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Document Security Systems, Inc. (NYSE:DSS) continues its march to higher revenues and profits by moving out of unprofitable businesses and opportunistically moving into new ones. The businesses DSS is involved in are now so varied it is planning to change its name to “Alset, Inc.” at its next shareholder’s meeting when it also plans to vote to reincorporate the company in Texas from NY pursuant to a merger with a holding company.
This quarter revenues grew a surprise 59% compared with a restated Q3 2019 (from the sale of the plastics business.) The biggest reason for the revenues beat was unexpected sales to new customers in the packaging printing and fabrication business. Not only did the company start using its own packaging for its direct marketing business, it has added customers in the food vertical that will have no seasonality, making revenues more stable. DSS is benefitting from continuing to produce packaging while some competitors were shut down. Its business with Shutterfly is also growing as its customers buy more personalized gift items such as mugs and pillows, which results in Shutterfly buying more expensive larger boxes.
The profitable quarter was caused by a one-time gain on the move to the equity method of accounting for its minority-owned direct marketer Sharing Services Global. This move resulted in an unrealized gain on marketable securities of $7.8 million, pushing the company to paper profits. Taking out this gain, the company lost $2.4 million. The gain was not as large as we originally had expected because the auditors settled on a different date to price the stock than we used in our calculation.
Next quarter, DSS’s 32% of Sharing Services Global’s net income will be reported as a new line item in other income. According to its most recent financial filing for the quarter ending July 31, 2020, Sharing Services generated $21.9 million in sales, and had a net loss of $1.1 million. It had free cash flow of $1.1 million. 32% ownership of it in the July quarter would have subtracted $352,000 from DSS’s reported net income. DSS will start reporting its share of net income on a two-month lag basis. As a result of the lag, the company did not included any Sharing Services revenues or expenses in its September quarter. We expect it to do so in Q4 when it will consolidate SSG’s numbers from August, September and October months (SSG’s October quarter.) SSG will report its October quarter before DSS reports its fourth, so we will see what contribution it will have at that time. Right now management expects it to earn money in its seasonally strong Q4 and contribute to DSS net income. Much of SSG’s losses come from high stock-based compensation which DSS, now in control of its board, may chose to change. We do not know what the plan on that is.
Given its revenue beat and better clarity on 2021, we are raising revenue estimates for 2020 to $18.3 from $17.1 and raising 2021 revenues to $27.0 million from $24.4 million. Our GAAP EPS estimate has been cut to $0.42 this year due almost entirely to a miss on calculating the one-time gain on Sharing Services Global. For 2021 we have increased the loss per share to $0.65 from earnings of $0.07. While we think there is some accuracy in the revenue estimates, we need further clarity on expenses going forward to get a more accurate idea of potential losses or earnings. DSS trades at an enterprise value of $39 million, that is 2.3 times EV to its current $16.7 million run rate. Incremental value includes its $7.6 million in stock in Alset International as well as the $50 million purchase price of Impact BioMedical.
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