8/14/2025

speaker
Joelle
Director of Investor Relations

Good morning, ladies and gentlemen. Welcome to Flow Capital's earnings call for Q2 2025. At this time, all participants are in the 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 like to remind everyone that today's discussions may contain forward-looking statements. that reflect current views with respect to future events. Any CART 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 example, capital risks and uncertainties related to these forward-looking statements, please refer to the Q2 2025 Companies Management Discussion and Analysis, which is available on CEDAR. Today's call is being recorded on Thursday, August 14, 2025. I would now like to turn the meeting over to Alex Belluta, Chief Executive Officer of Flow Capital.

speaker
Alex Belluta
Chief Executive Officer

Thank you very much, Operator, and thank you everybody who's joining this call live or listening to this call on the recording from our website. We will file, as we always do, our numbers. You can find our numbers, the transcript, the recording on our website or filed on CDAR. Very happy to announce another strong quarter for QC 2025. QC 2025 marks the eighth sequential quarter in a row where our revenue was up quarter to quarter, meaning up from the immediately prior quarter. For the three months ended June 30th, compared to the prior three months a year earlier, revenue was up 54%, to a record $3.2 million, up from $2.1 million a year ago. It was up sequentially almost 7% from Q1 this year. On a six-month basis, revenue was up 49%. Free cash flow, which is the recurring free cash flow metric that we talked about, which is a non-IFRS metric, but important for us in the way we manage our business. You'll see a reconciliation from recurring free cash flow into IFRS in our statements. But a recurring free cash flow was up 212% year over year to $884,000 up from $283,000. And for the six months, recurring free cash flow was at 1.7% up 148%. I'll come back to the growth in free cash flow in a moment, but it's worth pointing out that the free cash flow in our first half of the year at $1.7 million almost matches the recurring free cash flow that we did all of last year. And that's representation of the operating leverage in our business. Pre-capital per share for the first six months is just under six cents per share, up 152% over the same period last year. Total investments are up to 72.2 million, up from 62 million at the end of December. And for the quarter, we had an excellent quarter in terms of deployment of new – into new investments, up gross $16.3 million in new investments. That's a record for us in a single quarter, up from $9.3 million a year ago. We did have a buyout in the quarter. A company called Ballard Ready, one of our companies from a couple of years ago, they were acquired, you know, being – Total IRR on that investment for us was over 30%. It was an early repayment. There were some early repayments associated with that, but in addition, we maintain an equity position in the acquiring company. It's kind of worth pointing out here, if I pause for a second, how most of our deals are structured in the form of past interest and a tiny sliver of equity, either in the form, usually in the form of warrants, The value proposition for the borrower is that the cost of capital all in of our capital is dramatically lower than the cost of doing an equity round, even with our small sliver of warrants. On average, we have sort of a 1% to 2% equity position in our borrowers. So not only do we get cash pay on our investments, on our loans, the companies get a lower cost of capital, and then we get a tiny sliver that in many instances those warrants will expire, but it's probably one of the least understood parts of our business model from an investor perspective is that we have what we call internally a treasure chest of over 20 equity and warrant positions that we've established over the last seven years in high-growth companies. Remember, we target, we lend money to high-growth companies generally with growth rates over 20%. And as I said earlier, the value proposition that we provide them is that the cost, all-in cost of our investment is dramatically lower than the cost of equity. And so Ballot Ready is a great example of it works for them, it brings them to a transaction, it works for us from an IRR perspective on the cash-on-cash basis, and we continue to have a legacy equity position. Overall, the portfolio IRR, over a seven-year period, going back to our pivot seven years ago now, is still over 22%. So overall, it was an excellent quarter. There was, I will say the book value is down three cents a share from the December 2024 number. And it was driven by a couple of things. One, we had an FX hit of over a million and a half. Two, we did have some credit loss increase in one of our deals, and I'll get to that in a moment. And three, we are taking a much more conservative approach, meaning lower in the valuation of our Warren portfolio, the portfolio I just talked about, only because the Warren portfolio has to be market-to-market on every quarter, and it's it creates volatility in our numbers when warrants go up a little bit, warrants go down a bit. If the company is a public company, we obviously do a mark-to-market. But in our internal view, we're trying to be as conservative as possible, meaning valuing our warrants as low as possible. We still have over $7 million in total value in our warrant equity portfolio, but we did take warrants down on a same-for-same basis. meaning excluding new warrants issued during the quarter, down about $1.3 million. So we had a warrant write-down, ECL and credit loss, and SX decline. Net against the profits, that meant that book value came down about $0.03. I did want to go back to that operating leverage commentary that I made. The business model that we, as I mentioned on our prior two calls, had tremendous operating leverage and we see that continuing in the future as we scale our business. It should only get better. On a competition basis and the pipeline, the pipeline is always lumpy for us. One of the interesting things we are seeing is that banks are coming back into the market. I think that after the Silicon Valley bank episode a couple of years ago, banks pause their approach to the venture debt market. We're seeing a bit more of that, a bit more than now, but so we're seeing competitive term sheets from banks. Sometimes, you know, we can't compete with banks, but I wouldn't say it's dramatically changed the economics in the market for us. It's just a matter of it's a little unusual. The last point I want to make is on the portfolio. You know, we had an unusual situation this quarter. It actually was post-quarter, and that was actually in the bankruptcy of one of our investees. The net point is that on a cash-on-cash basis, we made a $1.75 million investment, and we should recover roughly, and that's in US dollars, roughly $1.6 million in the end in terms of cash-on-cash. But it was an unusual situation in how quickly it unraveled. It had to do with the company being on a platform. The platform provider released a competing product. Customers got a bit nervous. The customers actually stayed on board. There was churn in the business. It went from about $3.5 million down to $2.7 million. But it was also the pressure of a lot of employees, including senior executives, and In the end, we didn't have the ability to stabilize it in time. And the best path forward for all stakeholders, including us, was to see the company go into bankruptcy. And as I said, our cash-on-cash basis, our losses were to minimum. We tried ourselves on working with our companies on doing our best efforts to try and keep them going. But sometimes this is going to happen. We've got plenty of examples where we've worked, in fact, almost all other examples, we've worked over our company for extended periods of time to see them turn around their businesses, but sometimes this is an unfortunate outcome. From our perspective, it was about $700,000 in additional ECL charges on our balance sheet. That's Canadian. But, you know, as I'm alluding to, if the worst outcome for us in a company that unravels quickly is a six to 10% cash on cash loss. It's not so bad. Um, uh, but again, we do our best to minimize that. And we also do our best to work with our partners for as long as possible to try and help them recover. Um, um, and, and, and, you know, you know, we're not just thinking about ourselves, but we're thinking about employees and customers and other stakeholders. So an unfortunate outcome, um, but, uh, and one that we hope doesn't happen again and one that we work to avoid, but, um, Unfortunately, that did happen actually in July of this year. And with that, I'll pause my commentary. Again, it was another record quarter for us on almost all metrics. Year-to-year cash flow, revenue on a year-over-year basis, et cetera. And, Joelle, I'll pass it back to you for questions.

speaker
Joelle
Director of Investor Relations

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 touch-tone phone. you will hear a 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 headset before pressing any key.

speaker
Operator
Conference Operator

One moment, please, for your first question. There are no further questions at this time.

speaker
Joelle
Director of Investor Relations

I will now turn the call over to Alex for closing remarks.

speaker
Alex Belluta
Chief Executive Officer

Thank you, Joelle. Thank you, everybody, for tuning in or listening on the recording. Look forward to speaking to you in Q3, and thank you for your support.

speaker
Operator
Conference Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Disclaimer

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Q2FW 2025

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