purchase agreement for its AMRE LifeCare Plano location with a sale price at approximately $4,250,000 below its 2023 fair value. This transaction closed on March 26, 2025. Impairment of investments the Company determined an impairment of its investments in Nano9 and BioMed Technologies was necessary and were fully impaired in the amounts of $150,000 and $632,000, respectively, at December 31, 2024. No such impairments were deemed necessary in 2025. 24 Impairment of intangible assets is a result of the Company resigning its position as the registered investment advisor (“RIA”) of the American First Mutual Funds during the third quarter of 2025. The related asset was acquired at the time the Company became the RIA in September 2021. Provision for loan losses represents a reserve put against certain notes receivable deemed uncollectible. During the year ended December 31, 2024, the Company reviewed the entire loan portfolio and determined specific loans required an allowance for credit losses. See Note 5. Gain/(loss) on sale of assets the gain in 2024 is driven by the sale of its Linden, Ut facility while, the loss in 2025 is driven by the Company’s loss on the sale of its AMRE LifeCare Forth Worth, Tx facility of approximately $9,318,000 and AMRE Winterhaven facility of approximately $292,000. 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, 2025, the Company had cash of approximately $6.2 million. In addition, the Company believes that it will have access to sources of capital from the sale of its equity securities and debt financing. As of December 31, 2025, the Company believes that it has sufficient cash or access to cash to meet its cash requirements for at least the next 12 months from the filing date of this Annual Report. Cash Flow from Operating Activities Net cash used by operating activities was approximately $9.1 million for the year ended December 31, 2025 as compared to approximately $8.8 million for the year ended December 31, 2024. This decrease is driven by $3.1 million decrease in net loss adjusted to reconcile net loss to net cash used by operating activities, less payments of accounts payable of $0.7 million year over year as well as in collections of accounts receivable of approximately $0.5 million year over year. Cash Flow from Investing Activities Net cash provided by investing activities was approximately $18.1 million for the year ended December 31, 2025 and $12.1 million for year ended December 31, 2024. The year ended December 31, 2025 included $15.7 million in cash provided by the sale of real estate, as well as $2.4 million received from the sale of investments in related parties. In comparison, the Company sold $3.3 million in marketable securities, received payments on notes receivable of $4.1 million for the year ended December 31, 2024. Cash Flow from Financing Activities Net cash used by financing activities was approximately $14.1 million for the year ended December 31, 2025 driven by payments toward long-term debt of $17.8 million offset by borrowings of long-term debt of $3.3 million. Net cash provided by financing activities for the year ended December 31, 2024 was $1.4 million due to $0.9 million of additional borrowings on long-term debt as well as $3.2 million of proceeds received from Impact BioMedical’s IPO offset by $2.6 million of payments toward long-term debt. 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 $6.2 million in cash, the Company has incurred operating losses as well as negative cash flows from operating activities over the past two years. Aside from its $6.2 million in cash as of December 31, 2025, to continue as a going concern, the Company can generate operating cash through the sale of its $6.5 million of marketable securities. To continue as a going concern, Also, historically, the Company has been able to obtain equity via issuance of authorized shares of its common stock currently not issued and/or debt-based financing to meet its working capital needs. 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. 25 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 2025 or 2024 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, 2025, 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 for the year ended December 31, 2025. Allowance For Loans Losses The Company adopted amended accounting guidance ASC Topic 326 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. 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. 26 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, 2025, 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. Business combinations and 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. Segment reporting In November 2023, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure through enhanced disclosures about significant segment expenses. The amendment is effective for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024 and early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company has adopted the enhanced segment disclosures for the year ended December 31, 2024. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 27