DSS: DSS Continues to Exit Money Losing Operations While Investing In New Ventures

By Lisa Thompson

NYSE:DSS

READ THE FULL DSS RESEARCH REPORT

DSS’s Files to Raise $5 Million

Yesterday Document Security Systems, Inc. (NYSE:DSS) filed an S-1 to sell common stock to raise $5 million or a net $4.4 million dollars through Aegis Capital adding approximately 591,000 shares at yesterday’s price. The cash will be used to grow its businesses, acquire new businesses, working capital, and for expenses incurred to shut down its plastics business. This capital will be used to breathe new life into DSS and hopefully transform it to a profitable growing business while improving shareholder value.

DSS Shuts Down its Money Losing Plastics Division

While business restrictions show signs of easing, some things may be permanently changed, and one of those DSS believes may be the future use of plastic badges. The pandemics certainly has accelerated the concept of digital and touchless entry such as exemplified by boarding passes and venues may pull forward plans to use app-based entry that can be enhanced by biometrics and eschew the traditional plastic pass. The company cites hotel card keys, and smaller events being held in the future including sporting and trade shows as possible future outcomes. The pandemic was the final straw in DSS’s decision to shutter its plastics business, that had sunk to losses over past three years in the best of times and it losses were expected to increase in this, the worst of times. In Q1 it took a $685,000 goodwill write-off to exit the business. In its S-1 it says it will need to use another $400,000 in cash to shut down operations. The division will have revenues in Q2 but it will be considered a discontinued operation. The good news is this shut down should reduce losses at DSS. Last year this business lost $294,000. It has a lease on space in California that costs $233,000 a year it hopes to sublet.

DSS Reports A Record Q1 in 2020

Aided by the fourth quarter acquisition of the assets of RBC Life, DSS reported a record for a first quarter. Its total revenues were over $5 million versus $4.8 million a year ago, up 4.0%. Not knowing anything about RBC we had estimated revenue of $100,000 for the quarter, but it contributed $543,000 or 11.5% of sales. It is expected to continue to grow.

Printed product sales were down 9.6% to $3.9 million. Packaging Printing and Fabrication, and Plastic Cards, Badges, and Accessories, were flattish year over year. Walgreens shuttered its photo operations in store during the quarter leading to a build up of inventory that still lingers now. Shutterfly however with its completely online operation saw growth. Commercial and Security Printing as well as Technology Integrated Plastic Cards & Badges were down due to the lack of live events and travel. We expect worse results in Q2 as Walgreens continues to work off excess inventory.

Technology sales, services, and licensing increased 8.2% to $479,000, and the AuthentiGuard part of the business grew 43.9% year over year to $331,000, up from $230,000 in Q3 2019. AuthentiGuard was down sequentially as its major customer ceased production and DSS only get paid as the customer’s product is manufactured, packaged and labeled. It gets notified a month afterward, so it has little visibility into revenues.

Gross margins increased slightly to 34.6% from 34.3%, and gross margin dollars were up 4.9% due to higher revenues and higher than average gross margins contributed by RBC.

Operating expenses were $3.7 million compared to $2.1 million in 2019. Included in the $3.7 million was a $685,000 one-time charge for impairment of goodwill for the plastics division. Other than that, the biggest increase in spending was from sales and marketing, which increased $289,000 and SG&A, which grew $199,000.

In the quarter the company paid no income taxes and it still has $50.6 million in federal net operating loss carry forwards. For the first time the company reported minority interest. This was from the 48% of its new Medical REIT venture that started on March 3, 2020. The venture lost $140,000 from March 3rd to March 31st, and DSS reversed out $67,000 of it that it didn’t own. Going forward we have modeled in a full quarter of minority interest. Since this REIT is a start up it will have a number of quarters before it starts booking any revenue to offset these expenses, which are mostly salaries.

The net loss to common shareholders was $1.9 million versus a GAAP loss of $451,000 last year.

After a 30 for 1 reverse split, the GAAP loss per share this year was $1.23 versus a loss of $0.72 a year ago. Non-GAAP it was a loss per share of $0.79 versus $0.72 last year. The shares outstanding increased 164% to 1.5 million versus 583,000 in Q1 2019. Shares outstanding as of May 11, 2020 were 2,078,687.

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