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DSS: Recent Capital Raise Will Allow Capacity Expansion and Order Fulfillment

By Lisa Thompson



Document Security Systems, Inc. (NYSE:DSS) has long been afflicted with not having enough resources to pursue growth and this past quarter the company took actions to address longer term needs and raised enough cash to last for the next few years, rather than just funding the short term. With new management at the helm, DSS raised a net $5 million in June to fund both increased capacity and fulfill its current orders at two Fortune 100 companies that are in the process of rolling out AuthentiGuard worldwide. For years DSS has been trying to stay profitable while raising small amounts to satisfy cash flow needs, but in one fell swoop, this capital raise should have it set for years, unless of course signing additional large customers again puts a strain on capital.

This new cash is being used by both the printing business, which is increasing capacity by 20% by adding a new folder/gluer, as well as the AuthentiGuard business, which is in the process of installing printers and training personnel at its current customers locations worldwide. The increased capacity in the printing business is expected to add an incremental $2.5 million to revenues in 2019. AuthentiGuard gets paid per label printed, so its revenues will ramp as its customers print and ship product.

On June 10, 2019, DSS sold 11.2 million shares of stock at $0.50 per share for net proceeds of $5 million to fund its strategic objectives. The company has also granted the underwriters a 45-day option to purchase up to 1,680,000 additional shares of common stock to cover over-allotments, if any, at the public offering price, less the underwriting discounts and commissions. The company now has approximately 29.2 million shares outstanding.

The company trades at an enterprise value of $9.5 million, which is only 0.5 times EV to its trailing 12-month sales, and we believe the stock has considerable upside as the company shows signs of growth. Based on metrics of its peer group, we believe it is worth $1.66 per share using a blended average EV/sales of 2.1 times and an estimate of $21.5 million in sales in 2019. Any upside from the successful resolution of its IP enforcement efforts has not been factored into this valuation and adds considerable incremental potential for shareholders. Near term we believe announcements of new customer wins could also drive the stock.

Q1 Earnings Shows 10% Sales Growth

DSS reported total Q1 2019 revenues of $4.8 million versus $4.4 million a year ago, up 9.9%. Printed product sales grew 11.3% to $4.4 million as business at the new drug stores increased and new products were offered to customers. Technology sales, services, and licensing declined 2.5% to $443,000, however the Authentiguard part of the business grew 30%. The company is transitioning away from lower margin IT services, especially sales of hardware as a reseller and replacing those sales with its SaaS business.

The GAAP loss per share this year was $0.02 versus a loss of $0.02 a year ago. Non-GAAP it was a loss of $0.02 versus a loss of $0.01. The shares outstanding increased 5.4% to 17.5 million versus 16.6 million in Q1 2018. EBITDA for the quarter was a loss Of $97,000 compared with a positive $15,000 last year. Printed products contributed $395,000 in Q1, while Technology used $324,000.

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