Document Security Systems Inc. (DSS), the patent assertion company run by CEO Jeff Ronaldi, said it posted a net loss of $41.2 million because of impairment charges of $37 million related to a write down of patents associated with an adverse ruling in an infringement case brought by the company’s Bascom Research LLC unit.
The Rochester, N.Y.-based company said the net loss of 98 cents compared with net income of $2.6 million, or 8 cents a share, a year ago.
“The company faced significant headwinds in its technology management business due to changes in U.S. patent law that resulted in adverse rulings and ultimately significant impairments to our assets,” said Ronaldi in a statement.
In the fourth quarter, “we recorded significant impairments following an adverse ruling in our Bascom Research case against Facebook and LinkedIn, which was delivered on January 5, 2015,” he said.
The ruling in the Bascom Research case was handed down by the U.S. District Court for the Northern District of California.
“Investing in intellectual property presents the opportunity for significant returns but comes with significant risks,” he said. “We continue to believe that our remaining IP assets are strong and should be less impacted by the recent patent trends, which focus principally on software patents.
DSS’ “investment model of sharing risks with co-investors and our legal teams has helped us to weather this storm without significant cash losses while still retaining significant upside potential in our investments,” he said.
“However, we recognize that the current climate in the IP investment space is significantly different that it was in 2013 and first half of 2014 and that we will need to continually adjust our approach to our IP investments.”
Shares of DSS gained 2.2 cents to 40 cents in trading on the Amex on Monday and have traded between 28 cents and $1.52 over the past year.
Revenue in 2014 increased 5% to $18.3 million from $17.5 million in 2013. During the year, printed products revenue increased 7% while technology sales, services and licensing decreased 11%.
Costs and expenses totaled $64.7 million, an increase of 153% from $25.6 million in 2013. The increase was primarily due to the $37 million non-recurring and non-cash impairment charges in recognized during 2014.
Absent the impairment charges, costs and expenses 2014 totaled $27.7 million, compared to $25.1 million in 2013, an 11% increase.
The adjusted earnings before income tax depreciation and amortization loss was $2.8 million in 2014 compared to an adjusted EBITDA loss of $2 million in 2013.
In December of 2014, DSS received approximately $1.3 million in net proceeds from the sale of equity and completed the year with approximately $2.3 million of unrestricted cash.
As of December 31, 2014, DSS had net working capital position of approximately $1.3 million.
Total assets of $27.8 million reflect the decrease in assets as a result of the aggregate write-downs of approximately $37 million of assets made by the Company during the year.
In February 2014, DSS contracted to receive a series of advances from affiliates of Fortress Investment Group, whose IP business is run by Eran Zur.
DSS raised $2 million from Fortress affiliates in exchange for a promissory note in the amount of $1.79 million, fixed return equity interests in the amount of $199,000, and contingent equity interests in the amount of $10,000, to each of the investors, and in return received $2 million to be used by the company to meet its working capital and intellectual property monetization funding needs.
The company is entitled to receive another $1.5 million in funding from Fortress in exchange for a $1.35 million promissory noted and $150,000 in fixed return equity interests if it achieves other milestones.
The initial advance note and first and second milestone notes will bear interest at a rate per year equal to the applicable Federal rate on the unpaid principal amount thereof.
The notes are also subject to a make whole amount calculation, which will result in an effective annual interest rate of approximately 4.23% for the term thereof, assuming no prepayments.
DSS has the option to pay accrued interest when due on the notes, or elect to capitalize the accrued interest, adding it to the principal thereof.
The company agreed to apply any proceeds it receives in connection with the monetization of certain patents to the payment of the notes, the fixed return interests, and the contingent interests in a so-called pay waterfall.
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