Shares of Document Security Systems (DSS) have been hit hard since the January 14, 29014 announcement that the US District Court of Northern California issued a stay of proceedings in the Bascom Research case against Facebook (FB) and LinkedIn (LNKD). Bascom Research is a wholly-owned subsidiary of DSS. The stay was issued in light of Alice Corp. v. CLS Bank Int'l, a Supreme Court case covering the patentability of software. The slide was apparently fueled by blanket statements made in an article that followed the stay news. This gives value investors the opportunity to accumulate cheap shares while others sell due to either fear or ignorance, or both. For a more comprehensive and intelligent discussion on the stay implications, investors are encouraged to read the excellent article written by the Markman Advisors and published on January 6, 2013.
All eyes will now be on the Supreme Court's ruling in the case of Alice Corp. v. CLS Bank Int'l. It's anticipated that a ruling will likely be made in June. As a result, the Markman hearing for DSS is expected to be rescheduled after June 2014.
Regarding the stay decision, Jeff Ronaldi, CEO of DSS stated: "Document Security Systems, along with other owners of important software intellectual property, look forward to the results of the Alice Corp. v. CLS Bank case, which should help to clarify what subject matter is patentable under US Law."
The Supreme Court is expected to issue its decision in the CLS Bank case by June 2014, which means that any stay should only last six months, at the most. Furthermore, Facebook and LinkedIn have indicated that they only intend to invalidate one of the four asserted patents on the grounds of patent ineligibility. That means, even if the CLS Bank decision resolves in their favor, presumably only one of the patents will be affected, and the cases will nevertheless need to continue.
Investors appear to forget that DSS is a lot more than lawsuits against FB and LNKD. In fact, the analyst covering the stock has assigned $1.65 to the company's core businesses, and an ultra-conservative $2.35 for potential patent wins against Facebook, LinkedIn, and real money that will result from the cases that have already been settled: Broadvision (BVSN), Jive Software (JIVE), and Novell (NOVL). Regarding the settled cases, carrying royalties ranging from 4 - 5%, the 10-Qs are still reflecting unchanged technology and licensing revenues. Licensing revenues typically come 6-9 months AFTER a deal is signed. I expect licensing revenues from settled cases to start showing up in quarterly filings.
Other DSS catalysts being ignored by investors
VirtualAgility vs. Salesforce
On January 9, 2014, the US District Court in the Eastern District of Texas denied the defendants' motion to stay in the VirtualAgility case. As a result, the case between VirtualAgility vs. Salesforce (CRM) will continue as scheduled, with the Markman hearing on April 2, 2014 with a jury selection for November 2014.
Other defendants in the Salesforce case are Dell, Inc. (DELL), Dr. Pepper Snapple Group, Inc. (DPS), BMC Software, Inc. (BMC), LivingSocial, Inc., FedEx Corporation FDX), Bank of America Corporation (BAC), Merrill Lynch, Pierce, Fenner & Smith Incorporated, Kimberly-Clark Corporation (KMB), NBCUniversal, Inc., Bank of America National Association and Merrill Lynch & Co., Inc.
DSS has partial ownership In VirtualAgility, Inc., an enterprise software company. VirtualAgility provides a user-configurable platform that allows persons who are not specialists in information technology (IT) to create sophisticated, integrated applications.
The patent infringement lawsuit against AAPL
In September 2013 DSS acquired a patent portfolio titled "Personal Data Network" that covers Bluetooth technology. The company also acquired 10 patents from Cypress Semiconductor in October 2013. Jeff Ronaldi - CEO made the following statements on the Q3 2013 Conference Call:
"Thus far, in the third quarter we closed on two additional IT investments for a total of $2.5 million. To elaborate, in July we purchased two patents for $500,000 that cover methods and processes related to Bluetooth devices. In September, we purchased 10 patents for $2 million that relate to the methods and processes in the semiconductor industry.
In conjunction with these patent purchases, the company received over $1 million in external commitments from co-investors. These co-investors are consistent with strategy discussed on our last earnings call of aligning with outside investors who have dual interest in IT investment. These outside investors clearly demonstrate confidence in DSS's ability to appropriately manage and monetize the acquired assets.
We consider the Bluetooth and semiconductor investments valuable because of the synergies with our existing operations. We believe that the Bluetooth patent has potential for commercialization. We have already started to integrate hardware and peripherals and the DSS's R&D and Digital platform with the goal of developing dedicated devices that run AuthentiSuite.
Thirdly, Technology Management's recent acquisition of two IT portfolios meets our goals of making additional investments by the end of the year. In addition to diversifying our IT portfolio, management believes that these IT acquisitions have high growth and potential for high return. We expect to continue to diligently increase our IT investments overtime."
On November 27, 2013, DSS started the monetization campaign related to its new patent portfolio by filing a patent-infringement lawsuit against Apple, Inc (AAPL) in East Texas. The company asserts that AAPL infringes on "Personal Data Networks" Bluetooth patents 6,128,290 and 5,699,357 allegedly being used in products Apple products including iMac computers, iPod product line, iPhone product line, and iPad product line. DSS is further asking for an injunction, damages, and a reasonable royalty.
This lawsuit against AAPL represent a significant revenue opportunity as the infringing products have generated tens of billions of dollars, which DSS will ask for a piece of. I expect this case to draw significant interest in the future by both the media and investors as more information develops.
Obviously there is a huge difference between the lawsuit against AAPL and those against Facebook and LinkedIn since the former relate to hardware patents and the later to software intellectual property.
The news about the patent lawsuit against AAPL sent the stock flying from about $1.5 to over $2. All this gain has been lost since the Facebook and LinkedIn stay news. This means that the market is completely ignoring the APPL patent which could be even larger than the other two in terms of revenue potential.
DSS own core technology products and services
DSS core business has several divisions and many product lines. I will spend more time going over each division and product in an upcoming article. But for the time being investors are encouraged to watch a video interview featuring Peter Hardigan, DSS Chief Investment Officer. Mr. Hardigan explains some of the state-of-the-art technologies that the company is already providing governments and public as well as private companies to combat document and product counterfeiting. The company's flagship and most disruptive technology is called AuthentiGuard, part of the company's AuthentiSuite technology product line. I expect AuthentiGuard to be a huge revenue-engine going forward (more discussion in pages 31 - 33 of J. P. Moreno's report discussing DSS patents and products). AuthentiGuard/AuthentiSuite already won several large and lucrative multi-year contracts.
Investors should be able to tell per the foregoing statements that they are getting a great bargain buying DSS stock at current prices. I expect the stock price to bounce significantly going forward.