Flow Capital Corp.

Good morning, ladies and gentlemen, and welcome to the Flow Capital's Q1 2022 earnings conference call. At this time, all lines are list and only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, May 31st, 2022. I would now like to turn the conference over to Mr. Alex Belluta. Please go ahead, sir.

Thank you, operator. Good morning and thank you everybody for participating in this call. After the close of markets yesterday, we released our financial results for the quarter ended March 31st, 2022. Details can be found on our website or a website, by the way, at flowcap.com or on CDAR. We had an excellent quarter, continuing the progress we made last year. Book value grew by over 10% in the quarter. to 82 cents a share. That's on top of the 30, almost 34% increase that we saw in all of 2021. IFRS reported revenue was up to 3.9 million of 55% year over year. And net income, IFRS reported net income was 2.35 million of 79% year over year. Note that I say this on every conference call, IFRS numbers can be volatile. due to the unpredictable timing of buyouts and or unrealized fair market value changes and FX adjustments. Given that, what we really focus on is simple recurring revenue from ongoing operations, i.e. interest and royalty income. And that's a much more informative metric for us to track. Recurring revenue from royalties and interest income grew by 10% to approximately $1.77 million. I'm not going to go through the full financial statements on this call, but I want to focus again on a few of the highlights. If you'd like more details, I urge you to download our financial statements from the website or from CDR. And we're always open for questions if you have any questions after reviewing those statements. In terms of highlights, if you've been following Flow for any length of time, you'll know that 2021 represented a significant transition year for Flow, basically the culmination of three years' worth of more than three years with the transition efforts. During that year, last year, we experienced a very rapid transition in our business away from royalties, which was our legacy investment structure going back almost four years now, and firmly into venture debt. We define venture debt or growth debt as much lower risk, higher quality, senior secured debt investments into high growth companies. And primarily that's used into sectors of service or other technology companies. Well over 50% of our portfolio is skewed to technology. And this is in contrast to sort of the 2014 to 2018 time period where unsecured perpetual royalties were the primary focus of the company. This transition to higher quality investments with equity upside, I should add, has been part of our strategy, as I said, for the last four years now. And Q1, that $1.77 million of recurring revenue, sort of highlights an interesting transition. Last year, loan interest represented only, last year in Q1, that is, represented about 22% of our recurring revenue, while royalties represented about 7, 8% of our recurring revenue. If you recall, last year, we had five major buyouts of our very strong remaining royalty portfolio. And interestingly, this year, the percentages are reversed. Loans represented loan interest income revenue represented 78% of the revenue in the quarter, and royalties were down to 22%. And looking forward, you'll gradually see royalty revenue essentially fade away. We rarely issue a royalty term sheet these days as we focus on much higher quality investments, and the investee companies tend to self-select away from royalties and into loan structures. So it's not that we don't offer royalties, it's just that it's rare that the type of companies that we invest into those um, seek a royalty three book value. Um, it's pretty evident. We had a pretty phenomenal quarter in terms of the growth in book value of 10% in the quarter, uh, to 82 cents. That's up from 75 cents, um, in December. Um, the numbers are, they're, they're pretty striking. I'm actually, we're pretty excited about the performance over the last several years, uh, They were up almost 38% last year on a year-over-year basis. And if you look back to mid-2019, our book value is up over 85%. I don't know anybody else in our sector who's had that kind of performance in terms of book value growth. Growth in book value this quarter is driven primarily, although not exclusively, by the exit in Performio. There were no other material changes in our portfolio. I should add. I want to highlight Performio for a minute. It's a fantastic company, and it was a fantastic deal for us. And it actually is a perfect illustration of our ongoing strategy and what you really should come to expect from us over time. Performio is an investment that we closed last year. The exit was an early buyout, and they received a major equity infusion from a top-tier venture capitalists. They used that capital to buy. So that investment also triggered what we call a buyout on exit success fee. So as I mentioned, we run our business on recurring revenue. So on a day-to-day, month-to-month, year-to-year basis, our primary focus is on ensuring we have strong recurring cash-based interest and royalties. But in all of our loans, we take a small outside participation rate or a bonus, and it's either in the form of warrants or what we call a success on exit bonus, that's generally a non-dilutive small percentage of equity that is triggered on a change of control. Those success bonus on exits are generally smaller than warrants in terms of the representation, the size of the company that they present for us. So our warrant positions will average 1% to 4% of the equity of the company we invest in. Success on exit will be a little bit smaller. Over time... you know, we'll have a large portfolio of these bonus positions that are essentially tied to equity upside in our invested companies. As we reach forward to $100 million in assets, we expect that we'll have somewhere in the range of 25 to 30 positions. Right now, we're approaching almost 20 positions in terms of warrants, bonus on equity, or common equity positions. And these bonus, equity-related bonus positions represent not only the anti-protection for us, but as you saw in this quarter, a material upside to our book value over time. Now, as that portfolio of bonus positions grows, you'll see the cadence become a little bit more regular, but to be clear, it's very hard to forecast when, you know, usually these, if our average loan duration is in the range of 30 months, and every time we redeploy capital, we earn more warrants. We don't know the timing of those exits, Um, generally they will outlive the warrant positions, uh, if our, our at least two times the duration of our investment positions. Um, and so it's hard to forecast, but as we grow that portfolio, we will over time expect to see a more regular cadence of exits, um, uh, and, and upside. And as I said, these are a meaningful contributor, both to our downside protection, but also to our upside in terms of new deployments. Um, We deployed only a modest $500,000 in the quarter. It's a little disappointing, but the pipeline activity remained very strong. Shortly after the end of the quarter, we did close a third tranche into EchoBox. It's now our largest investment. It's one of our longest-term investments now. Another excellent company. And again, it's part of our strategy that as we continue to invest in strong, performing companies, we like to stay invested in those companies for as long as we can. EchoBox is an example of Their MRR to software and service company, their MRR is up well over 200% since we first invested our first $1 million tranche in that company several years ago. At the end of the quarter, the portfolio in aggregate was 41.9 million up from 29.8 million a year ago. We have 16 active investments, 13, one bonus on exit positions and four common equity positions right now in terms of the pipeline. We continue to see good progress in our pipeline as our referral network continues to grow and our internal efforts keep generating good deal flow. We're very encouraged about the future right now, though, for a different reason, which is that the recent volatility that you're seeing in public markets, two things have happened. One, technology valuations have come down, in some instances collapsed. More importantly, though, so public equity markets are closed. The VCs, venture capitalists are also closed. And we tend to piggyback over 50% of our portfolio is in venture-sponsored, venture-invested companies. What VCs, there's lots of news stories out there. What VCs are saying to their investing companies is, we're not funding anymore. You need to get the cash flow break even on the existing cash that you have. Some companies will make that, some won't. But what we feel is this is going to represent an excellent opportunity for us to see companies that we might not otherwise have seen as they would have used equity to fund themselves. Now, we still have to make good investments, and we still have to focus on due diligence, but we're excited about the increase in opportunities that we expect that we're going to see over the next three quarters for the rest of the year. From an available cash perspective, we have over $4 million on our balance sheet available to invest, and we expect that's going to grow as we continue to work on strategic initiatives to increase access to capital. In terms of recurring cash flow, again, it's a non-IFRS metric that we use to manage our business. It's defined as simply recurring revenue, less OPEX, less interest expense. It's just a cash OPEX generally. Free cash flow in the quarter was over $630,000. That is the highest that it's been in at least the last four years. It's been now positive for the past eight quarters in a row. Very proud of that number. We continue to to focus on generating not only revenue growth and a strong portfolio with equity upside, but strong free cash flow and positive EBITDA. So with that, I'll pause and just summarize that we continue to see good dealer origination and improving pipeline metrics. You know, we have spent several years reducing our costs and streamlining our operations together to start growing our free cash flow. We're seeing improvements a strong and reasonable performance in our portfolio. We expect to see more performio-like exits over time as our equity-related bonus positions grow. And we look forward to the rest of the year. With that, I'll pause and hand it back to the operator for questions.

Thank you, sir. Ladies and gentlemen, we will now conduct the question and answer session. If you'd like to ask a question, press start on the number one on your telephone keypad. If you'd like to withdraw your question, press start to If you're using a speakerphone, please lift your hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Ed Solba with Spartan. Please go ahead.