UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to_______ .

	001-32146
	Commission file number

DSS, INC.

(Exact name of registrant as specified in its charter)

New York

16-1229730

(State or other Jurisdiction of

incorporation- or Organization)

(IRS Employer

Identification No.)

275 Wiregrass Pkwy,

West Henrietta, NY 14586

(Address of principal executive offices)

	(585) 325-3610
	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Ticker symbol(s)		Name of each exchange on which registered
Common Stock, $0.02 par value per share		DSS		The NYSE American LLC

As of May 2, 2022 there were 84,626,847 shares of the registrant’s common stock, $0.02 par value, outstanding.

DSS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	3
Item 1	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021	6
	Notes to Interim Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 4	Controls and Procedures	35

PART II	OTHER INFORMATION	36
Item 1	Legal Proceedings	36
Item 1A	Risk Factors	36
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3	Defaults upon Senior Securities	36
Item 4	Mine Safety Disclosures	36
Item 5	Other Information	36
Item 6	Exhibits	36

PART I – FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

DSS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

As of

	March 31, 2022			December 31, 2021

ASSETS
Current assets:
Cash and cash equivalents	$	53,811,000		$	56,595,000
Accounts receivable, net		6,103,000			5,673,000
Inventory		9,778,000			10,380,000
Current portion of notes receivable		6,739,000			6,310,000
Prepaid expenses and other current assets		1,869,000			3,466,000
Total current assets		78,300,000			82,424,000

Property, plant and equipment, net		16,247,000			17,674,000
Investment in real estate, net		56,365,000			56,374,000
Other investments		10,466,000			11,001,000
Investment, equity method		1,193,000			1,080,000
Marketable securities		18,435,000			14,172,000
Notes receivable		6,240,000			5,878,000
Other assets		557,000			489,000
Right-of-use assets		1,181,000			498,000
Goodwill		56,606,000			56,606,000
Other intangible assets, net		36,269,000			38,630,000
Total assets	$	281,859,000		$	284,826,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	2,452,000		$	1,920,000
Accrued expenses and deferred revenue		16,515,000			21,180,000
Other current liabilities		402,000			402,000
Current portion of lease liability		540,000			393,000
Current portion of long-term debt, net		6,835,000			3,916,000
Total current liabilities		26,744,000			27,811,000

Long-term debt, net		59,398,000			55,711,000
Long term lease liability		782,000			120,000
Other long-term liabilities		880,000			880,000

Commitments and contingencies (Note 9)		-

Stockholders’ equity
Preferred stock, $.02 par value; 47,000 shares authorized, shares issued and outstanding (47,000 on December 31, 2021); Liquidation value $1,000 per share, $46,868,000 aggregate December 31, 2021).		-			-
Common stock, $.02 par value; 200,000,000 shares authorized, 84,626,847 shares issued and outstanding (79,745,886 on December 31, 2021)		1,692,000			1,594,000
Additional paid-in capital		296,450,000			294,685,000
Non-controlling interest in subsidiaries		36,345,000			36,409,000
Accumulated deficit		(140,432,000	)		(132,384,000	)
Total stockholders’ equity		194,055,000			200,304,000

Total liabilities and stockholders’ equity	$	281,859,000		$	284,826,000

See accompanying notes to the condensed consolidated financial statements.

DSS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

	2022			2021
	For the Three Months Ended March 31,
	2022			2021
Revenue:
Printed products	$	3,569,000		$	3,861,000
Rental income		1,663,000			-
Management fee income		11,000			-
Net investment income		129,000			-
Direct marketing		6,932,000			608,000
Total revenue		12,304,000			4,469,000

Costs and expenses:
Cost of revenue, exclusive of depreciation and amortization		5,443,000			3,287,000
Selling, general and administrative (including stock based compensation)		10,338,000			4,060,000
Depreciation and amortization		3,266,000			514,000
Total costs and expenses		19,047,000			7,861,000
Operating loss		(6,743,000	)		(3,392,000	)

Other income (expense):
Interest income		156,000			52,000
Other income		(1,703,000	)		-
Interest expense		(1,378,000	)		(20,000	)
Gain on extinguishment of debt		-			116,000
Loss on equity method investment		(112,000	)		(579,000	)
(Gain) loss on investments		424,000			(1,077,000	)
Gain on sale of asset		405,000			-
Loss from continuing operations before income taxes		(8,951,000	)		(4,900,000	)

Income tax benefit		-			838,000
Loss from continuing operations		(8,951,000	)		(4,062,000	)
Income from discontinued operations, net of tax		-			50,000
Net loss		(8,951,000	)		(4,012,000	)

(Gain) loss from continuing operations attributed to noncontrolling interest		903,000			31,000

Net loss attributable to common stockholders		(8,048,000	)		(3,981,000	)

Loss per common share:
Basic	$	(0.10	)	$	(0.21	)
Diluted	$	(0.10	)	$	(0.21	)

Earnings per common share - discontinued operations:
Basic	$	-		$	-
Diluted	$	-		$	-

Shares used in computing loss per common share:
Basic		84,626,847			19,432,831
Diluted		84,626,847			19,432,831

See accompanying notes to the condensed consolidated financial statements.

DSS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

(unaudited)

	2022			2021
Cash flows from operating activities:
Net loss from continuing operations	$	(8,951,000	)	$	(4,062,000	)
Adjustments to reconcile net loss from continuing operations to net cash used by operating activities:
Depreciation and amortization		3,266,000			514,000
Stock based compensation		4,000			12,000
Loss on equity method investment		(112,000	)		579,000
Loss (gain) on investments		424,000			1,076,000
Impairment of notes receivable and other investments		1,637,000			-
Gain on extinguishment of debt		-			(116,000	)
Deferred tax benefit		-			(838,000	)
Decrease (increase) in assets:
Accounts receivable		(430,000	)		82,000
Inventory		602,000			(601,000	)
Prepaid expenses and other current assets		1,597,000			(103,000	)
Other assets		(68,000	)		(382,000	)
Increase (decrease) in liabilities:
Accounts payable		532,000			107,000
Accrued expenses		(4,697,000	)		(3,521,000	)
Other liabilities		126,000			(778,000	)
Net cash used by operating activities		(6,070,000	)		(8,031,000	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(942,000	)		(72,000	)
Purchase of real estate		-			(3,230,000	)
Purchase of investment		(1,085,000	)		(4,329,000	)
Purchase of marketable securities		(4,693,000	)		2,188,000
Disposal of property, plant and equipment		2,152,000
Note receivable investment		(791,000	)		(1,006,000	)
Net cash used by investing activities		(5,359,000	)		(6,449,000	)

Cash flows from financing activities:
Payments of long-term debt		(246,000	)		(89,000	)
Borrowings of long-term debt		6,193,000			110,000
Debt conversion to equity in subsidiary		840,000			-
Issuances of common stock, net of issuance costs		1,858,000			61,068,000
Net cash provided by financing activities		8,645,000			61,089,000

Cash flows from discontinued operations:
Cash (used) provide by discontinued operations		-			(12,000	)
Net cash used by discontinued operations		-			(12,000	)

Net increase (decrease) in cash		(2,784,000	)		46,597,000
Cash and cash equivalents at beginning of period		56,595,000			5,226,000
Cash and cash equivalents at end of period	$	53,811,000		$	51,823,000

See accompanying notes to the condensed consolidated financial statements.

DSS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

	Shares		Amount		Shares		Amount		Capital		Subsidiary			Deficit			Total
	Common Stock				Preferred Stock				Additional Paid-in		Non- controlling Interest in			Accumulated
	Shares		Amount		Shares		Amount		Capital		Subsidiary			Deficit			Total

Balance, December 31, 2021		79,746,000	$	1,594,000		-	$	-	$	294,686,000	$	36,407,000		$	(132,384,000	)	$	200,304,000

Issuance of common stock, net		4,881,000		98,000		-		-		1,760,000		-			-			1,858,000
Conversion of debt to equity in subsidiary		-		-		-		-		-		840,000			-			840,000
Stock based payments, net of tax effect		-		-		-		-		4,000		-			-			4,000
Net loss		-		-		-		-		-		(903,000	)		(8,048,000	)		(8,951,000	)
Balance March 31, 2022		84,627,000	$	1,692,000		-	$	-	$	296,450,000	$	36,344,000		$	(140,432,000	)	$	194,055,000

Balance, December 31, 2020		5,836,000	$	116,000		43,000	$	1,000	$	174,380,000		3,430,000		$	(101,382,000	)	$	76,545,000

Issuance of common stock, net		21,834,000		436,000		-		-		60,632,000		-			-			61,068,000
Stock based payments, net of tax effect		-		-		-		-		15,000		-			-			15,000
Net loss		-		-		-		-		-		(31,000	)		(3,981,000	)		(4,012,000	)
Balance, March 31, 2021		27,670,000	$	552,000		43,000	$	1,000	$	235,027,000	$	3,399,000		$	(105,363,000	)	$	133,616,000

See accompanying notes to the condensed consolidated financial statements.

DSS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The Company, incorporated in the state of New York in May 1984 has conducted business in the name of Document Security Systems, Inc. On September 16, 2021, the board of directors approved an agreement and plan of merger with a wholly owned subsidiary, DSS, Inc. (a New York corporation, incorporated in August 2020), for the sole purpose of effecting a name change from Document Security Systems, Inc. to DSS, Inc. This change became effective on September 30, 2021. DSS, Inc. maintained the same trading symbol “DSS” and updated its CUSIP number to 26253C 102.

DSS, Inc. (together with its consolidated subsidiaries, referred to herein as “DSS,” “we,” “us,” “our” or the “Company”) currently operates nine (9) distinct business lines with operations and locations around the globe. These business lines are: (1) Product Packaging, (2) Biotechnology, (3) Direct Marketing, (4) Commercial Lending, (5) Securities and Investment Management, (6) Alternative Trading (7) Digital Transformation, (8) Secure Living, and (9) Alternative Energy. Each of these business lines are in different stages of development, growth, and income generation.

Our divisions, their business lines, subsidiaries, and operating territories: (1) Our Product Packaging line is led by Premier Packaging Corporation, Inc. (“Premier”), a New York corporation. Premier operates in the paper board and fiber based folding carton, consumer product packaging, and document security printing markets. It markets, manufactures, and sells sophisticated custom folding cartons, mailers, photo sleeves and complex 3-dimensional direct mail solutions. Premier is currently located in its new facility in Rochester, NY, and primarily serves the US market. (2) The Biotechnology business line was created to invest in or acquire companies in the BioHealth and BioMedical fields, including businesses focused on the advancement of drug discovery and prevention, inhibition, and treatment of neurological, oncological, and immune related diseases. This division is also targeting unmet, urgent medical needs, and is developing open-air defense initiatives, which curb transmission of air-borne infectious diseases, such as tuberculosis and influenza. (3) Direct Marketing, led by the holding corporation, Decentralized Sharing Systems, Inc. (“Decentralized”) provides services to assist companies in the emerging growth “Gig” business model of peer-to-peer decentralized sharing marketplaces. Direct specializes in marketing and distributing its products and services through its subsidiary and partner network, using the popular gig economic marketing strategy as a form of direct marketing. Direct Marketing’s products include, among other things, nutritional and personal care products sold throughout North America, Asia Pacific, Middle East, and Eastern Europe. (4) Our Commercial Lending business division, driven by American Pacific Bancorp (“APB”), is organized for the purposes of being a financial network holding company, focused on acquiring equity positions in (i) undervalued commercial bank(s), bank holding companies and nonbanking licensed financial companies operating in the United States, South East Asia, Taiwan, Japan and South Korea, and (ii) companies engaged in—nonbanking activities closely related to banking, including loan syndication services, mortgage banking, trust and escrow services, banking technology, loan servicing, equipment leasing, problem asset management, SPAC (special purpose acquisition company) consulting services, and advisory capital raising services. (5) Securities and Investment Management was established to develop and/or acquire assets in the securities trading or management arena, and to pursue, among other product and service lines, broker dealers, and mutual funds management. Also in this segment is the Company’s real estate investment trusts (“REIT”), organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. (6) Alternative Trading was established to develop and/or acquire assets and investments in the securities trading and/or funds management arena. Alternative Trading, in partnership with recognized global leaders in alternative trading systems, intends to own and operate in the US a single or multiple vertical digital asset exchanges for securities, tokenized assets, utility tokens, and cryptocurrency via an alternative trading platform using blockchain technology. The scope of services within this section is planned to include asset issuance and allocation (securities and cryptocurrency), FPO, IPO, ITO, PPO, and UTO listings on a primary market(s), asset digitization/tokenization (securities, currency, and cryptocurrency), and the listing and trading of digital assets (securities and cryptocurrency) on a secondary market(s). (7) Digital Transformation was established to be a Preferred Technology Partner and Application Development Solution for mid cap brands in various industries including the direct selling and affiliate marketing sector. Digital improves marketing, communications and operations processes with custom software development and implementation. (8) The Secure Living division has developed a plan for fully sustainable, secure, connected, and healthy living communities with homes incorporating advanced technology, energy efficiency, and quality of life living environments both for new construction and renovations for single and multi-family residential housing. (9) The Alternative Energy group was established to help lead the Company’s future in the clean energy business that focuses on environmentally responsible and sustainable measures. Alset Energy, Inc, the holding company for this group, and its wholly owned subsidiary, Alset Solar, Inc., pursue utility-scale solar farms to serve US regional power grids and to provide underutilized properties with small microgrids for independent energy.

On August 21, 2020, the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”), pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth Security, Inc. (“DSS BioHealth”), Alset International Limited (formally Singapore eDevelopment Ltd.), and Global Biomedical Pte Ltd. (“GBM”), which was previously approved by the Company’s shareholders (the “Share Exchange”). Under the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s common stock, par value $0.02 per share, valued at $6.48 per share, and 46,868 newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary (see Note 5).

Impact BioMedical strives to leverage its scientific know-how and intellectual property rights to provide solutions that have been plaguing the biomedical field for decades. By tapping into the scientific expertise of its partners, Impact BioMedical has undertaken a concerted effort in the research and development (“R&D”), drug discovery and development for the prevention, inhibition, and treatment of neurological, oncological, and immune related diseases.

On September 9, 2021, the Company finalized a stock purchase agreement (the “SPA”) with American Pacific Bancorp, Inc. (“APB”), which provided for an investment of $40,000,200 by the Company into APB for an aggregate of 6,666,700 shares of the APB’s Class A Common Stock, par value $0.01 per share. Subject to the terms and conditions contained in the SPA, the shares issued at a purchase price of $6.00 per share. As a result of this transaction, DSS became the majority owner of APB. (see Note 5).

On September 13, 2021, the Company finalized a shareholder agreement between its subsidiary, DSS Financial Management, Inc. (“DFMI”) and HR1 Holdings Limited (“HR1”), a company incorporated in the British Virgin Islands, for the purpose of operating a vehicle for private and institutional investors seeking a highly liquid investment fund with attractive risk adjusted returns relative to market unpredictability and volatility. Under the terms of this agreement, 4000 shares or 40% of the Company’s subsidiary Liquid Asset Limited Management Limited (“LVAM”), a Hong Kong company was transferred to HR1 whereas at the conclusion of the transaction DFMI would own 60% of LVAM and HR1 would own 40%. LVAM executes within reliable platforms and broad market access and uses proprietary systems and algorithms to trade liquid exchange-traded funds (ETFs), stocks, futures or crypto. Aimed at providing consistent returns while offering the unique ability to liquidate the portfolio within 5 to 10 minutes under normal market conditions, LVAM provides an array of advanced tools and products enabling customers to explore multiple opportunities, strengthen and diversify their portfolios, and meet their individual investing goals.

On December 23, 2021, DSS purchased 50,000,000 shares at $0.06 per share of Sharing Services Global Corporation (“SHRG”) via a private placement. With this purchase, DSS increased its ownership of voting shares from approximately 47% of SHRG to approximately 58%. SHRG aims to build shareholder value by developing or acquiring businesses that increase the Company’s product and services portfolio, business competencies and geographic reach. Currently, the Company, through its subsidiaries, markets and distributes its health and wellness and other products primarily in the United States, Canada, and the Asia Pacific region using a direct selling business model. SHRG markets its products and services through its independent sales force, using its proprietary websites, including: www.elevacity.com and www.thehappyco.com. SHRG, headquartered in Plano, Texas, was incorporated in the State of Nevada on April 24, 2015, and is an emerging growth company. SHRG Common Stock is traded, under the symbol “SHRG,” in the OTCQB Market, an over-the-counter trading platforms market operated by OTC Markets Group Inc.

The accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our consolidated financial position as of March 31, 2022 and December 31, 2021, and the results of our consolidated operations for the interim periods presented. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended December 31, 2021 (“Form 10-K”), and our other reports on file with the Securities and Exchange Commission (the “SEC”).

Principles of Consolidation - The consolidated financial statements include the accounts of DSS, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable, convertible notes receivable, inventory, fair values of investments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants to purchase the Company’s common stock, preferred stock, deferred revenue and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Reclassifications - Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 2021, have been reclassified to conform to current period presentation.

Cash Equivalents – All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Amounts included in cash equivalents in the accompanying consolidated balance sheets are money market funds whose adjusted costs approximate fair value.

Notes receivable, unearned interest, and related recognition - The Company records all future payments of principal and interest on notes as notes receivable, which are then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports the net investment in the notes receivable on the consolidated balance sheet as current or long-term based on the maturity date of the underlying notes. Such net investment is comprised of the amount advanced on the loans, adjusting for net deferred loan fees or costs incurred at origination, amounts allocated to warrants received upon origination, and any payments received in advance. The unearned interest is recognized over the term of the notes and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Net deferred loan fees or costs, together with discounts recognized in connection with warrants acquired at origination, are accreted as an adjustment to yield over the term of the loan.

Investments – Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at fair 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 6 for further discussion on investments.

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.

Inventory – Inventories consist primarily of paper, pre-printed security paper, paperboard, fully prepared packaging, and health and beauty products which and are stated at the lower of cost or net realizable value on the first-in, first-out (“FIFO”) method. Packaging work-in-process and finished goods included the cost of materials, direct labor and overhead. At the closing of each reporting period, the Company evaluates its inventory in order to adjust the inventory balance for obsolete and slow-moving items. An allowance for obsolescence of approximately $22,000 and $388,000 associated with the inventory at our SHRG subsidiary was recorded as of March 31, 2022, and December 31, 2021, respectively. Write-downs and write-offs are charged to cost of revenue.

Impairment of Long-Lived Assets and Goodwill - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value.

Acquisitions - In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-01, Business Combinations (“Topic 805”): Clarifying the Definition of a Business (“ASU 2017-01”). The guidance is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. Under this guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If the threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. See Note 5 regarding the 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 capitalized as a component of the acquired assets. 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 similar to those used by independent appraisers and that use appropriate discount and/or capitalization rates and available market information.

(Loss) Earnings Per Common Share - The Company presents basic and diluted (loss) earnings per share. Basic (loss) earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted (loss) earnings per share are computed including the number of additional shares from outstanding warrants, stock options and preferred stock that would have been outstanding if dilutive potential shares had been issued and is calculated utilizing the treasury stock method. In a loss period, the calculation for basic and diluted (loss) earnings per share is the same, as the impact of potential common shares is anti-dilutive. For the three months ended 31, 2022, potential dilutive instruments includes both warrants and options of 3,556 and 11,930 shares respectively. For the three months ended 31, 2021, potential dilutive instruments includes both warrants and options of 29,314 and 13,596 shares respectively. Additionally for March 31, 2021, there were 43,000 shares of preferred a stock convertible into 6,570,000 shares of common stock

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.

During the three months ended March 31, 2022, two customers accounted for 10% and 3%, respectively, % of our consolidated revenue. As of March 31, 2022, these two customers accounted for 29% and 6% of our consolidated trade accounts receivable balance. During the three months ended March 31, 2021, these two customers accounted for 31% and 8% of our consolidated revenue and 57% and 8% of our consolidated trade accounts receivable balance.

Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in income tax expense.

Recent Accounting Pronouncements - In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements.

2. Revenue

The Company recognizes its products and services 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 March 31, 2022, 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.

Accounts Receivable

The Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and generally does not require collateral. Payment terms are generally 30 days but up to net 105 for certain customers. The Company carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management’s estimates that include a review of the history of past write-offs and collections and an analysis of current credit conditions. At March 31, 2022, and December 31, 2021, the Company established a reserve for doubtful accounts of approximately $70,000 and $20,000 respectively. The Company does not accrue interest on past due accounts receivable.

Sales Commissions

Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions capitalized as of March 31, 2022.

Shipping and Handling Costs

Costs incurred by the Company related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to these costs are reflected as revenue.

See Note 13 for disaggregated revenue information.

3. Notes Receivable

American Premium Water Corporation

On October 15, 2020, APB entered into a loan agreement with (“APW Note”) with American Premium Water Corporation,(“APW”), a Nevada corporation. The loan, not to exceed the principal sum of $200,000, has an interest rate of 12%, and matures on October 15, 2022. The outstanding principal and interest as of March 31, 2022 and December 31, 2021, approximated $39,000 and is classified as a Current portion of notes receivable on the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021. GSX repaid the principal and interest in full in April 2022.

GSX Group Limited

On February 8, 2021, the Company entered into a convertible promissory note (“GSX Note”) with GSX Group Limited (“GSX”), a company registered in Gibraltar. The Company loaned the principal sum of $800,000, with principal and interest at a rate of 4%, due in one year from date of issuance. The outstanding principal and interest as of March 31, 2022 and December 31, 2021, approximated $837,000 and $829,000, respectively, and is classified as a Current portion of notes receivable on the Consolidated Balance Sheets at December 31, 2021. GSX repaid the principal and interest in full in April 2022.

On February 3, 2021, USX Holdings Company, Inc., a subsidiary of the Company entered into a binding joint venture term sheet (“GSX JV”), along with Coinstreet, whose CEO is also a member of the Company’s board of directors, for the creation of a USA based joint venture alternative trading system or exchange (“JV Exchange”). During the nine-months ended September 30, 2021, the Company and GSX finalized the terms of the JV Exchange. This JV is currently in the planning stages.

Dustin Crum

On February 21, 2021, Impact BioMedical, Inc. a subsidiary of the Company, entered into a promissory note (“Crum Note”) with Dustin Crum (“Mr. Crum”). The Company loaned the principal sum of $206,000, with interest at a rate of 6.5%, and maturity date of August 19, 2022. Monthly payments are due on the twenty-first day of each month and continuing each month thereafter until August 19, 2022, at which time all accrued interest and the entire remaining principal shall be due and payable in full. This note is secured by certain real property situated in Collier County, Florida. The outstanding principal and interest as of March 31, 2022, approximated $207,000 and is classified in current notes receivable on the accompanying consolidated balance sheets.

Sentinel Brokers Company, Inc.

On May 13, 2021, Sentinel Brokers, LLC, a subsidiary of the Company entered a revolving credit promissory note (“Sentinel Note”) with Sentinel Brokers Company, Inc. (“Sentinel”), a company registered in the state of New York. The Sentinel Note has an aggregate principal balance up to $600,000, to be funded at request of Sentinel. The Sentinel Note, which incurs interest at a rate of 6.65% is payable in areas until the principal is paid in full at the maturity date of May 13, 2023. As of March 31, 2022 and December 31, 2021, there was $151,000 and $0, respectively, outstanding on the Sentinel Note, and is included in current notes receivable on the accompanying consolidated balance sheet. Also on May 13, 2021, the Company entered into a stock purchase agreement (“Sentinel Agreement”) to acquire a 24.9% equity position of Sentinel for the purchase price of $300,000. During April 2022, the Sentinel Note was amended to increase the available revolving credit principal to $3,000,000. See Note 6.

Puradigm, LLC

On May 14, 2021, DSS Pure Air, Inc. a subsidiary of the Company entered into a convertible promissory note (“Puradigm Note”) with Puradigm, LLC (“Puradigm”), a company registered in the state of Texas. The Puradigm Note has an aggregate principal balance up to $5,000,000, to be funded at request of Puradigm. The Puradigm Note, which incurs interest at a rate of 6.5% due quarterly, has a maturity date of May 14, 2023. The Puradigm Note contains an options conversion clause that allows the Company to convert all, or a portion of all, into new issued member units of Puradigm with the maximum principal amount equal to 18% of the total equity position of Puradigm at conversion. The outstanding principal and interest as of March 31, 2022 and December 31, 2021, approximated $5,164,000 and $5,081,000, respectively, which is classified as Notes receivable on the consolidated balance sheet.

South Regional Management District (formally Harris-Montgomery Counties Management District)

On September 23, 2021, APB entered into refunding bond anticipatory note (“District Note”) with South Regional Management District (the “District”), which operates as a conservation and reclamation district pursuant to Chapter 3891, Texas Special District Local Laws Code; Chapter 375, Texas Local Government Code; and Chapter 49, Texas Water Code. The District Note was in the sum of $3,500,000 and incurs interest at a rate of 4.15% per annum. Principal and interest are due in full on September 22, 2022. This note may be redeemed prior to maturity with 10 days written notice to APB at a price equal to principal plus interest accrued on the redemption date. The outstanding principal and interest of $3,576,000 and $3,540,000 of the District Note is included in current portion of notes receivable on the consolidated balance sheet at March 31, 2022 and December 31, 2021, respectively.

Asili, LLC.

On October 25, 2021, APB entered into loan agreements (“Asili Agreement”) with Asili, LLC. (“Asili”) a company registered in the state of Utah. The Asili Agreement has an initial aggregate principal balance up to $1,000,000, to be funded at request of Asili, with an option to increase the maximum principal borrowing to $3,000,000. The Asili Agreement, which incurs interest at a rate of 8.0% with principal and interest due at the maturity date of October 25, 2022. The Asili Agreement contains an optional conversion feature allowing APB to convert the outstanding principal to a 10% membership interest. APB, as holder of the Asili Agreement, has the right to elect one member to the Asili Board of Managers. The outstanding principal and interest of approximately $803,000 and $784,000 of the Asili Agreement is included in current portion of notes receivable on the consolidated balance sheet at March 31, 2022 and December 31, 2021, respectively.

Leopoldo Bustamate.

On June 13, 2019, APB extended the credit to Leopoldo Bustamate (“Bustamate Note”) in the form of a promissory note for $249,540, bearing interest at 15%, with a maturity date of May 15, 2020. On June 5, 2020, the Company further extended the same credit in the form of a promissory note for $249,540, bearing interest at 15%, with a maturity date of May 14, 2021. On August 30, 2021, the Company further extended the same credit in the form of a promissory note for $249,540, bearing interest at 12.5%, with a maturity date of May 15, 2023. The modification agreement is effective May 14, 2021. This promissory note is secured by a deed of trust on a tract of land, which is approximately 315 acres, and located in Coke County, Texas. The outstanding principal and interest of approximately $289,000 of the Bustamate Note is included in long term portion of Notes receiva

SEC Form 10-Q filed by DSS Inc.