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DSS: Agreement with Wyeth Nutrition Could Lead to More Sales With Nestlé

By Lisa Thompson

NYSE:DSS

READ THE FULL DSS RESEARCH REPORT

Shareholders have long awaited announcements of customers for AuthentiGuard, but to date customers were reluctant to lend their names to any press releases for fear of admitting they had a counterfeit problem, or as to not alert the counterfeiters. Finally we see one that is proudly announcing that they are providing consumers with a way to be assured they have authentic product. Wyeth Nutrition, a part of Nestlé, has announced it is using AuthentiGuard on its baby formula brand, ILLUMA that is sold in China. A label is being embedded within the printed elements of the package, on both the container and box, with multiple points of authentication. This prevents counterfeiting and tampering as it enters the Asian market, as well as provides exact details about the product itself and how to use it all using a smartphone app. Not only can consumers be assured the formula is safe, it can be tracked throughout the supply chain. As an added feature, security is combined with a QR code that provides the family with added information about the product using augmented reality. Formula with AuthentiGuard packaging is already on store shelves in China as Document Security Systems, Inc. (NYSE:DSS) has been working with them since July, however not all of the printers are up and running leaving room for growth even for this one brand. Wyeth plans a continued roll out into other geographies, and DSS is hopeful that use of AuthentiGuard will spread to other Nestlé’s products worldwide. Nestle sells $5.5 billion in product in Greater China alone, and is the market leader for baby formula globally. This sale was made in partnership with Luminescence Sun Chemical Security who provides the security ink with a custom taggant.

Baby formula in China is a high profile topic due to the 2008 scandal that found baby formula adulterated with melamine and led to the death of six babies with 54,000 others hospitalized. This problem was found at 22 different companies and led to the arrest and even execution of those found at fault. It has led to suspicion of the quality of baby formula and dairy products produced in China ever since.

AuthentiGuard Grows 115% in Q3 2019

While on the surface the third quarter was uninspiring, taking a look at the components of revenue and the outlook for Q4, DSS is poised for accelerating revenues across multiple product lines.

DSS reported total Q3 2019 revenues of $3.5 million compared with $4.1 million a year ago. However technology sales, services, and licensing increased 60.3% to $498,000, and the AuthentiGuard part of the business grew 115% year over year to $307,000, slightly down from $319,000 in Q2 2019 as there were some one-time set up fees in Q2. Recurring revenue will build each quarter as new printers come online in various geographies for various customers, but onboarding will cause a few lumps. As printers are brought on, each printer could contribute upwards $100,000-$125,000 per year to revenues.

Printed product sales were down 19.8% as orders were received late from major customers and slid into the fourth quarter. As a result, we are expecting an exceptionally good Q4. The plastics business returned to normal from a weak Q2. We still haven’t seen the full effect of Walgreen adding 1,200 new stores to its chain. So far only about 500 of those Rite Aid stores have added photo processing and since this service was not available in Rite Aid locations before, they are generating 50-60% of the business seen at legacy Walgreen locations. Walgreens is DSS’s largest customer and was responsible for 31% of the company’s first nine months of sales in 2019.

Gross margins decreased to 37.2% from 37.7%, and gross margin dollars were down 14.7% due to lower revenues.

Operating expenses were up $593,000 year over year and $313,000 sequentially. The operating loss was $1.2 million compared to a loss of $379,000 last year. The biggest increase in spending was from professional fees related to litigation as the company moves closer to the February Apple trial, followed by an increase in stock-based compensation of $253,000.

Interest expense was $51,000 versus $27,000 last year, bringing the net loss to $1.3 million versus a GAAP loss of $412,000 million last year. The GAAP loss per share this year was $0.04 versus a loss of $0.02 a year ago. Non-GAAP it was a loss of $0.05 compared with a loss of $0.02 last year. The shares outstanding increased 43% to 24.0 million versus 16.8 million in Q3 2018. Shares outstanding as of November 14, 2019 were 36.2 million.

EBITDA for the quarter was a loss of $507,000 compared with a loss of $69,000 in 2018.

Balance Sheet

As of September 30, 2019 the company had $3.9 million in cash, working capital of $4.3 million and debt of $2.8 million. The company believes it has sufficient funds for current and planned operations through 2020.

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