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Document Security Systems, Inc. (NYSEMKT:DSS)

Investor Update Conference

July 8, 2013, 16:30 PM ET

Executives

Peter Salkowski - Managing Director - Blueshirt Group

Robert Fagenson - Chairman

Jeffrey D’Angelo - Vice President and General Counsel

Jeff Ronaldi - Chief Executive Officer

Philip Jones - Chief Financial Officer

Peter Hardigan - Chief Operating Officer

Robert Bzdick - President

Analysts

Matthew Hoffman - Cowen & Company

Mark Argento - Lake Street Capital Markets, LLC.

Robert Wasserman - Dawson James Securities

Sandy Wyman - Gilford Securities Incorporated

Yun Kim - Janney Capital Markets

Operator

Greetings, and welcome to the Document Security Systems Investor Update Conference Call. At this time all participants are in a listen-only mode. A brief 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, Mr. Peter Salkowski, Investor Relations for Document Security Systems. Thank you, Mr. Salkowski. You may begin.

Peter Salkowski

Thank you, Manny. Good afternoon and I'd like to thank everyone for joining us today for Document Security Systems Investor update conference call. Joining me on today's call from Document Security Systems are Chairman, Robert Fagenson; CEO, Jeff Ronaldi; General Counsel, Jeff D'Angelo and CFO, Phil Jones. Also on today's call are President, Bob Bzdick and COO, Peter Hardigan. Following management's prepared remarks we will open the call for questions.

Before management begins I'll review the company's Safe Harbor statement. Effective on July 1, 2013 Lexington Technology Group, LTG became a wholly-owned subsidiary of Document Security Systems or DSS. Forward-looking statements on this call, including without limitation, statements related to the company's plans, strategies, objectives, expectations, potential values, intensions and adequacy of resources are made pursuant to the Safe Harbor provisions of the Private Security Litigation Reform Act and contain words such as believes, anticipates, expects, plans, intend and similar words and phrases.

These forward-looking are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements other important factors risks and uncertainties that could cause results in those differences and those differences include but are not limited to those disclosed in the risk factor section of the company's annual report on Form 10-K for the year-ended December 31, 2012 previously filed with the SEC and the risk factor section of the company's definitive proxy statement or prospectus also previously filed with the SEC in connection with the DSS-LTG merger.

The forward-looking statements made as part of this call are being made as of today, July 8, 2013 and the company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

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

Robert Fagenson

Thank you, Peter. Good afternoon everyone. To those of you who are joining us as shareholders for the first time, welcome; to those of you who have been long-standing, long suffering shareholders, welcome back. Before management begins their discussion of operations and other items leading up to the Q&A. I want to just take a moment and reflect back on some things that we heard at the shareholders meeting that might be of interest to you in terms of clarification of what’s going on and then talk a bit about the market actions and other things that we're seeing currently.

As you know a number of resolutions were posed to our shareholder base this year, some perhaps leading to the successful closing of the merger, others did not. I just want to spend a moment as to motivation on those.

One was regarding reverse merger and people seemed to be very confused about why we would be proposing a reverse merger at this time. It was strictly defense in case the stock price dropped before the deal closed and we became subject to continued listing requirement that the stock was below $2 as of last Monday, could it pose a problem. There was no intent, if there were an intent to adjust, unilaterally reverse split the stock rather. So the reverse split rather reverse merger, the reverse split was simply on the ballot to protect us, it didn't pass anyhow and because the stock at the time was above the threshold price it became irrelevant.

The staggered Board, the staggered board was put in place basically to protect from a perspective of Board turnover the pre-existing Document Security shareholder base, from seeing the entire Board turned over because if the new shareholders gain a majority of share ownership they could perhaps call a special meeting and unseat the remaining Board members. So a staggered Board was proposed and the structure were if that was not achieved, which it wasn’t approved in the past, then in fact we would have a four-four Board, unless we find a mutually acceptable ninth member of the Board so then at least there would be an equality amongst previous Board members and new Board members.

The $0.02 warrant issue, the $0.02 warrant issue was created because as part of the original negotiated merger consideration some of the new shareholders were concerned that they might go over the 9.99% threshold of share ownership and therefore become the in-control person. As a result the third issue was injected into the structure so that they could hold preferred shares and not end up with more than 9.9% of a class that requires special registration and hold their positions if they do not want to take above that 9.99% threshold.

The alternative was that if the preferred share issue did not pass which it didn’t, that in lieu of the certain number of shares that they were to receive as part of the originally negotiated merger consideration they would instead receive $0.02 warrant that they could exchange for those shares they were supposed to get but didn’t get at closing. And the net result is the same number of shares outstanding that would have been, except the company, we’ll get the $0.02 share when they exercise the warrants.

So it wasn’t that additional shares were issued, or we were seeking authorization of additional shares in that resolution which did not pass. And therefore rather than create the preferred the $0.02 warrants which are now optically don’t [look] percentage but in fact it's not practical and have no practical change in the actual terms of the merger were created.

Obviously that the last piece is the escrow shares and both Jeff D'Angelo and Phil Jones will go into this in greater detail and we can answer questions on it. The escrow shares that you know are being held in escrow, over seven million shares and are subject to cancellation if the stock performance does not such as you’ve all read and studied the prospectus. And although they are included in the shareholder base count and they are votable shares they are not going to be distributed until as and if the conditions of the price activity as you read in the prospectus are in fact met, on the registration segment rather.

Now what’s being going on, obviously we're going through a transition. We have had historical shareholders who own DSS because of historical businesses in the prospect that they believe where they are that would lead to an eventual successful operation in terms of someone owning the shares. We have had new shareholders coming in, who have taken a look at the Lexington portfolio and management team and become excited about that and have purchased their share as a result of what they thought were those increased and broadened prospects of the company.

We now have found on a post-merger basis that we have a bunch of what we call financial shareholders who really don’t have a long term interest in the company, that they are simply today taking a short term view and selling the stock mercilessly down to ever increasing lows, millions and millions of shares have traded and continue to trade and as it is not unusual in post-merger activity as your shareholder base turns towards those that want to own the stock long term and those that simply don’t.

The market action historically in many stocks has not been indicative of what the long term prospects or medium term prospect for the company are because shareholder some of which are selling, some of whom are selling are not looking past near term market action towards long term prospect.

We have no choice but to manage the company and the best way we know how, was creating long term value, to understanding the short term market mechanisms that we are all suffering through and suffering is the operative word, are things that we hope will have a finite duration and that they will over when they are over. We don’t know what day that will be, we don’t know when all those who want to sell their shares with tremendous immediacy will finish. But all we can do is continue to manage and take the assets of the company, the substantial cash assets, operating assets, human assets and intellectual property that we have and move forwards towards monetizing it in the best way that our management knows how.

In the context of the reformation of the board Dave Wicker who remains with the company and John Cronin who remains available to us as a consultant of the company and Roger O'Brien have left the Board, as you remember Pat White retired. Peter Hardigan and Jeff Ronaldi our Executive Management team have joined the Board and remain on the Board with Bob Bzdick who is now President of the company and myself acting as a Chairman, as well as Ira Greenstein who heads a company called Genie Energy Limited which was, I believe spun out from IDT where his mom was the President and acts as Advisory to the Chairman, remains on the Board.

Jonathon Perrelli have joined us; Jonathon for those who have not read his bio has significant experience. He is Founder of four to five ventures in cyber security solutions that serve not only U.S. Department of Defense but also other members, our intelligent community but really brings to us as a tremendous wealth of experience in both technology and security company and it’s a tremendous synergistic add to the Board. Warren Hurwitz has been added to the Board as well, as a partner now through Capital Partners, which is a private investment fund that he co-founded. They focus a lot of their investing on enforcing and protecting their rights of intellectual property assets and Warren's again an extremely strategic addition to our Board.

David Klein, who was a member of our Board and as you know is the Treasurer and Senior Vice President of Constellation Brands, the Rochester based (inaudible) spirits company that owns Robert Mondavi, and has just taken over the distribution of Corona beer and a lot number of other brands. He is a tremendous asset to us because of specialty and strategic marketing and physical planning are certainly something that when we need on the DSS board.

So the reconstituted board is in place, our new management team is in place, our assets, our cash, our intellectual property are in place and the management of this company as you will hear in the minutes ahead, as they get to speak I believe have poised us to take the assets that we have and march forward and hopefully will be able to look back on the near term price action we are seeing in the stock and have it fade from memory as the benefit of the company that’s merged together and that we are building will start to showing through. And with that I will end and turn it over to Jeff Ronaldi.

Jeffrey D'Angelo

Jeff D'Angelo, actually.

Robert Fagenson

Oh sorry, Jeff D'Angelo.

Jeffrey D'Angelo

No problem, Robert.

Robert Fagenson

Too many, Jeffs.

Jeffrey D'Angelo

Thank you, Robert and good afternoon everyone. The management team of DSS are pleased and excited to announce the merger between DSS and LTG close on July 1, 2013. With the merger closed I'll further discuss the implications of the proposals that were not passed or discussed at the meeting of stockholders. I will then turn the call over to Jeff Ronaldi. Jeff will introduce everyone to the new DSS by providing background on the management team, insight into the management's strategic priorities and information on the revamp structure of the conference. Jeff will also discuss our plans for communicating with investors moving forward.

To quickly review the three proposals that were not approved at the special meeting related to implementing a staggered Board of Directors, authorizing a reverse stock split if necessary and authorizing the issuance of preferred stock. We believe the proposals that were not approved by our stockholders will not have a material or not have a meaningful impact on DSS' operations moving forward. I will address two of these proposals and Phil Jones will address the third proposal later in the call.

As noted a minute ago by Robert, instead of a staggered board structure the Board is comprises four Board members elected by DSS and four board members elected by LTG. Each Board member will serve annual terms, that is in the staggered three years on; if necessary management will evaluate the option and appoint a ninth Board member in the future. The unapproved reverse stock split proposal also should not material effect the company's operations for the following reasons.

Just prior to the closing of the merger the NYSE market made a decision to treat DSS' listing application as an additional listing application rather than an original listing application. Under an additional listing application scenario there is no bright line minimum stock price requirement to continue listing on the NYSE market. Under an additional listing scenario DSS must satisfy certain criteria to remain listed with the NYSE market. These criteria include one, maintaining stockholder equity of greater than $6 million; two, maintaining a total market capitalization of at least $50 million and three, having at least 1.1 million shares publicly held by at least 400 long lived stockholders and the total market value of each share equating to at least $15 million. As of today's call DSS is comfortably above each of those thresholds.

This concludes my comments. I will now turn the call over to Jeff Ronaldi, CEO of DSS. For those of you who are not familiar with his background, Jeff is the former CEO of LTG and has over 25 years of general management and IP monetization experience. Before becoming involved in IP investment Jeff helped a few companies public, UUNET and Concentric, and was the general manager of SPX's ImageExpo business unit. His investments have generated 175 million in return on less than $15 million in investments. Jeff?

Jeff Ronaldi

Thank you, Jeff. Above all else we wish to thank the stockholders of DSS for your participation and support at the special meeting of stockholders held on June 20, 2013. Overall we are very pleased with the results of the special meeting. For those of you who are not familiar with our executive team, I'd like to provide a quick introduction. Bob Bzdick is President. Bob was an entrepreneur who build Premier Packaging into a high successful and profitable business prior to the acquisition of Premier by DSS in 2010, having served as COO and later CEO of DSS, Bob brings extensive executive business development and operations experience as well as an entrepreneurial spirit for the current management role.

Peter Hardigan, who was COO of Lexington is now the COO of DSS. Peter began his career as a strategy consultant and became involved in IP by serving clients in the pharmaceutical sector. He has over 15 years of general management and IP management experience, including roles as the Principal at Charles River Associates in New York and Germany and as a CFO and Head of Investment management at IP Navigation Group.

Phil Jones is CFO. Phil has served as CFO of DSS since 2009 and has 17 years of experience in accounting and finance sector. His experience ranges from SEC and public company reporting to M&A and raising capital.

Turning your attention to the strategic priorities of DSS, management has established the five, the following five priorities. Number one, continued revenue growth and cost control to generate profit, continued monetization of AuthentiGuard through advancing brand protection as well as direct consumer marketing opportunities. Number three, continue to expertly manage the Bascom and VirtualAgility matters. Number four, develop the IP portfolio by leveraging the company's technological expertise to evaluate investments with significant potential and making investments in companies that meet our criteria.

And finally develop staff by bringing in additional managers and partners that can manage complex investments and intellectual property. In order to achieve these priorities we have separated the company into five divisions; DSS Printing, DSS Packaging, DSS Plastics, DSS Digital and as a result of the merger management has established a fifth operating division, DSS Licensing and Technology Management, which combines the legacy DSS Licensing division with Lexington. It's probable that this division will be named or will be renamed at a later date. This fifth division will hold the company's intellectual property assets including investment in Bascom Research and VirtualAgility as well as DSS' licensing operations.

The division is led by Lexington's experience and proven IP management team and will assume the ongoing management of the Coupons.com litigation and the DSS IP portfolio. It will also evaluate new investment opportunities in the IP monetization and licensing phase. We believe this structure will better position DSS to capture the financial potential associated with IP monetization while limiting the company's downside for continued growth of its legacy business operations.

DSS anticipates that the printing, packaging, plastics and digital divisions will provide a consistent stream of revenue from operations. We see a compelling amount of opportunities for DSS and believe that the structure will foster a strong but nimble company geared towards consistent profitability with the potential for significant upside returns. With that as a backdrop management is focused on attracting long term institutional investors who will work to attract investors and understand the business model and appreciate the long term growth prospects of the combined companies.

One way we hope to accomplish this is by remaining communicative and transparent with our stockholders and potential stockholders. That said we need stockholders to understand that in order for management to achieve our long term goals we are limited from disclosing certain information. Often we cannot release customer names, the terms of license agreements or the terms of settlement agreements. This is for contractual and competitive reasons. Further disclosing our IP valuation could ultimately hinder the company's ability to monetize its investments.

Stockholders can expect the management will provide update on court filings, developments such as markman hearings and settlements and other important issues when possible.

We believe we have laid the ground work for what will be a very exciting time for DSS. Although we still have a lot of work ahead, we believe the company is better positioned to achieve its long stated objective of developing consistent revenues, earnings and cash flows. We look forward to continued progress in 2013 and beyond. Thank you again for your support. With that I will turn the call over to Phil Jones. Phil?

Philip Jones

Thank you, Jeff. Upon the merger closing on July 1st, Lexington brought into the combined company cash balance in excess of the 6.2 million required by the merger agreement. This figure being net of the professional fees paid or to be paid by Lexington in conjunction with the merger. As a result the company has a very healthy cash balance to continue meeting its operating needs and more importantly make the investments in the patent and technology asset opportunity that Jeff referred to earlier.

The combined company also has the operations and operating assets from the DSS Security business line along with the substantial intangible assets from Lexington that will be reflected in a very different post-merger balance sheet. We are currently finalizing the determination of the accounting treatment of the merger as well as assessing the fair value of the various assets brought forth into combined company. We will be recording these numbers along with the required pro-forma financial information on a Form 8-K no later than September 13, 2013.

Our second quarter 10-Q will reflect the results of the pre-merger DSS business on a standalone basis through June 30, 2012. Regarding the second quarter financials into the company is in the process of finalizing core DSS business continue to see the benefits of the trends established in 2012 with both revenue growth, profit growth based on a focus of optimizing product sales mixes and containing our cost, each of which directly and positively impact the bottom line.

Our second quarter we will continue to see but will be the last quarter of significant merger related cost. Once again we will be issuing the full second quarterly results for the pre-merger DSS which we expect will occur during the first or second week of August. Subsequently for the third quarter and beyond the company will report as a combined company.

As of July 1, 2013 as a result of the merger there are approximately 46 million shares outstanding, of which 7.1 million are being held in escrow. Also in accordance with the merger agreement there were approximately 3.4 million warrants that we issued to certain Lexington shareholder in lieu of the preferred stock they were otherwise entitled. These warrants which effectively can be converted immediately into common shares were issued in place of the preferred shares that will not accrue to the stockholder immediately as Robert explained earlier.

With that I will turn the call over to Peter Salkowski for the question-and-answer session. I remind everyone that we will answer the questions to the best of our ability within the limitations and compliance of public company reporting requirements. Please keep that in mind when asking your questions and we greatly appreciate it. Peter?

Peter Salkowski

Thank you, Phil. I'd like to open now for questions, Manny for Q&A if you can give directions for how to get into the queue, appreciate it.

Question-and-Answer Session

Operator

Certainly. We will be now conducting the question-and-answer session. (Operator Instructions). Our first question comes from Matthew Hoffman of Cowen. Please go ahead.

Matthew Hoffman - Cowen & Company

So it sounds like the company has five different operating infants to be structured correctly and I was wondering how that new structure in the light of some of the headlines we have seen from the Obama administration about the role of patent holders and patent trolls entities, sheer patent association entities, but does this structure in any way enhance or hinder your access to certain venues like the U.S. ITC, versus the strategy for the operating company in light of that. Thanks.

Jeff Ronaldi

Sure, this is Jeff Ronaldi. I will answer it as it relates to the IP. Obama’s comments recently was to get out an executive order in relation to patent trolls does not affect us at all. We have never will -- we should not be considered a patent troll or an operating company that looks for undervalued assets and many times those undervalued assets are IP assets.

Specifically to the ITC, the ITC has its own rules about protecting U.S. domestic industry. You need to be U.S. domestic industry to enter the ITC. So if we have in an operating unit and deliver products that we believe the best venue is the ITC we should be able to use that venue. However at the end of the day it’s up to that system, the court system to decide if we belong or not, but by any stretch of imagination we are an operating company. So we should not be affected by many of the pending legislation.

As far as separating the units it will allow us to evaluate the unit as a standalone, make sure that we can make each and every one of those profitable and that's the ultimate goal.

Matthew Hoffman - Cowen & Company

So put another way, one of the rationales here for putting an IP heavy company together with a sort of operating company is that you would have an advantage over a pure PAE which has also a significant licensing revenue and the company's intention is post-merger you guys should have every benefit in the world of domestic manufacturer, right?

Jeff Ronaldi

That's correct.

Matthew Hoffman - Cowen & Company

So moving into the trickier questions now I know you can't release a lot of the balance sheet items post the merger, but can you bracket maybe net cash, receivables, inventory and payables, balance sheet items, pro forma post-merger maybe a wide bracket even?

Philip Jones

Yeah, hi, this is Phil Jones. We will, we are in the process of assessing the post-merger balance sheet. We do have a -- we have a date to do that work no later than September 30, 2013. So the traditional DSS balance sheet will look very similar to the first quarter and then post-merger balance sheet will be significantly different. We did provide some pro forma financials on the S-4. So I think that provides a pretty good picture of what we will look like after the merger.

Matthew Hoffman - Cowen & Company

Right, and no major surprises relative to the S-4 and specifically with the part of the listing, the listing requirements, -- when you say comfortably above you mean, very comfortably above.

Philip Jones

Yeah, company is very comfortably above the threshold right now.

Matthew Hoffman - Cowen & Company

Right, right. All right. Last question from me. So as you look out, I know you are not giving guidance at this point, but let's talk about cash flow for the company through the balance of '13 and then if you want to look into '14. You think cash flow is the right return metric to look at for the company right now, given that you have a lot to talk around the merger and expenses one time or should give us really cash flow you thoughts about what do you think the right return metric is?

Jeff Ronaldi

Phil you want to address that?

Philip Jones

Yeah, I think that the DSS traditional operations we have always felt that adjusted EBITDA is a good metric to judge performance and that has been a metric that has steadily improved after taking into account the merger related costs that we have experienced over the last nine months. Going forward I also think that's going to be a good metric for us. The investments that Lexington made in the various portfolios and intellectual property will be a different return, I guess qualitative return evaluation that you would expect to see, longer term on assets on the books that will eventually ensure they are valued in longer term. So I think you can see different metrics going forward, but adjusted EBITDA would be a pretty strong one to look at.

Operator

Thank you. The next question is from Mark Argento of Lake Street Capital Markets. Please go ahead.

Mark Argento - Lake Street Capital Markets, LLC.

Question around the acquisition criteria, asset acquisition criteria. Could you talk a little bit about what you are looking for in terms of assets and how are you going to use current, you are going to use the stock the acquisition, what are your thoughts on the deploying capital or cash versus stock?

Jeff Ronaldi

Okay. Our criteria for evaluating and acquiring new IP remains the same. I hate to use generic words but we like to see strong IP assets. So we go through the due diligence process, to verify that we believe that these patents are valid. We believe these patents are infringed that they are undervalued in the market. And they have a fit in our -- somewhere along our operations. So we do a considerable amount of background work on any opportunity that we see.

As far as how we're going to fund those they’re going to be on a case-by-case basis. At current stock price I don’t think it’s worthwhile to be issuing stock. We do have some cash and we do have the ability to leverage outside funders who want to participate with us as we acquire and monetize IP. And so like I said as we go through and evaluate each one we’ll make a decision on what’s the best way to acquire assets we believe that are strong.

Mark Argento - Lake Street Capital Markets, LLC.

Do you have a preference in terms of performing or non-performing assets at this point?

Jeff Ronaldi

Our preference is performing. I think we've stated before that we're looking for some operating companies with strong IP assets. So the preference is that, that it is operating, but what we look for is undervalued assets and if the undervalued asset is just a standalone patent we would look at it and evaluate it and see where it fits.

Mark Argento - Lake Street Capital Markets, LLC.

How would you characterize type one of things that you are looking at and clearly things are taking a little longer to get closed so given you guys have spent a lot of time in such identifying targets in the pipeline, is it full or how do you characterize regarding that?

Jeff Ronaldi

Yeah there’s an abundance of high quality assets available that are in front of us. I would say they are full and it continues to -- we continue to get phone calls from very trusted sources. Most if not all the assets that we acquired do not go through the traditional broker. They are usually just networked in where I or Peter know somebody in the industry. So I’m very excited about our pipeline.

Mark Argento - Lake Street Capital Markets, LLC.

Okay and then just so we have a better understanding on this, in terms of the fully diluted shares outstanding now roughly 46 million shares, is that right Phil?

Philip Jones

Yes it’s actually right around 46, 45.957 million.

Mark Argento - Lake Street Capital Markets, LLC.

That includes the seven million escrow shares but not the 3.5 million or 3.4 million warrants correct?

Philip Jones

Exactly, yes.

Mark Argento - Lake Street Capital Markets, LLC.

That’s correct. And then pro forma cash just so we can get -- I haven’t had a chance to dig through but what are we looking at rough ballpark just so we can get a better understanding of kind of the net of price value calculation so you get to that, what do we talk in terms of pro forma cash in terms...

Philip Jones

Like, like I said the licensing group did bring in, in excess of the $6.25 million that they were required to bring to the merger. DSS ended first quarter about $1.1 million. So we're right around that range approximately $7 million in that range.

Mark Argento - Lake Street Capital Markets, LLC.

And then any debt or any other type of contingent liability?

Philip Jones

Well DSS has it’s -- has had its debt, it has some bank debt associated with the equipment purchases in the past and ownership of one of our building. So that debt gets carried forward. There’s no new debt that was brought into the merged company.

Mark Argento - Lake Street Capital Markets, LLC.

Okay. And then do you have a fulltime employee number handy, how many employees?

Philip Jones

We are right about 108 post merger.

Mark Argento - Lake Street Capital Markets, LLC.

Great. Thank you.

Robert Bzdick

Thank you, Mark.

Operator

Thank you. The next question is from Bob Wasserman of Dawson James. Please go ahead.

Robert Wasserman - Dawson James Securities

Hey thanks and congratulations guys, getting the merger complete. Just a couple of questions, one on the legacy business and one on the new Lexington Group. On the Lexington Group can you make any comments about the two 5% of licensing agreements that you made from Bascom Research. I know that's somewhat -- you can’t say a whole lot of bad, but maybe when -- comment on when we can see some of that revenue coming in and whether that accrues 5% to Lexington and DSS and whether there is other partners involved and then that's it?

Jeff Ronaldi

Sure the 4%, 4% and 5% are two different settlements and I’m not able to tell you which ones are which for confidentiality reasons. And I can’t give you too many details into it other than we expect to see the revenue in 2013.

Robert Wasserman - Dawson James Securities

Okay.

Jeff Ronaldi

And with almost all of our monetization efforts we use outside vendors and partners such as law firms who do take a piece of it as they go forward and we do that with the intent of limiting our cash needs.

Robert Wasserman - Dawson James Securities

Okay. At some point will you disclose that in a 10-Q or 10-K maybe give more information about that?

Jeff Ronaldi

We will disclose what we are capable of disclosing. It’s a fairly common practice in this industry that the only way that you actually repeat checks from others as you honor your non-disclosure agreement. And so we will honor whatever agreement that we make.

Peter Hardigan

Hey, Bob, just to chime in for a second, this is Peter. We have disclosed publicly that we are keeping approximately 60% of the economic investment. So revenues that we received there, those revenue, a portion of the revenue is going to the inventor, a portion the revenue is going to IP navigation who is the manager of this and a portion is going to our counsel in the case. And we are keeping approximately 60%.

Robert Wasserman - Dawson James Securities

Okay, great. And the other question is related to the DSS, the four old divisions, where do you this, it’s kind of a broad question, but where do you see the growth going forward in that area?

Robert Bzdick

This is Bob Bzdick. Maybe your emphasis of growth is obviously going to be in our digital and AuthentiGuard products. A lot of what we've done with our current packaging of that is really designed to help market test and develop our digital and print based technologies. So the biggest growth area I believe is going to be important to our stockholders is going to be the licensing fees generating as a result of the digital effort and that one of those products will be of AuthentiGuard.

Robert Wasserman - Dawson James Securities

Okay. And when you report the second quarter I guess you will say a little bit more on how that's done? How the old DSS performed?

Robert Bzdick

Yes.

Robert Wasserman - Dawson James Securities

Okay. Great. Thanks a lot and congratulations again.

Robert Bzdick

Thank you.

Operator

(Operator Instructions). The next question comes from Sandy Wyman from Gilford Securities. Please go ahead.

Sandy Wyman - Gilford Securities Incorporated

Yes, thank you. Actually majority of my questions have been asked, but I do have unanswered. I do have a couple of quick ones. So when do we or let me rephrase that when do you expect to see, do you expect to see any additional filings in terms of 5% type holders I am surprised after the merger we haven’t seen those. That’s number one and number two with the new Board and so forth when the window opens, this just might be an ideal price and time to be showing the financial support, just some thoughts.

Jeff Ronaldi

We don’t disagree.

Sandy Wyman - Gilford Securities Incorporated

Okay. But do you expect to see any additional filings, I mean I saw the iconic files but that seems to be only -- unless I have missed them that seems to be the only filing since the offering.

Jeff Ronaldi

We really don’t have information as to how Lexington Technology Group shares are held, if they are held in concentration and certainly we would expect to see additional filing but because when they were private they weren't forced to share the information with our public shareholder. We are kind of flying blind and when we saw the preferred stock issue that more since the warrant issue. Clearly there is a sensitivity they have for being in the limelight having to report.

So it would not be unusual they had these positions held many, many places by many entities, so impossible to tell. I mean so far as the issues of our Board and our management and our company in terms of presence in the market it’s certainly an issue that’s going to be in discussion in the days ahead.

Sandy Wyman - Gilford Securities Incorporated

And have there been any additional updates to that?

Jeff Ronaldi

To which Sandy.

Sandy Wyman - Gilford Securities Incorporated

In other words I don’t have it in front of me, what’s the stated short position in the stock was going into the merger and do you sense that maybe some of it’s been filled?

Jeff Ronaldi

The [mechanisms] that have gone on post deal and pre-deal on this are for me unprecedented. I have never seen anything like this. We have not had any files that we could use. We watch our transfer sheet to see our stock or shareholder base and the sense is that we do have a lot of new shareholders are doing a lot of things and they will have related short positions, we don’t know whether or not transactions are being done to cover, whether or not transactions are being done to accomplish profits in certain areas. We just don’t know.

I mean every speculation that we have is just that, because we have no hard information whatsoever and sit around as you do, scratching our heads at the end of the day wondering when this is going to end and eventually it will but what the date is and how many shares were traded between now and then is impossible to tell.

Sandy Wyman - Gilford Securities Incorporated

Okay, well thank you very much. At least they are giving us some opportunity to average down. I appreciate it, thank you.

Jeff Ronaldi

Well I could do without that stress but I could probably…

Sandy Wyman - Gilford Securities Incorporated

All right. Okay. Take care, thanks.

Operator

Thank you. The next question is from Yun Kim of Janney Capital Markets. Please go ahead.

Yun Kim - Janney Capital Markets

Thank you. First congratulations on the merger. I know you guys have [inaudible] so I'll keep it somewhat high level. First question is can you guys share with us at least some of the operating and financial metric target for the core operating DSS as a business, for instance any margin, possibilities targets and also how you are thinking about the near term and long term when you grow "DSS business"?

Jeff Ronaldi

At the core this is about the core operating business, obviously as we move more into licensing fees generated by our digital technologies, the gross profits as per system we’ve had should continue to improve and perhaps to accelerate as licensing fees obviously are more of an annuity type situation going forward, what was achieved, while they are hard to get initially and to achieve them they do tend to become semi good taste of annuity. So I expect that as we transfer more of our sales and our sales revenues in the licensing we're going to see some significant improvement of our margins.

Yun Kim - Janney Capital Markets

Okay great and then based on that comment is it fair to assume that the net operating cash flow could trend positive after the merger?

Jeff Ronaldi

That is the short term goal, well I would say short term goal because obviously we're looking to get way beyond that, but I believe is the short term goal.

Yun Kim - Janney Capital Markets

Okay, great. And then Phil do you plan to break down details of segment revenue and margins going forward or will it be combined?

Philip Jones

Yes, in the past we have broken out the revenue line items with their associated gross profit on our -- on the page of our income statement, I don’t see that changing. In addition we do separate these divisions in the segment reporting. So I think you will continue to see that as well. Ultimately, as we grow we may find it to makes sense to combine some of these elements as well.

Yun Kim - Janney Capital Markets

And then again I’m kind of new to the story so I guess I will ask a question regarding the IP case, can you just talk upon couple of, what is the latest status of couple of high profile pending cases on the Lexington side of the business and maybe some of the near term events that we should be looking forward?

Jeff Ronaldi

Sure, first matter would be the Bascom matter, and many times with these types of litigation you have to hurry up and wait and so we're currently in the wait section -- position as we wait for the markman hearing which is scheduled for October of this year. Prior to that those lawyers are doing all the work they’re going through the discovery, they are putting together their argument so that the next big milestone in the Bascom case.

The other matter is VirtualAgility where we have a minority investment. That one is pending a hearing to decide if it's safe at its current venue which is Eastern district of Texas, Vernon. And I don't think that's scheduled yet, but as soon as we know something we will share that with everybody.

Yun Kim - Janney Capital Markets

I have a one last question. So I know you guys have already talked in detail regarding the warrants, the $0.02 warrants but can you just at a high level just explain the mechanism behind it and more importantly the rationale again, thanks?

Jeff Ronaldi

Well, when we originally negotiated the merger, there was a significant concern on the part of Lexington and their investor group, which I think is borne out by the tremendous activity in the marketplace, that they did not want to have the file with control persons who owned more than 10% or more of a particular issue, which makes you subject to a rule one 44 filings and a whole bunch of other regulatory filings. So as a result the thought process was they negotiated that if any holder would end up through the Lexington investment group and their affiliates and investors with a position that would result in them owning more than 9.99% of any issue that we would issue preferred stock in lieu of common stock on a one to one convergent basis, convertible preferred, they take their hold and therefore not have the issue of owning more than 9.99% of a class.

Now when we put forth that as an issue for both by the shareholder it didn't get approved, therefore the standby position was that if the preferred were not approved that in lieu of issuing these one-for-one preferred shares we will issue them warrants to buy common stock for $0.02.

So basically instead of them getting 16 odd million shares at closing they got 13 odd million shares at closing and 3 million $0.02 warrants. So they end up in the same place minus $0.02 basically, that they would have in terms of the economic they originally negotiated merger consideration.

Yun Kim - Janney Capital Markets

Okay, great. That helps a lot. Thank you so much.

Jeff Ronaldi

Okay.

Peter Hardigan

Hey, actually Jim. Just wanted to add one thing, it's Peter Hardigan. As Jeff said before that we will share the significant events in many of our patent cases and just one thing to remind people of, who don't know, I think many do, but court filings are a matter of public record and often there is a few days delay off when the posted that's similar to the SEC or public filings.

There is a system called Pacer, P-A-C-E-R, that if you search for the federal court system provides free access, information about all patent cases. So for those who want to keep abreast of what's going on with our cases, separate and apart from any pronouncements we might make, that system is available to everybody and I encourage anyone who is closely following what we are doing to get an account and follow us that way.

Yun Kim - Janney Capital Markets

Okay, thanks Peter.

Operator

Thank you. And ladies and gentlemen that is all the time we have for questions. I will turn the call back over to Mr. Ronaldi for any closing remarks.

Jeff Ronaldi

Thank you. First I would like to -- I want to thank everyone for their interest in DSS. We look forward to being able to focus on growing the company and provide an update on our early progress when the company reports the second quarter results in early to mid-August. Again thank you for showing interest in DSS. With that, I'd like to turn the call back over to the operator to close the call. Operator?

Operator

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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