Flow Capital Corp.

Good day and thank you for standing by. Welcome to the Flow Capital's 2021 year-end call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Alex Baluta. Please go ahead, sir.

Thank you, operator. And thank you, everybody, for joining or listening in on the recording. After the closing market yesterday, we released our audited financial results for the year ended December 31st, 2021. Details can be found on our website at flowcap.com or as filed on CDAR. We know that I'm only going to provide a cursory review of the numbers on this call. We're going to focus on the highlights. However, if you want to have more details, please visit our website or download the results on CDAR to see the detailed results. We had an excellent quarter to cap off an excellent year. Book value for the year grew at 33.7% to approximately 75 cents per share. IFRS net income grew grew by 164% to 5.6 million in the year. Note that IFRS numbers can be volatile due to the unpredictable timing of buyouts and unrealized FX and fair value adjustments. Given that, recurring revenue is a more informative metric to track and it's the one that we use to manage our business. Recurring revenue from royalties and interest grew by 13.4% in the year for approximately 6.1 million. Total revenue Under IFRS was $10.4 million in 2021, a slight year-over-year growth of 0.5%. In 2021, Flo completed over $40 million in transaction value, including $23 million in new deployments across seven investments, $5.5 million in equity sales, and $12.3 million across five royalty repayments, redemptions, and recoveries from previously discussed investments. Realized gain from a sale of investments with 8.7 million under IFRS for the year compared to a realized gain in 2020 of just under a million dollars. 2021 represented a significant transition year for us. During the year, we experienced a very rapid transition of our business away from royalties, which is our legacy business, and firmly into venture debt. We define venture debt or growth debt as a lower risk, higher quality, senior secured debt investments into high growth companies, primarily into software technology companies. This is in contrast to the unsecured perpetual royalties in all types of businesses that was the company focus in 2014 through 2018. This transition to higher quality investments has been part of our strategy for the past three years, and the transition actually happened much faster than we expected. During the year, five of our best performing legacy royalties bought us out. In fact, all of these buyouts happened in a very short period of time in late Q2 and early Q3. This was somewhat unusual as we had expected the buyouts to be spaced out over several quarters or even a couple of years. These legacy royalties represented $12 million in repay capital and they were generating over a 30% yield. These were some of our best legacy investments. They were generating over $3.5 million in revenue per flow. at the time of the buyout. However, during the year, we also redeployed just over $23 million in new capital into new investments, all of which were senior secured venture debt investments with warrants and or exit bonus upside, fully replacing the revenue loss from exited legacy royalties. The ability to redeploy this capital was the culmination of years worth of effort to build our origination platform and capabilities. In 2021, we reviewed 982 deals and invested in six companies plus two follow-on investments into existing portfolio companies. Note that that is a less than 1% close rate, and it highlights our obsession with focusing on high-quality companies. Not only did we see more leads in 2021 over 2020, we also saw bigger and better-quality companies. Our origination platform is one of the core pillars that will support our continuing growth looking forward. So let me give you a few more rapid-fire highlights from 2021. As I said, we had $12 million in repayments, but we also had an exit from one of our equity investments, that being Interspirit, which returned almost $5 million in cash for a balance sheet. As I said, we also deployed $23 million into new loans, into companies including EverWash, Performio, Joystick, Minilux, Ascot, and Kobo. EverWash is a SaaS subscription software platform targeting car washes, There are over 67,000 car washes in North America, and they've just deployed 500 units. And they have 2 million subscribers on the consumer side. And they just raised additional equity from venture capitalists after our investment. Formio is a SaaS-based sales compensation platform growing tremendously. Minilex, which recently went public after our investment, is disrupting both by technology and retail the personal nail care space and doing a lot more to improve the working business conditions for over 400,000 primarily female workers in that sector. JORSEC, the SaaS cloud-based B2B component content management system. AskVet is a subscription-based veterinary service with strategic partnership with Kong Pet Toys, and that includes the KongDoc subscription service. And Kobo is a tech-based billing solution provider that is consolidating a fragmented healthcare billing service in the U.S. This is an excellent group of companies and investments, and we're proud to be associated with these companies. And these are the kind of companies that we continue to search for, and we rely on the developments in our capabilities and our origination platform to find these companies. To continue with highlights, we generated strong adjusted recurring cash flow from recurring operations of over $1.6 million in 2021. This represented the second full year of positive free cash flow or adjusted free cash flow. And just to help you understand what we mean by that, look at our business very simply. Revenue from recurring interest and royalties, less OpEx, less interest, and that's our recurring cash flow. So it helps us avoid the movements that you get in your IFRS statements that don't help you really understand the business. We boil our business down to simple recurring revenue, We've now had positive recurring cash flow, positive EBITDA, and strong revenue performance for two years in a row. We transitioned to over 2021, we transitioned our portfolio away from royalty focused and towards venture debt focused. Today, over 85% of our invested assets are in venture debt loans, while only 14% are in royalties. We're seeing an increase in venture sponsored companies in our pipeline and in our portfolio. Today, over 58% of our invested assets have a VC sponsor or otherwise a VC investor is probably the way to explain it. I should add, I'm very proud of this number, but we continue to focus on building our relationships with more VCs, but we continue to focus on embracing investments in bootstrapped companies. So in companies that don't have a VC investor or a VC sponsor. So unlike many of our competitors, we don't shy away from from these kind of deals. And in many ways, we prefer them, that being bootstrap companies, as the returns in such investments are often much better. We do manage the risk of these investments by ensuring we do in-depth due diligence and ensuring there's appropriate levels of governance in these companies. But I think for us going forward, you'll probably see a mix of 50% VC-sponsored and 50% bootstrap companies in our investments over time. On the referral side, we're seeing increased referral traffic from various partners in the U.K. and Canada as we have built up our referral network and we continue to build that going forward. Another highlight is a growing warrant and equity portfolio. Since we transitioned away from royalty investments and into venture debt, we have built up a portfolio of 11 warrant positions, two bonus and exit positions, and four common equity positions. Building this warrant and equity portfolio is a very important part of our strategy and it's very much worth highlighting. So let me take a short diversion here and tell you why we love investing in growth companies and how that's related back to our ones. First, the equity in growth companies provides us with substantial downside cushion. In fact, the average loan-to-value of our portfolio of investments is well below 10%. That means our debt represents below or less than 10% of the total enterprise value of our investing companies on average. Second, high-growth companies have more exit alternatives. be it M&A, venture investment, lower cost of capital, bank financing, IPO, many different ways that they can raise capital. And this is important for us and how we exit our investments. And then finally, the third issue, to tie this back to my point about warrants, the third reason we focus on investing in growth companies is for the warrant upside. The equity in these types of companies increases disproportionately faster as they grow, both just through growth in revenue, but also through multiple expansions. So this warrant and equity portfolio that we currently have will become a strong driver of continued shareholder value growth for flow capital. Not only will warrant gains offset portfolio losses that we might have, as some of our competitors are learning, it's pretty hard to make up a small, even a small portfolio loss with only net interest spread. But we expect that these warrants will be substantial net contributors to our overall shareholder value growth and profitability over time. I really cannot overemphasize this. These warrants are a big deal. We manage our day-to-day business by focusing on being profitable based on only recurring interest revenue. But by the time we get to $100 million in assets, which is getting too far from today, we expect that we'll have 25 to 30 warrant conditions. And returns from that warrant portfolio should be meaningful over time. And this is actually a fairly big differentiator between us and our competitors. Back to highlights. I mentioned the growth of our origination capabilities, not just in terms of number of deals, but also in terms of quality and investing company size. In 2021, we made some of our largest investments to date, including a $5 million investment into Everwash. And you should expect this trend to larger and better quality deals will continue. On the operations side, over the past several years, we've cleaned up most of our legacy distress deal backlog that were left over from the 2014 to 2018 era of the company. And you'll see that we had a fairly significant reduction in associated legal expenses in 2021, which helped us significantly reduce objects. On continuing on the legal side, we did have a major legal win in a material dispute. This dispute is going to appeal, but we are very positive about the prospects for this outcome over the next couple of years. Our portfolio continues to see excellent revenue and resiliency through COVID. We invest in the kind of companies, frankly, that aren't affected by COVID, or if they are, it's positives. but these kind of companies perform well. These digital technology-enabled companies perform well in COVID or outside of COVID. Other highlights, we continue to clean up the balance sheet, and particularly eliminating overhang associated with the past mergers and leases, et cetera. And finally, a highlight for me in 2020 was one with the team that we've managed to assemble. I'm proud to be working with these folks, and with the team we have in place, we have the capacity to scale our business to over $100 million in assets. All of these highlights demonstrate the resilience of our business model, and it's really the outcome of over three years of hard work. And to summarize, we're seeing improving deal origination. We're seeing reduced costs and streamlined operations. We're seeing increasing investment quality and size. We're simplifying our deal structures, and we're cleaning up our balance sheet. The bottom line is we had an excellent year. And I'm going to re-summarize that in a couple of key numbers. First, our ongoing free cash flow generation, which I already mentioned, is $1.6 million. And secondly, our book value growth during the year, it increased by 35%, I should say 34%, to 75 cents a share. And so not only did we have a good 2021, but this was on the back of a very strong 2020. And I should highlight that over the past nine quarters, book value growth Book value has grown per share by 65%. Final comment. You may have noticed or observed that our stock trades at a significant discount to book value. We believe this offers a very compelling opportunity for us to purchase high-quality undervalued stock, that being our own stock. So you should come as no surprise that during the year, we purchased almost a million shares under our ongoing NCIB for an average price of $0.43 a share. And so with that, I'll pause my scripted comments and turn it over to the operator and see if we have any questions.

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star 1 on your telephone. Please stand by while we compile the Q&A roster. And there are no questions at this time. I would now like to turn back the call to Mr. Alex Belluta. Please go ahead.

Great. Thank you, operator. Again, I'll summarize. We had a great 2021 on the back of a great 2020. We've been working hard at building our capabilities, including origination execution. We're on the cusp of significant growth. And we expect 2022 will be a busy year as we continue to scale up and deploy our capital. grow our revenue, grow our free cash flow, and ultimately increase shareholder value, which is our primary focus. Thank you, everybody, for your time. As usual, if you have any questions, feel free to call us, email us, and we'll respond as quickly as we can. Thank you, everybody.

And this concludes today's call. Thank you all for participating. You may now disconnect.