Flow Capital Corp.

Good morning, ladies and gentlemen, and welcome to Flow Capital's Q1 2023 earnings conference call. At this time, all lines are in listen-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 today, Monday, May 29, 2023. And it is now my pleasure to turn the conference over to Alex Belluta, Chief Executive Officer. Please go ahead, sir.

Thank you very much, Michelle. Thank you, everybody, for joining the call or listening in on the recording. Today, we're going to talk about our Q1 2023 numbers. To be honest, a very inline, quite nondescript quarter. which is good news and bad news. It was our numbers. As you know, we publish our numbers in our financial statements on our website and on CDAR. So I'm not going to go through them in detail, but recurring royalty revenue, which is an internal metric, not an IFRS metric, was down slightly year over year. That's primarily because we had several major buyouts last year and not as many deployments as we had hoped. So we had Performio and Jorsic buyouts. and at the end of the year, we're only invested in prolific. And so we just haven't been able to deploy our capital as much, so you're going to start seeing a slight declining revenue trend, although we do expect that should turn around. Nevertheless, IFRS revenues, which can be distorted, we don't use that as a metric, but last year we had several buyouts in the three-month period, and any changes in balance you have to flow through uh, the income statement. So you had 3.8 million or 3.9 million revenue last year versus 1.7. That's honestly not a relevant figure. The more important one is looking at royalty revenue and loan revenue, which was basically down 4.4%. Book value, uh, was, uh, essentially flat quarter to quarter. And we continue to buy back shares on our NCID. I think the big news for us, um, isn't this quarter, which was frankly slightly better than our internal expectation. And, um, as expected down because of BIOS last year, was the opportunity that we're seeing in our pipeline. We've seen improving volume of deals and, more importantly, improving quality of deals. One of the metrics, we have a fairly robust pipeline approach to managing our pipeline And one of the metrics that we look at is what we call the preliminary investment committee meeting, where it's an all-hands meeting after we've qualified the deal, qualified that they understand our structure, our rates, and that they qualify from our perspective in terms of the revenue and capabilities and growth. Last year, in the entire year, we did 31 preliminary IC meetings. Year-to-date this year, already we've done 25. And we're over 100% up on preliminary IEC meetings. We have, at the current time, five, soon to be six, signed term sheets. We expect a deal that is going to close in the next week or two, followed by several others after that. There is instances, actually, I think last year we closed declined on closing on five deals post signing a term sheet because of the quality of the deal. We just weren't comfortable in due diligence, which is a testament to our real focus on quality. But nevertheless, very high quality deals this year, a lot of term sheets signed, a really, really deep pipeline on the order of hundreds of millions of dollars in our pipeline. And so I think you'll see us deploying capital fairly aggressively in the coming months. And so you'll start seeing a resumption in growth in our revenue. The good news is we continue to be profitable. We're continuing to generate adjusted free cashflow. We continue to generate positive EBITDA. Really our business after the last five years of adjustments to get here is performing very well. I want to point out over the next couple of weeks, we're also going to, we've done a, it's been five years. since the merger of Logic and Grenville. Grenville was a predecessor company of Flow Capital. We've decided to use that as a non-arbitrary time point to evaluate our progress. We'll publish a little bit of a preview, a press release coming out in a couple of days showing our IRRs. They're really quite good. In our business model, which is focusing on high-growth companies, we really take debt-like risk, and to the best of our abilities, shoot for equity-like returns. And we do that through two components, really. It's the cash yield, but also bonuses related to those cash yields on early repayment or sometimes a bonus on exit. And then the second part comes from our equity exposure. And in every one of our deals, we take equity exposure, unlike many of our competitors. It could be as small as a half a percent of equity in the company. It could be as large as two or two and a half percent of equity. But if you think about it, most of the companies we invest in, or almost all of them, are high-growth companies, primarily technology. Eighty-plus percent of our portfolio is tech, 80-plus percent is U.S. And so these are the kind of companies that not just the owners and the entrepreneurs, but also the equity investors are looking for an exit over time. And our relatively small portfolio of positions, but a relatively large portfolio of these positions, it's starting to generate very strong returns. And so you'll see our IRR is well above 20%. Again, pay attention to that in the next coming weeks when we publish our performance over the last five years. And if you think of a net loss ratio in terms of losses in capital because of failed deals, we really haven't had any in the past year. Five years, I should say. But more importantly, the gains in our warrant portfolio more than make up for any write-downs or losses we might have in our portfolio. So on a net basis, our IRR is a function of both our cash return plus our gains minus our losses, and our IRR is dramatically higher than the cash returns that we generate. So all in all, I'm going to stop there. A relatively benign quarter, a slight revenue decline as expected as we've had several buyouts and less deployments. The pipeline has never been stronger. The number of deals in signed term sheets and due diligence now is at a record concurrent level. We've never had this many. We'll see how many get through the full due diligence process. We've built the company, the infrastructure, the team to really scale this company from The $60 million in assets we have now to $100, then to $200, then to $500. So we think the future is bright. Our performance has been phenomenal over the past five years. And for that, I'll pause, turn it back to the operator, and see if there's any questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question will come from Ed Solbach at Spartan Fund Management. Please go ahead, sir.