Robert Fagenson - Chairman Jeffrey Ronaldi - Chief Executive Officer Philip Jones - Chief Financial Officer

Good day everyone and welcome to today’s program. [Operator Instructions] Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr. Jeff Ronaldi. Please go ahead.

,: This afternoon Document Security Systems issued a press release announcing its second quarter of 2016 financial results. Before we begin, I’ll review the company’s Safe Harbor statement. Forward-looking statements on this call, including without limitations, statements related 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 such words 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 include, 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, 2015, previously filed with the Securities and Exchange Commission. Forward-looking statements made as part of this call are being made as of today, August 15, 2016, 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’d like to now turn the call over to Robert Fagenson, Chairman of the Board of Document Security Systems. Robert?

Thanks, Jeff, and thanks to all of you for joining the call today. It has been quite a while since we hosted our last investor call. So some of you may be curious as to why we’re returning to this format today. To be perfectly frank, our feeling is that we’ve made a great deal of progress in stabilizing the company, and the time has come to increase our visibility in the financial community and improve our communications with our shareholders. Usually, that type of action is centered on the belief that the company has something positive to say and that is indeed the case. Both Jeff and Phil Jones, our CFO, will go into detail on the progress we’ve made in our various business lines, expense reduction, and other financial and operational measures that have finally let us after many, many years to a period where adjusted EBITDA has finally turned positive. We’re long last bearing the fruit of the hard work of our team members and what they've done and expect to be able to build on these accomplishments as our key technologies continue to find increased acceptance in our targeted markets and allow us to resume the type of growth and success that thus far as alluded us. So with that, I'll turn the call over for some subset of remarks to Jeff and Phil. And Phil Jones, you’re up.

Great. Thank you, Robert. Today, we announced our second quarter financial results which are summarized in the press release we published after market closed today and detailed in our Form 10-Q filed with the SEC today as well. As highlighted in our earnings press release, the second quarter was a very strong quarter for DSS, especially by the measurement of adjusted EBITDA, which I’ll go into further detail on a bit. Adjusted EBITDA has been an important measurement of core profitability of our operations and is the metric that has been a focus for the management team since mid-2015. During the second quarter of 2016, the company generated adjusted EBITDA profit of approximately $112,000, which has made the company adjusted EBITDA profitable for the first half of 2016. This is an important and exciting milestone for the company. After a very strong first quarter, revenue for the second quarter of 2016 dipped slightly to $4.1 million, down 3% from the same year ago period, but has maintained strong year-over-year growth of 10% for the first half of 2016. During the first half of the year, we have increased sales of printed products by 15% which includes our packaging, ID card, and security printing product sales as the company has benefited from increases in demand for a wide variety of our products and solutions in these areas. Revenues from technology sales, services, and licensing have decreased 23% during the first half of 2016, but this has been primarily due to a strategic decision to reduce low-margin hardware sales at our company's digital division, and the impact of an absence of a one-time license fee of $150,000 which we realized in the second quarter of 2015 that did not occur in 2016. Cost and expenses for the second quarter of 2016 decreased 18% from the second quarter of 2015 and have decreased 10% for the first half of 2016. To date in 2016, direct cost of goods sold as a percentage of total revenue decreased to 59% from 61%, primarily due to the growth in sales of our higher-margin products. In addition, during the second quarter and for the first half of 2016, expenses have decreased in nearly every category, including significant decreases in stock based compensation and professional fees. Professional fee decreases have been driven by reductions in litigation costs, primarily due to variations in the timing and stage of the company's various litigation matters. As a result, operating losses have decreased 78% and 70% during the three and six months ended June 30, 2016, respectively, as compared to same periods in 2015. Net loss during the second quarter was approximately $318,000 or $0.01 per share, which is a 70% decrease in net loss of $1 million or $0.02 per share in the second quarter of 2015. Net loss during the first half of 2016 is approximately $942,000 or $0.02 per share, which is a 65% decrease in net loss of $2.7 million or $0.06 per share in the first half of 2015. These significant decreases in net loss during both periods have been primarily the result of the company’s ability to increase sales of higher-margin products, but simultaneously reducing our operating cost and outside professional fees. As I mentioned earlier, we believe adjusted EBITDA is a very good measure of the company's core financial performance. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, and other non-recurring items, including intangible asset impairment charges. Adjusted EBITDA result for the second quarter and for the first six months of 2016 have shown strong improvement from the comparable 2015 periods. In fact, the second quarter of 2016 is the fourth quarter in a row of improved adjusted EBITDA performance. These improvements are the results of several factors. First and foremost is the performance of our printed products group, which increased its adjusted EBITDA profit 93% in the second quarter to now is up 85% for the first six months of 2016. The profit generated by this group results from the combined strength of our packaging, security printing, and plastic card manufacturing operations, each of which are performing at very high levels with strong demand and growing opportunities in each of their respective niches. Complementing this performance is a significant and consistent decrease in corporate cost which has reduced corporate adjusted EBITDA losses significantly as well during those periods. For our DSS technology management group, adjusted EBITDA performance has fluctuated which primarily reflects the quarterly variability of the costs and revenues associated with the company's IP monetization business. Adjusted EBITDA losses for this group increased 222% in the second quarter of 2016, but they have decreased 24% for the first half of 2016. So to summarize, the adjusted EBITDA results reflect the core strengths of our business, where our stronger and more mature operations are supporting the research, development, and early stage commercialization efforts of our next generation product initiatives. Our expectation is that these investments will be a significant source of meaningful growth in profitability in the coming years. Once again, adjusted EBITDA is a non-GAAP measure of performance and I ask you to please refer to the table included in our earnings release for a reconciliation of our GAAP net loss to adjusted EBITDA. Closely related to the adjusted EBITDA performance is the improvement of our cash flows. For the first six months of 2016, the company's use of cash for operations has decreased significantly from the first six months of 2015. While some of this improvement is due to the timing of changes in working capital elements such as inventory and accounts receivable, it does reiterate the positive trends in the company's recent financial performance and the near term impact on the company's self-reliance. In addition, the cash flow statement reflects that during the second quarter, the company used the proceeds of the sale of certain of its patent assets to pay down some of its third party IP co-funding debt. To date in 2016, we have made total debt payments of approximately $900,000, which is a significant increase from the first six months of 2015. In addition to this reduction in our debt, the balance sheet is beginning to reflect positive effects of our 2016 results, which have begun to trickle onto the balance sheet. Further, it’s important to understand that approximately $3.5 million of our short term debt as of June 30, 2016 is collateralized by certain of our patent assets [indiscernible] payment obligations of this debt will only be triggered as we monetize those underlying patents, which is expected to vary significantly from quarter to quarter as exemplified by this quarter's payment of approximately $500,000 of monetization proceeds that we received during the quarter. Of course, challenges still remain including the increase in accounts payable which will need to be serviced by the churning of our accounts receivable in inventory along with our current cash resources. The improving trends in our adjusted EBITDA which we expect to continue subject to the variability of our technology management results will allow us to reduce our near term liabilities to manageable levels, which is an important near term focus for the company. With that, I’ll turn the call over back to our CEO, Jeff Ronaldi. Jeff?

Thank you, Phil. I would like to thank everyone for your continued support of Document Security Systems and provide this update to our current and prospective investors. A lot has happened since our last call at the end of 2014. First, as Phil described, our financial performance has improved significantly. We have been able to decrease our costs without impacting our investments in research and development and our commitment to developing products and solutions to address the massive counterfeiting and product fraud issues that exist today. Our company has established several strong niches in our market upon which we are building our next generation products. So I'm very pleased with the adjusted EBITDA results; I'm even more pleased with the direction of our product zone and efforts. We continue to see immense opportunity within this billion dollar industry for DSS. We’re building the products and sales and marketing capability to capture market share. Improvement in our EBITDA results is a direct result of several underlying trends. Our packaging group led by Bob Bzdick, his experience, continued strong demand by its commercial packaging customers and is operating at a high efficiency that has a dedicated highly trained workforce that is focused on end to end customer service that has been critical to establishing and maintaining its important customer relationships. Our security printing group which is also headed up by Bob Bzdick and which operates at the same location and in close conjunction with our packaging group continues to apply our security printing technologies and solutions to a wide array of orders for our customers. This group's direct sales effort, bringing sales of high-margin products and keep us involve in solving the day to day issues faced by our customers. Understanding the challenges faced by customers provides us with insight necessary to direct research and development and build a product roadmap based upon customer needs. Our plastic card manufacturing group which has achieved significant sales and profitability growth by focusing on high-margin products as discussed in previous press releases. The team led by Mike and Jae Caulley and the expertise of Gary Andrechak and his sales team have established itself as a leader in technology-based card sales which support higher margins and offer greater birth opportunity. The [transports] technology based cards is important as the demand grows for more security by card users as well as drive by various regulatory and government agencies to increase security on personal identification. DSS plastic is very well positioned to continue to benefit from these trends. And finally, the ability within all of our divisions to do more with less. I’m very pleased with reaching the adjusted EBITDA milestone. We know it's just a step towards a larger goal of profitability and meaningful shareholder return. So we need to continue to pursue these new markets and new products [and if] they increase expenses in the near term. We have several areas of new product development that we believe provides substantial near and long term potential to the company. First, our efforts to develop our digital security product line, AuthentiGuard, continue. We have never wavered on our commitment to capturing market share for this next generation anti-counterfeiting and anti-product fraud. Led by Michael and working in conjunction with all our printed product divisions, the opportunity for AuthentiGuard remains large and is imminent. The allocation of resources to this opportunity has been an investment that has reduced near term results, but we believe is an important element of our long term profitability. In fact, during the first half of 2016, we increased our investment with the addition of new sales, marketing and product management with experience and bringing technology based products to market. AuthentiGuard is not the only area of future growth for the company. We’re seeing increased activity within other new product areas that have often been generated by our AuthentiGuard sales efforts. We have developed exciting relationship with customers for security in book publishing, product label and identity card applications that leverage the combined capabilities of our digital and printed products divisions and offer new sources of meaningful revenue and profits. Finally, I would be remiss if I did not mention that the backbone to our continued success in the anti-counterfeiting market are the efforts of Dave Wicker and Mike Caton, who lead our security print research and development efforts. As thought leaders in our industry with the passion for problem-solving for our customers and licensees, Dave and Mike’s participation in a variety of industry working groups, panel and committees, including the Document Security lines, has established DSS as an expert in anti-counterfeiting community and as a source of a continual flow of different development [ph] contacts. Furthermore, the digital development team led by [Mike Rory], Adam Darder, and Rick Parrinello have been remarkable in their ability to bring these ideas to life in an ever-changing digital environment. In regards to our IP monetization business, we have experienced a great deal of volatility over the last two years in regards to our investment in this space. The impact to our financial results during 2014 and 2015 was significant, but we continue to pursue the successful conclusions of our current investments and see potential for future opportunities with significant value propositions. We seek to minimize the cost and expenses associated with these efforts. Our ability to offset a portion of these costs associated with our IT monetization efforts over the years with co-funding arrangements has minimized especially in 2016, the impact of these efforts of our overall results. While future cost and revenue associated with IT monetization business may provide future variability in our results going forward, we believe that the major impact on our financial results as seen in 2014 and 2015 are over. To conclude, as you can probably tell, I’m very excited about the results and trends at DSS as a leader on the anti-counterfeiting market. There is a strong opportunity for us to build growth-oriented profitable position in this immense market. By achieving adjusted EBITDA profitability for the second quarter and for the first half of 2016, we have reached an important stage in the continued development of our business. With that, I’d like to turn the call back over to Robert Fagenson, our Chairman. Robert?

Thank you, Jeff. And once again for a final time, thank you all for staying with us and for being on the call today. And first I’d like to discuss the reverse stock split [indiscernible] after the market close on Thursday, August 25. On that day, the 1-for-4 reverse stock split will be effectuated, thus reducing our share count to approximately 12,976,000 shares immediately after the split, with an offsetting increase in our share price as of that date by four times. The stock split will not affect the market value of DSS, but will impact our ability to maintain our status on the New York Stock Exchange’s market exchange. As we explained in our Annual Report and proxy, we felt this is an important step that we needed to make, and we're pleased that our shareholders agreed and approved the split on our shareholder meeting in late July. Maintaining an exchange listing is an important company asset and important shareholder asset, and we appreciate your positive votes in having this vital proposal approved. While there are people who would say that a reverse split doesn't help and then the share price falls again and clearly it's either going to go up or down or remain what it is, the prospect of losing our listing for us was a certain loser. If we allowed that to happen, the value of our company and our shares we felt would be depreciated significantly just as people perceive the accessibility of a marketplace that they can have some faith in being able to buy and sell shares. So that is what led us to the conclusion and that ultimately is what led to shareholder approval, I believe. As I said before, it's nice to have something positive to report. Obviously, there's no guarantee that recent successes will continue, but I'm extremely hopeful that they're on the right track at the company and that our patience and perseverance and hard work that our team continues to do will lead to meaningful rewards in future quarters. Basically you've heard from two of our senior operating executives about the success that they made and I don't want for a minute to minimize the work and effort of our entire team in getting there. It's been years and years of talking about it, finally reaching a positive adjusted EBITDA number. And now the time is here and the question is how do we leverage it going forward? I think Jeff and Phil and Bob and Mike and the rest of their team are moving in the right direction and we can finally hopefully see the light at the end of the tunnel that we have been so much anticipating for so long a time. So with that, I'm going to open up the floor to questions. And operator, would you take over, please?

On behalf of Jeff and Phil, I can also say goodbye. Thanks once again for being with us, for staying with us, for having the faith and hopefully in the quarters that come towards us that faith will be rewarded and the trends of recent years will be reversed. We are continuing in our best efforts to make that happen and you can rely on us to do so. So with that Jeff, Phil, anything else?

No. I and Phil want to appreciate the support and looking forward to continuing to open up our transparency to our investors so they can see what we're doing.

Absolutely. So we’ll all be talking to you in the quarter that's coming. Thanks again and goodnight.

Ladies and gentlemen, this will conclude today's program. Thank you for your participation. You may now disconnect. Have a great day.