Sep 14, 2009

• NYSE up 36.2 (0.5%) to 6,879.98.
• DJIA up 21 (0.2%) to 9,627.
• S&P 500 up 6.6 (0.6%) to 1,049.
• Nasdaq up 11 (0.5%) to 2,092.

GLOBAL SENTIMENT

Document Security Systems (AMEX:DMC), a company built on overly-promotional deals and an unblemished history of financial failure, has recently announced several new operational initiatives as well as their second quarter 2008 results.

Unfortunately for shareholders, these appear to be the last gasps of a company whose days are limited.

Editor's note: Some positions presented in this article have been disputed. See Seeking Alpha Policy for Disputing an Article.

On Thursday January 24, Document Security Systems (AMEX:DMC) announced that they had elected Robert Fagenson to Chairman of the Board of Directors and Lead Independent Director. This announcement comes shortly after the January 1st filing that Robert Fagenson’s company, Fagenson and Co, Inc., had entered into an agreement to lend DMC up to $3 million, with DMC agreeing to pledge their P3 Plastic Printing Professionals subsidiary as collateral.

Editor's note: Some positions presented in this article have been disputed. See Seeking Alpha Policy for Disputing an Article.

Editor's note: Some positions presented in this article have been disputed. See Seeking Alpha Policy for Disputing an Article.

DMC is a company without a decent product, without any significant assets (tangible or intangible), without any hope of ever making any sales significant enough to justify its current market cap. While the company has doubled its revenues over the last year ($1.75 million in Q1 2007, vs. $0.86 million in Q1 2006), about half of that increase has come ! from acquisitions ($215k from 2006 acquisition of P3) and from growth in the acquired companies (approximately $200k in sales growth in P3, see p.17 of the 10Q for details). Also, for an intellectual property company, Document Security Systems spends very little on R&D: $109k in the most recent quarter (see the August 9, 2007 press release). Net loss was $2.9 million in the most recent quarter (Q2, ended June 30). As for sales, they were up 10% in Q2 2007 versus Q2 2006. Not bad. But again, the company did make some acquisitions in that time. Oh, and share count was up 6% in the same period of time.

DMC's one asset is a patent (actually, a few related patents) on a document security system that prevents documents from being digitally scanned or copied. The one problem is that the patent was ruled invalid in the United States in 2000 and was ruled invalid in Britain and WIPO just this spring (the company has filed appeals). The company is of course appealing the recent rulings in Europe, but the case against them seems to me to be pretty strong. Also, if the company loses its appeals in Europe, it will not only have its patents invalidated but it will be liable for the court costs of the European Central Bank (which is trying to have the patents ruled invalid). The company did win an identical case in Germany, but it is unclear what would happen if the company won cases in some countries but not others. For a brief synopsis, I suggest reading Asensio.com's report (Asensio.com is an independent short-selling research outfit). I also suggest reading Asensio's prior reports on DMC. You can see DMC’s European patent online. I have uploaded a pdf copy of the patent here.

But they have just lost a patent validity lawsuit in the UK and the International Bureau of World International Property Organization’s (WIPO) March 13, 2007 denied DMC's European patent. (DMC has been silent to date about the WIPO ruling).

The company was quick to point out that each European country would decide for itself. On March 27 we hear that the German Federal Patent Court approved the validity. It is believed that several other jurisdictions are grinding their way to decisions.