DSS, Inc. (DSS) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Document Security Systems' Third Quarter 2017 Earnings Call. Currently, offline lines are in a listen-only mode. Later there will be an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please be advised today's program may be recorded. It is now my pleasure to turn the program over to Mr. Jody Janson. You may begin, sir.

Thank you. Good afternoon. I would like to thank everyone for joining us today for the Document Security Systems' third quarter 2017 earnings conference call. I am Jody Janson, Investor Relations Director at Document Security Systems. And joining me on today's call from DSS are CEO, Jeff Ronaldi; CFO, Phil Jones; and the Chairman of the Board, Robert Fagenson. Following our prepared remarks, we will open the call for questions. This afternoon Document Security Systems issued a press release announcing its third quarter 2017 financial results. Before we begin, I'll review the Company's Safe Harbor statement. Forward-looking statements on this call, including without limitations, statements relating to the Company's plans, strategies, objectives, expectations, potential value, intentions and the adequacy of resources are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act and contains words such as believes, anticipates, expects, plans, intends, and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected. In addition to this factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences included, but are not limited to, those disclosed in the Risk Factors section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission. Forward-looking statements made as part of this call are being made as of today, November 14, 2017, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. During the call today, management will discuss adjusted EBITDA. In the Company's press release issued this afternoon, you will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA. I would now like to turn the call over to Document Security Systems Chairman of the Board, Robert Fagenson. Robert?

Thank you, Jody, and thank you all for being with us today, remaining shareholders and remaining who are participants in our conference calls. The Company showed another positive quarter of EBITDA, and as Phil and Jeff will discuss has made progress in many areas and while the volume wasn't what we had hoped for, seasonal differences do affect our business and business that is lost in one quarter very often returns in the next. What I hope you will see is that we reconstituted our Board. We have some very new high quality, very experienced Board members. We have reconstituted all our Board committees and I think that going forward, our Board will be most engaged and certainly helpful to management moving the Company forward. So, with that, I'll turn the call over to Phil Jones, our Chief Financial Officer. Phil?

Thank you, Robert. Today we announced our third quarter 2017 financial results which are summarized in the press release we published after market close today and details in the Form 10-Q filed today with the SEC. As highlighted in the PR, the Company's revenues dipped during the quarter as compared to the third quarter of 2016. While we are hoping to see better numbers, we recognized that there were several factors that contributed to the sales decline. First, typically the first two months of the quarter July and August are slower months for our Packaging and Printing Group as summer vacations generally dampened big work then typically September has been a very strong month as the Company's largest customers begin to stock up for the holiday season. However, this year unfortunately the timing of this September order season was behind schedule with many orders slipping into early October. This contributed to our Printed Products Group recording a 15% decline in revenue from the third quarter of 2016. A decline we believe will be offset in the fourth quarter. This Group remains healthy with strong positions in our market and excellent long-term customer relationships. Secondly, our technology sales group also reported a decline in sales of 19% as compared to the third quarter of 2016. However, this figure was impacted by a $150,000 one-time license fee that the company received in the third quarter of 2016 that was not replicated in this quarter. These one-time settlements do occur from time-to-time in our IP management business, which are great, but they do create variability in our revenue results. Absent this amount, technology sales would have increased approximately 13% for the quarter. So, this Group continues to benefit from the revenues derived from the large SunGard customer relationship, it landed at the end of last year. For the year thus far, Printed Products revenues now reflect a slight decrease in the first nine months of 2016 down 5% while technology sales are up 3% year-to-date. Our costs were also down during the quarter with direct cost of goods sold decreasing 16%, the same percentage as the decrease in sales. This is the good sign as we were able to maintain a consistent gross margin of approximately 42.8% despite the sales dip. In addition, we saw decreases in compensation costs with offsets to increases in professional fees, and sales and marketing fees. Those primarily in support of our SunGard and other technology based product offerings. So, we've been able to reduce costs in certain areas without sacrificing the commitment to the resources that will drive future growth. For the quarter, the Company had a net loss of $277,000, but earned an adjusted EBITDA profit $191,000. While not a strong into third quarter of 2016, which was once again favorably impacted about $150,000 one-time license settlement. We are especially pleased that we generated at our sixth consecutive quarter of positive EBITDA results. This point for the strength our core businesses that can absorb the impact of variability in sales while continuing to support investments in our newest product lines. For the year-to-date, net loss is lower by 25% and we have more than doubled our adjusted EBITDA profit, up $104% to $817,000 for the first nine months of 2017. Moving to the balance sheet, as of September 30, 2017, we have $4.2 million of unrestricted cash and account receivable in inventory totaling $3.7 million with the inventory, especially high reflecting the orders impacted by the sales timing issue I described at our Packaging and Printing Group. Our account payable in accrued expenses decreased during the quarter that's Company has been able to use its improved adjusted EBITDA results to reduce these current liability accounts. One account that continues to impact our current liabilities at short-term debt, listed at approximately $3.6 million. It is important to note that this debt is a limited recourse debt that is settled revolves by the company when due in February of 2018 of the transfer of patterns underline with debt. For this debt can be settled without the use of cash. Absent this short-term debt amount, our networking capital is approximately $2.2 million as of September 30, which is an improvement from the beginning of the year. Furthermore, total liabilities have decreased approximately $1.8 million since December 31, 2016 to $13.3 million. We expect to continue to strengthen our balance sheet as we continue to produce positive EBITDA results in the coming quarters. In summary, our business, especially our Printed Products Group is going to be subject to occasional sales variability from quarter-to-quarter. However, our ability to match direct cost and maintain consistent gross margins, allows us to maintain core profitability, even in periods of low sales as proven by its third quarter results. Furthermore, with our sixth consecutive quarter of positive adjusted EBITDA, we are seeing consistent improvement on the balance sheet and the further strengthening of our financial position, one that we can build upon as we continue to develop the next generation of products and market opportunities for the Company. So, thank you for your time. I will be available to answer more detailed questions regarding our third quarter financial performance and position at the end of this call. With that, I will now turn the call to our CEO, Jeffrey Ronaldi. Jeff?

Thank you, Phil. I would like to thank everyone again for joining us on the call today, while our topline revenue didn't meet our expectations, there are many positive during the quarter. As Phil describe, the quarter was heard by some sales at our Printed Products Group that they're going to slip in the third quarter that slipped in the fourth quarter. I don't expect that our full-year results will be impacted. Our Printed Products Group had a strong position in its market and benefits from its long-term customer relationships. Furthermore, this Group has typically been fourth quarter weighted, which should repeat this year. Our technology revenue continued to see the impact of our first major AuthentiGuard customer implementation. This exciting project has seen that's customer implementing our anti-counterfeiting marks on millions of packages, labels and bags, which are present throughout their U.S. supply chain, but plans to expand throughout their global supply chain. These marks are read by our AuthentiGuard smartphone app by their field personnel and we weren't formed at this customer discovery of large collection of counterfeits with our system. This is an exciting project and we look forward to where this product is headed. To that end, as Phil discussed, we have been expanding our sales, marketing and development resources dedicated to AuthentiGuard. In addition, during the quarter, we have begun our first major push into Asia where we think there is an immense opportunity for AuthentiGuard. To this end, we have benefited from the guidance and resources of one of our Board members and now our largest shareholder Mr. Fai Chan with helping us build our presence in Asia, specifically Hong Kong. We're currently working to build the staffing contractors for aggressively ramp up this new division, DSS International. We see plenty of opportunities to meet the counterfeiting issues at their source and further our capabilities [indiscernible] and brand owners. As your CEO, I am committed to creating unique value proposition for our stockholders through all of the above described initiatives and greatly appreciate your continued support and confidence. Once again, thank you for your continued interest in DSS. With that, I would like to turn the call back over of Robert Fagenson, if you have any other comments.

Thanks, Jeff. Well as you've heard, the Company continues to progress while it is not showing at the topline and certainly our share price has not yet reflected what we believe in the positive things that have happened in this Company in last year. The balance sheet remains strong, as Phil alluded to before, they'll be resetting the balance sheet because we have certain debt that's able to be settled by the relinquishment of patents rather than cash and we have ample cash in hand and positive cash flow to continue to grow the company around the company. We are no longer a company that is eating itself every month and every quarter with negative cash flow. So, stability is here, and we believe growth will soon fall. I want to thank the management team once again for diligently working as hard as they had. I want to thank our newly expanded Board for being engaged and helping and we know we are going to count on them in the future and all of you, our shareholders for sticking with us. And I am hoping that finally the awards that we had so long waited for will be ours in the future. And with that, we will open up the call to questions. Operator?

Thank you. [Operator Instructions] And we can take our first question from Sandy Wyman with Ladenburg Thalmann. Your line is now open.

Yes. Thank you for taking my call. Can you give us any kind of an update on additional major customers? I know there's been something in the wind reported to be for the last few years and congratulations on fulfilling. The first one, do we have anything else in the pipeline? Thanks.

Thanks, Sandy and thanks again for your support and interest in the Company. We do have our pipeline at full and as with almost every customer we have until the lots of consumer based product offering for authentic art require us not to disclose exactly who we're working with. Having said that, we do have specific opportunities in the pipeline that are very promising for us and we continue to work with them to help them secure their supply chain.

Okay. Thanks. And then on the China progress, can you give us any kind of a timeframe when you think we might start to see some revenues?

Yes. We are very early in the process. We've identified the first sales agency worked with us based out of Hong Kong and has specific anti-counterfeiting track record within the industry. We need to get out there and train them to be able to sell this product effectively. It probably is going to be a three to six months before we can get them up to speed. The lead time in this industry unfortunately is longer. So, we're not going to achieve revenue for six months or more. So, we are excited about where we're going with it.

All right. Thanks a lot.

Thank you.

[Operator Instructions] At this time, there are no additional questions.

All right, then we'll wrap up. Once again, I'd like to thank all of you for sticking with us. I know that patience is not only a virtue, but a necessity with this Company. When you hear about things that are in the pipeline, they are never around the corner, they are always far away. The reality is that we are working closer and closer to many, many great positive that the management team has been working on that our Board is bringing to us and with financial stability not to have to go over the well every month for money. We have the ability to be able to picking shoes more carefully, choose our opportunities not waste our time, not waste our resources, and I think the results will start to show as 2018 unfolds. So, with that unless member and management team had something you like to add, gentlemen, anything further?

Nothing, Jeff.

We will say good night and hope to see you next quarter with better news. Thank you, all.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.