Aug. 7, 2020 5:09 PM ET|About:  Document Security Systems, Inc. (DSS),    Includes:  SHRG

Written 8/6/20

A little history about DSS, as I have followed the company for many years:

Years ago, DSS had created an anticounterfeiting technology called AuthentiGuard. DSS plastics and packaging divisions, which has been responsible for nearly 98% of DSS $18 million in annual revenues has also supported their investment in AuthentiGuard and patent litigation expenses. Finally, AuthentiGuard is ready for prime time. AuthentiGuard as a service App is now available on the App Store after years of struggling to bring the technology to market. DSS management finally realized the patent litigation was not a viable business model and have begun to wind it down.

DSS - Document Security Systems, Inc. - NYSEMKT:DSS - Digital Brand Protection

Far more interesting is how DSS is currently reinventing itself. For years, DSS has operated 4 divisions:

Premier Packaging Corporation

Plastic Printing Professionals

DSS Digital Inc. (AuthentiGuard)

DSS Technology Management, Inc. (IP litigation division)

In its most recent SEC filing, DSS has stated they would be moving away from 2 of these 4 divisions and, in the same breath, creating 5 new exciting cutting-edge businesses. DSS Technology Management is currently being wound down, drastically reducing their main contributor to cash burn, as well as exiting the printing and plastics business. Leaving AuthentiGuard and Packaging. Packaging should help propel new AuthentiGuard contracts.

https://www.sec.gov/Archives/edgar/data/771999/000149315220010164/form8-k.htm

In DSS recent SEC filings, DSS has created 5 new divisions:

DSS Blockchain Security, Inc.  -  Intends to specialize in the development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber securities across global markets.  Decentralize Sharing Systems, Inc.  -  Seeks to provide services to assist companies in the new business model of the peer-to-peer decentralized sharing marketplaces.DSS Securities, Inc.  -  Has been established to develop or to acquire assets in the securities trading or management arena, and to pursue two parallel streams of digital asset exchanges in multiple jurisdictions  DSS BioHealth Security, Inc.  -  Is the business line which they intend to invest in or to acquire companies related to the biohealth and biomedical field, including businesses focused on the research to advance drug discovery and development for the prevention, inhibition, and treatment of neurological, oncology and immuno-related diseases. This new division will place special focus on open-air defense initiatives, which curb transmission of air-borne infectious diseases such as tuberculosis and influenza, among others  DSS Secure Living, Inc. -  Intends to develop top of the line advanced technology, energy efficiency, quality of life living environments and home security for everyone for new construction and renovations of residential single and multifamily living facilities

Aside from  Decentralized Sharing Systems, Inc.,  the activity in the these newly created subsidiaries have been minimal or in various start-up or organizational phases.

So, let&rsquo s take a closer look at  Decentralized Sharing Systems:

DSS current management team (less than a year old) has very impressively proven they know how to create value. Since February 2020, DSS' s  Decentralized Sharing Systems  has been purchasing SHRG shares in the open market and through private placements as SHRG sat near its multi-year lows. We could only dream management of far larger companies could be this opportunistic.

With a total investment of less than $5 million, DSS now sits on a whopping short-term liquid asset on their balance sheet of nearly $43.2 million (based on today&rsquo s price of .60 SHRG as I write).   DSS also holds a warrant for $10 million SHRG shares exercisable at .20. You are probably asking yourself how could an investment increase so quickly? In July,    SHRG  settled a major legal issue with two large holders of its stock, where SHRG was disputing ownership. This lingering problem had been artificially depressing SHRG shares.  The most recent 10K states SHRG  is currently in the process of up listing to NASDAQ,  also contributing to SHRG' s recent meteoric rise in price. Finally, SHRG is coming off its first net profitable year in 2020. Based on their enterprise value, SHRG meets all NASDAQ listing requirements.

SHRG entered the multi-level marketing business only 3 years ago. Its website is  Elevacity * Elevating Health, Wealth & Happiness.

SHRG grew revenues from $85 million in 2019 to $132 million in 2020.

I like to use enterprise value as I feel it&rsquo s the most authentic way to understand the most accurate value of a company. I mean, if you exclude debt, like many investors do and only use market cap, it can be very misleading.

Comps	SHRG	Herbalife	Nuskin	Medifast
Revenue multiple 8/4/20	.5	1.75	1	3

SHRG  is already growing at over 50% YoY with 99% of their revenues coming from only Texas.  www.elevacity.com. Enormous growth potential.

What DSS offers SHRG is an expansion route into China. DSS' s CEO and Chairman has a publicly traded company on the Singapore exchange, SeD Singapore edevelopement. He has many contacts in Asia. His personal website is  Chan Heng Fai.

SHRG is just beginning their expansion. It is well capitalized with $14 million in cash and no debt. Outstanding shares approximately 129 million. I say approximately because, in the company&rsquo s most recent legal settlement, they have bought some shares back and issued some, but it doesn' t seem material.

SeD currently trades in Singapore and DSS owns approximately 10% of their outstanding shares. This equates to approximately $8 million in short term liquid asset value. 

DSS holdings in publicly traded entities:

**SHRG Holdings (62 million common and 10 million warrants @ .20) (72 million shares) ($.60 per share) = ($43,200,000/4,600,000*) = $9.39	$9.39
SeD Holdings (120 million shares @ .09 Singapore dollars)	$1.73
CASH $10 million +	$2.17
(Debt) $2.5 million	(.54)
Warrant conversion $2 million	(.43)
DSS short term liquid assets	$12.32

**every .01 increase or decrease in SHRG stock price equates to $720,000 in value (warrants included) to DSS share price or $.15 a share.

*DSS currently has 4,600,000 million shares outstanding with 3.9 million float. 

 

SHRG 

Main reason to be excited for higher prices.  Up listing to NASDAQ  is a BIG deal and normally a company' s share price will continually rally into the actual day it  Up lists  and it normally pops on the up listing day as well. I have laid out some very plausible outcomes of  SHRG' s  valuation once up listed.

SHRGrevenue $135 million	SHRG  stock price (129 million outstanding + $14 million cash/135 million)	Market value:    DSSholdings of    SHRG	SHRG  price per  DSS  share	Total  DSSLiquid asset value per Share
*1x revenues	**$1.10 per share	$79 million/ 4,600,000	$17.17	$20.10
2x revenues	**$2.20 per shares	$158 million/ 4,600,000	$34.34	$37.27

*If we use a VERY conservative 1x revenue multiple for SHRG. DSS liquid asset value increases to $20.10 per share. And with SHRG being such a small company many investors could easily apply a much higher multiple to revenues.

** possibly +/- .02-.04

 

Now let&rsquo s take a look at DSS managements up-coming deal:

Impact Biotech  www.impbio.com

There are many exciting possibilities with Impact Bio for DSS shareholders, but I want to focus on the actual transaction. DSS is about to vote on approving the acquisition of Impact Biotech    Monday August 10th. DSS has signed a deal to acquire Impact Bio for $50 million, $46.8 million in preferred DSS shares and $483,333 in DSS common shares

From recent SEC filing:

On April 27, 2020, prior to the execution of the Share Exchange Agreement, Impact BioMedical&rsquo s ownership of a suite of antiviral and medical technologies was valued at $382 million through a required independent valuation that was completed by Destum Partners. Because the valuation was higher than the previously agreed value, the purchase price to be paid be the Company was capped at a value of $50 million.

The $50 million dollar amount was a maximum purchase price between DSS and the seller prior to a 3rd party valuation analysis. The seller has given up their rights to receive any IPO shares as a further concession in establishing valuation. This becomes a large benefit to current holders as the seller is currently the largest holder of DSS common stock.

The main aspect of this deal is that DSS is not becoming a cash burning biotech. DSS' s plan is to IPO Impact after purchase therefore avoiding the cash burn that normally accompanies biotechs.

The key component of this transaction is that Impact has been evaluated by Destum Partners (  www.destumpartners.com) to the tune of $382 million. Another analysis was performed by another firm and that was even higher, but let&rsquo s keep our feet on the ground, shall we?

https://links.sgx.com/FileOpen/SeD-PR-Valuation_Impact_BioMedical.ashx?App=Announcement& FileID=607811

Now, whether you agree with the Impact Biotech valuation analysis or not, it' s still another huge potential windfall for DSS shareholders. If you pay $50 million and you apply a whopping 75% haircut to the valuation analysis you still come up with a $100 million value for Impact Bio, 100% upside to the transaction. I think many investors would take that deal, especially since DSS plans to IPO Impact biotech and give 2-4 shares to each DSS common holder depending on holding dates. If this transaction is anything like what management has already accomplished, there seems to be substantial upside to DSS current share price.

 

Disclaimer: These are my opinions and estimates based on my due diligence. I am NOT a financial advisor nor pretend to be one. Do your own due diligence.