Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Much has already been written about DSS and its potential catalysts. For a relatively small company, DSS has been covered by a long list of Seeking Alpha Contributors. The focus of many recent articles have been on the Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD) Markman hearings. Originally scheduled for the upcoming weeks in February/March, the run up to which was meant to send shares higher on speculation alone. It suffices to say that shares were gathering momentum nicely as predicted until an unexpected spanner was thrown in the works in the form of the Alice vs. CLS Bank case.
The decision by Judge Susan Illston to stay the case pending the Supreme Court's decision on the Alice vs. CLS Bank case has seen DSS shares fall by around 40% from their high of £2.46 on January 7.
A bearish article published by SA contributor Justin Giles on January 15 entitled "Shares Of Document Security Systems Fall 15% After Stay Ruling: Should Investors Get Out Now?" did the stock price no favors either. We note Mr. Giles had declared a long position at the time he wrote his original bullish piece on September 30 entitled "Document Security Systems: Should Investors Take Advantage Of This Opportunity And Average Down?", but declared no position at the time of his second article on January 15. It follows then that Mr. Giles had sold his stake sometime in between publication of his two articles. The shorts appeared to have it all to themselves until SA contributor Micro-Cap Gem Finder published his well written and insightful recent article entitled "There is a lot more to Document Security Systems than the Facebook and LinkedIn Lawsuits."
Micro-Cap Gem Finder omitted to mention one potentially huge near-term catalyst that appears to be all but forgotten about, overshadowed perhaps by more recent action involving Facebook, LinkedIn and of course Apple (NASDAQ:AAPL). This catalyst could yet catch everyone by surprise. I am talking of course about DSS's case against Coupons.com. Contributor Stock Croc wrote about this back in July 2012.
Prior to their merger with privately held Lexington Technology Group (LTG), DSS were not heavily into the patent enforcement business as they now appear to be. Many seem to forget that the pre LTG merged DSS was still a promising business. I don't believe DSS needs wins against Facebook, Apple et al to survive in the long run and therefore I don't think it is fair to categorize DSS into the same pile as Vringo (VRNG), VirnetX (NYSEMKT:VHC), Marathon (OTCQB:MARA) and a host of others who are strictly Non Practicing Entities (NPEs), also known as Patents Trolls. DSS have an underlying business and own patents which they are entitled to enforce, whether they themselves use them or not. For an overview of their core business, I suggest visiting their website. Worth mentioning that CEO Jeff Ronaldi was recently on Fox News talking about their patented anti-counterfeiting technology Authentiguard.
To recap, in October 2011, long before their merger with LTG, DSS filed a lawsuit against Coupons.com alleging that Coupons.com had misappropriated DSS trade secrets and breached confidentiality agreements with DSS. The suit involves DSS's proprietary digital copy protection technology; DSS contended that their technology had been utilized by Coupons.com on billions of internet generated coupons since 2006. The stated claim amount was approximately $240-300M in total.
It was the magnitude of this case in fact, that I believe attracted the experienced litigation team of LTG to DSS. Patent enforcement was in fact LTG's forte and they came to the table with an outstanding track record. There were obvious benefits to the merger. A practicing entity can claim much higher damages than a non-practicing entity. You can read up more on this in JP Moreno's publication mentioned above.
One thing we know for sure is that this case does not depend on the outcome of the Alice vs. CLS Bank case! It has nothing to do with asserting software patents.
DSS issued an update to the case on 17 April 2012 to say that the first US Federal court hearing was scheduled for October 9, 2012. This date was brought forward by a couple of months to August 2012, likely in relation to Coupons.com's then anticipated IPO. A quick search found the following court document and you can get more of the case specifics here. Bear in mind, this was in August 2012.
The only subsequent update I am able to find on DSS's website is dated 5 September 2013 to say that the case was then in Discovery stage. In layman terms, Discovery is essentially preparation before a trial. You can brush up on the term here.
Coupons.com is a dotcom era private company and there has been talk of it going public for a while now, at least since late 2011 as stated in this article by Frank Rollins published 16 July 2012. Reading this article, it would appear now that Coupons' IPO has been delayed, in large part, due to the ongoing lawsuit with DSS. Of particular note are the following paragraphs:
Coupons.com has not publicly released any comment regarding the lawsuit. After originally planning on taking the suit to court on October 9th of this year, Document Securities Systems announced today that it will be moving up the hearing to August 16th. Speculation as to how Coupons.com will respond is beginning to heat up as rumors of their expected IPO later this year roughly coincide with the lawsuit. It may be in both Coupons.com and Goldman Sachs' best interest to settle quickly (and perhaps outside of the court of law) in order to avoid controversy amidst their IPO. If an agreement cannot be reached, it is possible Coupons.com will postpone plans for an IPO until the negative publicity passes.
The lawsuit and potential upcoming IPO could cause drastic changes to the stock prices of both Document Securities Systems and Coupons.com. With a market cap of $80.66 million as of the market close on Friday, Document Securities Systems may experience an influx of trading activity. Coupons.com, on the other hand, could face some hardships with the lawsuit ahead. If the IPO is timed right and publicity is managed well, both companies could emerge from negotiations in good shape.
Coupons.com plans to sell 157 million shares, but by late afternoon Friday it had not listed an opening share price. An internal company valuation performed in November, 2013 determined that common stock at the time would be worth about $10 a share. Using that valuation, the company value would be about $1.5 billion currently.
I have a feeling this is not the main beef of the IPO and the big one is yet to be announced. As stated, Goldman Sachs & Co., Allen & Company LLC, BofA Merrill Lynch and RBC Capital Markets are listed as the underwriters on the filing. $100M appears a rather small amount for these guys to get involved in.
Contrast this with Facebook and Twitter who raised 16B and £1.82B in their IPOs respectively. Of course, Coupons is much smaller, but I'd still expect them to raise more.
It is also interesting to note there is no specific mention of the DSS lawsuit in Coupons.com's S1 filing with the SEC, although there is a general paragraph under Litigation on page 4.
The DSS vs. Coupons.com case has dragged on for long enough and it may be in the benefit of both parties to move on from it. Does Coupons.com really need a $200+ Million suit hanging over its head before its long awaited IPO? Settling eliminates a future risk for prospective investors and something they need not stain their IPO with. The price achieved could be negatively affected if the lawsuit lingers. DSS could use the cash injection to focus on their core business and other efforts.
DSS's market cap, at the time of writing is a mere $72m at a price of $1.47 per share. As stated above, the damages sought represent multiples of the current market cap. Even a much smaller settlement would give DSS's share price a nice uplift. It would appear, on the surface, to be a win-win situation. Of course, we are only speculating here and ultimately, we don't know how this particular litigation will play out. Until then, we await the next official update.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I am long DSS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.