Difference Capital Financial Inc. has booked its second consecutive steep quarterly loss. The small cap Toronto-based merchant bank reported its third quarter results late Wednesday, reporting a $12-million net loss. In the second quarter, it had a $13-million net loss. The company, founded in 2012 by legendary Canadian stock trader turned star of CBC's Dragon's Den show, Michael Wekerle, mostly takes positions in late-stage private companies in the technology, media and health care sectors, with the aim of making a big profit once they go public.
The problem is, some of its investments will never get there. Lignol Energy Corporation, one of the biggest investments Difference Capital has made to date, went into receivership during the third quarter, wiping out the value of its equity. Difference invested $17.8-million in the alternative energy firm, which it has since written down to $1-million.
The company pegs the fair value of its 27 holdings at $116.9-million, with a cost base of $150-million. By that measure, Difference is about 22 percent under water on its portfolio. Its stock has lost 55 percent of its value in 2014 alone. Some of Difference Capital's early investors are sitting on even heavier paper losses in convertible debentures. The company has $51.8-million in debentures outstanding, with a conversion price of $5.75 a share. Difference's shares currently trade at $1.25 a share.
Difference co-founder and CEO Mike Wekerle took part in a quick-fire conference call early Thursday, that was done and dusted in about 15 minutes. [Difference] "had some challenges early on in the year," he said. "We have done some changes. We are very confident. We believe we have picked the right sectors. Our visions are long term."
The company is in the midst of a wide ranging restructuring that was rolled out in the summer. Difference has been raising cash by slashing its exposure to real estate, and getting out of the "lumpy" investment advisory services business.
Crucially, though, Difference is streamlining its core holdings of companies. It's planning to get down to about 20 positions over time, and expects to have a special focus on just 13 core names. In a telephone interview, Tom Astle, head of investment strategy at Difference, said the company has eight "IPO-ready" investments. There is no guarantee these companies will go public, but it's a possibility. In the conference call he also said the company is working hard to fix "problem files" such as gaming company WG Limited (World Gaming).
According to the latest filings, Dundee Corp. Fidelity Investments Canada Ltd. and CI Investments Inc. collectively own 10.6 percent of Difference's stock. When asked whether Difference has been getting concerned calls from these institutional shareholders, Mr. Astle said in an interview, "We are doing risky investments that have high return potential. Some investors may not have understood the longer-term nature of our investments. But they [institutional shareholders] understood when they came in, that late-stage venture capital is a longer term process and we said from day one we were doing three-year time horizon investments."
I asked Henry Kneis, CFO of Difference, whether Mr. Wekerle's outside interests such as Dragon's Den and his investment in Toronto's El Mocambo nightclub are distracting him from the day to day running of Difference.
"I think the reality is Michael brings a unique skill set to the team here," Mr. Kneis replied, "which has more to do with raising capital, being an introducer of deal flow because he is so well known in the capital markets. So a lot of people reach out to him with ideas. But when he gets those calls and ideas he hands them over the investment team."