DSS Inc (DSS) 2008 Q4 法說會逐字稿

Welcome to the DMC fourth quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded Tuesday, March 31, 2009. I would now like to turn the conference over to Jody Burfening. Please go ahead, ma'am.

Thank you, operator, and good afternoon, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Welcome to Document Security Systems' conference call for the fourth quarter of 2008.

Joining us from management are Chairman, Robert Fagenson; Chief Executive Officer Patrick White; and Vice President of Finance, Philip Jones. This conference call is also being webcast and can be accessed at the Company's website, www.documentsecuritysystems.com.

Before turning the call over to management, I will read the Safe Harbor statement. Statements made on today's conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including all statements including future or expected events or results.

Actual results could differ materially from these projected in the Company's forward-looking statements due to numerous known and unknown risks and uncertainties, including, among other things, the risks and uncertainties described in risk factors in the Annual Report on Form 10-K filed by Document Security Systems with the SEC this afternoon.

Part of the Company's presentation will include non-GAAP numbers that management considers to be useful, such as adjusted EBITDA, which is earnings before interest, taxes, depreciation, and amortization, stock-based compensation and non-recurring items. These non-GAAP measures should be considered as supplemental to its corresponding GAAP numbers. And we encourage you to review the differences between these measures as described in today's quarterly earnings press release.

With that, I will now turn the call over to Robert Fagenson, Chairman of Document Security Systems. Good afternoon, Robert.

(inaudible) -- communications. As you will recall, I think the Company and our investors held the view that we had been making too many small releases that led to a tremendous amount of confusion and disappointment in the marketplace. It was my decision that we have a period of time to sort of cleanse that impression and give the marketplace a rest from too much information.

Sometimes the pendulum swings the other way and many people may feel that we are giving too little information. So I think we join everyone in feeling that Document Security Systems has now reached a stage in its corporate development where it's appropriate for us to begin communicating with the investment community and our shareholders in a public forum on a more regular basis.

And that's what the process that we're starting today. Now, I'm reading from a prepared script to make sure we cover all the things that we want to, which is not something I normally like to do, so if it sounds a bit stiff, for those of you that know me, pardon me, and we'll try and get through this, and then we'll have a more extemporaneous period at the conclusion of our prepared remarks and during Q&A when we can talk differently.

For those of you who are new to Document Security Systems, I'd like to take a moment and tell you a little bit about the Company and the highlights of 2008. After that I'll turn the call over to Patrick White, our CEO, who will walk you through the operational highlights and performance for the fourth quarter and the year, and then on to Phil Jones, Vice President of Finance, who will review our financial results. Then we'll open up the phone lines to answer questions with the time that we have remaining.

Document Security Systems is a leader in the development of optical deterrent technologies that help deter and prevent counterfeiting and brand fraud schemes that attempt to utilize the most advanced scanners, copiers and imaging systems in the market to accomplish their fraudulent acts. The Company's patent and patent pending technologies protect valuable documents and printed products from counterfeiters and identity thieves.

Our suite of products offers a cost-effective solution to address the growing need of governments, companies, and consumers to prevent the unauthorized duplication of printed and digital documents, such as currency, vital records, brand protection, ID cards, Internet commerce, passports, gift certificates, labels, and other such things. Document Security Systems' strategy is to become the world's leading producer of cutting edge security technologies for paper, plastic, and electronically generated printed assets.

Our focus today, as a customer driven full service provider, is the result of a strategic shift that we began last year to transform Document Security Systems from an IP licensing model to a customer driven model offering a wide range of security products and solutions to monetize our leading edge IP. In other words, we wanted to take an activist hand in controlling our own destiny.

Last year I outlined five key strategic objectives for our Company. The first was expanding our sales, then reducing our expenses. Third, completing the development of our digital delivery product. Fourth, segregating our ECB litigation. And fifth, the forging of new strategic partnerships while we continue to evaluate candidates for possible acquisitions.

I'm happy to report that in 2008, DMC accomplished its operational objectives on most of these fronts. Sales had been up 23% year-over-year through the first nine months, and early indications were that in the quarter in the fourth quarter suggested the momentum would continue. Obviously, I don't have to tell anyone about what happened to the economy, not only in the United States of America, but throughout the world in the fourth quarter.

As the quarter progressed, we increasingly saw customers cancel and delay orders, which was completely reflective of what was going on in the global economy as it deteriorated. Nonetheless, we were successful in achieving four out of our strategic objectives which has positioned us as the front runner we hope to be in the rapidly growing market for anti-counterfeiting and brand protection. Obviously, saying that we didn't meet our sales goals as a result of the economy is an excuse, and I'm not happy making excuses.

But at the age of 60 I can tell you that the economic turmoil in which we find ourselves in this country and in the world is unprecedented during my lifetime, and while it may not be excuse, it certainly is a potent backdrop for the disappointment that we suffered in the sales level that we achieved in the fourth quarter and the effect that it had on all of 2008.

In August of this year we signed an agreement with Trebuchet Capital Partners to segregate our previously reported European patent validity and infringement lawsuits against the ECB and other governmental and private sector entities.

This agreement met our strategic goals of substantially eliminating eliminating the financial burden from these costs that were being brought to bear on our Company while funding our broader objectives of protecting and monetizing our proprietary intellectual property. It allows Document Security to maintain any upside from the litigation, while freeing the Company to dedicate its resources solely to its growth initiatives.

In other words, basically, in terms of strategic objective, the financial drain and the management drain of prosecuting the European litigation in-house for the Company was hurting us. We have now negotiated an agreement where we retain upside, but have shifted the cost and management burden away from the Company.

Many of you have asked us to provide an update on the progress at the [Euro] litigation, and we would love to be as responsive as we could be to your questions. However, I have to remind you that under the terms of our agreement with Trebuchet, which we certainly wouldn't want to jeopardize, we are precluded from doing so.

We can assure that you that Trebuchet is moving forward with this important matter, and when it's appropriate to do so, and they have the control over saying when it is appropriate, we'll provide an update to the investment community. Pat will allude to this briefly later in his remarks. But in the meantime, we ask that you remain patient and respect that we are just not able to discuss the matter in detail.

Rather, we will stay focused on the ongoing operations of the company which we are always delighted to discuss with you. Our hopes in terms of the European litigation is that as the year progresses our expectation and our hopes would be that things do move ahead and perhaps finally we'll be able to get off the defense and move on to the offense. But we're not in control of that nor do we have information to support that, it's just that is what we hope will be happening in this year.

In April, we signed a new two-year agreement with the Ergonomic Group, one of the largest software and hardware engineering firms in the tri-state area, enabling us to hasten the development of the digital delivery of our products and become a front runner in the rapidly expanding market for digital solutions. This new agreement is a reciprocal agreement with both EGI and DMC agreeing to equally divide with each other any gross profit margin generated from digital sales of DMC's technology completed by either party.

Obviously, the delay in releasing the product had an effect on this as did its release in the fourth quarter of 2008 which, as I mentioned, that you all know, was not exactly the best time to be releasing a new product. Pat will talk more about this later in his presentation as well.

Going forward, EGI will provide their installation expertise and other resources to help us fulfill orders as hopefully digital product finds acceptance in the marketplace. Also in the digital arena in October we launched digital AuthentiGuard DX, the newest version of our digital product, which we believe hopefully will become a game-changing digital information security technology.

AuthentiGuard DX is a networked appliance that allows the author of any Microsoft document, Outlook, Word, Excel, PowerPoint, for instance, to secure nearly any of its alphanumeric content when it is either printed or digitally stored. AuthentiGuard DX prints selected content using DMC's patented technology so it cannot be read by the naked eye.

Reading the hidden content or authenticating the document is performed either by using proprietary viewing devices or by software. In December, and of particularly great significance, we acquired DP I, a full-service digital printer and commercial offset printer located here in Rochester, New York.

The acquisition of DP I is what we'd call a transformational event for DSS. It not only accomplished the fifth of our five strategic goals for 2008, but it is truly a synergistic acquisition for our printing division. It significantly advanced our goal of becoming a leading provider of security solutions.

With DP I's cutting edge digital print equipment and much needed capacity we are well positioned to meet the growing global demand for our security print products. I spent most of the day at DP I in Rochester today and it reinforces my belief and as the figures are reinforcing, that this was an excellent move for our Company, that the execution of the purchase, together with Walter Baum's group, has been well accomplished and actually is following through on our expectations.

Lastly, we reduced our cash operating expenses by $150,000 per month during 2008. The full effect was felt in the third quarter and this was the result of actions that we had initiated at the end of the first quarter but, obviously, not all of it flows through immediately. We implemented additional cost cuts and cost cutting reduction initiatives in the first quarter of this year, 2009, and intend with the combination of the two to lower cash operating expenses by an additional $600,000 per fiscal year.

Phil will give you the details on these, but essentially what it means is if you take the $150,000 per month accomplished in 2008 that totals to $1.8 million and add another $600,000 initiatives that we've tacked on to that in 2009. So as we look back at 2008, it's a year of tremendous accomplishment but also significant disappointment. I am very proud of what we accomplished and the vast majority of strategic goals that we did complete.

I have every confidence that we will continue moving DSS forward in 2009. But, obviously, the economy and our inability to achieve the sales growth goals that we had wanted to gives us some disappointment. On the other hand, in a tough economic market, difficult time, I think that we really accomplished a great deal.

We certainly have to thank all the participants who made up a part of this, and we don't want to give anyone the impression that despite the tough economic times that it's not our intention to fight for every sale and fight for every dollar.

I don't think our prospects have ever been brighter than they are today, and while we accomplished a great deal and some of it may not show in terms of the raw figures when Phil gets into the details of cost reduction and reduction in negative EBITDA I think any investor can see that the foundations that we've laid in 2008 leave us very well positioned for 2009.

So with that I would like to turn the call over to Patrick White, who will now walk you through the operational highlights of the quarter and the year, and then I'll be back at the end for some concluding remarks before we go to Q&A. Pat?

Thank you, Robert, and good afternoon, everyone. After three strong quarters with year-to-date revenue growing 23% over 2007, we had early indications of potential orders during the fourth quarter that led to us believe that our strong performance would continue.

Unfortunately, as the global economic environment rapidly deteriorated, a large print order and three initial orders for AuthentiGuard DX were canceled or delayed by customers. Offsetting the revenue slowdown were the cost cuts and efficiency measures we initiated in early March 2008. These fully took hold during the fourth quarter enabling us to hold operating expenses in check.

We reported revenues of $1.3 million compared to $1.7 million in the quarter of 2007. For the year, revenue rose 11% to $6.6 million including $90,000 of revenue from DPI Secuprint which we acquired on December 18, 2008. The good news for DSS is unfortunately bad news for the world.

Counterfeiting continues to be a major growing world problem that is affecting almost every type of product and every type of brand on the planet. More and more is being discovered every day. This is a massive, growing segment that has not seen its peak yet. I can safely say that if it were not for terrorism counterfeiting and information security would be the number one and two crimes in America and the world.

Just to review, our solutions are recognized for their ability to protect valuable information from unauthorized scanning, copying, and digital imaging. They provide a first line of defense and an easy method of authenticating. It can be layered for increased protection and multilevel verification, are compatible with other security printing technologies and substrates. They can be delivered on paper, plastic, packaging, or digitally.

They require no special equipment or material to adopt and not like the others it has no known health or privacy risks. Globally, the market for printed digital and plastic solutions is, in theory, limitless. With the strategic initiatives we took in 2008, DSS is now well-positioned to grab its piece of the enormous opportunity and to attack some large game-changing opportunities.

Now let's discuss Document Security Systems' four major revenue drivers. First, is our plastic printing operation called P-3 located in San Francisco, California. This manufacturing plant specializes in secure and traditional printing on plastic substrate such as ID cards, driver's licenses, transaction cards just to name a few. Gross profit margins run typically over 40%.

In 2008, we completed a move to a larger 25,000-square-foot facility, and we've invested in new equipment which enabled the Company to add capabilities and RFID manufacturing on high speed variable data printing, which is required for driver's licenses and very high end credentials. Although P-3 had some small wins in 2008 such as printing secure IDs for the Super Bowl, P-3 is now working on tests with significant cutting edge integrators.

If these tests are successful, P-3 will have revenue increases in 2009 and beyond. The tests themselves are small, but they are for large ongoing opportunities in foreign countries which would drive higher revenue with increased gross profit margins for DSS.

Second, as our new secure printing operation called DPI Secuprint located in the imaging capital of the world, Rochester, New York. This manufacturing plant specializes in high-end, traditional and digital commercial printing as well as security printing using our technology. In 2008 on a pro forma basis, DPI on a stand alone basis was $7 million in revenue and to give you a feel for our new size combined with Document Security Systems, revenue would have topped roughly $14 million last year.

Approximately 12% of DPI's Secuprint current work is for the U.S. government, with the remainder with large, local commercial clients. The printing plant houses over $4 million in state-of-the-art press and bindery equipment and has over 30 employees. Gross profit margins typically run around 30%, but we think this will rise as we get into some higher margin security print projects outside the local printing market.

Whenever you make an acquisition of this sort there's some risk. But I'm happy to say that we've quickly and smoothly combined operations and we're pleased with the first quarter performance. We purchased DPI for a reason. Previous to this acquisition our business model relied on licensing printers and receiving royalties based on their sales efforts and technology usage.

The flaw in this model was in relying on outside printers to drive revenue on our behalf. Sales cycles have been horrendous, to say the least. On top of that we were at the mercy of our licensees to make the sale. We had way to control our efforts.

We were literally at a point where we had to decide to be an auditing company or a secure print manufacturer. Also, this model prevented us from meeting with end user and learning what their problems were with counterfeiting as well as teaching them about solutions we have to offer to meet their needs.

In summary, we decided to exert control over the end user relationship from design to print. Our strategy, therefore, was to acquire our own print facility and meet the end users at major national brand owners face-to-face for the first time, introduce them to our valuable secure print solutions which can then -- we can directly manufacture per their requirement.

Although in its early stage, this strategy is working as we have received printing quotations from almost every meeting we've had thus far with certain consumer product companies. We even received our first purchase order for a $60,000 secure print product which required several of our anti-counterfeiting technologies for a very large, well-known, consumer product company.

The final hurdle for us seems to be trying to break long-standing print relationships with the print buyers' current vendors. We are now competing with multi-billion dollar commercial printers and holograph companies on a one-on-one basis. We feel we will be successful in these attempts because we offer unique cost justified and much more effective security print technology.

The most interesting aspect that we have learned from our early sales calls is that we have discovered that our competition is mainly pushing extremely expensive holographs as its one true security feature. Holographs have an interesting history. They were invented in the 1940s. It wasn't until 1968 that M.I.T. figured out how to mass produce the holograph.

Even after that it took ten years before anybody knew what to do with them. One day somebody said why don't we use the holograph as a security feature for bank charge cards. Instantly an industry was born. The reason I'm relaying this is that on a much lower scale we are seeing the same thing occurring with our DSS technology.

Our sales calls are turning into education seminars for the potential client. The print buyers we have met are just now discovering their usage and application. They are learning that they can work as an additional layer with their holograph or work as an effective alternative at a much less costly stand alone technology. Based on our early sales calls, I'm confident this strategy will drive some strong national and international revenue and improve gross profit margin for DSS.

The third major revenue driver will be our digital solution products which includes our first information security software product called AuthentiGuard DX. Our timing of the launch of this software, the fourth quarter of 2008, couldn't have been worse. We had three enthusiastic ADX prospects who were on the verge of making a purchase of our ADX system. As the financial markets tumbled, these prospects literally went silent, citing economic conditions.

It has only been in the last 30 days that our traction in this space has seemed to percolate again. That's the bad news. The good news is our digital security software product is cutting edge and the first of its kind. We have something here that is so new that it takes time for prospects to understand its use in protecting their vital records and files.

This product, by the way, was an outgrowth from a request we received from the Pentagon. They wanted us to create a software that created printed reports which could only be seen with a special viewing system rather than the human eye. We have now enhanced this tenfold. Our opinion, although time will, is that we are in the right place at the right time.

Information security is the next defense industry and AFX is far removed from the simple redaction systems that are in vogue in the world and governments today. It is much more.

It's a powerful information security product that secures user highlighted alphanumeric text in Microsoft applications such as Outlook, Excel and Microsoft Word from hackers, as well as producing secured documents in printed form files or even screen images which contain critical information such as social security numbers, credit card numbers or health records. A prototype of this product is currently protecting visas of sailors entering in and out of the Panama Canal.

To give you a flavor of this product's potential uses we are in preliminary discussions with a three-letter federal agency for the use of the product for producing a nationwide secure credential initiative. If this opportunity comes to fruition and is successful, it could be a game changer for DSS.

We also have some interest from several large legal departments of major entertainment companies. In addition, we have a cloud computing company looking at the system to protect health records, which is an opportunity that is part of the new stimulus package. And we have a major university looking at it for securing law school admission tests.

Currently we are enhancing the product with some additional software based on feedback from various prospects on functionality. From the opportunities I've described you can see it fills a need and there is interest from important potential clients. It's a revolutionary product in its early adoption phase so it is, therefore, tough to predict what future revenue the product will produce.

Finally, the fourth driver is our technology licensing. Gross profit margins for this segment are in the 90% range. Now that we have our own print manufacturing operation, we have made the decision to actively seek only strategic licensees that present a compelling case for our technology such as large, public companies and large public printers, as well as governmental entities.

Additionally our strategy is to optimize our revenue potential with our major current licensees by enhancing their usage of the technology. Our major licensees are diverse and strategic as we currently have one of the largest GPO printers in the nation, the largest commercial secure printer in the country and several leading banknote and security paper companies as licensees.

Our licensees are protecting everything from a well-known federal ID card to car titles, checks, birth certificates as well as spare parts for the aerospace industry. In addition, I'm pleased to inform you that he we've submitted several of our more cutting edge optical deterrent technologies to the federal Government to be considered for a new currency design which is being contemplated due to the growing currency counterfeit problem.

This being the federal government, there are no guarantees and as you may imagine we have no control over the timing of the decision, but our contacts have indicated that we're likely to hear sometime in 2009, and I will say that is possibly subject to change.

Finally, we feel our approach on selective licensing gives us control over what end users see and, therefore, will give us the ability to upsell our manufacturing capabilities If successful, we should then enjoy longlasting revenue relationships with our customers. I think you will agree that DSS is in a much better position today than sitting and waiting for a licensee to make a sale on our behalf.

Let's summarize our strategies. We will continue to introduce new products such as information security software and new lines of security papers. We will selectively license and expand sales efforts directly with major end users. We will capitalize on our increased production capacity and capabilities with our new equipment and facility.

We will continue our cost cutting effort. And we will consider new strategic acquisitions, alliances, and joint ventures at major integrators and paper manufacturers. DSS may be small, but we have multiple revenue streams and big opportunities. Hopefully, based on this presentation you now have a better understanding of our current makeup and a feel for our various revenue opportunities.

Finally, I would like to touch on the European litigation situation headed by our litigation partner, Trebuchet. For those of you who may not know about this litigation we filed suit against the European Central Bank for infringement of our technologies on the euro currency. This was based on expert opinions on both sides of the Atlantic that our technology was printed and utilized on billions of printed euros since the year 2000.

We successfully defended patent validity in Germany and the Netherlands, but the process became burdensome for us. It distracted management from operating and growing the business and was very expensive as well. So we decided in 2008 to transfer the euro patent infringement initiative to Trebuchet in return for a 50% interest on any recoveries while Trebuchet manages the legal process for our mutual benefit.

This saves Document Security Systems an enormous out-of-pocket costs as well as it allows for a talented legal team to focus on the project. While Trebuchet is forging ahead with its litigation efforts they have asked us to refrain from commenting on particular tactics or possible outcomes. Doing so would compromise their strategy and they're quite firm in this point.

I am personally very comfortable with Trebuchet at the controls. Rest assured with Trebuchet's permission we'll make updates as developments transpire.

In closing, our goals for 2009 are simple. That is to significantly increase sales and to move towards positive adjusted EBITDA. We have a strategy to achieve these goals even though the pace and magnitude of our progress largely depend on business conditions and the timing of the recovery from the current economic recession.

Now I will turn the call over to Phil, who will take you through the fourth quarter 2008 performance.

Thanks, Pat, and thanks, again, to everyone for joining us today. I will now take you through the financial results for the fourth quarter and the full year 2008. Revenue in the fourth quarter of 2008 was $1.3 million compared to revenue of $1.7 million in the fourth quarter of 2007. Included in the fourth quarter of '08 is approximately $90,000 of revenue from DPI Secuprint during the 12 days that we owned them in December.

As we have discussed, we believe the decrease in revenue of 21% during the quarter of '08 directly reflects the impact of the severe economic downturn that occurred, which caused delays and cancellations of customer orders. As a result of the decline in revenue, gross profit for the fourth quarter of 2008 was $581,000, a decrease of 28% from the fourth quarter of 2007.

Fortunately, the Company had initiated significant cost cuts in early 2008 that really began to take hold in the third and fourth quarters. Our selling, general, and administrative costs decreased 31% during the fourth quarter of 2008 to $1.4 million as opposed to $2.1 million in the fourth quarter of 2007.

Other operating expenses which include depreciation and amortization, stock-based payments, and impairments of other intangible assets increased 27% to $1.2 million during the fourth quarter of 2008 as compared to $908,000 in '07. In the fourth quarter of '08, the Company recorded a $505,000 asset impairment charge associated to one of our intangible assets.

Net loss for the fourth quarter of '08 was $2.1 million, or $0.15 per share, as compared to a net loss of $2.2 million or $0.16 per share in the fourth quarter of 2007. Adjusted EBITDA, which is earnings before interest, taxes, depreciation, and amortization, stock-based compensation and non-recurring items, is a measurement that we like to use to measure our performance. Once again, I want to stress to everyone that adjusted EBITDA is a non-GAAP measurement that we believe is a good indicator of financial performance for our Company at our current stage.

But I do encourage everyone to review the differences between this measure and GAAP-related performance measures as we describe in today's press release. But once again, adjusted EBITDA during the fourth quarter was a loss of $857,000, or $0.06 per share, as opposed to a loss of $1.3 million, or $0.09 per share in the fourth quarter 2007. This was a reduction of 32%, and we believe reflects the general improvement of our financial performance, even in light of the very difficult sales environment that the Company experienced in the fourth quarter.

For the year, revenue was $6.6 million, which includes the $90,000 of revenue from DPI's Secuprint. This is up 11% over revenue from continuing operations of $6 million in 2007. Gross profit increased 16% to $3.6 million as compared to $3.1 million in 2007. In addition, our gross profit percentage increased to 54%, up from 52% in '07. And this primarily reflects the positive impact of the increase in technology licensing the Company achieved during 2008.

Total operating expenses for 2008 were $10.6 million as compared to $10.1 million. Net loss for the year was $8.3 million, or $0.59 per share, compared with a net loss of $7 million or $0.51 per share in 2007. However, once again, we look at adjusted EBITDA as a fair indicator of our financial performance, and adjusted EBITDA improved to a loss of $2.1 million as opposed to a loss of $3.8 million in 2007, an improvement of 44%.

As we have mentioned, in early 2008 we initiated substantial cost cuts, which included significant cuts in professional fees, consulting services, sales and marketing, and general administrative expenses, including staff. While most of these actions were very difficult, we have greatly reduced our operating cost structure and will significantly impact our business as we continue to do business going forward.

However, in recent months, we have initiated additional cuts in response to the recent economic downturn. To this end we have implemented several voluntary salary reductions from senior management and have further reduced our use of consultants and other services. These recent measures, as opposed to the earlier cuts which we consider more structural changes to our costs, these recent measures are designed to be more temporary in nature and allow us to maintain flexibility to meet our growing customer requirements.

Moving along to the balance sheet, we ended the year with $88,000 in cash and had available to us $1.3 million under our various credit facilities. In December of 2008, we borrowed $900,000 of short-term debt in conjunction with our acquisition of the assets of DPI. In addition, we expect that the existing working capital at DPI will be sufficient to satisfy the payment of the $900,000 when due in December 2009.

As we have discussed, we have significantly reduced our operating cash flow requirements and have virtually eliminated our patent litigation costs. As a result, we believe that the cash available to us under our current credit facilities will be sufficient to cover our cash needs for the next 12 months given our current revenue forecast.

In addition, we will continue to evaluate other sources of funding, and we believe that additional funding sources will be available to us if needed. And with that, I would like to turn the call back to Robert.

Thank you, Phil, and thank you, Pat. I will just sum up a bit before we go to Q&A. This is a year in which we relied very much on the loyalty of our customers, our executive management team, our staff, and, of course, all of us and all of you who are our shareholders. It's a year in which our products and technology, which are top notch and are best-of-breed, continue to be enhanced by our team here and I can only tell you they are really doing great things.

We got our cost structure under control and brought it in line with a company of our size. We refocused and expanded our sales force both here, across the country, and in Washington, and we've increased customer interaction, the number of meetings, the number of quotes, and our success rate. We have successfully completed the migration of this Company to a base of stable bread-and-butter business for our plastic printing, our existing royalty stream, the addition of DPI and its classical printing business, and the cost savings and increased margins that those bring.

We are increasing our cross selling and our competitive advantage in the marketplace, and we have not taken away any of the sizzle of the high-tech aspect of our business. This leads us to the simple goals that Pat referred to earlier in his comments for 2009, to increase our sales and to move to positive EBITDA. I can only tell you in my estimation that our prospects have never been better.

While the fourth quarter proved a disappointment, for me the year was not. I'm excited and encouraged about the progress that we've made and the position that we find ourselves in, which from my point of view, set the stage for us to reap the benefits of all the restructuring that we've done.

So with that, I will pause and we can start taking your questions and see what your reactions are and how we can fill in any informational gaps that you don't think that we've covered.

(Operator Instructions). One moment, please, for the first question. Your first question comes from Sandy Wyman with Gilford Securities.

Good afternoon, gentlemen.

Good afternoon, Sandy.

Two quick questions. You had indicated that on a pro forma basis, that you would have done roughly $14 million in sales had the acquisition been made, obviously, in last January.

If I recall in the last few years the indications were that if you had, under the old structure, gotten to the -- roughly that number that you would be seeing positive EBITDA, and even perhaps earnings. Does the change in the profit margins move that number higher? That's the first question.

Then the second question, which is sort of unrelated, there's been an awful lot of publicity lately about counterfeit coupons and so forth as being a real bane on the American society, and I'm just wondering, if you have dressed that market any further than what has been talked about roughly a year ago? I'll put it back on speaker and thank you.

Okay, I can answer the first question. This is Phil Jones. Yes, clearly, the acquisition of DPI does change our various break-even levels. For adjusted EBITDA, though, we are seeing a break-even level of between $13 million to $15 million which is very consistent of where the combined companies would have been in 2008.

I do caveat that saying it does depend on our revenue mix. Certainly, certain revenue items have higher gross profit margins than others. But, yes, we do feel that, given all the cost cuts we have done and the acquisition of DPI, we are in a range of adjusted EBITDA break-even in the $13 million to $15 million range.

Great, thank you.

Sandy this is Patrick White, and thank you for your question. I just -- in regards to the coupon situation, coupons are just one of many things we're seeing occur out there, but I can tell you that that is a big, growing segment that our customers are telling us in our face-to-face meetings as we go out through the country and meeting with them.

We met with probably ten of the largest consumer product companies in the United States in the last several weeks, including beverage companies and pharmaceutical companies, and I'm telling you, there's need out there, and basically the holograph is what they're using. We met with one cigarette company, and they use the holograph, and they had no idea that there were alternatives to that, or there was ways to add even more security with our types of technologies.

So we've -- on these meetings, we're meeting with them and we're showing them our solutions to their issues and we're getting very positive results.

I think we're getting about 75% of the meetings we have are getting quotes, and as I mentioned in my commentary, we actually landed a very large purchase order from one of these huge consumer product companies for a job that we're going to be doing for them at DPI Secuprint, and the margins are quite nice, a lot higher than normal printing, and it's because of our technologies. So I think we're in the right place at the right time in regards to that.

Your next question comes from [Zaser Kalakhan].

[Zafir]?

Hi, Robert. I understand the quarter was a disappointment, but today is March 31st. In your press release, you guys indicated that this was a $7 million printing, manufacturing that you guys bought for about $940,000.

Can you give us an indication, based on the first three months of this year, if DPI is actually making sales compatible to what that $7 million number is? And if you could give us at least some kind of guidance coming off a really bad quarter, how the sales has been in this quarter?

And the second question that I have, since is I've been following Document Security Systems, I know there has been -- this is the second public relations company, and just reading their press release indicated to me that buying a company for $940,000, with assets of around -- liquid assets around $860,000, press release was horrible. What are you guys doing to get the document message out there to people that doesn't know it? Thank you.

[Zafir], it's Robert Fagenson. Insofar as our ability to comment on the first quarter of DPI, we just can't since we don't give projections. So I will simply, as non-executive Chairman, say that my expectations from the acquisition of DPI are being very positively reinforced and fulfilled. At the point at which we can start sharing figures we will, and we bought the Company, as you said, by putting up $940,000, which essentially was the value of their liquid assets. So basically we got it, one could say, for nothing, and my gut reaction is we got a tremendous asset and a wonderful bargain.

Insofar as our financial public relations firm, it's a relationship that we've had for a period of time, and is subject to constant review, and based on comments here in the Company and from our shareholders, we will take any appropriate action. But in terms of financial public relations, [Zafir], I can only tell you that I've been in the business, and used financial PR firms for 38 years, and it is very, very difficult to satisfy all the people, all of the time, and sometimes it's difficult to satisfy any of the people any of the time.

But nonetheless, we will work closely with our existing firm and if we feel that it's appropriate to make a change, then we will. And I'm sorry that you were disappointed in the way they handled that particular press release.

(Operator Instructions) Your next question comes from Tom Feldner with T&T Commercial Corporation.

Congratulations, Pat, and your team on the successful restructuring that you accomplished in 2008, as well as your successful purchase of DPI. It looks like it was really the right way for you to go to be able to build your business without having to worry about other third parties carrying the water for you.

But my specific question gets down to what's the status of the paper side of your business? I didn't hear anything on it.

Security paper is a good product line for us in regards to providing good margins for us. But there are some dynamics changing in this sector. Beginning on April 1, I guess the federal government now is hoping that doctors will convert to electronic prescriptions versus paper prescriptions.

They're actually giving them some incentive to do that, and -- so that's got a possibility of hurting the paper market, but we -- we're attacking it from a different way. Our paper sales did flow in the fourth quarter. Basically, Boise Cascade, who has been the front runner for us in regards to paper sales, has had slowing of sales, probably due to the economic condition more than anything else.

But we're attacking it from the a different point of view. We're going to be creating some new security paper that we -- I have my guys inventing and testing right now, and we've met with one major security print manufacturer recently. They visited us here in Rochester, and saw these paper samples we've been creating, and we're hoping we can form an alliance with them and take this product line out on the streets using their feet.

So we're going to be adding new paper lines. There's still a business for paper, and -- but if we stay the way we are, it probably would slow down.

Tom, this is Robert Fagenson. We're clearly disappointed that we haven't been seeing the growth in the marketplace for security paper we had hoped. We thought that the prescription pad initiatives would add a tremendous amount of volume.

So basically we are taking our position with DPI, and trying to leverage new customers by taking a classic print customer who had not heretofore used security paper and showing them for a small incremental cost how they can, in fact, add security features to whatever product is that happens to be their business. And thus far, this is meeting with some good initial reaction.

So rather than sitting around and waiting for the telephone to ring, or for the doorbell to ring, we're going out trying to help create the market using tremendous classic print customers to whom we now have access because we are not walking in trying to sell them a security feature, but we are walking in and selling them printing and adding the incremental benefit of security and security paper at a small incremental cost to get them started. And so far we're seeing some success and we hope that will expand over time.

Would an example of that, Robert, be coupons? Or could it be coupons?

I think what Pat and the team have been successful in doing with coupons, which we're starting to see with this first order that we hope will have a lot of follow-ons, based on the quote and quality of customer, that is quoting, it looks like that's a distinct possibility. What's happening is we're reeducating the marketplace that there is not only one mouse trap out there, and when they look at ours, they actually like it better, and the typical reaction is I didn't know that was available.

So as we get into these customers, and interestingly enough, many of them have seen or heard about the product and are beating a path to our door, rather than the reverse. We're able to say that holographic protection is not the only thing out there, and they actually seem to like what we've got better. So we'll see how that pans out, but initial reactions are encouraging.

Thank you very much.

Your next question comes from the line of Jeff Briggs with Rochester Wealth.

Good afternoon, gentlemen. I appreciate all your efforts to right-size the Company and move forward, and 2008 was a bad year for all of us. But I go back to 2007 in September when the on-demand technology was launched in the fourth quarter there, and then I know in April the agreement with the Ergonomic Group was modified, and also at the shareholders meeting it was discussed that this is the highest margin product the Company has.

On this call I don't think it's been directly addressed, but can you give me an idea of what kind of sales occurred in 2008 and any indication of what 2009 opportunities might bring for the Company in that area?

Well, I think management hopefully they said that we didn't have sales, and unfortunately, the agreement with Ergonomic, while it leaves us in a good position to distribute and support the product, the sales that we thought we had in the fourth quarter just evaporated into the ether. I can say that the sales level and activity and interest and people seeing the product, getting a demo, being able to react to it has started to increase again as the pulse of business seems to be going from the moribund and the dead back to where people actually have a pulse in this country.

But it is a daunting thing. We have not been able to successfully complete a significant sale in this arena with the exception of the initial product that we were able to introduce in the Panama Canal. And it is a significant disappointment given the facts that you actually laid out, it is a high margin product that seems to have tremendous demand when we show it to the customers, but no one has pulled the trigger.

And I can't tell you when it's going to happen. And Ergonomic Group, while standing by to provide the support that we would need for either individual or wholesale installations has also not been successful in delivering sales to us.

Okay, well, let's hope between this quarter's call and next quarter when we get the results of the first quarter we can have some information on that, and I do appreciate your taking the time out. I think it's invaluable for the shareholders to be able to hear it, at least on a quarter-by-quarter basis directly from management versus what we can read in a press release.

Yes, we are committed now that -- I mean to be perfectly frank, I am excited and reinvigorated about the accomplishments of 2008 and where it's positioned us for 2009.

Good, bad, or indifferent, we are going to be face-to-face with everyone at the annual meeting and on the webcast, and with regular conference calls, and we are very, very hopeful that we'll have things to discuss that everyone will be happy to hear. And as one of the Company's larger shareholders I share with each and every one of you the common interest of seeing the Company succeed and the value of our shares move from the price where it sits today.

So if there are no other questions --

There are no further questions at this time. You may proceed with your presentation or any closing remarks.

No, I think we've pretty much summed it up. Pat, Phil, anything you want to add?

No.

Well, thank you for joining us today. We just hope the call does give you a better appreciation for the opportunity ahead for us. We look forward to giving you another update on our progress next quarter. Have a good evening.