Jody Janson - IR Jeffrey Ronaldi - CEO Philip Jones - CFO Robert Fagenson - Chairman

Unidentified Analyst -

Good day everyone and welcome to today’s program. At this time all participants are on a listen-only mode. Later you have the opportunity to ask questions during the question-and-answer session. Please note this call is being recorded. I will be standing by should you need assistance. It is now my pleasure to turn the call over to Jody Janson. Please go ahead, sir.

Good afternoon and I’d like to thank everyone for joining us today for the Document Security Systems’ fourth quarter and full year 2016 earnings conference call. I’m Jody Janson, Investor Relations Representative with 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 before time Document Security Systems issued a press release announcing its fourth quarter and full year 2016 financial results. Before we begin, I’ll like to read 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 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 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, 2016, filed today with the Securities and Exchange Commission. Forward-looking statements made as part of this call are being made as of today, March 28, 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 today, you will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA. I’d now like to now turn the call over to Phil Jones, Chief Financial Officer of Document Security Systems. Philip?

Thank you Jody. Today we announced fourth quarter and full year 2016 financial results which are summarized in the press release we published after market close today and details in the Form 10-K filed with the SEC today as well. As highlighted in our earnings press release, the fourth quarter was a very strong quarter for DSS especially by the measurement of adjusted EBITDA which I will go through in further detail in a bit. This is the third and largest straight quarter that the company has posted positive adjusted EBITDA results. Adjusted EBITDA has been an important measurement of core profitability of our operations and as a metric management uses to evaluate and measure our performance. During the fourth quarter of 2016 the company generated a strong adjusted EBITDA profit of approximately 662,000 which approximates 11% of sales. Significantly bolstering this figure was the impact of revenues from the new AuthentiGuard client that we began to service in the fourth quarter. This shows the meaningful impact that success from our AuthentiGuard and related technology based products will have on our financials. So I'm very pleased that the time, effort, and resources we have invested in our technology based product research and development is beginning to be realized. Revenue for the third quarter was $5.786 million up 6% from the fourth quarter of 2015. Year-to-date revenue ended up 10% to 19.2 million an increase of approximately 1.7 million for the year. For the year sales of packaging and printing services increased 10%, sales of plastic card products increased 11%, and licensing revenue which includes AuthentiGuard sales increased 40%. The only revenue category which declined was our IT services and hardware sales which fell 23% during the year as our digital group now focuses primarily on the AuthentiGuard product line. One particular area of growth is our plastic ID card sales of technology based cards which were 37% higher in 2016 compared to 2015. These are high value card in projects that require specialized product knowledge, technology and skills that the team at DSS Plastics is uniquely qualified to deliver. In all our revenue from 2016 showed a consistent positive trend of growth that is more and more weighted towards our higher value technology based products. Cost and expenses for the fourth quarter of 2016 decreased by 65% from the fourth quarter of 2015 and decreased 37% for all of 2016. The decreases are primarily due to the reduction in impairment charges incurred in 2015 but not in 2016. Even so absent the 2015 impairment charges cost and expenses in the fourth quarter of 2016 decreased approximately 5% from the adjusted 2015 fourth quarter and costs and expenses decreased approximately 8% for the full year of 2016 as compared to the 2015 amounts. During the fourth quarter of 2016 direct cost of goods sold actually decreased 4% despite the 6% increase in sales as well for the for the full year direct cost of goods sold only increased 4% while revenue increased 10%. These results reinforce our ability to generate a larger percentage of our revenues from our higher margin technology based offerings. In addition the company saw decreases during 2016 in nearly every expense category with the most significant being a 58% decrease in professional fees and a 66% decrease in stock based compensation costs. Professional fee decreases have been driven by reductions in legal costs due to the variations in the timing and stages of the company's various IP litigation matters. For the fourth quarter of 2016 the company posted net income of $19,000 and for the year the company has posted a net loss of $950,000. Both were significant improvements from the 2015 corresponding periods with the primary factor being the absent of impairment charges. However, even taking out these impairment charges the company's net income results have significantly improved during the year. The improvement is better highlighted in the improvement of adjusted EBITDA results. As I discussed earlier we believe adjusted EBITDA in a good measure of the company's core financial performance especially when broken out by segment. 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 results for the fourth quarter and for the full year of 2016 clearly displayed a significant improvement in results by the company from the comparable 2015 periods. The strong adjusted EBITDA performance for the fourth quarter of 2016 is the third straight quarter of positive adjusted EBITDA performance that we view as the new base of expectations for this business. Driving these results has been first and foremost the adjusted EBITDA profits generated by our printed products group which comprises our packaging, plastic ID, and security printing operations. This group delivers consistent and growing profit and cash flows to support our digital and IT management operations as well as the corporate overhead cost primarily associated with being a public company. For 2016 the printed products group generated 2.897 million of adjusted EBITDA profit which is up 33% from the full year of 2015. For our DSS Technology Management Group which includes our digital division which is now primarily focused on our AuthentiGuard product line as well as our IP monetization and technology licensing business adjusted EBITDA was positive in the fourth quarter of 2016, a milestone for this group. While expected to be subject to a greater degree of fluctuation going forward, this group showed the potential of significant profit growth from the early commercialization of AuthentiGuard and the ongoing strength of our technology licensing programs. For the year the group while still in the negative with a loss of 556,000 improved its adjusted EBITDA performance by 69%. Finally we continue to focus on corporate expense reductions where possible which helped decrease adjusted EBITDA losses in this group by 26% for the year. Furthermore going forward our corporate costs will benefit from a cross sharing arrangement we made in conjunction with an IP transaction we completed in the fourth quarter of 2016. As we announced in November of 2016 during the fourth quarter we entered into a comprehensive agreement with a third party funder for the acquisition and management of a large portfolio of patents in the LED field. This transaction was based on the value of our capabilities in the IP monetization field for which the company continues to strive to achieve returns from the various IP matters we have. And our third party funding partners have invested in. This new deal has had an immediate positive impact on our balance sheet and financial position and provides the company with the working capital required to manage related IP monetization program. As a result of this transaction the company ended the year with a cash balance of approximately $5.9 million and a net working capital position of approximately $1.8 million. Furthermore as I mentioned above, as a result of the transaction the company will realize the benefit of the amount of the transaction allocated to working capital of approximately 1.8 million with an ongoing offset to the company's overhead expenses for the next three years. In conclusion the fourth quarter was a very positive quarter for the company and we enter 2016, I'm sorry, we enter 2017 with a business generating strong core financial results and a strengthened balance sheet. With that I will now turn the call over to our CEO, Jeff Ronaldi.

Thank you, Phil. I would like to thank everyone for your continued support and interest in Document Security Systems. First as Phil has described, the fourth quarter continues our recent trend of strong financial performance and significantly improved financial results. Our business presents a blend of solid and consistent performance from business lines that have strong probable niches that have supported our investments in newer product lines primarily AuthentiGuard our next generation brand protection offering. While I'm excited that we now have seen the early impact of our first major AuthentiGuard customer that we announced earlier this year, this is a significant win for our company. Winning a global deployment for a largest global 500 company is a significant validation for AuthentiGuard technology and our ability to implement and service the global customer. We are excited to see the results of the implementation as our customer realizes the benefits of weeding out counterfeits in the supply chain using our technology. We're truly proud to have been chosen for this project. The commercialization of AuthentiGuard marks the starting point for what I believe is the next stage of our company as primarily a technology company. As I have said in the past our dedication to research and new product development of our digital group has brought us to this point and we're now seeing a positive effect of this focus on our financial results. During the fourth quarter as expected we benefited from strong seasonal sales of our packaging group which continued to deliver significant profitability to the group. In addition our plastic group had another strong quarter and is benefiting from its growing presence in the technology card market. In addition our security printing group continues to expand its presence in coupons, vital records, and now the book publishing market where we see immense potential. The response to anti-copy print technologies for use in textbooks and manuals have been very positive in an industry in need of a solution to its rampant counterfeiting problems. Finally we believe that our continued presence in the IP monetization business is an undervalued asset of our company. The funding agreement that we entered into during the quarter as Phil described was a very good deal for us. I'm excited to work on this IP monetization opportunity and please financial terms for us which have strengthened our balance sheet and limits to near zero the downside risk we have from the underlying program. With regard to our share price in the current market cap I'm pleased that we have seen a recent increase in our stock price which has approximately doubled since our last earnings call in November. This is a step in the right direction and hopefully the investor community is rediscovering our company and our value proposition. To that end we are rebuilding our Investor Relations capabilities including the addition of Jody Janson who introduced us on this call for those efforts. Once again thank you for your continued interest in DSS and I'll pass the call over to Robert Fagenson, our Chairman. Robert?

Sorry, I'm having difficulty hearing, I'm sorry about the background noise. Thank you Phil, thank you Jeff and in summary before we take your questions after many years of patience and waiting I hope our investors and shareholders can see that we are beginning to show the inherent strength and earning power of our core businesses. Through aggressive cost control and increased sales we finally brought what we've long hoped for and that is sequential quarters of positive EBITDA, positive adjusted EBITDA. And these have been achieved without having a [indiscernible] allowing to compromise the company without losing a potential for our brand protection IP assets. With the addition to the opportunities in IP we see an expanding array of larger companies that have been interested in testing and installing our brand protection and product tracking technology. This is a very, very positive development that we've been waiting for and I believe it bodes well for increased use and acceptance of AuthentiGuard array of technology based products. So with that and with the thanks to all of our team at DSS we will throw it open to questions from operator and we will see if we have any questions from our shareholders on the line.

[Operator Instructions]. We will take our first question from Howard Isis [ph]. Please go ahead.

Hi, first of all I would like to extend my deep sorrow to the President of the company on his recent loss and I know about losses myself personally and I just would like to express my concern for him and his good health.

Thank you very much, it's much appreciated.

You're quite welcome. I will lead with good things like the fourth quarter and I would like to tell you how thrilled I am. I am a holder of the stock for more years than I want to say but I am glad that I have held my breath on many occasions but I'm glad to see we're on the right track. And AuthentiGuard I just wish it the greatest and I think from what I hear it is a terrific item that you are producing. I just have a couple of questions and now that we have a little bit more money free and I don't want to sound like a sorry sport but is there any chance of helping the purchasers of the stock way back when and because we have some money that's free maybe to give a new issue or something to help lighten our loads that we've been with over the last several years?

I'm not quite sure what you have in mind but…

Like a buyback of some of the shares.

Under our current bank covenants that would be very difficult to do and so we're able to show some more earnings and some more capital. Certainly from a medium and long term perspective we'd love to return money to our shareholders, both new ones and long term holders. But we can't take the first steps and begin to think you can run without running into problems. So it is a conversation much better year from now when we see what we've been able to do for another twelve months and then find ourselves in a comfortable enough cash position that needle our banks, our securities markets that are listed or our shareholders would think that we were not acting in the best interests of growing the company.

I can appreciate that and hopefully next year when you have your annual meeting we'll talk about it again and be able to do something about it.

That would be nice.

Just have a good year.

Thank you.

Alright, take care.

[Operator Instructions]. And it appears we have no further questions at this time.

Thank you. Thank you all for whoever is listening in. Thanks to our management team and thanks to all part of the DSS team who have worked so hard including the pilot who is flying over my head to produce these results. And we hope to be able to have sequential calls that have more positive results. So with that gentlemen, Jeff, Phil anything else you would like to add before we sign off.

I don’t, just thank you for your support and we are working hard to improve the performance of the company.

Thank you everybody, thank you operator. That would conclude the call.

This does conclude your teleconference. Thank you for your participation, you may now disconnect.