Matrix Asset Management Inc.

Matrix Asset Management Inc.

December 01, 2014 23:51 ET

Matrix Reports Third Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Dec. 1, 2014) - Matrix Asset Management Inc. (the "Company" or "Matrix") reported today its financial and operating results for the nine months ended September 30, 2014.

President and CEO, David Levi commented, "Addressing Matrix's working capital deficit and identifying options for the Company to restructure its present debt obligations is a key priority".

Selected Highlights for the Nine Month period Ended September 30, 2014 - Unaudited

  • At September 30, 2014, assets under management ("AUM") were $210 million, compared to $232 million as at December 31, 2013 and $300 million as at September 30, 2013.
  • Total revenue for the nine month period ended September 30, 2014 was $5.6 million compared to $9.9 million during the same period last year.
  • Recurring expenses for the nine month period ended September 30, 2014 were $7.2 million compared to $15.9 million during the same period last year.
  • Net loss for the nine month period ended September 30, 2014 was $(2.5) million compared to $(8.2) million for the same period last year. The Company recognized a net loss from continuing operations for the nine month period ended September 30, 2014 of $(2.4) million compared to net loss from continuing operations of $(5.7) million for the same period last year.
  • Total current liabilities of $7.2 million as at September 30, 2014 are scheduled for repayment over the next 12 months.
  • Working capital deficit increased during the nine month period ended September 30, 2014 by $2.1 million to $5.0 million. See "Liquidity and Capital Resources".

Further to the financial challenges facing Matrix, it has initiated discussions with its creditors regarding a potential restructuring of its obligations.

This release should be read in conjunction with Matrix's unaudited financial statements and Management Discussion & Analysis ("MD&A") for the nine months ended September 30, 2014, which are available on the SEDAR at www.sedar.com.

Subsequent Events:

Matrix management team announces that its subsidiary, Growth Works Capital Ltd. ("GWC"), has obtained an additional loan of $1,009,373 ("Additional Operating Loan") from R.C. Morris & Company Special Opportunities Debt Fund II LP ("Lender") that previously extended to GWC a $5,362,250 million loan announced on October 1, 2013, December 30, 2013 and July 30, 2014 (together with the Additional Operating Loan, the "Entire Loan").

Mr. Christopher Morris is President and CEO of GWC, as well as the principal of the Lender, and President of R.C. Morris & Company Ltd., a turnaround and restructuring firm based in Vancouver which provides consulting services to Matrix and certain of its subsidiaries, including GWC.

The Additional Operating Loan matures on December 31, 2018 and bears an interest rate of 12%, payable quarterly. An annual processing fee of 6.5% of the principal amount of the Additional Operating Loan will also be payable quarterly. A structuring and commitment fee of $9,373 was also payable to the Lender at closing. The Lender will also receive, as partial consideration for the Entire Loan, approximately 24.0% of incentive payment amounts earned by GWC and related companies from the venture capital funds they manage during the time of the Entire Loan and three years thereafter.

The Entire Loan is secured by the assets of GWC and guaranteed by the assets of Matrix and certain of its non-registrant subsidiaries and personal assets of David Levi, Matrix's Chief Executive Officer, including an option ("Option") granted to the Lender to acquire substantially all of the shares of GWC and certain other subsidiaries of Matrix.

As previously announced in 2012 and 2013, Matrix also has three loans outstanding from two shareholders with an aggregate principal of $675,000. Pursuant to the terms of those loans, the lenders have elected effective the closing of the Additional Loan to have the terms of their loans amended to adopt the terms and the security of the Entire Loan, subject to approval of the Lender and subject to the shareholder loans' security ranking behind the security of the Entire Loan and without any of the additional interest and fees charged under the Entire Loan.

Corporate Overview

Matrix is a venture capital asset management company with offices in Vancouver, Toronto & Halifax. As at September 30, 2014, the Company managed approximately $210 million in assets operated through GrowthWorks Capital Ltd., which manages funds in the venture capital sector.

Summary of Financial Results for the Nine Month period Ended September 30, 2014 - Unaudited

The following table sets out selected consolidated financial information about Matrix for the three and nine months ended September 30, 2014 compared with financial information for Matrix for the same period in 2013.

For the three
months ended
September 30,
2014

(in $ thousands)
For the three
months ended
September 30,
2013
(in $ thousands)
For the nine
months ended
September 30,
2014

(in $ thousands)
For the nine
months ended
September 30,
2013
(in $ thousands)
Revenue
Management and administration fees 1,671 2,545 5,163 8,239
Additional administration fees 89 221 275 714
Incentive participation revenues - - 86 390
Interest income 1 67 3 431
Other income 14 38 47 135
1,775 2,871 5,574 9,909
Expenses
Selling, general and administrative 2,414 5,144 6,832 12,738
Share-based compensation - 17 20 130
Amortization - property and equipment 14 398 49 508
Amortization - deferred sales commissions - 145 152 447
Amortization - asset management contracts - 1,077 - 1,569
Interest 278 122 938 522
2,706 6,903 7,991 15,914
Loss before merger, acquisition and other special project costs and income taxes (931 ) (4,032 ) (2,417 ) (6,005 )
Merger, acquisition and other special project costs (- ) (210 ) (1 ) 1,014
Loss before income taxes (931 ) (3,822 ) (2,418 ) (7,019 )
Income tax recovery - (377 ) - (1,304 )
Loss from continuing operations (931 ) (3,455 ) (2,418 ) (5,715 )
Loss from discontinued operations, net of tax - (1,652 ) - (2,437 )
Net loss (931 ) (5,097 ) (2,418 ) $ (8,152 )
Basic and diluted loss per share from continuing operations (in $) (0.02 ) (0.07 ) (0.05 ) (0.11 )
Basic and diluted loss per share from discontinued operations (in $) (0.00 ) (0.03 ) (0.00 ) (0.05 )
(a) Dividends declared and paid(2)
As at
September 30,
2014

(in $ thousands)
As at
September 30,
2013
(in $ thousands)
As at
December 31,
2013
(in $ thousands)
Cash 409 3,301 1,251
Total assets 3,766 7,516 5,303
Total long-term liabilities 6,798 5,349 6,781
Total assets under management(1) 210,000 300,000 232,000
Notes:
(1) Assets under management or "AUM" means the fair value of the net assets of the funds and accounts managed by Matrix and its subsidiaries in respect of which fees are earned.
(2) During the nine months ending September 30, 2014 no dividends were declared or paid. Dividends are described in Matrix's MD&A for the nine months ended September 30, 2014 posted on SEDAR.

The unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with the International Accounting Standard 34 - Interim Financial Reporting as issued by the International Accounting Standards Board and are the responsibility of the Company's management. The Company's independent auditor has not performed a review of these financial statements.

Liquidity and Capital Resources

As at September 30, 2014, Matrix had total assets of $3.8 million, a decrease of $1.5 million from $5.3 million at December 31, 2013. During the nine month period ended September 30, 2014, current assets decreased by $1.2 million while long term assets decreased $0.3 million. Total liabilities of $14.0 million as at September 30, 2014 increased by $0.9 million compared to $13.1 million as at December 31, 2013. Current liabilities increased by $0.8 million while long term liabilities increased slightly.

The working capital deficit increased from $(2.9) million as at December 31, 2013 to $(5.0) million as at September 30, 2014 primarily due to increases in the current portion of corporate debt due in the next twelve months, increases in accounts payable and accrued liabilities, and loss from operations. The corporate debt due in the next twelve months is a related party loan from two majority shareholders. The primary uses of cash from continuing operations during the quarter was cash used for operations of $1.7 million (see Consolidated Statements of Cash Flows in the interim condensed consolidated financial statements), which $0.8 million was used for interest payments.

On September 30, 2013, Matrix announced that GWC had entered into financing arrangements for a term credit facility of up to $5 million which bears interest at 12% per annum calculated and paid quarterly. In addition, GWC agreed to pay a processing fee of 6.5% per annum, calculated and paid quarterly. $4 million and $1 million of the facility were advanced to the Company on September 30, 2013 and December 30, 2013, respectively. Advances made under the facility are due and payable in full 60 months from the date of each advance. The facility is secured by the assets of a subsidiary of the Company, a guarantee from and a charge of the assets of the Company and certain of its non-registrant subsidiaries and a second guarantee from David Levi, President and Chief Executive Officer of Matrix. On September 30, 2013 and December 30, 2013, Mr. Levi agreed to provide a personal guarantee for the facility advanced to the Company. Financial covenants of the loan, as amended on July 30, 2014, require the GWC's weekly working capital position to be no less than $0.1 million until July 31, 2014 and no less than $0.25 million after August 1, 2014. As of September 30, 2014, all financial covenants relating to the debenture have been met.

Management will continue to consider other options for reducing the Company's working capital deficit and improving the Company's operating results, including re-financing and re-structuring the Company's indebtedness, and further cost reduction measures.

The Company requires capital for operating purposes, including funding current and long term liabilities, and current and future operations. Subsidiaries of the Company registered under securities laws must also maintain minimum levels of working capital in order to meet regulatory requirements under securities laws. If these minimum working capital requirements are not maintained, these registrations may be revoked. As a result of the term credit facility provided on September 30, 2013 and December 30, 2013, the Company believes that it has rectified its previously announced working capital deficiency but securities regulators have not finalized their review of the matter and any confirmation of that rectification is still pending. There can be no assurance that these subsidiaries will restore and maintain compliance with working capital requirements to the satisfaction of regulatory authorities and a failure to do so would have a material adverse effect on the Company's ability to operate and its financial position and future operating results.

The Company's capital structure is comprised of shareholder's equity and corporate debt.

The Company's objectives in managing capital are to maintain a capital structure that will:

  • Fund current and future operations;
  • Facilitate building long-term shareholder value; and
  • Satisfy financial obligations and meet long-term debt covenants

Matrix's liquidity position and capital resources are dependent on cash flows from operations which in turn are dependent on AUM. Matrix's AUM is subject to a number of risks and uncertainties and has declined significantly with the result of the dispositions related to the SEAMARK Sale and the Marquest Transaction. Matrix's working capital position has also deteriorated significantly over the past two years. Failing to meet payment obligations, including in respect of secured indebtedness or failing to maintain compliance with working capital requirements under securities laws, may have a material adverse effect on Matrix's financial condition, operating results and ability to carry on business. See "Risk Factors" in Matrix's MD&A for the nine months ended September 30, 2014.

As at September 30, 2014, Matrix had a working capital deficiency of $(5.0) million, comprised of $2.2 million current assets and $(7.2) million in current liabilities. Matrix's retained earnings deficit as at September 30, 2014 was $(33.9) million and the net loss from continuing operations for the nine month period was $(2.4) million. Significant items contributing to the working capital deficit are: (1) $5.5 million in accounts payable and accrued liabilities; (2) $0.2 million of employment related obligations, primarily non-recurring lump sum payments due during the next 12 months; (3) $0.6 million in operating lease related obligations; and (4) $0.8 million for the current portion of the corporate debt.

The financial statements and MD&A were prepared on a going concern basis, which assumes that Matrix will continue to realize its assets and discharge its liabilities as they become due.

Management's cash flow forecasts indicate that the Company is expected to have resources available to continue to operate as a going concern; however the forecasts are based on a number of assumptions with respect to future cash flows and the Company's ability to re-structure $0.8 million of payments due to related parties on March 31, 2015 and obtain additional financing. There can be no assurance that Matrix will re-structure debt obligations and obtain additional financing in a manner that will allow Matrix to continue to operate. Uncertainties surrounding these assumptions may cast significant doubt on the ability of Matrix to discharge its liabilities in the normal course of business and continue to operate as a going concern. See Note 1 "Organization and Continuing Operations" in the annual audited consolidated financial statements and see Note 9 "Corporate Debt" in the interim condensed consolidated financial statements for a description of terms and security on corporate debt.

There is material uncertainty surrounding Matrix's ability to generate positive cash flows to generate savings from cost reduction programs (and as to the quantum of such savings), to re-pay, re-finance and/or re-structure debt obligations, to collect fund management fees and incentive participation dividends from managed funds with poor liquidity, to collect tax refunds and as to the outcome of regulatory reviews and filings and prospects for future transactions. See "Forward-Looking Statements". If the Company is unable to re-pay or re-finance its debt obligations, the obligations and associated security may be enforced, which would have a material adverse effect on the Company's business, financial position, and operating results and the Company's ability to continue to operate. The auditor's report in respect of Matrix's consolidated financial statements for the year ended December 31, 2013 was unqualified, however did contain and Emphasis of Matter notation with respect to Matrix's working capital deficit as at December 31, 2013, net loss for the year, and Matrix's ability to continue to operate as a going concern.

It is not possible to predict whether strategic options pursued by Matrix will result in sufficient improvements to Matrix's financial condition to allow Matrix to continue as a going concern. If the going concern assumption ceases to be appropriate, adjustments will be necessary to the carrying amounts and/or classification of Matrix's assets and liabilities. Further, a comprehensive restructuring plan could materially change the carrying amounts and classifications reported in the consolidated financial statements.

Matrix's September 30, 2014 financial statements and MD&A are available on SEDAR at www.sedar.com.

About Matrix (www.matrixasset.ca)

Matrix is a venture capital asset management company with offices in Vancouver, Toronto & Halifax. As at September 30, 2014, the Company managed approximately $210 million in assets operated through GrowthWorks Capital Ltd., which manages funds in the venture capital sector.

Forward-Looking Statements

Certain statements in this press release are forward-looking statements based on beliefs, assumptions and expectations of the Company and not on historical fact. Forward-looking statements are provided for the purposes of assisting the reader in understanding the Company's financial position and results of operations and to present information about management's current expectations and plans related to future periods. Readers are cautioned against placing undue reliance on forward-looking statements and that such statements may not be appropriate for other purposes. These statements may include, without limitation, statements regarding Matrix's ability to continue to operate as a going concern and meet minimum working capital and other regulatory requirements, future operations, business, financial condition, AUM, financial results, expense reductions, tax refunds, dividends and dividend policies, proposed financings, re-payment, re-financing and/or re-structuring Matrix's financial obligations, managed venture capital fund divestments, prospects, opportunities, goals, strategies, accounting policies and estimates and outlook of the Company for the current fiscal year and subsequent periods. Forward-looking statements include statements that are predictive in nature or depend upon or refer to future events or conditions.

Forward-looking statements are based upon beliefs and assumptions of management that were applied in drawing a conclusion or making an estimate, forecast or projection as reflected in the forward-looking statements, including the perception of historical trends and current conditions and beliefs and assumptions with respect to levels of AUM and related assumptions as to levels of portfolio returns and managed fund sales and redemptions, beliefs and assumptions concerning prevailing and future economic and market conditions and the impact of such conditions and other factors on Matrix's AUM, managed portfolio performance and the trading price of Matrix shares, the continuation of portfolio and fund management and advisory engagements, the extent and effectiveness of cost-saving measures and the impact of such measures and other factors on earnings, the outcome of pending and future tax filings, the outcome of litigation, the outcome of disputes on the allocation of expenses between Matrix and the Canadian Fund, the outcome of claims made to the Canadian Fund, the status of pending transactions and proposed transactions and the expected benefits from and impact of transactions on Matrix's future operations, the ability of Matrix to re-pay, re-finance or re-structure financial obligations, maintain compliance with related contractual covenants, minimum working capital and other regulatory requirements and other laws, tax rates, the outcomes of regulatory compliance reviews, the ability of managed venture capital funds to generate liquidity, pay management fees and IPA revenues when due and satisfy secured payment obligations under financing arrangements, performance of managed venture capital investments relative to carrying values and performance fee return thresholds, the collection of trade receivables and the absence of extraordinary or one-time expenses not currently known to management. While management considers these beliefs and assumptions to be reasonable based on information
currently available, these statements are subject to numerous risks and uncertainties and no assurance can be given that such beliefs and assumptions will prove to be correct. Accordingly, actual results may differ significantly from those expressed or implied by forward-looking statements due to many factors including, but not limited to, regulatory and other risks associated with venture capital fund management sector generally, market, economic, political and other risks affecting portfolio performance, interest and foreign exchange rates, levels of managed fund sales and redemptions and in turn Matrix's AUM, risks associated with tax filings and litigation, other risks affecting revenues and earnings, regulatory and other risks associated with fund and asset management activities, managed venture capital fund divestments and liquidity levels, risks associated with non-performance of financial obligations, including secured obligations, integration and continuity risks affecting completed acquisitions, changes in consumer demand for the financial products offered by the Company, Matrix's ability to respond to competition and other risks and uncertainties listed under "Risk Factors" in the MD&A for the period ended September 30, 2014 and in Matrix's Annual Information Form dated March 31, 2014, which is available on SEDAR. Many of these risks are beyond the control of Matrix.

The assumptions and risks noted in this press release are not exhaustive of the factors that may affect any of the Company's business and the forward-looking statements in this press release. Readers should consider these and other risks, uncertainties and potential events carefully and should not place undue reliance on forward-looking statements. Other than as specifically required by law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made, or to reflect new information, future unanticipated events or results or other factors.

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