Dss Inc

NYSE-MKT:DSS

Earnings Call Transcript 2018-Q1

[Operator]

Good day everyone and welcome to Document Security Systems' Incorporated First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Please note that the call may be recorded. [Operator Instructions]

It is now my pleasure to turn today’s conference over to Investor Relations Director, Jody Janson. Sir, please go ahead.

[Jody Janson, Investor Relations-Director]

Thank you. Good afternoon. I want to thank everyone for joining us today for the Document Security Systems' first 2018 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.

Today Document Security Systems issued a press release announcing its first quarter 2018 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 the 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 on March 06, 2018.

Forward-looking statements made as part of this call are being made as of today, May 15, 2018, 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 today, you will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA.

I would like to turn the call over now to Robert Fagenson, Chairman of the Board of Document Security Systems Robert?

[Robert Fagenson, Chairman of the Board]

Thank you, Jody, and thank you all for being with us today. I am on a satellite link, which is somewhat unreliable, so I will basically just be saying good afternoon, I’ll try and be with you for the Q&A. Jeff and Phil will bring you up todate on the last quarter and the solid progress the Company continues to make towards our goals and hopefully, if you have questions, I will be able to give you answers that you will find productive and interesting. Management is doing a good job moving the Company forward and I have every confidence that you will agree.

So with that I will turn it over to Phil Jones. Phil?

[Phil Jones, Chief Financial Officer]

Thank you, Robert. Today we announced our first quarter 2018 financial results, which are summarized in the press release filed today and also detailed in the 10-Q filed today with the SEC.

As described in the press release, the Company's aggregated revenues for the quarter decreased 8% as compared to the first quarter of 2017. The decrease was driven by a 11% decrease in printed products group revenues, which had revenue of $3.9 million. While disappointing, it was not completely unexpected since that group had its biggest quarter ever in sales in the fourth quarter of 2017 of approximately $5.4 million.

So some of the fluctuation was based on timing, when looking at the past six months, revenues for the printed products group were down 1.4% from the comparable six-month period ending March 31, 2017. This group continues to benefit from its relationship with two large customers, which while quarterly variable have provided and are expected to continue to provide stable sales upon, which the company can build it’s technology based businesses.

Technology sales on the other hand were very strong during the quarter, posting a 23% in the first quarter of 2017, in particular sales of digital authentication products and services, which includes AuthentiGuard were $177,000 up 172% from the first quarter of 2017. So we are very pleased with this progress.

Total cost and expenses decreased 3% during the first quarter of 2018, which primarily reflected a 99% decrease in stock based compensation expense, offset by increases in professional fees and R&D cost. The professional fee increase reflects an increase in the activity of certain of our litigation cases, which impacted legal costs and an increase in consulting costs committed to building our sales and marketing presence in Asia, with the opening of our new location in Hong Kong.

In addition, the Company saw an increase in research costs due to initiation of a research project with the Hong Kong R&D Centre for Logistics and Supply Chain Management which is assisting us with the adaptation of blockchain technology for product authentication.

The entrance into Hong Kong to target opportunities in the Asia Pacific market is an investment we are excited about for the remainder of 2018 and beyond. For the quarter the Company had a net loss of $406,000, which reflected the impact of the softness in sales at our Printed Products and the correlating decrease in gross profit produced by this group, which was further impacted by the increase in professional fees and R&D costs.

Further more adjusted EBITDA results were also lower than the first quarter of 2017 but we're still profitable, which is our eighth consecutive quarter of positive adjusted EBITDA results.

Moving to the balance sheet, as of March 31, 2017, our unrestricted cash position was at $3.7 million and our net current assets were $8.1 million. As discussed in our fourth quarter earnings call our current short-term debt amount of approximately $3.7 million is related to 8-K we filed on February 16 of this quarter. In that 8-K, we disclosed that the agreement and related notes and payment obligation to underlying this debt matured on February 13, 2018.

Despite the fact that the company did pay the funder certain amounts call for under the agreement prior to the maturity date, the full amount owed to the funder was not satisfied and as a result a nonpayment default occurred. This default triggered the contractual remedy call for under the agreement whereupon at the end of the full year term, the sole remedy of the funder for the satisfaction of the amounts due is the transfer of certain patents owned by the Company to the funder. This essentially means the debt will be settled on a non-cash basis.

Furthermore, since the underlying patents are currently recorded on the company’s books at their net carrying value in the aggregate of approximately $420,000 as of March 31, 2018. The resolution of this debt will result in a net gain of extinguishment of a liability for the company in the expected amount of approximately $3.3 million.

We are working on finalizing the agreement associated with this issue as soon as possible. So that we can recognize the impact on our financial statements which will significantly improve our net working capital position.

With that, I'll turn the call over to our CEO, Jeff Ronaldi, but please let me know if you have any questions during the Q&A portion of the call. Jeff?

[Jeff Ronaldi, Chief Executive Officer]

Thank you, Phil. I would like to thank everyone for joining us on the call today. As Phil noted, the two big stories of the quarter were the strength of sales of AuthentiGuard product and the initial phase of our expansion into Asia-Pacific market. The Asia-Pacific region is in many regards the center of the worldwide counterfeiting epidemic. And by opening an office in Hong Kong, we intend to build a presence and develop resources for global customers as they expand their usage of our products throughout their supply chains and to attract and retain customers directly in that region.

During the first quarter, we have developed and have begun to implement our sales and marketing programs and have had sales calls in Hong Kong, China, Malaysia, Philippines, India and Australia. We are targeting both AuthentiGuard opportunities and traditional security printing and licensing opportunities. We are receiving very positive responses especially since we are well established and trusted U.S. safety public company.

In addition in Hong Kong, we have five developers available to us that we have been working on the continual improvement of the AuthentiGuard app, especially to meet the diverse challenges posed by a wide array of smartphones that are used in Asian markets. These efforts not only serve our current customer as they expand to the next phase of the implementation of AuthentiGuard but with prospective customers as well.

In addition, as we announced during the quarter we have initiated a research project with the Hong Kong R&D center, which has provided us access to a range of academic and industry experts and supply chain and logistics management, who are helping us design and integrate blockchain based capabilities into our AuthentiGuard platform.

We believe that the inroads that we have made with our current and prospective customers and our proven ability to integrate our product into their existing supply chain with minimal disruption provides us a unique opportunity to provide next generation blocking tools for them. Our goal is to enhance our ability to prevent counterfeit issues for our customers utilizing this next generation technology. We are excited with this partnership and look forward to the results of their project.

In regards to AuthentiGuard, as we have discussed in the past, we have been working with our first large customer on a global implementation of our AuthentiGuard product. This includes working with the various print suppliers to certify their capability to achieve and maintain the quality requirements of the program. Our implementation team has been working with these print suppliers throughout the world on this project which will pave the way for the expansion of this customer's implementation of AuthentiGuard throughout its global supply chain.

This effort has not only deepened our relationship with our customer but also with their suppliers, which we feel will be a significant source of future business opportunities for AuthentiGuard and other anti-counterfeit related opportunities. Furthermore, our team continues to learn from our customers and suppliers and use these infield experiences to guide our research and development efforts. At our core, we are still dedicated to the research and development of ever evolving solutions to counterfeit problems.

Of course, as our customer expands the use of AuthentiGuard. We're also pleased to see the impact on the growth of this revenue line, which as Phil mentioned showed 172% increase for the quarter. But more importantly it provides us living environment from which to further our understanding the experience in a [indiscernible] (0:12:00) which our customers and prospects desperately need.

With that, I look forward to answering your questions you may have. Operator, can you please start the question-and-answer period.

[Operator]

[Operator Instructions]

[Operator]

It appears we have no questions at this time.

[Jody Janson, Investor Relations-Director]

Okay, operator, thank you. Jeff, Phil, thank you. All our investors we appreciate your patience and your understanding as we’ll move this company forward, management is diligently doing everything they can to bring all the opportunities to present themselves to fruition, operation and inquiries as well as the opportunity with large customers continue to move forward and I remain confident as a shareholder, ultimately our patience would be rewarded. Anything further, gentlemen?

[Jeff Ronaldi, Chief Executive Officer]

No. Thanks.

[Jody Janson, Investor Relations-Director]

I don’t have anything else further. I will conclude the call.