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Difference Capital Reports Fiscal Fourth Quarter and Full Year 2016 Results

TORONTO, ON--(Marketwired - March 08, 2017) - Difference Capital Financial Inc. ("DCF" or the "Company") (DCF.TO) (TSX:DCF.DB), today reports its financial results for the three months and year ended December 31, 2016.

Full Year 2016 Financial Highlights

  • Net asset value1 per share decreased 21% to $7.89 from $10.03 at December 31, 2015;
  • Net loss from investments and marketable securities of $6.6 million compared to net gain of $12.9 million in 2015;
  • The portfolio produced a gross loss (before operating costs) on total investable assets of 5.9% for 2016 vs. a gain of 11.2% in 2015;
  • Net loss of $12.9 million or $2.20 per share compared to net income of $2.1 million or $0.30 per share in 2015;
  • Cash at the end of December 31, 2016 was approximately $10.8 million;
  • During 2016, the Company repurchased $5.6 million principal amount of its 8% July 31, 2018 convertible debentures (the "Debentures"), at a purchase price of $948 per $1,000 principal amount through its normal course issuer bids; and
  • Through interest payments, debenture repurchases, and common share repurchases, the Company has since 2013 returned to investors a total of $47 million.
                 
(figures are in $000 except per share amounts and shares outstanding)   Q4 2016   FY 2016   Q4 2015   FY 2015
Net realized gain (loss) on investments and marketable securities   ($2,544)   ($16,507)   $1,983   ($25,269)
Net change in unrealized gain (loss) on investments and marketable securities   (2,022)   9,868   (716)   38,171
Net gain (loss) on investments and marketable securities   (4,566)   (6,639)   1,267   12,902
Other income   450   1,541   1,015   3,695
Total expenses   (2,128)   (7,836)   (2,225)   (14,452)
Net income (loss)   (6,244)   (12,934)   57   2,145
Basic and fully diluted earnings (loss) per share   ($1.05)   ($2.20)   $0.00   $0.30
        FY 2016       FY 2015
Total assets       75,649       93,066
Total liabilities       29,421       34,190
Net asset value       46,228       58,876
Shares outstanding*       5,858,637       5,872,397
Net asset value per share*       $7.89       $10.03
Share price*       $4.15       $4.85
* Data prior to November 30, 2016 have been adjusted to reflect the five-for-one share consolidation
 

2016 Review

Our portfolio strategy of investing in later-stage private growth companies was partially predicated on an occasional initial public offering ("IPO") window opening up. 2016 was not a particularly good year for the IPO market amid heightened political and economic uncertainty, market volatility, ongoing strength of the private capital market, and a number of IPO capable candidates waiting for better internal metrics. It was the weakest IPO showing in at least 20 years according to a report by PricewaterhouseCoopers. The slow IPO market was somewhat offset by an active mergers and acquisitions ("M&A") market, accelerated in Canada due to the strength of the U.S. dollar relative to the Canadian dollar.

The Company benefited from this positive M&A market through the exits of Quickplay Media Inc. ("Quickplay"), BTI Systems Inc. ("BTI"), Embotics Corporation and a few smaller positions. In addition, the Company has begun the sale process of its Rancho Mirage real estate investment that could conclude in 2017.

The Company continued to prudently manage its liquidity and de-lever its balance sheet during 2016. The Company repurchased an aggregate principal amount of $5.6 million of its outstanding Debentures, resulting in a cumulative to-date repurchase of $26.5 million, or 47%, of the original $56.1 million principal amount of Debentures issued, leaving $29.6 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.

2017 Outlook

As we look ahead to 2017, we are cautiously optimistic that the IPO market will return. Markets are healthy; the few 2016 U.S. technology IPOs performed well; demand for new growth names remains high; private capital is getting a little harder to find; and, most importantly, a number of IPO candidates are getting the metrics needed, with sales and profits at levels that should make them attractive to a large number of institutional investors.

While IPOs could finally return in 2017, we also expect M&A activity to remain healthy. We think these trends will continue to be supported by the weak Canadian dollar, recognition that Canada is a good location for R&D, and the vast amount of cash available to big U.S. technology companies.

Full-Year 2016 Financial Results

Net loss for the year ended December 31, 2016 was $12.9 million, or $2.20 per share, compared to a net income of $2.1 million, or $0.30 per share, for the year ended December 31, 2015.

For the year ended December 31, 2016, the Company recorded $16.5 million of net realized capital losses. The realized capital losses were primarily attributed to the dispositions and write-offs of the following investments: iPowow! Inc. ("iPowow") ($5.5 million), Crailar Technologies Inc. ("Crailar") ($5.0 million), Kalina Power Ltd. ("Kalina") ($3.0 million), and three other investments ($4.5 million). The Company had previously marked down these investments and thus there was minimal impact to net income other than an accounting reclassification of previously recorded unrealized losses to realized losses. These losses were offset by realized gains on dispositions of Quickplay ($2.5 million) and BTI ($0.4 million).

For the year ended December 31, 2015, net realized capital losses on investments were $25.3 million. The realized capital losses were primarily attributed to the dispositions of the WG Limited ("World Gaming") and Lignol Energy Corporation ("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 Pharmaceuticals Inc. ($2.8 million), Chieftain Residential LP ($2.4 million), and Infraredx, Inc. ($1.4 million).

For the year ended December 31, 2016, the Company recorded $9.9 million of unrealized gain on investments and marketable securities. The significant changes in unrealized gain of the Company's investment portfolio during the year were primarily due to the following:

  • Reversal of $18.9 million of unrealized losses previously recorded on investments in Ipowow, Crailar, Kalina, and three other investments that were disposed of or written off in 2016, as noted above; and
  • The Company marked up its investments in Rancho Mirage (U.S. real estate), Vision Critical Communications Inc. and Touchbistro, Inc. totalling $5.5 million; offset by
  • Fair value write-downs on investments in BuildDirect.com Technologies Inc., Carta Solutions Holding Corporation, Mogo Finance Technology Inc., Thunderbird Films Inc. and Waterloo Innovation Network I LP totalling $13.5 million; and
  • Net change in unrealized loss of foreign exchange of $1.2 million on the Company's U.S. investments.

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 of the Company's investment portfolio during the year were primarily due to the reversal of unrealized loss previously recorded on World Gaming ($25.6 million) and Lignol ($17.5 million) investments that were realized when these assets were sold in 2015.

Other income decreased to $1.5 million for the year ended December 31, 2016 from $3.7 million for the same period in 2015. The decrease in other income was primarily due to lower interest and dividend income of $1.3 million, down from $2.5 million in 2015, due to smaller holdings of convertible debentures and debentures.

Total expenses for the year ended December 31, 2016 were $7.8 million, compared to $14.5 million for the year ended December 31, 2015. The significant components of expenses were as follows:

  • Compensation expense for the year ended December 31, 2016 was $2.9 million (full year) versus $1.5 million in 2015 (7 months). 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.
  • Management fees decreased to nil due to the Internalization Acquisition, compared to $0.9 million in 2015.
  • Professional fees for the year ended December 31, 2016 were $0.6 million, compared to $1.4 million in 2015.
  • Financing costs for the year ended December 31, 2016 were $3.6 million compared to $4.8 million during the same period in 2015, as the Company continued to take steps to reduce its outstanding Debentures.
  • Transaction costs decreased to $0.0 million from $4.0 million for the year ended December 31, 2015. Included in transaction costs during 2015 were $2.4 million associated with the Internalization Acquisition and $1.4 million related to the World Gaming sale 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.