Flow Capital Corp.

Good morning, ladies and gentlemen. Welcome to Flow Capital Corp's earnings call for Q1 2024. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has difficulties hearing the conference, you may press star zero for operator assistance at any time. I would now like to remind everyone that today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Flow Capital's risks and uncertainties related to these forward-looking statements, please refer to the Q1 2024 Companies Management Discussion and Analysis, which is available on CEDAR. Today's call is being recorded on Thursday, May 23, 2024. I would now like to turn the meeting over to Alex Belluta, Chief Executive Officer of Flow Capital.

Thank you, Joelle. Good morning, and thank you all for participating in today's call. I am joined by Michael Denny, our Chief Financial Officer. After the close of market yesterday, we released our financial results for Q1 to March 31, 2024. Details can be found on our website at flowcap.com or as filed on CDAR. This call is being recorded and will be available for replay on our website as all of our calls are. I am going to keep my comments relatively brief today and free form, unscripted, a little unusual for me. During Q4, I should say Q1, we did report another record quarter in terms of almost all metrics, recurring revenue as a record, assets are a record, portfolio is at a record, And this is going back as far back at least as far as December 2018, which is when we formally transitioned our strategy away from royalties and into growth debt or venture debt and changed our name to Flow Capital. I'm not, as is usual, going to be going through the full financial statements on this call, but we'll provide a few highlights following along the highlights that we put into our press release. If you'd like more detail, I encourage you to read the full financial statements that's filed or call us at any time. Recurring interest revenue was a record 1.76 million up 16% compared to the prior year. As I mentioned on the last call, which was only a month ago, we're starting to see traction in the second half of 2023 and that traction in terms of new deployments continued into this year and looks to continue into the future. And as I mentioned, every call is a quick aside, and I've repeated this time and time again. It's worth making the point that our definition of recurring revenue is a non-IFRS metric. For us, recurring revenue means cash revenue generated from our investments. It doesn't include PIC. It doesn't include bonuses, early exits, et cetera. Total reported revenue under IFRS is different. That revenue can be distorted and hard to follow based on – the fact that changes in the balance sheet need to flow through the income statement. And so it can lead to distorted numbers that are hard to follow. So we like to talk about recurring revenue and recurring cash flow. And you'll note that we've consistently been talking about this now going back years. And we think that's a better way to track our business. So to review some of the highlights, recurring revenue was up to 1.8 or 1.76. up 16.4%. I want to note that our cash yield on our current loan book, which is almost $44 million, is over 16%. That's a cash current consistent cash yield. Our book value per share was back up to a recent record of $1.23, where we were five quarters ago. I will note that the drop in book value over the last five quarters was primarily due to dilution from warrants and some auction exercises. The book value is up 2.9% over the prior quarter and over 49% over the past two years. Recurring free cash flow was $415,000, and that's up over $1.1 million over the past four quarters. That is up, I should say, positive. for the last 16 quarters in a row. In fact, the last negative free cash flow quarter we had was Q1 2020. And I'm going to give you a quick comparison to Q1 2020 in a moment. Total assets, 65.4 million, up almost 3%, quarter over quarter, and 10.6% year over year, another record. And here's an interesting metric. We've deployed over $28 million in the last 12 months. For us, that's a record, and, you know, we're getting to this stage where, I'll talk about it in a minute, we expect that number to grow substantially as we scale our business. A couple of minor points. Post-quarter, we did, and this was press released, we received a $4.5 million U.S. repayment of the successful investment in Pure. That was a four and a quarter year term, and that represents on repayment over a 20% ILR. We then quickly redeployed that money into a $4 million loan into a company called Tattle, a fantastic B2B SaaS software company focused on customer experience improvement. We did an additional small second tranche into Judy AI as well. So I thought I'd just quickly mention Looking back to our last negative free cash flow quarter, which was Q1 2020, so kind of a four-year progress. Recurring revenue over that time has gone from just below $1 million to almost $1.8. Our assets over that time have grown from $34 million to $65 million. Importantly, most importantly, our book value for share attributed to the common shareholders has gone from $0.46 a share to $1.23 a share. At the time, over 80% of our revenue was generated from royalties, which were much higher risk in our, from our opinion, and it was higher risk investment structures. And now it's less than 10% come from royalties. In fact, we only have one material royalty outstanding in that, that is just over a million dollars. And that's in a fantastic company called true golf, which just recently in public, um, Our free cash flow at the time in that quarter was below negative $200,000. It's now over $400,000 in the quarter. And part of the reason for that cash flow growth, there's multiple reasons, growth in revenue, growth in assets, but our costs actually from that time period are flat to down over a four-year period. Importantly, our gross IRR over that time period has been, last year we put out a press release, it was just over 30% on the trailing five years. It's still very close to 30, a little bit lower in the high 20s. We'll be putting out another press release, giving you our six-year track record on IRR shortly, so please pay attention for that. And that is really driven by the relentless focus on quality and And you'll see that in our closed numbers in our pipeline where we still see just below 1,000 leads per year. But even after we get all the way down to term sheet, we still only close about a third, below a third, or I should say between a third and a half of the deals we sign a term sheet on. And that's because we're just, we do an incredible level of due diligence. And, you know, internally, as I mentioned before, we focus on zero zeros. And as a manager, it's so hard for us to make back a million dollar capital loss on the net spread on the rest of our portfolio. So we're laser focused on high-quality investments with appropriate risk adjustment. And that is what's generated what I think is a fantastic growth IRR over the last six years. But you can see that we've grown, and what we've done, you might argue that You know, going from a million to recurring revenue to a million and eight over a good span of four years is great, but it's still small. And I would agree with you. But what we've done over the last four years is develop a consistent approach, a consistent focus. We've built our brand. We've built our processes. Importantly, very importantly, most importantly, we've built a fantastic team. And we've set the stage for what we think is going to be continued strong growth in all of our metrics, recurring revenue, recurring free cash flow, assets, book value. And our goal, after having built, done a lot of the hard work over the last four years, is to grow first to 100 million in assets, then 250, then 500, then a billion. It is a very, very achievable target in the market that we plan, which is venture debt and or growth debt. Peak originations in this market in the early 21, 22 timeframe were well over $30 billion per year in North America alone. We focus on both Canada on all three – I should say Canada, the U.S., and the U.K. in terms of our loan origination deals. And while originations have come down a little bit in venture debt, that's more of a short-term cyclicality given the rates and changing the market and venture capital appetite. But it's still a – multi tens of billions of dollar origination market globally. And we're very excited to be part of that market. And we see the path to get to hundreds of millions of assets over the next several quarters and several years. And I'm very, very proud of the results that we've generated over the last five, six years. Our progress has been sometimes a little lumpy given the nature of repayments and the nature of redeployments. As you saw with the pure repayment, we within seven to ten days redeployed that into TATL. We continue to have an exceptionally strong pipeline, three term sheets that are signed and incurring due diligence, several term sheets that are in negotiation behind that. And while I mentioned earlier our close rate post-term sheet signing was between a third and a half, I do expect that that's going to improve a little bit over time, but we're still going to be selective. But I'm going to end the comments there. You know, if you want to, if you'd like to go back and listen to the comments that I, on the quarter that we just, the Q4 that we reported about a month ago, they're very similar. You can get a little bit more detail there. But I'll pause there and see if there's any questions.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. There are no questions at this time. I will now turn the call over to Alex.