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Executives

Peter Salkowski – Managing Director - Blueshirt Group

Robert Fagenson – Chairman

Robert Bzdick – President and Chief Executive Officer

Analysts

Elliott Howard Blonde – Royal Bank of Canada

Mark Argento – Lake Street Capital Markets

Morris Levy – M A Levy & Associates

Document Security Systems, Inc. (DSS) Q4 2012 Earnings Call March 6, 2013 8:00 AM ET

Operator

Greetings, and welcome to the Document Security Systems Fourth Quarter and Full-Year Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Peter Salkowski of the Blueshirt Group. Thank you, Mr. Salkowski. You may begin.

Peter Salkowski, Managing Director – Blueshirt Group

Thank you, Doug. Good afternoon, everyone. As Document Security Systems’ Investor Relations representative, I’d like to thank everyone for joining us today for the company’s fourth quarter 2012 earnings conference call.

Joining me on the call today from Document Security Systems are Chairman of the Board, Robert Fagenson; Chief Executive Officer, Robert Bzdick; and Chief Financial Officer, Phil Jones. Also, on today’s call from Lexington Technology Group are Chief Executive Officer, Jeff Ronaldi; and Chief Operating Officer, Peter Hardigan. Following management’s prepared remarks, we will open the call for your questions.

Before turning the call over to Robert Fagenson for his opening remarks, I’d like to review the company’s Safe Harbor statement. Management will make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Please refer to our SEC filings for more detailed description of the risk factors that may affect our results.

During our call today, we will discuss adjusted EBITDA and our press release issued this afternoon, which is posted on our website, you will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA.

I would like to now turn the call over to Robert Fagenson, Chairman of the Board of Document Security Systems. Robert?

Robert Fagenson

Thank you, Peter. Good afternoon, everyone, and thank you for joining us for our fourth quarter and full-year conference call for 2012. As you can see for those of you who had a chance to review the press release and review our earnings, you can see that the numbers continue to move in the right direction. And with Bob Bzdick, leading our management team after Pat White’s retirement, the company has achieved a new focus and how it’s operating.

While Pat’s management style was one were he would direct the company in a number of potential areas, where he thought we could achieve success. The result unfortunately over time was that many times we were diluting our management talents and time, as well as our financial capabilities. And unfortunately, very often the results did not come to fruition in a way that was meaningful.

Bob’s management style is one at a much greater focus, trying to find the greatest near-term commercial opportunities with the greatest potential and with laser focus taking our management team on our financial resources and devoting him in that type of focus management style.

The results, which Bob and Phil will speak to, and then Jeff will talk about Lexingtons’ recent developments, I think are showing up in both our growth and the ability to produce higher margins and just increasingly better results on a quarter-to-quarter basis.

I’m going to turn it over as we move into the final half lap of our merger process to the operating executive, so we’ll give you far greater detail and then I will finish up when they’re done and then we’ll go to Q&A.

So with that, I turn it over to our CEO, Bob Bzdick.

Robert Bzdick

Thank you, Robert, and thank you all for your interest in DSS. We are very pleased with our fourth quarter performance and continuation of our recent sales and gross margin fronts. We continue to emphasize sales growth opportunities, as well as explore ways to increase productivity and operating efficiencies in our legacy business divisions.

Again, 2013 was a transformative year for DSS. Our new product offerings as well our pending merger with Lexington Technology Group promises for very active, potentially rewarded in 2013. During 2012, we’ve made investments in research and new product development that significantly improved our ability, to deliver and manage our corporate print technologies digitally through the cloud.

Developing the ability to read our corporate security market using iPhone’s and now Android phones were key developments. This important next step in our technology portfolio resulted in the launch of AuthentiGuard in late 2012. We expect this offering to result in several new licensing opportunities in 2013.

AuthentiGuard is a powerful new tool for brand owners in the fight against counterfeiting and product diversion world wide. We are aggressively promoting and presenting AuthentiGuard to whether it’s going to be very receptive in a gazed audience of Fortune 500 brand owners... We have seen significant interest for pharmaceutical, cosmetics, fashion and apparel accessories companies as well as in various identification applications.

The complexity as of introducing and undermining security related technologies result in lengthy sales cycles. We have several brand owners who are entering or preparing to enter the beta testing phase of the process. Every potential client entering our space is a real accomplishment. This process is very disruptive and it requires the involvement of all internal logistical levels for brand owner and in most cases, outside revenues and security personnel.

As a result, they’ve access to be the non-initiated and with significant value is perceived by the brand owner. Effectively we’ve established that level of interest and is extremely encouraging. As it relates to our targeting markets and brand owners that we are gauging, I would like to make our stockholders aware of DSS’s adopted and non-disclosure policy.

There are serious potential consequences of counterfeits in the various products to brand owners. They share sensitive information with DSS during sales and implementation phases. Accordingly, they deserves expect and in fact ran the highest levels for discussion to be exercised by the providers of technologies that they implement.

Accordingly, going forward, DSS will not provide (inaudible) brand owners for specific products it was involved and protected. Accordingly, the Lexington Technology remains on track to close in the second quarter. The SEC review approval process continues to move forward regarding our S4 filing aided to actually move with our proposed merger.

In our view, we’re already in the final stages of that process. Once we clear the hurdle of record date will be set and a special stockholder meeting will be scheduled to where the merger proposals as such for in the set S4 filing.

Stockholders could expect with that meeting of what will be scheduled approximately 40% from the SEC approval in the S4. I would like now to turn over the call to Phil Jones, DSS’s CFO to take you through the fourth quarter and full-year results for DSS. Phil?

Philip Jones

Thank you, Bob. Today, we announced our fourth quarter and full-year 2012 financial results combined in the earnings press release we issued after market closed today and detailed in our Form 10-K, which we are in the process of filing today with the SEC.

To begin, we are very pleased to report that revenues reached $5.5 million in the fourth quarter, a record quarter for the company, up 30% over Q4 of 2011. For the full year, revenues reached $17.1 million, a 28% increase from 2011 and the highest annual level in the company’s history as well.

Our packaging division drove revenue growth both during the quarter and for the full-year. Packaging revenue increased 66% during the fourth quarter to finish the full year up 59% over 2011. For the full year 2012, each of our divisions, except for the printing divisions achieved revenue increases.

The printing group continues to see a reduction in overall revenues as it moved away from certain types of commercial printing to focus on its highest margin opportunities. The strategy is working. In fact, during the fourth quarter of 2012, security printing sales increased 47% as compared to the fourth quarter of 2011.

Just as strong is the revenue growth has been the growth in the company’s gross profits. Gross profit for the fourth quarter of 2012 was $1.6 million, a 40% increase over the fourth quarter of 2011. The company has greatly improved margins for the printing division in the fourth quarter which was 34% compared to 4.4% in the fourth quarter 2011, was the primary contributing factor to the company’s ability to increase its gross profit margin to 30% for the quarter, which is a 200 basis point improvement.

For the full year, gross profit increased 37% to $5.7 million with a 33% margin compared to a gross profit of $4.2 million for a margin of 31% for the full year of 2011. As has been the case throughout the first nine months of 2012, our efforts to streamline operating cost and focus our sales efforts on higher margin opportunities has paid off, especially in the printing division. So during 2012, we saw an increase in sales along with an even greater increase in gross margins, which of course, is a very strong formula for success.

Moving to operating expenses, for the full year, total operating expenses increased 24%, which was driven by significant increase in professional fees primarily due to the cost associated with our pending margin with Lexington. In addition during 2012, we increased our research and development cost for 72% and had a 96% increase in stock-based compensation cost.

Taking out these three expense items, on a comparable basis, total operating expenses would have increased only 7% from 2011. So despite a 37% increase in gross profit, what we consider to be core recurring operating costs only increased 7%. As such, we also measure performance using adjusted EBITDA, which is earnings before interest, taxes, depreciation, amortization, stock-based compensation, and other non-recurring items, including for our purposes, the merger-related professional fees.

During the fourth quarter, our adjusted EBITDA loss was $280,000, a 49% improvement from the fourth quarter of 2011 and for the full year, our adjusted EBTIDA loss reduced to 43% to $1.3 million. I remind everyone that adjusted EBITDA is a non-GAAP measure of performance and I encourage everyone to refer to the table we included in our earning release today for a reconciliation of our GAAP net loss to our adjusted EBITDA loss that I just referred to.

Net loss for the fourth quarter was $1.1 million, or $0.05 per share compared to a net loss of $1 million, or $0.05 per share in the fourth quarter of 2011. Net loss for the full year was $4.3 million, or $0.21 per share compared to a loss of $3.2 million, or $0.17 per share in 2011.

Once again, due to the large degree of non-cash expenses that affected our financial performance, including stock-based compensation and the impact of the merger cost, our adjusted EBITDA improvement during both the fourth quarter and full year 2012 is a useful indicator of performance.

Moving to the balance sheet; at December 31, 2012, we had approximately $1.9 million in cash and $2.1 million in account receivables, which we thought were strong sales in the fourth quarter of the year. Net working capital was a positive $1.3 million compared to a working capital deficit of $1.1 million at the end of 2011. In addition, total debt was reduced by approximately $1.7 million during 2012 to $2.6 million at the end of 2012 compared to $4.3 million at the end of 2011.

To summarize, we believe our strong fourth quarter 2012 and our full year performance was based on three important metrics, revenue growth, gross profit growth and core operating cost containment. The strengthening of our core financial results as measured by our adjusted EBITDA performance allows the company to continue to focus on research and development and other opportunities such as the proposed merger with Lexington Technology. These have the potential to generate significant long-term benefits to the company.

With that, I’d like to turn the call over to Jeff Ronaldi, CEO of Lexington. Jeff, the call is yours.

Jeff Ronaldi

Thank you, Phil. Yesterday, Lexington Technology Group announced that it made a strategic investment in VirtualAgility Incorporated, a developer of user-friendly programming platforms that facilitate the creation of sophisticated business applications without programming or coding. Lexington’s investment in VirtualAgility reflects our commitment to supporting operating businesses that hold strong IP rates.

The state complements Lexington’s acquisition of Bascom Research LLC in 2012, and it will be relevant to DSS articulate to its AuthentiGuard product line, which will benefit from VirtualAgility’s collaborative development tools. The investment provides Lexington with minority stake in VirtualAgility and the potential opportunity to expand its ownership in VirtualAgility over time under DSS’ umbrella once the proposed merger is completed.

The VirtualAgility investment provides Lexington with the opportunity to participate in VirtualAgility’s future growth and performance including its pending patent litigation recently filed in the U.S. federal district court in Eastern Texas, VirtualAgility versus Salesforce.com and others, which involves several major information technology companies. VirtualAgility’s leading edge innovations are protected by five issued U.S. patent and multiple trade secrets. The company also has several additional patents pending on innovative systems and methodologies.

Bascom Research litigation against Facebook, LinkedIn, and three other companies in the social networking space involving four U.S. patents continues to progress. Bascom Research, a wholly-owned subsidiary of Lexington, I believe defendant for a violation of key patents covering the technology and is seeking adjustment of infringement, injunctive release, and appropriate damages.

Lexington continues to explore opportunities to acquire IT assets, partnered with IT holders and the final pattern that would support both strategic business objectives and monetization initiative. The Lexington management team will look forward to the approval of pending merger and working closely with the DSS management.

With that, I’ll pass the call back to Robert.

Robert B. Bzdick

Thanks, Jeff. And also thanks to Bob and to Phil for their reports as well. Before we go to the Q&A, hopefully what you’ve taken from this is the fact that the focus of the company has changed and obviously with a pending merger with Lexington is going to change again.

For years, we used our technology the driver of our sales approach. Trying to sell customers what we bought that they needed and what our patented technology could do for them. The sales cycle is long and where we had limited success, the big scores that we are waiting for just never materialize.

Bob has the taken the team in the company and our new product suite in a different direction. We are using customer demand driven approach, where we take my technology working with the customer at the early stage and saying, what is that you really need out there in the marketplace? I can wrap around our technology and work for you. And if you had it, you would buy it, and that is how we’re operating now.

It will do two things, one it shortens the sales cycle and that is for variety reasons, not the least of which is it brings us into the company in a much higher level. We’re operating with the security directors and the people are actually in charge of brand protection, and will have the authority to proceed.

And as Bob alluded to earlier, that is let us – into datastage agreements with a number of customers, and that has happened far more quickly that we ever saw in our previous approach. So as we move forward with that and hopefully in regarding our future close with Lexington. The company will take on a variety of new dimensions and that we are very excited about and the legacy company as you can see continues to expand and perform well, better and better. On the focused management with the company that is now solidly financed and with the exciting drive by having a whole different aspect to it, once the merger closes.

So I guess the biggest marks many of you have is why is the stock not performed better or under these circumstances. Those of us have been in the market for a lot of notice; there is no easy answer. During attendance of America very often forces. Also knows that you think part of the basics that people rely on tend to over time in historical market fundamentals.

As so I say we’ve drove very, very closely inclusion on the merger. Hopefully that phase will end and will get into a point were people start to evaluate the combined companies in a way that will take a merger distortions out and let future determined, where and how our stock acts going forward.

And with that, I will now turn it over to our moderator to open the Q&A period.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Elliott Blonde from Royal Bank of Canada. Please proceed with your question.

Elliott Howard Blonde – Royal Bank of Canada

Couple of three questions. On the $2.1 million outstanding, what’s the DSOs on that?

Philip Jones

I don’t have the exact figures in front of me. But our typical DSO is about 45 days, so we’ve seen those collected in the first quarter.

Elliott Howard Blonde – Royal Bank of Canada

Okay. On the printing side which is doing very well, do you continue to see progress there from where you are now?

Robert Bzdick

We see progress in the security print side of the business, the commercial side of the print business is still I’ll say there’s more of a universal comment, commercial side of the industry it’s very impressed and still remains impressive.

Elliott Howard Blonde – Royal Bank of Canada

Okay. And I guess the big question mark would be licensing, you are in the beta testing now, when you said a long cycle what you were referring to just give a generalization?

Robert Bzdick

Typically speaking, the brand-owners will fit one or two brand products that is currently are not maybe just coming out of the market or something that have specific problems with. We have to go through a cycle down to train their internal and external logistics partners and then we are able to move forward. Once we test those things and they are successful, I would say that the company is going to position in brand-owner via position to make (inaudible) 30 to 60 days from there.

Elliott Howard Blonde – Royal Bank of Canada

So we are talking like six months perhaps, nine months I mean is there a generalization you can make?

Robert Bzdick

I would hope that it would not be that long. In some cases, depending on how and viable the beta data is, we anticipate be hold some income even out of the beta testing.

Elliott Howard Blonde – Royal Bank of Canada

Okay. And just two more if I may, what do you expect for continuing merger expenses?

Philip Jones

We won’t see the levels we saw from fourth quarter. A lot of the heavy lifting was done in that quarter. So we’ll still see an impact in the first quarter until the merger closes, but we should expect not to the same degree as the fourth quarter.

Elliott Howard Blonde – Royal Bank of Canada

Okay. And then for the Lexington guys, hello Peter, can you comment after we pushed out of Virginia to I believe its California how that’s proceeding?

Peter Hardigan

The case is proceeding much as we anticipated. We are in discussions with I think all of the tenants and we expect that we will be successful in assorting the patterns that we have, with the dependence that we have over sort of a slightly longer time period. I don’t think that there is much of a change in terms of how we anticipate the case to go just that California is a little bit longer timeframe.

Elliott Howard Blonde – Royal Bank of Canada

Okay. Thank you very much and good progress.

Robert Bzdick

Next question.

Operator

Our next question comes from the line of [Brian Merriman], a Private Investor. Please proceed with your question.

Unidentified Analyst

Billionaire Dr. Philip Frost has a sizable stake in DSS. My question to you is twofold, can you comment on what his current share ownership is, and can you comment on whether or not we hope he is more active in this oncoming merger?

Robert Bzdick

We can’t comment on his ownership, only he has to comment on that if he chose to and we certainly always happy to have intelligent engaged activist investors as part of our shareholder base, whomever it is in this case the gentleman you referred to, if you take a look at past history and affiliations, certainly we like to have investors in our shareholder base who have proven successful.

And we hope that in the event that Phil Frost is in fact the sizable shareholder that he is done so, because he has same face in the company that we do. But quite frankly it’s inappropriate for us to either comment on individual shareholdings or be able to speculate on what they might do in the future.

Unidentified Analyst

Thanks, thank you.

Robert Bzdick

Next question.

Operator

Our next question comes from the line of Mark Argento from Lake Street Capital Markets. Please proceed with your question.

Mark Argento – Lake Street Capital Markets

Hi good afternoon. Quick question for Jeff and Peter. I apologize if you already have discussed this, I came on little bit late, but the VirtualAgility transaction that you did recently just put out of press release on, can you talk a talk a little about that in particular, kind of how you structure that deal. And then we’d like to have at least one litigation pending right now. How broad is that portfolios or opportunities above and beyond just the litigation that we see so far?

Jeff Ronaldi

Sure. This is Jeff Ronaldi. We made an equity investment in VirtualAgility, we see it as an operating company that supported by strong IT assets. So this is a strictly a patent play this is – we’re getting access to the products and services and expect to help them sell their product and services as well as use them our self. In the case of the litigation, as a stockholder, we’re going to share the proceeds of that litigation. It’s currently a single patent filed in Eastern Texas against, about nine defendant sales force being them to main product that it’s being asserted against them a number of others. The VirtualAgility portfolio is currently size issued U.S. patents about five others pending. We expect to continually look thorough the portfolio for other opportunities. I can’t really speculate on whether they will add additional defendant, or our additional cases with other patents, but we believe that they also have a very strong portfolio, and we will share in those proceeds as we move forward.

Mark Argento – Lake Street Capital Markets

As part of the transaction do you have the ability to scale up your investment if you purchase?

Jeff Ronaldi

We do. We have options going forward that allow us to invest additional funds if we choose to do so, which would also increase our stake in the company obviously.

Mark Argento – Lake Street Capital Markets

And is it safe to assume that you are looking at other opportunities similar to this, in terms of being able to deploy capital both from – into operating business as far as that are also IP-rich?

Jeff Ronaldi

Yeah, what we’re working for is operating companies with strong IT asset and VirtualAgility fits that mold. So we will look for other opportunities that fit, that can use, that we can use their products, or they could use our products. And compliment what we do with the essence.

Mark Argento – Lake Street Capital Markets

Great. Thank you very much.

Jeff Ronaldi

You’re welcome.

Robert Bzdick

Next question.

Operator

Our next question comes from the line of [Tom Selker], a Private Investor. Please proceed with your question.

Unidentified Analyst

This is for Bob Bzdick, Bob would you describe basically for that and functionality of the data testing that is ongoing with some of your customers, with the iPhone and the Google software, android?

Robert Bzdick

Yes, as far as the process goes, as I mentioned before the brand-owner has get one or two items, one that we are interested in perceiving with those new pharmacy drug, the other is a consumer product, [over the sell] kind of thing. Basically in the first step obviously is to trade and then and how the market is work.

Document as educate their vendors that they want to use their own vendors is to how to print the products. Then we install a management program that allows them to determine who in their organization is able, or who is in the security arena are able to download apps to do the reading of the products was to [get another] field.

And then we setup the back-end portal that allows them to actually manage turn it on and off, give this access for the apps to us to change what the colleagues mean if they want to extend the expiration date for instance they can do that right through the portal. They can indicate through the portal that product is under recall, they have a vast amount of flexibility there.

We also demonstrate to them how we can manage the information whether they want to do it on acceptation basis, whether they want to do it by region. Each read gives an information as to where GPS therefore driven rigorously, and where the product was whether it passed or failed in real time which is all things that are very valuable to the brand owner.

It look like answers your question, but basically we bring the process to suit the nuts, turnkey capability so they can actually use it for a period of time within restrictions of volume and so forth.

Unidentified Analyst

Okay. You answered partially to my question. Let’s take for example the pharmaceutical industry, are you starting – are they starting to use your technology, when the pills for example go over low end of the bottle and our package tightly at a factory and then caught often through the distribution chain on to the retail market.

Robert Bzdick

I can’t really disclose as part of our non-disclosure, because again that’s part of the (inaudible), so people don’t know where it is. But it could be anywhere from on the bottle, on the label, on the table, on the eminent seal on the box, it could be anywhere and that’s part of the cohortness of the market.

Unidentified Analyst

Thank you.

Operator

Our next question comes from the line of Morris Levy from M A Levy & Associates. Please proceed with your question.

Morris Levy – M A Levy & Associates

Hi, guys. I’m sitting here and thinking about the potential of the company and I’ve heard a lot of good stories about it. And my only question is what kind of valuation that you give on these lawsuits against using pack with this information both with (inaudible). Do you have any kind of a number that we could kind of – what kind of valuation would you give on that?

Peter Hardigan

This is Peter Hardigan. I think that one thing that maybe helpful. We haven’t disclosed this. It’s not something that is positive to disclose, because it’s something that impact both the litigation itself, and it’s something which is…

Morris Levy – M A Levy & Associates

All right.

Robert Bzdick

Not always the straightforward thing. But one thing I’d say is, if you look at the last round of financing that Lexington did for part of the merger as we disclosed in our S-4. We saw approximately 10% of the company due to experience investors for about $5.5 million. So the year the company at that stage when we had acquired the portfolio and assembled initial management team was around that number. So it’s sort of a on a market approach and that will you sense.

Morris Levy – M A Levy & Associates

Maybe kind of put a number on it. But do you have enough capital now to explore the merger while it gets completed, I’m sure it will. Do you have enough capital to keep operating?

Robert Bzdick

Part of the merger agreement requires license to have $7.5 million in cash and or cash equivalent assets at closing in addition to the cash that would be in DSS at the time of closing. We’ve done litigation analysis to see how much we think we need to see the current suite of advance through to conclusion. And the answer to your question is, yes, we believe that we have provided adequately for those needs.

Morris Levy – M A Levy & Associates

Because you can do it, you can do an offering at $2 a share. But I don’t know what, if the market doesn’t consider the potential of the company, but that’s not my business.

Robert Bzdick

When we did…

Morris Levy – M A Levy & Associates

I’ve been in a business for 50 years and I know it’s an exiting opportunity. I know a lot of stock and it’s an exciting opportunity if everything pours in place. And I wish you guys, the best of luck and I just wanted to be sure that you have enough operating capital. I saw you had a TV spot on Fox Business news and was pretty interested, yet nothing happened yesterday. But are you going to contribute to do these kinds of informational things?

Robert Bzdick

We’re going to continue with the program of trying to help get our story effectively.

Morris Levy – M A Levy & Associates

Good, great.

Robert Bzdick

And we expect that with the closing of the merger, which the period we feel is getting very short in time. But then we’ll be able to be far more aggressive in discussing what’s going after we done with that…

Morris Levy – M A Levy & Associates

And the S-4 has done?

Robert Bzdick

Exactly…

Morris Levy – M A Levy & Associates

Are there any problems with getting approval of your S-4?

Robert Bzdick

As we sit her today, we do not see any problems. It’s been moving according to schedule. Was the SEC went home today; they run from the snow storm early?

Morris Levy – M A Levy & Associates

No, Obama gave him the week off.

Robert Bzdick

Yes, we won’t get sequestered into a slower.

Morris Levy – M A Levy & Associates

Let him get sequestered.

Robert Bzdick

Thank you, Dr. Leamy.

Morris Levy – M A Levy & Associates

Take care, buddy.

Robert Bzdick

All right.

Morris Levy – M A Levy & Associates

God bless you guys and have a wonderful big number.

Robert Bzdick

All of that thank you.

Morris Levy – M A Levy & Associates

I keep buying it. That must be Fagenson. I think he knows me, because I was down the floor of the New York Stock Exchange in the 50s.

Robert Bzdick

Don’t worry. They ask me to take the question, because I knew who you are.

Morris Levy – M A Levy & Associates

Okay, buddy. Take care, God bless.

Robert Bzdick

Take care.

Morris Levy – M A Levy & Associates

Bye-bye.

Robert Bzdick

Next question.

Operator

Our next question comes from the line of Howard (inaudible), a Private Investor. Please proceed with your question.

Unidentified Analyst

Yes, I would like to know how many shares have been issued in the year 2012 compared to 2011?

Robert Bzdick

Phil, that would be the offerings that we did, right.

Philip Jones

Yeah, approximately two million shares in 2012 which is 40,000 shares in 2011.

Unidentified Analyst

I’m just interested because I know that Mr. Ronaldi was on the payroll of DSS. And then he changed over to Lexington and he got several amount of shares. And now I see that Mr. Bzdick has been awarded a lot of shares and options and I’m just wondering are we diluting the stocks at the cost of the other stockholders?

Philip Jones

Well, we certainly don’t think that we are and I’m not aware that Mr. Ronaldi was affiliated with DSS.

Unidentified Analyst

If you look on November and then in October that he was on your, is this Mr. Fagenson?

Robert Fagenson

Yes, it is.

Unidentified Analyst

Okay, he was on your payroll so to speak.

Robert Fagenson

Jack, have you been on the payroll of Document Security?

Unidentified Analyst

Our best option is to buy shares of your company.

Peter Hardigan

This is Peter Hardigan. When Jeff agreed to take on the role of CEO at Lexington Technology Group, he was awarded an option package that was in Lexington stocks that we convert to DSS stock upon completion of the merger. Jeff has had no relationship with Document Security Systems prior to his involvement with Lexington Technology Group. Jeff was boarded by the Lexington Technology Group from August through November 2012 and became CEO on November 20, 2012. So he has had no relationship exactly with Document Security.

Unidentified Analyst

So he already has his shares of Lexington Technology Group.

Peter Hardigan

Correct, as it stands now. That’s correct. We at DSS and DSS shareholders have not awarded to anything to him or been diluted by Jeff at this point.

Unidentified Analyst

All right, I’m just worried about the number of shares that have been issued and options given and to lower the value of the stockholders that have been with you for several years and have seen no increase in the value of their stocks, in fact a major decrease.

Peter Hardigan

As someone who with my wife and children personally owns well over 1 million shares. Trust me, we are in the same boat with you, I have not. . .

Unidentified Analyst

Okay, I wish you all the best.

Peter Hardigan

I wish us all the best, trust me.

Unidentified Analyst

Thank you.

Peter Hardigan

Thank you.

Operator

Our next question comes from the line of [Ben Dino], a Private Investor. Please proceed with your question.

Unidentified Analyst

Yeah, hello?

Robert Bzdick

Yes, go ahead Ben.

Unidentified Analyst

Yeah hi. I’ve been investing in DSS for approximately for over six years and the strategy of the company seems to change early 12 months. I’d like to know the reason for that?

Philip Jones

Well, I don’t think the strategy changes so much as the market realities change. We’ve taken a very, very small company when I became a share holder and then when I agreed to get involved, that had $3 million or $4 million in sales and was loosing $4 million a year and we’ve grown it with limited financial resources to one that is just book record sales and then about $17 million in sales and is rapidly shrinking its negative EBITDA number to the point. I think last quarter is $280,000.

With that what we try to do and adapt to the market trends, at the point where we acquired the printing company it appear to us that based on the information and results we’re having with customers and having the higher margin security printing business in house rather than at that point getting it out of house and giving a way around the margin was the right thing to do.

Just is that happen of course the bottom, so lot of the economy and the regular printing business went through the floor, and suddenly something that looks so bright even if few months ahead looked dismal. And had we not adopted and changed our focus in direction at that point, it could have taken the company on that.

So I think what we are as to million like and that we have to change and adapting environment we find ourselves and despite effect that the validity of our technology and the excellence of our technology team has never been challenged. The problem in the marketplace is one that when the economy particularly when it’s not doing well, it starts to people are not willing to compromise margins for security, it became increasingly difficult to penetrate the markets in the way that we’re going here with the big licensing dollars.

And what I meant essentially was that if you are commercial bank and you were paying 100% to protect your check with basic outdated security when you go to your printer and say I want the best, but I’m not going to pay more for it, the printer is disinclined to license our technology in the camaraderie margin. So, essentially our customers and licensees became our enemies to a certain extent, because they were refusing to pay and unable to pass through the course for their customers.

So if we haven’t adopted our approach, I think we would have been standing still and we still be looking at the company with the quarter of the sales and suffering massive losses. So while I can’t say that you are wrong, I’d say that what we’ve done to take any approach that we have to adapt to the market and take the basic technological buildings that we’ve got and continue to seek the best way to make the type of scores that we think are out there for this company.

And I think the purchase that we’re now, which is one of the thing customer driven versus technology driven is showing us that the results that we see from the customers who are willing to go much more rattling at the data testing, because we’ve given the products that they’ve asked for, rather than the products of our technology dictated.

So do I know that we’re right, as they say I want to check cash, is I don’t know it’s good. I can’t tell you for certain, but I can tell you that we have continue to invest time, energy and mind, in what we believe, also look at best fruits, and disappointing as it may be in terms of current stock price for all of us.

I think that the merger with Lexington open the horizons to much brighter potential and continuing to mind the fields more effectively around like our technologies, where we think we have to be at this point. And yes have we changed over the years, there’s no question about it, but at some point you’re faced with adaptor guy and that’s basically what’s generated, what we’ve had to do.

Unidentified Analyst

What’s interesting is that four, five years ago I have involved in this stock. I purchased some stock at $8 in a $11 and the company was nowhere as you had just mentioned. Now the company is so much better how you know (inaudible)?

Philip Jones

It is a fascinating dichotomy, and I can’t deny it. People who are at stock in early years based on expectations and hopes that the technology would take you up as people would just rush to brand protection on when counterfeiting with just absolutely expanding. And now we are at a time where counterfeiting is at all-time high, and our technology is finally getting accepted in the stock is selling at a quarter what it was.

Listen all I can do from my own personal financial situation as well as all my fellow shareholders is hope that we’ve reached the bottom and the cycle is going to reverse. I mean all we have to do – all we can do is drive towards that goal, our stock is at and what depending more than yours.

Unidentified Analyst

Clearly I just want to know some type of methodology volumes when we’re doing, amazing at $70 million with 20% of the revolving, we are doing $4 million we need sales (inaudible) of $4 million now.

Peter Hardigan

If I could figure out why the market does these things then I’d be a genius, but I’m not. But all we can do is the best that we can. We thank you for your continued support in share holding and we hope that this year will prove to be a good one.

Unidentified Analyst

Okay.

Robert Bzdick

Thank you. Any more questions moderator?

Operator

There are no other questions in the queue. I would like to hand the call back over to management for closing comments.

Robert Bzdick

Thank you all our shareholders for your interest, for your questions, for your time and for your ownership with DSS shares. I thank our management team for their continued good work. And I hope that in succeeding quarters, next time we meet we will have a merger that’s closed and results that are better. And with that we’ll wrap-up the call. Any one else want to add anything?

Thank you all and good evening.

Operator

Ladies and gentlemen this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have wonderful day.

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