SOURCE: Difference Capital Financial Inc.

Difference Capital Financial Inc.

March 09, 2016 17:05 ET

Difference Capital Reports Fiscal Fourth Quarter and Full Year 2015 Results

TORONTO, ON--(Marketwired - March 09, 2016) - Difference Capital Financial Inc. ("DCF" or the "Company") (TSX: DCF) (TSX: DCF.DB), today reports its financial results for the three months and year ended December 31, 2015.

Full Year 2015 Financial Highlights

  • Net gain from investments and marketable securities of $12.9 million compared to net loss of $38.8 million in 2014;
  • Net income of $2.1 million or $0.06 per share compared to a net loss of $48.1 million or $1.24 per share in 2014;
  • Net asset value1 per share increased 16% to $2.01 from $1.73 at December 31, 2014;
  • Gross return on investable assets, excluding operating expenses, financing costs and non-recurring items, was 11.7% in 2015;
  • Cash at the end of December 31, 2015 was approximately $13.0 million;
  • In October 2015, the Company repurchased $12.0 million principal amount of its 8% July 31, 2016 convertible debentures (the "Debentures"), at a purchase price of $880 per $1,000 principal amount through a substantial issuer bid; and
  • In December 2015, the Company also repurchased 6.6 million common shares at a price of $1.05 per share for total consideration of $6.9 million through a substantial issuer bid.
                 
(figures are in $000 except per share amounts and                
shares outstanding)   Q4 2015   FY 2015   Q4 2014   FY 2014
Net realized gain (loss) on investments and marketable securities   $1,983   ($25,269)   $227   $4,635
Net change in unrealized gain (loss) on investments and marketable securities   $(716)   $38,171   ($23,407)   ($43,431)
Other income   $1,015   $3,695   $1,031   $7,021
Total expenses   ($2,225)   ($14,452)   ($3,756)   ($16,313)
Net income (loss)   $57   $2,145   ($25,905)   ($48,088)
Basic and fully diluted earnings per share   $0.00   $0.06   ($0.68)   ($1.24)
        FY 2015       FY 2014
Total assets       $93,066       $114,952
Total liabilities       $34,190       $49,018
Net asset value       $58,876       $65,934
Shares outstanding       29,361,984       38,197,734
Net asset value per share       $2.01       $1.73
Share price       $0.97       $1.14
                 

2015 Review

In 2014, the Company undertook important steps to refocus the portfolio on later-stage investments, restructure underperforming assets and divest non-core holdings. During 2015, the Company achieved several significant outcomes from these initiatives:

  • Closed the sale of Chieftain Residential LP ("Chieftain") for $12.9 million.
  • Recovered $5.2 million from the sale of Lignol Energy Corporation ("Lignol") assets.
  • Sold its majority interest in WG Ltd. ("WorldGaming") to Cineplex Corporation, resulting in approximately $7.4 million in net cash proceeds plus a small stake in the new company managed by Cineplex.
  • Exited its investment in Infraredx Inc. ("Infraredx") for approximately US $5.0 million.
  • Sold the majority of its interest in Aurinia Pharmaceuticals Inc. ("Aurinia") common shares for gross proceeds of $5.1 million, resulting in approximately $2.8 million of net realized gain.

These transactions allowed the Company to significantly reduce its exposure to earlier-stage and non-core positions and boost its cash position. Many of the Company's mostly later-stage investments continue to progress well and the IPO capable and public positions now represent over 50% of the invested portfolio. While capital markets and IPO opportunities for our investments have cooled somewhat, this may be temporary. The slow IPO market is somewhat offset by a very active mergers and acquisitions market, accelerated in Canada due to the strength of the U.S. dollar relative to the Canadian dollar.

"We are pleased with the portfolio's performance in 2015," states Tom Astle, Chief Investment Officer. "We managed several material exits and shifted the focus of the portfolio to later-stage quality names. In addition, the portfolio generated double digit returns against a backdrop that saw the S&P/TSX composite down 11%."

In June 2015, the Company acquired Difference Capital Inc. ("DCI") (the "Internalization Acquisition") and terminated its management agreement (the "Management Agreement") with Difference Capital Management Inc. ("DCM"). All DCI and DCM employees became employed directly by the Company. The Internalization Acquisition gives the board of directors (the "Board") enhanced oversight over the operations, strategic direction, and investment process of the Company, and assists with the retention and compensation of key members of management.

The Company continues to prudently manage its liquidity, and where desirable, de-lever its balance sheet. During 2015, the Company repurchased an aggregate principal amount of $16.7 million of its outstanding Debentures, resulting in a cumulative to-date repurchase of $20.9 million, or 37%, of the original $56.1 million principal amount of Debentures issued, leaving $35.1 million Debentures currently outstanding. Management and the Board remain committed to dealing with the remaining Debentures in a manner that is non-dilutive to shareholders. The Debentures mature on July 31, 2018.

In December, the Company also successfully closed a substantial issuer bid for its common shares by purchasing 6.6 million shares at a price of $1.05 per share for total consideration of $6.9 million. With investable assets at the beginning of the year of $112.5 million, the Company returned to investors a total of $23.4 million through the repurchase of its securities in 2015 (20.8% of starting investable assets). These common share and Debenture repurchases generated a $7.7 million positive impact for shareholders in the year.

"As the clean up of our portfolio and management structure is behind us, we are well positioned to capitalize on liquidity events for our many strong investments over the next 12-24 months," says Henry Kneis, Chief Executive Officer of DCF.

Full-Year 2015 Financial Results

Net income for the year ended December 31, 2015 was $2.1 million, or $0.06 per share compared to a net loss of $48.1 million, or $1.24 per share for the year ended December 31, 2014.

For the year ended December 31, 2015, net realized capital losses on investments were $25.3 million. The realized capital losses was primarily attributed to the dispositions of the WorldGaming and Lignol assets, which resulted in $18.3 million and $13.0 million of losses respectively. These losses were reduced by capital gains realized on the dispositions of securities of Aurinia ($2.8 million), Chieftain ($2.4 million), and Infraredx ($1.4 million).

For the year ended December 31, 2014, the Company realized a $4.6 million capital gain on investments, primarily attributed to a $2.7 million gain on the conversion and disposition of Enterprise Group Inc. common shares and a $1.7 million gain on the disposition of common shares in Diversified Royalty Corp. (formerly known as BENEV Capital Inc.).

For the year ended December 31, 2015, the Company recorded $38.2 million of unrealized gain on investments and marketable securities. The significant changes in unrealized gain (loss) of the Company's investment portfolio during the year were as follows:

  • Reversal of unrealized loss previously recorded on WorldGaming ($25.6 million) and Lignol ($17.5 million) investments that were realized when these assets were sold in 2015.
  • Reversal of previously unrealized gain recorded on Aurinia ($2.0 million) and Chieftain ($1.6 million) investments that were realized when these investments were sold in 2015.
  • Mark-up of investments in Ethoca Solutions Inc. ($2.1 million), BTI Systems Inc., Vena Solutions ($1.4 million) and Vision Critical Communications Inc. ($0.5 million) based on recent completed third-party transactions.
  • Write-down of investments in Appinions Inc., Baanto International Ltd., iPowow! Inc., Crailar Technologies Inc., Cricket Media Group Ltd. and Mogo Finance Technology Inc. ("Mogo") totaling $7.1 million. Other than Mogo common shares which were marked-to-market, the fair value adjustments for the private investments reflects past performance, current outlook, and existing financial position, as well as valuations of comparable public companies and other transactions.
  • Net change in unrealized gain of foreign exchange of $3.6 million.

During the year ended December 31, 2014, the Company recorded $43.4 million of unrealized loss on investments and marketable securities. The unrealized loss was primarily due to write-downs of investments in Lignol ($12.8 million), WorldGaming ($19.5 million), and a few other smaller positions. The net change in unrealized loss was partially offset in 2014 by unrealized gain of investments in BuildDirect.com Technologies Inc. ($2.5 million), Blue Ant Media Inc. ($1.0 million) and Carta Solutions Holding Corporation ($0.5 million), as well as approximately $3.3 million of net change in unrealized gain of foreign exchange.

Other income decreased from $7.0 million for the year ended December 31, 2014 to $3.7 million for the same period in 2015. The decrease in other income was primarily due to lower interest and dividend income of $2.5 million, down from $5.8 million in the same period of 2014, due to smaller holdings of convertible debentures and debentures.

Total expenses for the year ended December 31, 2015 were $14.5 million, compared to $16.3 million for the year ended December 31, 2014. The significant components of expenses were as follows:

  • Management fees decreased to $0.9 million for the year ended December 31, 2015 compared to $3.0 million in the prior year. Effective June 1, 2015, the Management Agreement with DCM was terminated in connection with the Internalization Acquisition. In addition, management fees between January to May 2015 were lower than the same period in 2014 due to lower assets under management.
  • Compensation expense for the year ended December 31, 2015 was $1.5 million versus nil in 2014. Effective June 1, 2015 all DCM and DCI employees became employees of the Company.
  • Harmonized Sales Tax decreased to $0.3 million for the year ended December 31, 2015 from $0.6 million in 2014 due to the elimination of HST on management fees paid to DCM.
  • Professional fees for the year ended December 31, 2015 were $1.3 million, compared to $2.4 million in 2014. During 2014, the Company incurred higher legal and professional fees associated with the Benev investment and the Lignol receivership proceedings.
  • Financing costs for the year ended December 31, 2014 were $4.8 million compared to $5.5 million during the same period in 2014, as the Company took steps in 2015 to reduce its outstanding Debentures through the normal course issuer bid and a substantial issuer bid.
  • Transaction costs increased to $4.0 million for the year ended December 31, 2015, compared to $0.7 million in 2014. Included in transaction costs during 2015 were $2.4 million associated with the Internalization Acquisition and $1.4 million related to the WorldGaming transaction.

Please refer to the section regarding forward-looking statements which form an integral part of this release. These results, along with the audited financial statements and the company's MD&A, are available on the company's website at www.differencecapital.com and on SEDAR at www.sedar.com.

About Difference Capital Financial Inc.

Difference Capital Financial Inc. invests in and advises growth companies. We leverage our capital market expertise to help unlock value in technology, media and healthcare companies as they approach important milestones in their business lifecycle.

Caution Regarding Forward-Looking Statements

Certain statements contained in this press release may be deemed "forward-looking statements." Forward- looking statements are statements that are not historical facts and are generally, but not always, identified by the words "expects," "plans," "anticipates," "believes," "intends," "estimates," "projects," "potential," "scheduled," and similar expressions, or that events or conditions "will," "would," "may," "could" or "should" occur. Although DCF believes that the expectations reflected in those forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct and such forward- looking statements included in this press release should not be unduly relied upon. These statements speak only as of the date of this press release. DCF undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise, other than as required by applicable law.

1 Net asset value ("NAV") is a non-IFRS financial measure and is calculated by subtracting the aggregate fair value of the liabilities of the Company from the aggregate fair value of its assets. Net asset value per share is calculated by dividing NAV by the number of common shares outstanding as at the measurement date. The term net asset value per share does not have any standardized meaning according to IFRS and therefore may not be comparable to similar measures presented by other companies.

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