Wednesday, November 13, 2013

Document Security Systems' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Document Security Systems' CEO Discusses Q3 2013 Results - Earnings Call Transcript

You're going to hear a story today about our third quarter for our management, but more importantly, as knowing about a company that was deep in the middle of its transition as the two arms of Document Security, our classic businesses and our new technology division which came out of our merger with Lexington Technology starts to gel together. There are as a result, different forces pushing on the company at this time than we had that in the past. I’ve had a conversation with many of you about disappointing action of our stock price and the best I can tell you is simply this. Management is staying in the course in terms of moving this company forward. I believe the story you'll hear today is one of the success in our divisions and further optimism as we move forward towards the complete integration and move into the combined company.
So I will turn it over to Phil Jones who will fill you on the actual financials and I hope to be available at the end for questions-and-answers if there any for me and if not I apologize. Phil?

For the third quarter, revenue increased 2% year-over-year to approximately $4.25 million. Printed Product revenue was essentially flat while Technology revenue increased approximately 14%. The year-over-year increase in Technology revenue primarily reflects the addition of revenue generated by our DSS Technology Management subsidiary. This new revenue was partially offset by a 27% year-over-year decrease of Technology hardware sales and cloud-based technology services revenue from our DSS Digital Group, as that group continues to concentrate on the development and commercialization of the AuthentiGuard product suite.
Total gross profit for the third quarter of 2013 was $1.6 million, a 6% increase over the third quarter of 2012. Total gross profit margin was 38%. The increase in third quarter gross profit was primarily due to a 31% increase in the gross profit from Technology revenue, which benefited from an increase in revenue resulting from the litigation settlements received by DSS Technology Management.
In the third quarter of 2013, total operating expenses increased $1.7 million to $4.3 million, primarily due to the $1.5 million year-over-year increase in non-cash tangible amortization and impairment expense. The $970,000 year-over-year increase in non-cash amortization expense in the third quarter is due to the substantial increase in intangible assets on the balance sheet resulting from the merger that closed at the beginning of the quarter. The higher operating expenses resulted in a $1.7 million year-over-year increase in loss before income taxes of $2.7 million for the third quarter of 2013.
Net income for the third quarter was approximately $6.5 million or $0.15 per basic and diluted share, which compares to a net loss of $1.1 million or $0.05 per basic and diluted share in the third quarter of 2012. A one-time deferred income tax benefit of approximately $9.2 million impacted this third quarter of 2013 results. This non-cash tax benefit is related to our recently closed merger and a reversal of deferred tax valuation allowances that have been carried by DSS.

We see the partnership with NADDI as an excellent opportunity to build and strengthen our relationship in the pharmaceutical industry. Adding to this momentum, last week we announced the partnership with Brides Magazine the Conde Nast Publication. Brides has partnered with DSS to offer AuthentiSite technology to its advertisers and retailers. AuthentiSite allows consumers to independently verify that a website is an authorized or licensed recently. We look at AuthentiSite prior to making a purchase online the consumer uses a smartphone to read the mark on the computer screen. The mark is verified in real time through the cloud with the brand owner's database. While consumer gets peace of mind that he or she is accessing an authentic site, the system could also be configured the report scanned back to the brand owner to assist with investigations of fraudulent websites.
As part of the Brides Against Counterfeiting Campaign, DSS has integrated this technology into the Brides Wedding Genius app which will allow consumers and investigators to validate the authenticity of websites. We believe DSS's partnership with Brides Magazine is a strong foothold in the retail space and that it will expose DSS AuthentiSuite Solutions to many other companies in the specialty fashion retail industry. We expect that as consumers become aware of this technology more brand owners will protect their customers with the name brands by incorporating multiple AuthentiSuite technologies.
These developments clearly demonstrate the value of DSS's investments in our digital division. These three agreements MedTech, NADDI, and Brides, would not have been impossible without the digital delivery and cloud-based management system DSS has developed over the last 18 months. While we anticipate the need for ongoing R&D investments, we expect to see notable growth in revenues associated with our investments in the digital division. We tie everything together during the quarter we launched with a series of the central showcase for brand owners to learn about our products that comprise the AuthentiGuard suite.
Moving to Printed Products. During the quarter we initiated plans of combining our Printing and Packaging facilities. Our refurbished items progresses being is solved as we speak and moving plans are well underway. In line with our goal of improving the profitability of the Printing Products business we expect to begin realizing efficiencies in cost savings in 2014. We remain focused on aligning these business operations so that they generate a reliable stream of profitable revenues.

Thus far, in the third quarter we closed on two additional IT investments for a total of $2.5 million. To elaborate, in July we purchased two patents for $500,000 that cover methods and processes related to Bluetooth devices. In September, we purchased 10 patents for $2 million that relate to the methods and processes in the semiconductor industry.
In conjunction with these patent purchases, the company received over $1 million in external commitments from co-investors. These co-investors are consistent with strategy discussed on our last earnings call of aligning with outside investors who have dual interest in IT investment. These outside investors clearly demonstrate confidence in DSS's ability to appropriately manage and monetize the acquired assets.
We consider the Bluetooth and semiconductor investments valuable because of the synergies with our existing operations. We believe that the Bluetooth patent has potential for commercialization. We have already started to integrate hardware and peripherals and the DSS's R&D and Digital platform with the goal of developing dedicated devices that run AuthentiSuite.
In addition, we believe that both investments bring IT, which DSS Technology Management can consider for IT monetization. Regarding the VirtualAgility and Bascom portfolios during the quarter we announced that the initial calendar has been established for the VirtualAgility pace. The Markman was set for April 2, 2014; in addition the Bascom Research Markman was set for February 26, 2014. As a reminder since the merger with Lexington Technology Group, DSS Management has established several priority areas. We believe success in these areas will trade positive growth in our business. In the third quarter we made great progress in several of these areas.
First, we are focused on generating revenue from AuthentiGuard. And I'm pleased that the three year agreement with MedTech will result in AuthentiGuard revenue contribution in 2013. Secondly, we are working towards improving our profitability of our Printed Products business segment. As Bob mentioned, we are implementing our plans to consolidate our Printing and Packaging operations into one location. We believe that this consolidation will improve operational efficiencies and generate cost savings ultimately increasing profitability as measured by adjusted EBITDA. As we progress towards improving the profitability of Printing and Packaging operations, we plan to focus our future investments in areas of our business that have the highest potential for generating the highest return on investment.
Thirdly, Technology Management's recent acquisition of two IT portfolios meets our goals of making additional investments by the end of the year. In addition to diversifying our IT portfolio, management believes that these IT acquisitions have high growth and potential for high return. We expect to continue to diligently increase our IT investments overtime.
In the fourth quarter and into 2014 we'll focus on leveraging this momentum. For the Digital operations, we plan on leveraging the partnership with NADDI and Brides to seek new revenue opportunities. Speaking to our partnership with Brides and its retailers its estimated counterfeiters across the Bridal industry millions of dollars with the newer clients reporting 600,000 fake wedding dresses are purchased online each year. We believe DSS's Solutions are very well suited for brands in this market.
Bob Wasserman - Dawson James
Hey guys thanks for taking the question, congratulations on that guidance and quarter. Could you I know you mentioned a little bit about MedTech but may be could you give us some more color on the three areas in the legacy business and when those revenues might start kicking in -- might start accruing over the next couple of years?
Jeff Ronaldi - CEO
The base revenue that started in the fourth quarter in this year that's for the basic software. The royalty revenue will probably start in later fourth quarter and first quarter and that department is based on usage as they introduce it to their clients. We get basically a clip charge for every Wristband that is present with our technology and then we have a back service for anything where there is a special reports and so forth that need to be developed for any specific event that we paid a developed royalty for those events.
So I see those things obviously ramping our business as the three years go on and they get a bigger protocol in the event management portion of the business. This is a fairly new area down there one of the largest Wristband companies in the world and they're assuming a natural progression within the guidance on the event management program. So we will be growing longer with them at this point. So we're really helping them to develop this program and we have already got several events lined up.
Bob Wasserman - Dawson James
It sounds like then it's pretty high margins really the only cost of revenues would be staffing development for these base revenues?
Jeff Ronaldi - CEO
That's correct. Our primary work with them gives them three various scenarios in which the levels of service think and provide the client. Each one of those obviously drive revenue to DSS based on the number of people who attend the event. So once those levels are established which we have done, as I say in those events up the flow through would be much the same formulation as any licensing fee were being paid for the technology that we got to bear as much as anything else.
Jeff Ronaldi - CEO
Yes. So it came into the company and the idea behind having co-investors is to allow us to make investments and control risk in such a way to offset some of our risk to other investors frankly. We have the capability to identify, manage, and execute on various monetization programs and there has been appetite for investors who want to investor directly in the IT. So an investment directly in IT allows us to -- like I said, offset the risk and these investors have no liquidation capability they're stocking this for the long-term and will drive result as we create them in monetization programs.
Bob Wasserman - Dawson James
Will there be more disclosed on it in the 10-Q and when will that be coming out?
Phil Jones - CFO
Yes, hi this is Phil. And I just wanted one clarification so the amount is a $1 million in commitments of which approximately $350,000 was received during the third quarter and that's being held up as a deferred revenue item on the balance sheet. So the $1 million commitment will be delivered to the company as certain milestones on that. The 10-Q is being filed as we speak we expect it to be filed hopefully this afternoon.
Yun Kim - Janney Capital Markets
And then again just talking about two acquisition -- two patent portfolios acquired in the quarter when you are seeking outside investors do they require you to fund greater in terms of the purchase so that you carry on enough risk, so that both you guys and the outside investors are sharing enough risk with the plans that you have what are some of the feedbacks that you're getting from when you're approaching these outside investors for co-investing?
Jeff Ronaldi - CEO
Right. Each investor has its own requirement; some prefer that we have a share drift; some has actually expressed the desire to fund our deals than actually eliminate our risk altogether. And again it's an opportunity basis we evaluate each individual opportunity both for the lowest cost of the capital and move forward with that. So not every investment require that we have equal money in some have where the investors have significantly more and then we do.

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