For existing investors and those seeking a new patent stock, Document Security Systems, Inc (DSS) offers a potential homerun opportunity. The previous article, Document Security Systems Has Significant Patent Monetization Plans, offered a glimpse at the potential in the stock. The real key for the stock will be the execution of those plans.
DSS is a leading developer and integrator of cloud computing data security, Radio Frequency Identification (RFID) systems and security printing technologies that prevent counterfeiting and brand fraud.
With the stock lingering around 52-week lows around $2.70, investors still have the opportunity to purchase the stock below the merger and private placements levels. That price won't last over the next few weeks and months if the company starts executing on target dates whether with the patent cases or the merger.
The company has several major catalysts that could push the stock up starting with the Motion to Transfer for the Bascom Research patent case on December 7th through to the merger with Lexington Technology Group (LTG) that is expected to close in March.
The biggest issue with investors in DSS remains that the Bascom Research litigation against Facebook (FB), LinkedIn (LNKD), and the others starts prior to when the merger with LTG will be finalized. Could any significant progress in the case jeopardize the merger?
Other potential catalysts include the Coupons.com trademark lawsuit and the IPNav license program. Naturally the Coupons.com lawsuit is of prime focus considering it revolves around technology already owned by DSS and not dependent on a merger. While the IPNav license program could provide a significant royalty stream assuming the success of the Bascom Research case.
Catalyst 1 - Bascom Research Patent Lawsuit
Naturally this lawsuit involves the greatest interest from the investment community with the potential for vast license fees from the large revenue bases of Facebook and rapidly growing LinkedIn. As mentioned, it involves a greater risk to DSS shareholders as all the potential rewards could disappear if the merger isn't finalized. While all the executives appear on board with the merger, a small possibility always exists when a merger needs SEC and shareholder approval.
The initial crucial date is this Friday. The Motion to Transfer occurs on December 7th with LTG hoping to have the case held in the "rocket docket" court in the Eastern District of Virginia. The defendants want the case moved to the Northern District of California court. While probably not a signal of the ultimate outcome, a decision to move the case to California could add up to a year to the outcome.
After the transfer motion, any responses are expected within a couple of weeks providing an expectation of completing the response prior to Christmas. The company expects the chances of staying in Virginia as strong based on the plaintiff, Tom Bascom, living in the district for over 20 years. Not to mention, the company was founded and operates in Virginia. On top of that, the new LTG headquarters and CEO will be based in Virginia.
Assuming the case remains in Virginia as expected, the company will have a scheduling conference by early January. This conference will set the dates for the Markman hearing and the trial date. The scheduling conference will set out the track for the trial whether 10, 12, or 14 months.
Discovery will kick off after the transfer motion and that typically kicks off the incentives for defendants to settle. At that point, costs increase as time goes on during that process. Though Facebook has plenty of cash to see this case play out to the end.
Assuming a 10-month track for the case, the Markman hearing should be between April-June with a trial between July-October. Naturally the longer trial tracks would extend the dates a few months.
Catalyst 2 - LTG Merger
The merger remains solid and on course for a March closing date. For anybody buying DSS it probably highlights the largest risk. Especially for investors looking at DSS for buying into the patent monetization plans of LTG. Until the merger is closed, investors always have the risk that the merger falls apart. While probably a small risk, it clearly is something to consider and possibly what has held the stock back.
LTG wants the patents and technology of DSS plus the access to the public stock market. The stock will be a useful currency in future patent portfolio acquisitions. An investor in DSS at these levels obtains a roughly break-even company with some strong technology and potential litigation damages of its own. The downside risk appears limited, but investors aren't loading up on the stock regardless.
The company filed the S-4 on November 23rd. The next key date will be the SEC approval followed by the shareholder vote in hopefully February. Finally, the merger has an expected completion date of March.
Catalyst 3 - Coupons.com
DSS filed a lawsuit back in October 2011 against Coupons.com alleging breach of contract and theft of trade secrets. The case is taking place in the Southern District of New York with damages claimed in excess of $10M. The last known court hearing took place during October with a mediation in November prior to the Q3 earnings call. The company was unwilling to discuss the case on the call other than to mention that it was progressing as expected at the slower pace expected from a case in the clogged courts of New York.
At this point, the litigation experts at LTG are only able to help in a limited role until the merger is finalized. Both management teams expect the experts from LTG to be able to apply additional pressure on the case in order to improve the outcome and encourage Coupons.com to move forward. Otherwise, the case could take several years to complete.
Catalyst 4 - IPNav License Program
In addition to the Bascom Research lawsuits, LTG has initiated a licensing program via IPNav in order to obtain license fees from hundreds of other companies utilizing the technology created by Mr. Bascom. The potential is significant considering a majority of these companies are still in the growth phase.
The company has had initial discussions with a few companies, but most firms are waiting for the decision on the Motion to Transfer before initiating any settlements. The company is also careful about locking in any royalty rates prior to litigation of the patent cases.
Significant Dates - Timeline
Considering the company has a ton of moving parts, the key will be the company executing on the plans. Below are some of the key dates:
- December 7th - Bascom Research patent case Motion to Transfer hearing.
- December 21st - Bascom Research patent case response to Motion to Transfer hearing that should occur prior to Christmas.
- December 31st - IPNav initial licensing potential based on Motion to Transfer hearing for Bascom Research patent.
- January 2013 (early) - Scheduling conference for Bascom Research patent case.
- February 2013 - SEC approval on LTG merger.
- February 2013 (late) - Shareholder vote on LTG merger.
- March 2013 - Closing of LTG merger.
- April-June 2013 - Bascom Research patent case Markman hearing dates based on 10-month track in Virginia.
- July-October 2013 - Bascom Research patent case trial dates based on 10-month track in Virginia.
- 2013 hearings - Unannounced Coupons.com trial dates.
At this point, two key dates will kick off the other important dates. The Motion to Transfer on December 7th for the Bascom Research patent case and the SEC approval in February will kick off the LTG merger.
The stock remains at the 52-week lows and has flat lined since the original article about two weeks ago. The weakness with the general micro cap stocks was an original speculation for the stock dropping since the announced LTG merger and lawsuits. Interestingly though, most micro and small cap stocks have rallied the last week while DSS remains flat.
As the below chart shows, the stock has been very weak since announcing the deal.
3-Month Chart - Document Security Systems
While the stock has held support at the $2.50 level, the lack of a bounce actually suggests the stock could go lower. With patent stocks having exceptional years, the weakness in the stock is extremely confusing. The inability of the stock to move above the 20ema is very concerning.
Any investor looking for a huge risk/reward event might want to purchase DSS prior to the transfer motion hearing on Friday. While not dictating the ultimate case, a positive outcome that leaves the case in the Eastern District of Virginia might finally ignite some interest in the stock.
Over the last week, the stock has averaged an incredibly low 50,000 shares traded a day. This limited market action suggests a stock with limited catalysts, which couldn't be farther from reality. With a positive outcome on Friday finally kicking off the action in this stock, investors might finally jump into it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DSS over the next 72 hours. Please consult your financial advisor before making any investment decisions.