DSS Inc (DSS) 2010 Q4 法說會逐字稿

Greetings and welcome to the Document Security Systems fourth-quarter and 2010 year-end financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jody Janson, Director of Investor Relations. Thank you. You may begin.

Thank you, Joseph, and good afternoon, everyone. I want to thank you for joining us for the fourth-quarter and 2010 year-end results conference call and webcast.

Joining us from management today are our Chairman, Robert Fagenson; Chief Executive Officer, Patrick White; CFO, Philip Jones; COO, Bob Bzdick; and Vice President of R&D, Mr. David Wicker.

This conference call is also being webcast and is archived -- will be archived at our website at www.documentsecurity.com.

Before turning the call over to management, I would like to read the Safe Harbor statement. Document Security Systems has included in today's press release and conference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including all statements considering future or expected events or results.

Please note that during the course of this call we will be making forward-looking statements regarding management's opinions and expectations about Document Security Systems' business, its markets and financial performance. These statements are subject to risks, assumptions, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied in such statements. For more detailed information about Document Security Systems risk factors that may cause actual results to differ from expectations, please see the Company's filings with the SEC that are referenced on our website, including our Form 10-K that will be filed later this week.

Part of the Company's presentation today includes 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 nonrecurring items. These non-GAAP measures should be considered as supplemental to its corresponding GAAP numbers. We encourage you to review the differences between these measures as described in today's press release.

With that, I will turn the call over to Philip Jones, Chief Financial Officer of Document Security Systems. Philip?

Thank you. First, I would like to go through the fourth-quarter 2010 results and then touch on the full-year results.

Revenue for the quarter increased 77% from the fourth quarter of 2009. Consistent with recent quarters, the revenue increase reflects the addition of Premier Packaging, which recorded $2.3 million of sales in the fourth quarter.

The sales additions at Premier Packaging offset declines in the commercial print business as compared to the fourth quarter of 2009. Sequential revenue, which we are very pleased to, which is comparing revenue from the fourth quarter of 2010 to the third quarter of 2010, increased 31%. This includes a 66% increase in Premier Packaging, which maintained its track record of having strong holiday season sales with its largest customer, Walgreens.

Commercial Printing during the fourth quarter continued to reflect reductions in orders that we are receiving from one of the largest customers that that division had in 2009. While we have made significant inroads with new customers to replace this loss base, we have not been able to do so at the pace we had hoped.

On the other hand, we are very pleased to see continued growth in security printing. Security printing increased 56% in the fourth quarter of 2010 as compared to the fourth quarter of 2009.

In addition, security printing increased 20% sequentially from the third quarter of 2010. So both of these trends we are very pleased with, and these continue to be the focus of our sales and marketing efforts.

Gross profits for the fourth quarter increased 29% and increased 22% from the third quarter of 2010. So, once again, we are seeing strong sequential growth. As we have previously discussed, the gross margin percentages of our business are now lower because packaging generally carries a lower gross margin than our traditional businesses had. So, as the weight of packaging increases on a revenue side, the weight on the gross margin increases as well.

Operating expenses increased 14% from the fourth quarter of 2009. However, this quarter we included a $376,000 write-down of patent acquisition costs that we deemed appropriate as a result of recent decisions in the ECB case. Without this impairment charge, operating expenses would have actually declined by 5%, despite the addition of an entire new division, the Packaging division, which in and of itself records -- totaled about $4000 worth of operating expenses in the quarter. So I don't believe it can be understated how significant that is is that we were able to bring on an entire division, increase revenue by 77% while lowering operating expenses.

Our continued focus on cost controls at all of our divisions has allowed us to do this, and we continue to believe that this is a strong, strong trend that we will be able to leverage in the future.

In addition, during the fourth quarter of 2010, holders of approximately $800,000 worth of convertible debt exercised their conversion rates into our shares. While this has a very favorable impact on our balance sheet, it did cause a one-time impact on our P&L of approximately $260,000 accelerated note discount expense, which I can certainly explain in more detail if anybody wants to during the question and answer session. So we had two fairly significant large one-time items in the quarter that negatively impacted our net loss, and we did try to highlight that on the press release.

Where I think the most telling figures for our performance is once again in adjusted EBITDA. And that is a measure that we have used as a management team consistently over the past several years, which once again is a non-GAAP measurement, but it does provide us insights into the day to day performance of our business.

Adjusted EBITDA for the quarter was a loss of $465,000. Therefore, when comparing to net loss, we had a net loss of $1.6 million, but an adjusted EBITDA loss of $465,000. We have provided a reconciliation of the difference in those amounts in the press release.

Looking into those numbers a little further, we had anticipated a slightly better adjusted EBITDA performance given the revenue performance of the quarter. We did have certain items that I want to highlight to everybody that is going to give a flavor for the type of expenses that we did incur during the fourth quarter, which will not likely occur in the future and which have negatively impacted our results.

During the quarter, we had about $185,000 of somewhat unusual items, including $55,000 for severance accrual; $15,000 related to consulting for our equity raise that I will touch on in a few seconds; $20,000 of expenses associated with our dividend that we distributed in the fourth quarter of 2010, along with about $40,000 of uncapitalized equipment maintenance expense that arose unexpectedly but was certainly worth doing. So absent these figures, our adjusted EBITDA would have been much closer to desired levels, approximately a negative $300,000.

I would like to touch base on the adjusted EBITDA for the full year, and I will go into more detail in a few minutes.

Regarding the balance sheet, as you likely know, we executed a very strategic capital raise on the very last day of 2010. We raised $4 million from a group called Fletcher Investments, which we are very, very pleased with. We believe this equity raise was on very favorable terms not only for the Company but for the shareholders. The investment reflected their confidence in our business plans after an extensive due diligence process, which they performed prior to closing.

Now in regards to that Fletcher investment, you will note on the face of our balance sheet our cash position improved, our working capital position improved, and our current ratio improved.

One element that is now also was originated because of this transaction is a balance sheet item called derivative liability. We recorded a $3.8 million derivative liability on the face of the balance sheet.

Now this is a fairly complex accounting-related entry, and I can certainly go into it in more detail, and we have gone into deep detail in our 10-K filing. However, what it is based on, it is an attempt to record a potential liability for the fair value of the potential additional liability associated with the warrants that we issued in connection with the Fletcher investment.

Now the good news is that, as you may have seen, we have amended these agreements with Fletcher in the first quarter of 2011. We reported on a series of 8-Ks various amendments to these agreements. One of the results of those amendments is that this derivative liability will be reversed in the first quarter of 2011 and will not be an element of our financials going forward. However, due to the accounting rules, we literally had to record it because it existed on December 31, 2010. We can certainly go through more details on that on the question-and-answer session, but one further note. The liability is offset to an entry to shareholders equity. So there was no profit and loss effect on this entry.

Furthermore, as I mentioned, we had during the fourth quarter we converted $800,000 in debt to equity, which further helped our financial position.

Regarding the full-year 2010 results, most of the results generally reflect the same trends I just discussed in the fourth quarter. So I just want to briefly go over those. Revenue for the year was up 35%, which reflected packaging sales offset by declines in Commercial Printing. Furthermore, security printing sales went up 56% year over year. So those are very similar trends to the fourth quarter. Gross profits were flat, and operating expenses were flat.

Regarding gross profits, one thing that is important to understand is that when we acquired Premier Packaging the gross profits that they had generated as private company were not -- due to the fact that we had to follow fair value accounting during the acquisition process, we capitalized at fair value the fixed asset base. This has caused a fair amount of depreciation and now hits our cost of sales line. So gross margins are being mitigated by the depreciation that we recorded. However, those assets were fully paid and fully amortized prior to the acquisition. So it is important to note.

Regarding adjusted EBITDA for the full year, adjusted EBITDA for the full year was a loss of $1.8 million as compared to a loss of $1.9 million. I thought it would make sense to quickly highlight the components of that adjusted EBITDA by division.

Our Packaging division did exactly what we thought it would, and it had a very strong adjusted EBITDA, a positive adjusted EBITDA of about $650,000 for the year. Furthermore, our Plastic Printing group has basically a breakeven adjusted EBITDA, which it is worth noting that commencing at the end of 2011, they will have paid off a significant amount of operating leases associated with capital additions we did about three years ago. That number will really start to improve at the end of this year all things being equal.

Furthermore, DSS, which is our security printing and new licensing business, they are basically a breakeven EBITDA group. And then that group has really carried a lot of our expense increases that we have incurred during the year to our sales and marketing team to some of our consulting efforts for business development. So that area is designed to really reinvest all of its profits into its sales and marketing group and its R&D as well.

The unexpected hit to our adjusted EBITDA was our Commercial Printing group. During the year, they had a negative EBITDA of $675,000, and that is the area that is our biggest concern at the moment because it was not expected and it did not reflect what we thought the conditions would be. So that is a big negative, and had that not have occurred, then adjusted EBITDA would have been in an area approximately less than $1 million, which is right where we wanted it to be.

Our Corporate group in addition carries a lot of our overhead regarding being a public company. In addition, it carries a lot of our expenses associated with the numerous transactions that we actually did this year, which I think is worth noting.

During the year, we spent $300,000 of accounting and legal costs, $180,000 for shareholder and SEC-related costs, another $100,000 for D&O and insurance. So these are the type of costs that way down our corporate results.

The legal costs and professional fees I think is worth noting. This was a very active year. Not only did we acquire the Packaging group and in the new accounting guidance you can't capitalize professional fees associated with acquisitions, in addition, we did the dividend of Internet Media Services, which is certainly not a normal transaction. It did require a fair amount of professional fees. We had numerous private placements, and we had a fair amount of business development efforts that required a lot of contractual work, Kodak being a significant partner.

So I believe that these expenses certainly are well spent, and we expect to see a significant reduction in those amounts going forward.

With that, I would like to pass it to Bob Bzdick, and I can certainly answer any questions in the answer session.

Good afternoon. Thanks, Phil. This year that I spent with DSS has been enlightening in many ways. First and foremost, to say the worldwide markets for our technologies is significant would be a gross understatement. We continue to attract sizable opportunities at every level of our organization for our products.

During last earnings call, I spoke to the need of DSS to develop a more consultative approach to our sales effort. This conclusion was reached after several presentations which were so positively received seemed to stall. We determined that our target customers needed more support in applying the technologies in their environment. We also found hesitancy in committing given the uncertainty of upcoming regulations.

At the time funds required to aggressively pursue this approach were not readily available. Since the Fletcher investment, we are accelerating our sales and marketing plans. In addition to hiring our sales and marketing director, we have engaged a brand protection consulting group to achieve several things.

One, review our facilities for both physical and procedural requirements to meet audit standards of brand owners. Two, to introduce to those partners whose technologies will complement ours. Three, develop a process to survey our customers and identify appropriate solutions. Four, identify potential sales candidates with brand protection backgrounds. Five, train our current sales staff in brand protection issues. Six, provide the introductions to brand owners that they currently work with. And lastly, assistance sales calls and presentations.

We are multi-tracking this plan and have initiated the process for two eyecare brand owners for packaging, a tobacco company for employee access cards and packaging, and an Indian tribe for border IDs. Our feeling is by developing a reputation as a resource and brand protection, we can assure our target clients that we can assist them as their needs change whether it be through regulation or criminal activity.

In addition to this initiative, we have engaged in marketing and ad agencies to help us rebrand DSS to reflect our capabilities. This will involve both the legacy products produced by P3, DPI and Premier, as well as emphasize our security offerings. We feel strongly that this will assist us in lead generation and Company recognition.

Lastly, one of our largest challenges has been our printing operation. While we expect that our efforts in packaging, coupons and security paper will continue to increase and positively impact DPI, we feel that we also need to continue to develop conventional printing and have announced we have a dedicated manager overseeing the initiatives we put into place.

To that end, I am pleased to announce that Bob McAleavey has joined us as President of DPI. Bob has a long and successful printing career as owner of Specialized Printed, which was purchased not too long ago by Ennis Corporation. Bob has access to over 2000 print brokers and has worked over the years as well in dealing with federal and state printing offices.

In summary, we are taking the necessary steps and perhaps overdue steps to increase our sales bandwidth and effectiveness.

With that, I will turn the conference call over to David Wicker, our Vice President of Research and Development.

Thanks, Bob. At this time I just wanted to go over four points that I feel are very important. Our latest transformation of brand security offerings from single technologies to a broader, more consultative, all-inclusive portfolio that would tackle all avenues of brand protection from Internet monitoring to track and taped solutions. We are addressing this need not only by broadening our partner portfolio, but by also creating new technologies to enhance our partner solutions.

The second point would be that our competitors at least in the secure document arenas have not budgeted for research and development, instead relying on outdated legacy technologies to fulfill their clients' needs. If you took a look at our competitors' offerings, the technologies have not changed since the early 1990s certainly behind the ever moving advancements of scanning and copying devices. As DSS is a technology-centered company, we dedicate significant resources and team efforts to not only conceptualize new technologies to bring them to product stage and global acceptance.

Point number three is more product-oriented, but our latest coupon protection technologies are gaining traction as we have implemented several duplication deterrents for major brand owners resulting in two positive actions. The first is an increase in the security layers utilized in both finished coupons and security substrates utilized by brand owners' in-house print facilities. And the second is the incorporations of our copier and scanner deterrents in Internet-delivered documents.

My final thought would be that the addition of our DSS Packaging division has further broadened our portfolio twofold. First, by the addition of an experienced team, and also, by allowing us to integrate our existing brand protection technologies into packaging and create new authenticators geared towards packaging and labels.

I will now turn the mic over to Patrick White.

Thank you, Dave, and good afternoon, everyone. Document Security Systems recorded increased revenue of 35% for the year and 77% quarter over quarter. Unfortunately margins were tighter than normal due to product mix, and as Phil described, a significant negative impact from various year-end accounting adjustments created a negative bottom-line performance.

We fully realize that there is much more we need to do. I assure you everyone at DSS is working diligently towards turning in the results we all expect. No one wants losses, and as CEO, I take full responsibility, and I also fully recognize it is imperative to quickly react and focus on larger wins that transform DSS to the growing, profitable company we all know it can be.

I assure you that no one is more inpatient than I am concerning this issue. I also feel there is no reason it cannot happen this year.

The good news is that we have a thriving relationship building with new effective licensees such as Eastman Kodak, which I will discuss later in the presentation.

We also have a very valuable intellectual property portfolio that continues to grow and add value to DSS. And finally, DSS' stature as a leader in the field of brand protection is growing all over the world.

First of all, I would like to make a few comments concerning the three trends in our industry, all of which will give you a sense for our positioning in the brand protection space. The first trend is that counterfeiting continues to increase uncontrollably all over the world. A recent 60 Minutes segment did a great job highlighting the issue in the counterfeit pharmaceutical industry. The crime has increased 10,000% in the last 20 years, and it is now estimated to be $600 billion to $700 billion or 7% of world GNP. The key to this trend as it relates to DSS is that large companies such as Procter & Gamble, Pfizer, PepsiCo, Altria, Boeing to name a few are all coming to DSS for help in consulting for their growing counterfeit issues.

DSS is now viewed as a source as well as a solution to their problems. It goes without saying that this is a very important trend we are experiencing.

That brings us to trend number two, which is that only $3 billion to $4 billion is currently being spent by American and world industries to fight this crime. That is a very minute number that I predict will grow and rise dramatically. Corporations will need to spend 30 times those amounts in order to effectively combat this crime and they know it. That would put the brand protection segment at a $90 billion to $120 billion market. DSS is, therefore, positioned to take advantage of this massive growing industry, which certainly will expand as time goes on providing DSS the opportunity to grab its portion of this industry in terms of increased revenues.

Trend number three concerns itself with the current state of our brand protection counterfeit prevention industry. The current anti-counterfeiting industry remains highly fragmented with hundreds of small companies offering products and services.

Now with advances in new counterfeit prevention technologies such as DSS has developed, it was inevitable that a major wave of consolidation of both technologies and companies has begun taking place in our industry. Multiple companies in our space were acquired in 2010, and it is estimated to grow even more volatile in 2011. This consolidation trend is an opportunity for DSS as we can look for right acquisitions to fill any gaps or enhance our product offerings, and DSS itself may attract potential large suitors, especially for our very valuable intellectual property.

DSS' largest client is RR Donnelley. RR Donnelley is the largest printing company in the world. In the past year, RR Donnelley made the decision to increase their DSS technology offerings by signing a contract revision and adding several new technologies. Then again this year they approached us and expanded their geographical coverage as they recently completed another contract with DSS, which added Mexico and Central America for the use of our technologies.

Now while they continue to expand with us contractually, they also have failed to penetrate any new opportunities other than the shrinking bank check industry, which has caused a drop in our overall licensing royalties. This is a real dilemma for us, but in our meetings and in some of the communications we have seen, they are pursuing secured coupon projects with large several well-known consumer product companies. We are continually having dialogue, and we will keep you posted on this opportunity, which could absolutely explode if they begin applying the technology to a broader client base. We will continue to see how this develops.

One of the highlights of 2010 was the reseller and licensing agreement with Eastman Kodak Co. This contract was signed in November of 2010. I'm happy to report that after some corporate structuring at Kodak, the relationship is finally in full gear. In the last month, we are meeting and working daily with Kodak at both of our Company's facilities here in Rochester, New York.

Currently we are working together on installing and testing software versions of our DSS technology for their digital next press. We have also had the pleasure of presenting to one of their global VIP clients, and we are bringing Kodak into a couple of important tax stamp security projects that have presented themselves to us. The relationship has been very positive and is blossoming like no other partner we have ever engaged with.

From our point of view, this relationship is a significant financial opportunity that gives DSS the global reach, an integrator partner, and the ability to penetrate large projects that will produce a higher volume of revenue during the later half of 2011 and beyond.

During the past 12 months, DSS added 17 patents to our portfolio, giving us a total of 31 with another 34 pending applications as of the end of the year.

As I mentioned earlier, in the past summer months, we have licensed RR Donnelley's Mexico subsidiary, and we have also licensed a company located in Buffalo, New York, called Midwest Banknote Company.

Midwest Banknote Company prints all of the New York State lottery tickets here in New York. They also do major car titles for a lot of the states. They do a lot of secure vital records. It is a very big player in the space here in the US.

Now they are the US division of a company called Thomas Greg & Sons, which is an important $300 million security printer headquartered in Bogota, Colombia.

In addition to their South and Central American locations, Thomas Greg has manufacturing locations all around the world, including India, China, Thailand, Philippines, just to name a few. We are shooting for a summit meeting here in Rochester in early May with their CEO and management people to view our facilities, our capabilities because we want to sell them some manufacturing, as well as some technology demonstrations.

The opportunity for DSS is a possible licensing agreement to acquire technologies to their worldwide client base, as well as gather some important manufacturing work from them to fill needs that they have.

Turning now to our digital initiative, in 2010 we completed substantial improvements to our core AuthentiGuard DX technologies. Several key software enhancements were implemented, and additionally DSS has been busy filing numerous patent applications covering the relevant DX-associated inventions.

During the last several months, we made multiple presentations to a Fortune 50 healthcare organization of the product. They have shown interest in DX for internal use, as well as a marketable product they can sell to their client base.

We have also been in exploratory talks with a cloud computing company, which we feel will bring much needed digital expertise to our organization, as well as provide revenue-producing -- a revenue-producing vehicle to deliver our solution to interested businesses. We will make announcements to all shareholders as this opportunity develops.

Also, speaking of digital solutions, DSS did install a technology for an Internet-produced coupon for Altria. This was a three-month test that Altria paid for. Currently we are evaluating the results of the client to determine what changes or new features they may or may not want us to implement. But it is the first coupon that we were able to put a technology through the Internet and through a coupon search engine -- production engine, excuse me.

I receive a lot of calls from shareholders from time to time inquiring as to who we are working with and what we are working on. I understand their desire to know, but frankly we are typically bound by nondisclosure agreements since many of the clients do not want anyone knowing they are having counterfeiting issues, or for competitive reasons, we must refrain from disclosure in order for us to have a better chance of winning the work.

Now with that said, I assure everyone that DSS is very focused on large contractual revenue opportunities.

I would like to share something with you. During the last six months, DSS was heavily involved in an African voting ballot project bidding process. This was a $26 million opportunity for DSS. We were up against 48 other companies from around the world, all of which were much larger than DSS. Travel was to an extreme location with warnings from the US State Department not to travel due to kidnappings, etc. of Americans. We ignored the warnings, and we did travel to the country and after getting our people inoculated for yellow fever, hepatitis and malaria.

We also engaged our US ambassador to the country, and we engaged an agent, a citizen of that country, to work on our behalf. The citizen had very good government relationships. I'm very proud to say that we did our homework. We sharpened our pencil, and DSS ended up having the lowest bid and the best security features for the process.

We received a phone call from the US ambassador's office telling us we won the bid. Now normally when you win the bid, when you have the lowest bid and the security technology, you win. However, the country ended up selecting a much higher bid and informing us that the reason we lost was because the US was too far away for the project. This is in lieu of the fact we had 16 cargo planes ready to make the delivery on our behalf.

My whole point of this discussion is I think this shows our extreme efforts and risk we undertook to bring home a significant win for DSS. Politics or back room deals could have played a part, but that's not something a US company can partake in, a US public company cannot partake in.

The good news is that we did build relationships, and we now have an agent that continues to work on our behalf in that country, and he is presenting new counterfeit prevention opportunities to us, of which we do manufacture secure driver's licenses containing our technologies for their government.

In conclusion, DSS has very strong positives. After weathering some of the worst economic times in a lifetime, we continue to have growing IP portfolio that adds real value to the world.

Today DSS is recognized on a global scale as a leader in counterfeit prevention and brand protection. Major corporations from around the world such as Procter & Gamble, PepsiCo, and Pfizer are all current customers of ours as they sought our help for their counterfeiting needs.

I'm also pleased to inform you that in just the past couple of months, we received initial orders from Johnson & Johnson, Wrigley and Nivea for secure printing projects. These are early stage projects, small projects, but it shows we are getting a foothold and a reputation.

Finally, I want everyone to know that I am personally available for anyone that has specific questions concerning anything we have talked about today for our published financials. In order to do so, please contact me at any time during normal business hours, and if I can do the call immediately, I will. If not, I will schedule a convenient time.

This concludes my prepared remarks, and now Robert, would you like to add anything prior to the question-and-answer?

No, Pat, what I think I'm going to do is hold my comments for the sum-up because maybe there will be questions I will want to react to as well. So why don't we do the Q&A first, and then I will add my remarks.

Okay.

(Operator Instructions). David Watson, William Smith & Co.

I just had a couple of questions. First, I was hoping you could talk more about the status of cloud computing, where you thought it figured in in terms of 2011, and any new potential clients on the horizon. I know last call you had discussed the accounting firm that you were involved with.

Yes, the cloud computing company is a local company here in Rochester that specializes in accounting and legal professionals. They have worked with our DX system in a cloud environment and displayed it and tested it with some of their clients, and there was strong interest, particularly in the accounting field for securing people's financial data.

They saw real value, and we are in discussions on how to utilize the cloud company's basis for delivery. And there have been some real significant developments, but we need to speak with our board and before we can make any further comments. But I can tell you it is -- the cloud will be a significant part of this Company as long as I have the ability to convince the board. I think it is going to be something that has a lot of legs in regards to reach around the world.

Okay. Great. So is there any timeline involved, and have you received any revenue yet?

I think the timeline could not be shorter. It is very, very soon, and we will release information upon decision-making by the board.

I'm sure that is oblique enough, David, that you cannot figure out what it means. But I will just comment on that from the Chairman seat is -- has made a proposal about how to proceed with this initiative, and the board will be considering it later this week. So when something has been decided, then we will make a release.

Okay. Great. And then my other question was just regarding seasonality. I was just wondering if you could comment on what role seasonality played in terms of your revenue this quarter and what we could expect going forward?

The primary seasonality is probably in the packaging area. Our main customers have historically been involved in the photofinishing industry, and the photofinishing industry is heavily skewed towards holidays and towards the end of the year. January, February, March is very quiet usually. There is not a lot of traveling. You go to April, May, you have got Easter, college graduations, the start of the wedding season, summer vacation, back-to-school, Halloween, Thanksgiving and Christmas. So you can see how that obviously ramps up toward the end of the year for activity. And that is definitely reflective in this just in time delivery of inventory, people will give you orders, but then take them in the time that they need them because a lot of these labs don't have a lot of storage facilities.

So that is the primary area. I would hope as we get into more what I would consider more durables products such as consumer products and so forth that are not related to specific dates of the year, that we will see more of a flattening obviously to utilize our equipment more toward the beginning of the year.

[Maurice Levy], [Levy MA & Associates].

I'm a recent stockholder, and I was a former member of a New York Stock Exchange firm many years ago. (multiple speakers). And I'm really excited about your concepts, your patents and the things you do. Can you give me an idea in projections. Are you in need of more capital to exercise your plans?

I will take that one --

This is Robert Fagenson. What I was going to say in some of my wrap-up comments is that we have run the Company for four years if you take a look at our balance sheet from last year with short-term liabilities always exceeding short-term assets. So we were always --

That is not good.

No, it makes life very difficult. You are managing cash flow, you are making decisions on what not to spend based on those, and I think that has hurt the Company over the last few years in terms of us not being able to gear up our sales and marketing and lower our cost of funds and high-cost leases and high-cost borrowings. Starting in this quarter and the next, you are going to see that trend change.

In conjunction with our new financial partner, Fletcher, who made the investment at the end of the year, they have the ability to make an additional investment several months from now. And if they choose to, then certainly I cannot foresee anything in the future which would require additional capital investment for the next 12 to 18 months unless something terribly unusual and unexpected came along.

In terms of near-term working capital needs, they are well covered as you can see by the abundance of cash on the balance sheet this year as opposed to anywhere in this Company's previous operating history.

So I think what we have in hand now is the ability to start making expanded and more strategic commitments to grow this Company and to support expanded business lines with sales, marketing, additional equipment and other capital needs that might be there that can really start increasing the pace of our ability to grow, which has clearly been hampered in the past by just the lack of cash.

That is great. That sounds like I made a good investment, and if there is anything I could do, yes, I'm not doing investment banking now. I'm just living on my rewards for 50 years in the business.

Isn't one of your board members an ex New York Stock Exchange Chairman?

Vice Chairman. That is me, yes.

That is you?

That is me.

I was a partner of Hurst & Company New York Stock Exchange, and I knew [Al Shaleyer] on the curve, that was the old curve.

Unfortunately I attended a funeral earlier today for [Judd Stryker] who was a significant presence on both the New York and AMEX -- (multiple speakers)

Right. Isn't that interesting? When I heard that -- (multiple speakers)

We certainly have a long and rich history at the exchange, and we are hoping that --

Fabulous. That will help.

We are hoping that someday soon DMC will be qualified to be on the big board.

Where are we? We are NASDAQ now, right?

No, we are on the AMEX, which is now part of NYSE.

The AMEX big board.

Right.

You think, well, maybe they will merge them finally after this European thing, Euronext.

Who knows where the market is going to go. But as DMC, we have our own fish to fry, but we hope to be able to grow.

Well, I'm glad you are up there with the top guys, and I want to congratulate you all. You seem to be putting together a heck of a different kind of a company that would really -- you know, you are probably going to be an acquisition target I'm sure. But we don't want to give it away until we get to a good number.

I like the spirit. And as someone who grew up in an industry where profits are measured by eighths of a point and we turn very quickly, I can only tell you that the sales cycle in this Company has become so long that for me every time a customer instead of giving us a huge order goes from a small one to a medium one, I feel like I'm getting a hernia. But I hope that will change, too, and thank you for your support.

It is very good talking to you. My congratulations to you and the board for building a real interesting company.

We appreciate your support and your positive comments.

Okay. I'm 83-years-old.

Well, we hope that by the time you're 84, things will be better.

Well, I'm in there, hanging in there, and I am telling a lot of my old buddies to buy stock, whatever. But I want to see the stock at $15, $20 a share or higher, but that is my life. You know how I think.

Thank you very much. I would love to chat. (multiple speakers) You can call me later, but we have got to move on to the next question. Thank you.

Sandy Wyman, Gilford Securities.

Just a couple of quick questions because some of them were asked earlier. Pat, can you give me an idea on the current revenues what percent are recurring revenues and which ones do you have to constantly go through the sales cycle? In other words, do you have like coupon sales that you have committed for many years, or is it a constant recycling? That is one question.

And then another question would be, I remember in a different era a couple of years ago you were looking to breakeven in $11 million, $12 million range run-rate, and obviously we are over that but we've got considerably more costs and so forth. I'm wondering what the breakeven number would be at this time? So there are a couple of questions, and then I have one more after that.

Okay.

This is Philip Jones. I can try to answer those questions. Regarding the breakeven, it is between $17 million, $18 million. It all depends on product mix as you can imagine. Certainly as licensing revenue grows and that number could come down, packaging which covers lower margins, that number would go up. But approximately $17 million to $18 million is a run-rate we are targeting for the breakeven.

And that is cash flow breakeven or bottom line breakeven?

Yes, adjusted EBITDA breakeven. Regarding the first question, the most consistent reliable revenue on our financials is our technology licensing because that tends to be reported on a quarterly basis by our licensees. Feel free to jump in, Bob, but most of the other work is bid work.

Most of it is bid work. We always encourage longer-term commitments. We offer some significant savings to customers for price protection, if you will, inflation protection for materials for periods up to a year if they are willing to commit to that. We have had some success in the past in the packaging area and a few successes recently in our printing area that way where we have committed to a year's pricing for a block of business. We find that positive from the standpoint of planning and being able to not only forecast material uses, but also labor force utilization and equipment utilization. So we try to encourage that whenever we can. But in these days and times, everybody seems not to want to commit to more than what they need for the next quarter or so.

Along that same line, have you in your wildest dreams stopped to think about what the potential of Kodak could be and when that will start to kick in? I know, Pat, you had said sort of in the second half of the year you expect things to fall in place. Have you budgeted for any potential low number or high number kind of thing?

Well, we certainly know there are huge opportunities out there that we can do with Kodak as shown by the $26 million voter ballot project.

That was through them?

No, that was on our own. It was brought to us from one of our clients that does smart cards, and it is offering them to that country in which we would manufacture those at P3. And I guess we are still alive in that bidding process, Bob; is that true?

I would like to also say you know being a smaller company we had somebody, which, as Pat said, with shots and on an airplane within three or four days when the opportunity hit. It is difficult, sometimes frustrating when a company the size of Eastman Kodak or any other large company like that to get them to react quite as quickly as that. They tend to be a little bit more lumbering in their approach. That has been a frustration for us obviously with a lot of our client base that are client targets, but we are starting to get some significant movement now that I'm very encouraged about.

Well, Kodak, just to continue a little bit from my perspective because I have been heavily involved with the opportunity, I can tell you this for a fact. That their senior management -- and I am talking most senior management -- is heavily involved in making this brand protection a significant part of their future plans for Eastman Kodak as far as an opportunity. They are working both on development work, as well as opportunities from all around the world.

They brought in a VIP client for us to meet with from another country that has government contacts. It is very, very big stuff. I mean Kodak is not going to look at the small stuff. I mean that would not be into their best interests. So we are -- you know, they have asked us to dance, and they are leading us --

But clearly over a cup of coffee or something, they should be able to look you in the eye and say, hey, there are $3 million worth of opportunities or $300 million worth of opportunities. I guess what I'm trying to do is obviously you are focusing on it and so forth, but I'm just trying to model in something here in terms of expectations.

Well, I can tell you that they would want the larger numbers.

I tend to ask the same questions that you do from the same perspective. I think that a quarter from now Pat will be in a better position to answer that question.

There was a significant delay in getting the relationship to where it is now because of some things going on at Kodak. Let's not forget that is a company that is busy reinventing itself after a lifetime of selling film, which it does not produce anymore.

I think what Pat is indicating is a brand protection is a key leg of their new strategy. I think in the last few weeks, as they have had these intense rounds of meetings, it is first beginning to show what the level of interest is. But while they have defined in broad terms where they think the customer base may be, I think the answers you are looking for are going become more evident in the next 90 days as we actually start to go out and meet the clients and see what they think is the average client in which we can then do some modeling about what the potential is. So I think the question is a good one, but it may be a quarter too early.

Okay. I appreciate that. As far as Fletcher is concerned and I presume they are on the call and so forth, are they -- is this strictly a financial commitment on their part, or do they have representation on the board? It seems strange to me that they are willing to make ultimately a potential $16 million commitment, and that's a great testament to you but with a company that was really just sort of floundering here to a great extent. So they must have seen an awful lot that many other people have not seen, and I'm just wondering what that sort of decision process was?

Well, I certainly don't like to speak for someone else, but it was a very intense and very compressed due diligence process that took place over the last few weeks of the year. But they had certainly identified us before that time.

Fletcher are pretty smart folks who take a look at industries, who take a look at companies and decide where they think the future might bring the greatest chance to make strategic investments in areas that they think can be explosively exciting. And I think that despite the fact that the past few years have been difficult, I think they see what you have seen over the years and what your clients have seen and what -- I mean all of us who have the ability to vote with our feet but have stayed onboard or increased our investments have done. Which is despite the lumbering pace at which things may happen in this industry and for us probably we have reached a strategic tipping point where if ever the value of the intellectual property in this Company is going to suddenly start showing commercial value to all of us who are shareholders, this is probably the 12- to 24-month period where some of us would want to be investing if we were first walking in for the first time.

So they are not activists in they don't have representation on the board, although we would welcome that if they chose to at some point. But I think they like the industry, and they feel that the IP suite of the Company is strong enough that it's going to be very, very valuable in the years to come. And I certainly agree with them, and I certainly hope we are all right.

I hope so, too, and I feel a little bit like we have had a two or three-year pregnancy. Now it is time to have twins. Thank you very much.

It has been a two or three-year pregnancy with an empty bank account. So I mean now with the faith they have shown in rebalancing our balance sheet and being in a better strategic position to use that money, I think the timing is good. So I hope that they are right, and I hope that we are all here to capitalize on it.

As there are no further questions in queue, I would like to turn the call back to Robert Fagenson for closing remarks.

Thank you. I am proud of our team in terms of what they achieved in sales in the fourth quarter and lowering expenses and expanding our IP portfolio. I'm particularly pleased with the faith that Fletcher has shown in making investment and fighting hard in negotiations for the opportunity to increase that investment, their choice in future months.

I think what we have seen is unfortunately through the weak economy we are not a commodity. We are not something that someone has to buy to subsist. We are a specialty product, and we went through a period of time when our customers were cutting costs to preserve their margins. And despite the fact that they might have wanted to move aggressively towards something that we had to offer, I think now as the economy recovers what Pat is talking about and what Bob about the enhanced volume and quality of the customer contacts we are seeing is that the trend in our high-value customers is positive. And they are beginning to refocus on brand protection and the losses that they are suffering through counterfeit grade market and other people who are simply trading on their dime.

I am be going out with the troops once again in April and May visiting with Kodak, with Banknote and getting more of a direct sense of whether or not what I'm sensing is correct. But I, like most of you, I am a shareholder, a substantial shareholder. And while the stock price may be higher than it was a year or two ago, I'm particularly interested in where we are going from here.

I think we have gone through a period where we got involved with too many tire kickers, people who wanted to come in, look under the tent, see what we had but not pay. They proved not to be real customers. We have signed some deals with some big names that have not proven to be revenue-producing opportunities.

We have changed our focus. When customers want us to run tests, now they pay. And I think that's a pretty good sign of the value that they put on our products because heretofore we were asked to go in and make demonstrations. Now we come up with the costs and we ask them to pay and they do. We're going to be putting a significant investment into our sales and marketing effort. And it is the first time during my tenure that we have had the financial wherewithal to do so.

We have struggled, as I have said, over the last three to four years always monitoring cash flow, always managing cash flow, and not having the ability to get the most advantageous terms on the leases we sign, on the loans that we took out. So our interest cost and cost of funds has been tremendously, tremendously destructive to our income statement.

Now we have the ability to change all that. That period is over. Bob alluded to our new manager at DPI. Bob, he is starting today?

Yes.

Okay. So I just wanted you to know this is not the future; this is now. So, in the months ahead, I think you're going to see more experienced additions to our team, more marketing initiatives. What Pat talked about in cloud computing, we will be discussing that later this week. As we restructure these high-cost leases and loans, you'll be seeing our cost of funds go down. And while the sales cycle is still much longer than I would like, we are so much further along today than we were a year or two ago with some of our major customers that a lot of that work is behind us, and we may start to see the fruits in terms of larger orders.

I mean our goals remain the same. While Phil gave you a number of $17 million to $18 million for EBITDA breakeven, that is assuming the current product mix and margins. If we got back more to historical product mix and historic margins, excuse me, then that number would be lower.

I think the value in this Company still remains and is even greater this year with our new patent additions than it ever was and the valuable IP. As we are starting to convert those to revenue-generating relationships and opportunities, that is when we unlock the value of this Company.

Just like you, as a nonexecutive Chairman, I vote for this Company with my feet. If I did not believe the story just as much today as I did in the past, I could quietly retire, sell my stock and disappear. I have chosen not to. I have stayed with all my stock and stayed with my time and my efforts. And we could not ask for a management team that is more focused on our success, the new IP that they have added this year, and the ones that they are going to add in the year to come with the team of Wicker and Caton on march there only renews my faith in the fact that we are on the right track. And I hope this is going to be the year.

I know I have said it before and I know I have believed it before, and if some of you are not tired, I would be surprised. But I can only tell you that with the money in the bank and the opportunity to invest where we think we want to instead of having to pinch our pennies, I believe that you are going to see significant improvement in how we do our business, and I hope the year ahead will be a good one for all of us.

Anyone else on the management team want to add anything? If not, then I would like to thank you all for participating in the call. Just as Pat has said where he is available, I am always, always available to try and call you back if not the same day the next day. If you have investor questions, you can reach me at my office in New York. If you need the number, just call the Company.

So, with that, operator, we will conclude the call.

Thank you. This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.