While on the surface the second quarter was uninspiring, taking a look at the components of revenue and the outlook for the second half, Document Security Systems, Inc. (NYSE:DSS) is poised for accelerating revenues across multiple product lines. DSS reported total Q2 2019 revenues of $4.1 million flat with a year ago. However technology sales, services, and licensing increased 33% to $484,000, and the AuthentiGuard part of the business grew 83% to $319,000. AuthentiGuard grew sequentially $89,000 from $230,000 last quarter and we expect that incremental dollar amount to increase each quarter going forward as additional printers are deployed worldwide for multiple customers. This recurring revenue will build each quarter as new printers come online in various geographies for various customers. We believe there are approximately eight or nine printers up and running right now. Each printer could contribute upwards $100,000-$125,000 per year to revenues, which shows how exciting the roll out should be for investors.
Printed product sales were down 2.7% due primarily to a decline in plastic cards. The printed product business is not only seasonal, but in last year’s quarter in the plastics business there was a large first time corporate customer that ordered a year’s worth of badge inventory and has not made an add on purchase since. It is expected to buy more product in Q3. While it is counter intuitive that packaging printing and fabrication revenues could decline sequentially given the company’s claim it is capacity constrained, it is rather building capacity to meet what it anticipates for sales in the seasonally strong Christmas quarter as Walgreen adds 1200 new stores to its chain. Capacity will be increased by approximately 25% and the company expects that capacity to be filled. Walgreen is DSS’s largest customer and was responsible for 48% of the company’s first six months of sales in 2019.
Gross margins declined to 29.4% from 32.6%, and gross margin dollars were down 9% as the company spent to install printers for its customers worldwide and spend on marketing.
Operating expenses were up $53,000 and the operating loss was $992,000 compared to a loss of $818,000 last year. Sequentially they were up $130,000 with increased spend on marketing and travel and with some severance costs from employee reductions.
Interest expense was $40,000 versus $34,000 last year, bringing the net loss to $1,000,000 versus a GAAP gain of $2.7 million last year on $3.7 million gain on extinguishment of debt. The GAAP loss per share this year was $0.05 versus a gain of $0.16 a year ago. Non-GAAP it was a loss of $0.05 flat with last year. The shares outstanding increased 32% to 21.9 million versus 16.6 million in Q2 2018. Shares outstanding as of August 13, 2019 were 29.7 million.
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 $1.50 per share using a blended average EV/sales of 2.0 times and an estimate of $20.7 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.
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