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DH Corp. defends accounting practices, calls hedge fund report 'misleading'

TORONTO – Financial technology company DH Corp. is defending itself against what it calls a “false and misleading” report from a hedge fund that casts doubts on its growth prospects and past performance.

The report by Lawton Park Capital Management alleges the Toronto-based company (TSX:DH) is making “desperate” acquisitions and playing “accounting games” in order to obscure its dwindling performance.

The report takes issue with DH’s approach to accounting for its revenue and alleges that “numerous” insiders of the company have been selling their shares, which could indicate trouble brewing that the public isn’t aware of.

DH released its quarterly earnings report earlier than planned and bumped up its conference call to discuss its results, originally slated for Wednesday, to Tuesday morning in order to address the allegations.

The company, formerly known as Davis + Henderson in the days when it was primarily known for printing and supplying paper cheques for Canada’s big banks, says investors should rely on its public filings and not the analyst report.

DH’s chief financial officer Karen Weaver said the company follows “disciplined accounting practices” that are in accordance with the International Financial Reporting Standards.

Chief executive Gerrard Schmid called reports that company insiders have been dumping their shares “categorically untrue” and “highly misleading,” noting that while there have been a number of “individual, one-off transactions,” on a net basis insiders have accumulated more shares over the past three years.

Schmid said that during the second quarter of 2015, company insiders — including board members and senior management — held roughly 580,000 shares, up from 215,000 shares in the second quarter of 2012.

Lawton Park Management declined comment.

In their earnings news release issued Tuesday, DH called Lawton Park’s allegations “self-interested attacks” and said it believes the hedge fund in question is engaged in short-selling its shares — an investment technique that depends on a stock value falling rather than rising.

“We are deeply disturbed by the false and misleading allegations contained in the report, and intend to vigorously defend ourselves and D+H against these assertions,” Schmid said during the company’s third quarter earnings call.

“D+H recommends that investors review its public filings as providing accurate information regarding the company and its performance, and not to rely on this report which contains misrepresentations and which may have purposes other than giving investors accurate information and impartial analysis.”

The hedge fund report also alleges that a U.S. regulatory order imposed on Fundtech — a payment services firm that DH acquired for $1.25 billion earlier this year — has been hurting the segment’s ability to grow its business and retain existing customers.

However, DH says it was aware of the regulatory order, which requires Fundtech to beef up its risk-management practices, before it made the acquisition and has been working to remedy the issue.

“Our view is that the consent order has had no material impact on our ability to grow the Fundtech business, both within the United States and abroad,” said Schmid.

Faced with the gradual decline of cheque usage, DH has been working over the past decade to transform itself into a technology business serving financial institutions, with cheques now comprising only 20 per cent of its revenue.

The company reported net income of $30.7 million for the three months ended Sept. 30, down from $32.2 million a year ago, while adjusted net income was $65.2 million, up from $50.6 million.

DH says revenue for the quarter was $415.1 million, up from $289.2 million during the same period last year. Adjusted revenue was $418.8 million, up from $292 million a year ago.

The Fundtech acquisition, which has been rebranded as DH’s global transaction banking solution business, comprised a significant portion of the revenue increase. DH says the segment accounted for $87.9 million of its revenue in the third quarter, or $90.4 million on an adjusted based, compared with none last year.

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