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

John Ray - Gordon Securities

Good day everyone and welcome to today's Fourth Quarter and Year End 2017 Financial Results 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 this 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.

Good afternoon everyone. I want to thank everyone for joining us today for the Document Security Systems' fourth quarter and full year 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. On Tuesday, March 6th, Document Security Systems issued a press release announcing its fourth quarter and year end 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, March 8, 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, 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 Document Security Systems Chairman of the Board, Robert Fagenson. Robert?

Thank you, Jody, and thank you all for joining us today. I appreciate your loyalty and I appreciate your interest in my company. It is really nothing of interest that I could add, so I am going to turn it right over to Phil Jones and Jeff Ronaldi, who will give you an update on information right now you’re anchoring for and then we’ll have Q&A, if I can be helpful I will. So Phil, it’s over to you.

Thank you, Robert. On Tuesday, March 6th, we announced our fourth quarter and full year 2017 financial results which are summarized in that press release and detailed in the 10-K we also filed on Tuesday, March 6 with the SEC. As highlighted in the press release, the Company's revenues for the fourth quarter increased 1% as compared to the fourth quarter of 2016. The increase was propelled by a 7% increase in revenues from our printed products group, which generated $5,473,000 of revenue. That is our highest quarterly folder of this group in our history. As we had expected, this group had recovered from a slower third quarter in 2017 as timing of traditional third quarter orders for some of the group largest customer were pushed into the fourth quarter. The strength was partially offset by a decrease in our technology-based sales, which were below last year’s fourth quarter due to the impact of a $300,000 of setup revenue the Company recognized last year from the Company’s first AuthentiGuard customer. This customer began the production phase of the project in 2017 and has provided the Company steady monthly income which will increase as this customer brings more readings into production. So despite the sales decrease reflected in the quarter, we are very pleased with the success and progress we’ve had with this customer during its first full year of a multi-year agreement. For the year, total revenue was 3% lower than 2016 with printed products up 1% and technology-based sales up 14%. Our printed products groups have been consistent steady performers and had grown 10% in 2016 as compared to 2015. So while we are disappointed that targeted revenue growth was not generated during 2017, the two year average growth of approximately 4.5% has not been consistent with expectations. And we believe these businesses continue to be well positioned in our markets to capture consistent reliable and profitable opportunities for future growth. For our technology-based sales, we saw a significant change in product mix during 2017 as the Company transitioned its resources and focused away from some of the traditional IT services, it has traditionally provided to the operation in support of our AuthentiGuard product line. For the year, AuthentiGuard sales now represent 31% of technology sales. Offsetting the emergence of AuthentiGuard sales was a reduction in traditional IT services revenue of approximately 190,000. This trend will continue as we expect expanded uses of AuthentiGuard from our largest current customer along with the potential impact of additional AuthentiGuard customers coming on board during 2018. Total cost and expenses decreased 1% during the fourth quarter of 2017 with most notably professional fees down 48%. This decrease was primarily the result of the favorable impact of a reduction in approved legal cost of approximately $219,000 we achieved during the quarter from the negotiated payment settlement we made with one of our litigation firms. In addition, stock based compensation cost decreased significantly as compared to the fourth quarter of 2016. For the year, total operating cost decreased 5% with corresponding decreases in nearly all expense categories achieved. During the year we focused on cost controls at our operating divisions to help ensure consistent profitability and we focused on the transfer and transition of resources in our technology divisions to support AuthentiGuard product roll out. This allowed us to achieve significant progress in the development of AuthentiGuard without a significant cost increase. We expect to begin to add resources to this group in 2018 as our customer continues to expand its roll out of AuthentiGuard throughout its global marketplace. For the quarter, the Company had a net income 147,000 which reflected a strength in our printing products group, the improving margin of technology sales, which while reduced were more heavily weighted towards AuthentiGuard and the favorable impact of the legal cost settlement achieved during the quarter. Full year net loss was 599,000 which was 36% lower than the net loss of 2016. We are pleased with this improvement as the Company strives for consistent positive net income while not hampering the prospects for its technology-based product opportunities. In regard to profitability, for 2017, we did see an increase in adjusted EBITDA profit of 32%. As we’ve stated in the press, adjusted EBITDA is an important metric for management due to the traditionally large impact that IT asset amortization and stock-based compensation has had on our net profit result. Achieving our growing adjusted EBITDA in 2017 supports our business model where our moment shows stable product operations generate profits to not only support because of being a public company, but the investments we are making and developing to put and to roll out our technology-based products opportunities, which have the potential for significant growth and profitability at the beginning that which we saw in 2017. Moving to the balance sheet, as of December 31, 2017, our unrestricted cash position remained strong at $4.2 million and our net current assets were $8.3 million. Accounts payables were substantially lower than recent history of accrued expenses also showed a decrease, so accrued ratio of the liquid assets to current liabilities improved significantly during 2017. Now I’m making the statement, I’m specifically excluding the short-term debt amount of $3,646,000. This amount I think is important to understand and is related to the 8-K we recently filed on February 16, 2018. 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 amount call for under the agreement prior to the maturity date, the full amount hold to the funder was not satisfied and under the result a nonpaying 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 amounts due is the transfer of certain patterns owned by the Company to the funder. This means the debt will be settled on a non-cash basis. Furthermore, since the underlying patterns are currently recorded on the Company’s books at their net carrying value in the aggregate of approximately $500,000. The Company believes that the resolution of this debt will result in a net gain on extinguishment of a liability for the Company in the expected amount of approximately $3.2 million. So we look forward to the resolution of this debt and the positive impact such resolution will have on the Company’s operating result in the period of resolution along with the benefit, it will have on the Company’s balance sheet and specifically our networking capital position. Absent this amount, the Company exited 2017 with approximately $2.7 million of debt to include the addition of approximately $522,000 in debt secured in the fourth quarter of 2017 by our plastics division for the acquisition of a fixed color press that we using to improve and increase the production capability to meet their increasing demand. With that, I will turn the call to our CEO, Jeff Ronaldi, but please let me know if you have any questions during the Q&A portion of the call. Thank you.

Thank you, Phil. I would like to thank everyone again for joining us on the call today. As Phil noted, the commercialization of our AuthentiGuard product line began in earnest during 2017 and/or even more excited by the prospects of this product than where we began the year. As you know, we landed of our first major AuthentiGuard client at the end of 2016 and since that time, we have put forth of their print vendors in production with the customers actively applying our marks to various forms of product packaging. In fact during the year, the customers' printed AuthentiGuard mark on more than 150 million times so that represents a $150 million product labels and packaging that are beginning to make an impact on the global counterfeiting problems, But that is just the beginning, not only for this customer but for the potential opportunity we see. For instance, we have been working to expand the breadth of our current customer’s current vendors as they roll out the use of AuthentiGuard to additional product lines and geographic regions. We have now printers capable of printing this technology in North America, South America, Europe and Asia with more expected during the coming months. In addition, we have been working on building strong efforts that have sent our team to India for a proof-of-concept project that could lead to another significant opportunity. We continue to learn more and more about the issues branding as they are facing. The difficulty they are having finding solutions and the immense opportunity that we have in front of us. So I leave 2017 with more excitement about AuthentiGuard than ever. During 2017, the efforts of our teams have been extensive and tireless, and we’ve learned a lot during this time as we worked with a wide array of participants and a global supply chain. Our expertise and unique set of skills continues to grow and continues to attract significant interest in our technology. And more importantly, our ability to execute is validating our position in the market. To that end, as Phil mentioned, we have transferred as much internal resources as we can towards AuthentiGuard including all software development, IT infrastructure resources. While this has caused us to like some of the traditional IT services work our DSS Digital team used to generate, the AuthentiGuard opportunity requires an all-hands-on-deck. In addition, in late 2017, we began an expansion of our international capabilities with the opening of DSS International in Hong Kong. This group not only gives us closer proximity to certain of our customers and prospects but we have also been able to acquire the services of a range of software development skills that we need in order to meet the demand of AuthentiGuard, especially in foreign markets where a wider range of smartphones are used than in the U.S. market. To that end, what AuthentiGuard can do is very difficult to achieve. As we're able to find tune this product, we have increasingly seen quite frankly how much our product is better than our competition. But it requires significant expertise and a wide range of skills from the printing art to the visual art. We now have the ability to attract and retain top talent and see the exciting opportunity we are working on. I think we will see the benefits of this in 2018. For our Printed Products group, 2017 was a solid if not great year. We continue to rely on the financial strength to help offset our cost being public and to help offset the investment we are making in AuthentiGuard. Also and more importantly, this group has the skills and equipment resources needed to help our research and development and assist with implementation of the printing component of the AuthentiGuard market. Premier packaging, our Printing and Packaging group located in Victor, New York is our most profitable and consistent performer and benefits from several large reliable customers. Our plastics group, DSS Plastic located in Brisbane, California which is just south of San Francisco has impressive array of products and customers, where RFID event badges are used by a wide array of major sporting events that access control cards that are used by cutting edge commercial and residential property group and even trusted by a variety of state and government agencies for secure badges. In addition, this group just began to state-of-the-art secured card line services even for customers where they don’t do the production. In addition, DSS Plastics recently secured a new fixed color press which will improve its quality and productivity when quite in service in next few months. So, I am pleased with the business and where they fit in our business model. In addition, we continue to be active in the IT monetization business. This business presents unique opportunities for us to acquire and seek monetization of pattern innovators, limit our risks while providing significant potential upside. During 2017, we initiated several offices and seeking damages for the wage infringement of certain of our LED patents. These matters will likely take several years before we will know the outcome, but we are pleased with the progress made thus far. So to summarize, as we exit 2017 as you can tell I’m very excited for the progress and prospects with our AuthentiGuard products. We are now a much more experienced and established player in this global market opportunity. So I look for accelerating progress in 2018 in this area while we continue to leverage our strengths in Printed Products market. As a CEO, I’m committed to creating a unique value proposition for our stockholders through all the above described initiatives and greatly appreciate your continued support and confidence. Once again, thank you for your interest in DSS. Robert?

Thank you, Jeff. And now we’re going to turn it over to questions and answers, I think which you heard is that 2018 is going to be a tremendous transitional year for us, as AuthentiGuard hit with strides. Jeff has rebuilt the team internally, extended out our reach, opened our first overseas outpost in Hong Kong and is really moving forward with tremendous determination. Financial results speak for themselves, you're going to have to Phil and then we’ll do a wrap-up at the end. So operator, let’s go to questions.

[Operator Instructions] We’ll go ahead and take our first question from Scott Delrobert with Private Investor. Please go ahead. Your line is now open.

So, I just had a quick question about because when I saw back little while back without the expansion in Asia and Hong Kong, but I haven’t really heard anything since. I was wondering if possibly if you could elaborate on if there is any new news or anything about that?

Sure. So, we opened up an office in Hong Kong, hired a veteran of many technology companies in the name of Vincent Lum and he will be running DSS Asia out of Hong Kong. As we stated earlier, he is part of the development team that's currently in India, doing a proof-of-concept as we speak. Well, they might just sleep right now, but they're currently there, working on a proof-of-concept with another customer, with potential customers. He is there getting up the speed and identifying new opportunities for us. As we know 80% to 90% of all counterfeits are coming out of the Asia Pacific region, and we need to have people there who understand the process and the people there to build and deliver products and services to them. Do they have -- they don’t currently have any specific customers to sign up, but we are in discussions with many of them as we’re sitting here today. Does that answer your question, Scott?

Yes, appreciate it. Thanks.

We will go next to John Ray with Gordon Securities. Please go ahead. Your line is open.

First I want to congratulate you on seven straight quarters of positive EBITDA. And my question is where do you see your company’s future with blockchain?

Well, thank you. And I am glad it’s been recognized that we’ve been able to improve the operating performance of the Company consistently overtime. So I appreciate that. With regard to blockchain, blockchain is an exciting opportunity for us and it’s something that is in R&D for us, and we are in discussions with customers about we fit into their products and services. We believe there is a natural fit with blockchain and our mobile authentication tool AuthentiGuard. So as blockchain is incorporated or accepted as a way to new business, I think we are going to have something there. So while we don’t have a specific product yet, we are in R&D with blockchain.

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

Thank you, operator. Once again our last question to key in on the continued positive EBITDA that company has been able to generate. In fact, as Phil told you that we have cash in the bank. Jeff has explained how we are aggressively expanding our marketing of AuthentiGuard, both domestically and throughout the world. We have enough money in the bank to do that. And as a result, the Company is a far different one since we are accreting cash rather than burning it from a point of view of losses. So we are able to make choices and move forward as we never were able to do in prior years. So with that, unless Jeff and Phil, has other closing comments, we will close it off gentlemen.

I am good.

Thank you everybody for joining us.

Well, thank you all once again and we will speak with you next quarter.