DSS, INC. 10-Q

ITEM 2 - 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. 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. 28 Results of operations for the three and three months ended March 31, 2026, as compared to the three months ended March 31, 2025. This discussion should be read in conjunction with the financial statements and footnotes contained in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2025. Revenue Three months ended March 31, 2026 Three months ended March 31, 2025 % Change Product Packaging $ 4,163,000 $ 3,998,000 4 % Securities 155,000 920,000 -83 % Commercial Lending 6,000 21,000 -71 % Biotechnology 7,000 15,000 -53 % $ 4,331,000 $ 4,954,000 -13 % For the three months ended March 31, 2026, total revenue decreased 13% as compared to the three months ended March 31, 2025. Printed Product revenue increased approximately 4% is driven by new customer orders as well as existing customer orders exceeding their forecasts. The decreases in Securities revenue of approximately 83% is driven by decreases in rental income as a tenant at AMRE LifeCare Pittsburgh facility vacated the location during the second half of 2025. Additionally, the Company received approximately 90% less in commission revenues associated with its Sentinel Brokers subsidiary during the three months ended March 31, 2026 as compared to March 31, 2025.The decreases in Commercial lending income approximating 71% is due to a number of loans made going on non-accrual during 2025 as borrowers have struggled to make expect payments. Biotechnology revenue is driven by sales of the Company’s air purification Celios brand. Costs and Expenses Three months ended March 31, 2026 Three months ended March 31, 2025 % Change Cost of revenue Printed products $ 4,439,000 $ 3,801,000 17 % Securities 1,094,000 1,396,000 -22 % Biotechnology - 11,000 -100 % Commercial lending - (21,000 ) -100 % Sales, general and administrative compensation 999,000 1,176,000 -15 % Professional fees 597,000 506,000 18 % Stock-based compensation 1,440,000 872,000 65 % Sales and marketing 375,000 401,000 -6 % Rent and utilities 132,000 126,000 5 % Research and development 46,000 236,000 -81 % Other operating expenses 696,000 176,000 295 % Total costs and expenses $ 9,818,000 $ 8,680,000 13 % 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 increased for the three months ended March 31, 2026 as compared to March 31, 2025 by approximately 7%. Cost of revenue increased at our Printed products business line driven by an increase in revenue year over year which was offset by decrease in cost of revenue within our REIT business driven by the sale of the Fort Worth, Tx and Winter Haven, Fl facilities in December 2025 for which costs were incurred during the three months ended March 31, 2025 and not incurred during the three months ended March 31, 2026. 29 Sales, general and administrative compensation costs, excluding stock-based compensation, decreased 15% for three months ended March 31, 2026 as compared to 2025 is primarily due to headcount reductions within our Securities segment. Professional fees increased for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025 due to cost incurred to expand the sales force at Premier Packaging as well as training for Premier’s operations staff. Additionally, cost have increased at Impact BioMedical as a result of due diligence and other professional fees in connection with potential mergers and/or acquisitions. Stock-based compensation includes expense charges for all stock-based awards to employees, directors, and consultants of Impact Bio. Such awards can include option grants, warrant grants, and restricted and unrestricted stock awards. In January 2026, the Impact BioMedical granted and issued 3,200,000 shares of common stock, valued at approximately $1,440,000, to various individuals including executives, board members, and audit committee members for services to be provided during the first quarter of 2026. On February 6, 2025, 1,000,000 shares of the Company’s common stock, valued at approximately $870,000, was awarded as compensation to Heng Fai Holdings Limited (“HFHL”), a Hong Kong Company, which is beneficially owned by Mr. Heng Fai Ambrose Chan, Director of DSS, Inc., for consulting services to be provided during the first quarter of 2025. Sales and marketing which include internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses. Sales and marketing decreased 6% during the three months ended March 31, 2026 as compared to 2025 due to decreases in marketing, and travel costs within our Printed Products division. Rent and utilities increased 5% during the three months ended March 31, 2026 as compared to 2025 primarily driven by increases in utilities at our Premier Packaging facility. Research and development represent costs consisting primarily of independent, third-party testing of the various properties of each technology the Company owns, research on new technologies as well as costs to patent newly developed technologies and other related fees for the development of new technologies. Research and development decreased 81% for the three months ended March 31, 2026, as compared to the three months ended March 31, 2025 due primarily to a decrease in spending on identifying new technologies as well as pausing the spend on several in-development technologies at our Impact BioMedical subsidiary. Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, and insurance costs. These costs increased approximately 289% during the three months ended March 31, 2026 as compared to March 31, 2025, primarily due to collections of previously written-off of accounts receivable associated with our AMRE LifeCare facilities of approximately $600,000. Other Income (Expense) Three months ended March 31, 2026 Three months ended March 30, 2025 % Change Interest Income $ 1,000 $ 3,000 -67 % Interest income on note receivable, related party 6,000 6,000 0 % Dividend Income 10,000 - N/A Other Income (expense) (14,000 ) 4,000 -450 % Interest Expense (39,000 ) (33,000 ) 18 % Loss on equity method investment (3,000 ) (3,000 ) 0 % Loss on investments (700,000 ) (930,000 ) -25 % Change in fair value of convertible bond investment – related party (128,000 ) - N/A Loss on sale of real estate - (684,000 ) -100 % Total other income $ (867,000 ) $ (1,637,000 ) 47 % 30 Interest income is recognized on the Company’s money markets, and a portion of notes receivable, identified in Note 4. The decrease 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 and remained flat year over year as outstanding principal balances remained flat year over year. Dividend income for the three months ended March 31, 2026 represent dividends received on certain investments owned by the Company. No such dividends were received the three months ended March 31, 2025. Other income (expense) for the three months ended March 31, 2026 as compared to 2025 fluctuated due primarily to foreign exchange losses for the three months ended March 31, 2026 of approximately $19,000 as compared to approximately $3,000 for the three months ended March 31, 2025. Interest expenses increased 18% during the three months ended March 31, 2026, as compared to the same period in 202, due to additional debt taken on during the fourth quarter of 2025. Loss on equity method investment is the Company’s prorated portion of earnings on its investments treated under the equity method of account for the three months ended March 31, 2026 as compared to 2025. Loss on investments consists of net realized 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 decrease in loss on investment for the three months ended March 31, 2026 as compared to 2025 is driven by the performance of our stock portfolio. Change in fair value of convertible bond investment – related party represents the change in fair value of the convertible bond investment in True Partners from the acquisition date of March 27, 2026 and March 31, 2026. See Note 6. Loss on sale of real estate is driven by the sale of the Company’s Plano, Texas facility. Net Loss Three months ended March 31, 2026 Three months ended March 31, 2025 % Change Net loss $ (6,354,000 ) $ (5,296,000 ) -20 % For the three months ended March 31, 2026 the Company recorded net losses of $6,354,000 as compared to net losses of $5,296,000 for the same period in 2025. The increase in net loss is driven by a decrease in total revenue of approximately 13% as well as stock-based compensation of approximately $1,440,000 paid at our Impact BioMedical subsidiary during the first quarter of 2026. 31 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 March 31, 2026 the Company had cash of approximately $4,936,000. As of March 31, 2026, the Company believes that it will have access to sources of capital from the sale of its equity securities and debt financing, and thus believes that it has sufficient cash to meet its cash requirements for at least the next 12 months from the filing date of this Quarterly Report. Cash Flow from Operating Activities Net cash used by operating activities was $133,000 for the three months ended March 31, 2026 as compared to cash provided by $1,168,000 for three months ended March 31, 2025. This fluctuation is driven by increases in net loss, after reconciling items, approximating $752,000, an increases in inventory of approximately $211,000 offset by accounts receivable decrease by approximately $229,000 and accounts payable of approximately $789,000. Cash Flow from Investing Activities Net cash used by investing activities was $2,639,000 for the three months ended March 31, 2026 as compared to net cash provided by investing activities of $10,070,000 for the three months ended March 31, 2025. This fluctuation is driven by the cash outflow for the purchase of a convertible bond – related party of approximately $2,450,000 during the first quarter of 2026. During the first quart of 2025, there was a cash inflows for the sale of real estate approximating $9,500,000, and the sale of related party investments of approximately $1,500,000, offset by the purchase of marketable securities of approximately $1,000,000. Cash Flow from Financing Activities Net cash provided by financing activities was $1,394,000 for the three months ended March 31, 2026 as compared to net cash used by financing activities of $11,694,000 for the three months ended March 31, 2025. This variance is driven by payments toward long term debt of $284,000, payments on margin loans of $1,548,000 offset by borrowings of convertible note payable – related party of $2,450,000 during the first quarter of 2025 versus payments toward long term debt of $8,997,000 and payments on margin loans of $2,806,000 during the first quarter of 2025. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues, or expenses. Critical Accounting Policies and Estimates 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2026. 32