Flow Capital Corp. (FW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Flow Capital Corp's 2020 Third Quarter Earnings Call. [Operator Instructions] 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 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 company's management discussion and analysis dated November 17, 2020, which is available on SEDAR. Today's call is being recorded on November, 18, 2020. I would now like to turn the meeting over to Alex Baluta, Chief Executive Officer of Flow Capital.

Thank you, operator, and thank you, and good morning, and thank you, everybody, for joining today's call. I'm joined by Gaurav Singh, our Chief Financial Officer. After the close of market yesterday, we released our Q3 2020 financial results. Details can be found on our website at flowcap.com or on SEDAR. Our total IFRS revenue for the quarter was $3.84 million, up from $472,000 in the same quarter last year, and up 109% from the $1.83 million in Q2 of this year. Note that the IFRS numbers can be volatile due to the unpredictable timing of buyouts and/or realized and unrealized fair value changes in FX adjustments. Given that, recurring revenue is perhaps a more informative metric to track, and it's the metric that we use to track our performance. Our recurring revenue for the quarter was $1.6 million, up 24% from the $1.3 million in the same quarter last year, and up 24% from Q2 of this year. These numbers were better than our internal expectations, and they were driven by strength in our portfolio even through the ongoing COIVD crisis. The numbers were also aided by recoveries from previously distressed investments. Recovery from past investments -- distressed investments is something we spent a lot of time on in the last 8 quarters. It's interesting to note that several of our portfolio companies continue to perform and experienced record revenues even through the COVID crisis. Adjusted EBITDA for the quarter was $1.5 million, a year-over-year decline of 11% from the $1.7 million in the same quarter last year. Adjusted EBITDA to date for the 9 months ended September 30, 2020, is $2.36 million. Flow generated cash from operations of $1.57 million in the quarter compared to $3.6 million from Q3 last year. The decrease in cash generated from operations was due to a higher value of buyouts in the prior period compared to the current period, and buyouts are very hard to forecast. Again, in the context of the ongoing COVID pandemic, we are quite pleased with our Q2 numbers. And we had better performance on both our revenues and on controlling our operating expenses. Contrary to prior calls, we will not be reviewing the financial results in any further detail during this call, but we will focus on a business update. The financial results are summarized in the press release and the detailed statements are available both on our website and on SEDAR. I encourage you to look at those, and If you have any questions, please feel free to call or e-mail. Flow Capital is a growth investor. We invest in revenue stage high-growth companies. As we sometimes say, once they've nailed it, we help them scale it. So if they've nailed, if the investee companies nailed their value proposition, our capital has -- can be very useful for them. We're not an equity investor, but rather, we use cash flow generating structures like term loans, bullet loans and royalties. For a high growth company, a minimally dilutive structure such as the ones that we can provide can often be the most cost-effective funding structure that they can use. As a reminder, we generate revenues from 3 sources: one, recurring revenues in the form of interest and royalties; two buyout revenue, essentially, premium is sometimes paid to us when the investee exits and royalty agreement; and three, modest equity upside from small equity positions that we take as part of our investment, usually in the form of warrants. That's why we term ourselves as minimally dilutive. Buyouts are important part of how we generate these -- our returns. And while they can add substantially to the free cash flow, they do generate a negative near-term impact on revenue as we lose a revenue-generating investment, until that money is redeployed. Hence, the importance of continuing to deploy our capital. As we discussed on our last call, increasing our deal flow and continuing to make investments into high quality, high-growth companies, is our primary focus for 2020 and, in fact, in perpetuity looking forward. But we've been very careful and increasingly careful in our investment selection and we've intentionally been focusing on higher-quality investments, or as we say internally, coming down the risk curve. That has meant that our deployment of capital has been somewhat slower than we had hoped. Nevertheless, we keep on building our pipeline, and we're now starting to see a return on our efforts as we close $6.5 million in new investments just after the end of Q3. I'd like to review those investments because they are excellent examples of the types of transactions that we like to do. We invested $2 million into one of our existing portfolio companies, Echobox. Echobox is a U.K.-based SaaS company that is helping publishers to maximize their returns on their content efforts across multiple channels, including social media. It's an AI-based solution. Their growth has been stellar, and we are very excited to be a bigger part of their future. We also invested $3 million into a new investment called The Pure Company. Pure designs and manufactures commercial air purifiers that provide dynamic protection against a range of pathogens and improve indoor air quality by eliminating volatile organic compounds and odors. Pure technology mimics the way sunlight sanitizes the outside environment by safely generating hydroxyl and diffusing organic oxidants indoors. The company's flagship product is FDA registered as a Class II medical device, and Pure is completing testing on its ability to reduce SARS CoV-2, which is the virus that causes COVID. Flow was a perfect fit for Pure. The company is experiencing tremendous growth and Flow provided them with flexible minimally diluted capital to help them fund their working capital while they grow and thus help them capitalize on their growth opportunities. We're very excited about both our investments in Echobox and in Pure. Those companies have nailed their value proposition and Flow is helping them scale their businesses. Note that both of these deals at USD 2 million into Echobox and USD 3 million into Pure are at the larger end of our historical deal size. Increasing our deal size is something we've discussed in past calls, and it's something we have actively been focusing on for the last 8 quarters. We expect deal size -- our deal size will stay at this level or even larger into the future. To do -- to continue to invest in good companies like this, it's all about deal flow. Deal flow remains our primary focus going forward, and it's a primary driver of our continued success. To that end, we continue to make excellent progress in our origination efforts. In early Q4, we added a new team member of the origination team, John Karayel, who is based in Vancouver and has had a decade of relevant experience with the likes of BDC and lighter capital. We're very excited to have him on the team, and his relationships are already generating value for us. In addition, we continue to work on several different areas including digital marketing with our content efforts, SEO, online ads, et cetera; on network relationships and deal sources like investment bankers and VCs; on building out referral platforms; on building out outbound reach -- excuse me, outreach campaigns like conferences and cold calls and cold e-mail campaigns; and on building our brand. In particular, we've been doing several podcasts, and we'll be doing several more in the coming months, one of which is a very interesting approach that will be focusing on developing U.K. business. We actually like investing in companies in the U.K. We see some excellent companies, well-managed and some interesting opportunities that are a little less competitive than the ones in North America. All of these efforts are gradually paying off, and we're starting to see more and better quality deals every quarter. But I don't think we will ever be content with our pipeline as it is a continuous effort, a continuous race to find the best companies. Hence, it's always a focus for us. However, I do feel we're in the right place with respect to the balance between price, risk and return, and we're seeing substantially lower risk investments than we've done in the past. And -- so we are seeing more of the relevant deals to fill our pipeline. So I am excited about the progress we've made and about the outlook when it comes to our pipeline. As for COVID, while we're being cautious as we enter the second wave, the reality is most of our portfolio companies have adopted very well, in some cases, very, very well to the challenges of COVID. We continue to do monthly updates and reviews with all of our portfolio companies. And we will continue to monitor the situation and do what is best for our investee partner, for our shareholders. But so far, the impact on our portfolio has been negligible. On the competition and pricing front, we have seen no major changes in pricing, up or down, in the quarter at the risk level that we're targeting. And from what we can tell, we only occasionally see a competing term sheet in the deals that we're interested in. Frankly, we think this speaks to the market opportunity for our type of growth capital. It is a big market. As for the availability of capital, I'm very pleased that we've recently closed on the first tranche, that being $17 million into our innovative priority return fund structure. This was our second fund structure called Priority Return Fund II. The PRF structure, as we call it, is an excellent way for us to increase the velocity of our existing capital as we free up cash from well-performing existing investments and make that capital available for new investments, while also providing a protected preferred returned -- return to those investors in the PRF fund. For PRF II, Flow Capital is investing our own capital, representing about 20% of the total assets in the fund in subordinated units. These subordinated units provide substantial downside protection for the other preferred investors in the fund. And frankly, it's a reflection of the confidence we have in our portfolio. The recent fundraising success, followed by additional upcoming closes in the fund provides us with a substantial amount of capital to invest in 2020. I don't think capital -- we will have a capital shortfall for the investments that we plan to do in the coming 4 quarters or 5 quarters. I should also point out that we will be repaying the outstanding principal on our B debenture, 7 months early. We've already press released that repayment. It should be done in early December. The early repayment saves over $200,000 in interest expense, and it further cleans up or unencumbers our balance sheet. Quite honestly, I'm very pleased with the financial position of the company. It's been a work in progress for the last couple of quarters, but we have an excellent clean balance sheet, strong pipeline. And I feel that we're well positioned to take advantage of the opportunities in 2021. Finally, before I end my remarks, I'd like to highlight the performance of our book value. To be honest, I think this is the single most important metric that we should look at, both as shareholders or as shareholders of the company. For the past 8 quarters, we've undertaken several initiatives, as I said, to clean up our portfolio, increase our deal quality, reduce our costs, clean up our cap table and broaden our deal flow network. While we're working on deploying -- carefully deploying more capital, all of these above initiatives have started to show positive and incremental impact. I'm pleased to highlight that for year-to-date, since December 31 last year, we've seen a 21% increase in book value per share. That's significant, and I'm proud of the work that the entire team here at Flow Capital, including our board, has put into what I might call a modest term. But we are very excited about the progress we've made. I'm very excited about the team we have on board, and I'm very excited about the future. And ultimately, this is what it's all about. We're laser-focused on continuing to do the right thing and to continue to increase our book value and to improve shareholder returns. And with that, I'll hand it back to the operator for any questions.

[Operator Instructions] And we have no questions at this time. I turn the call back to Alex Baluta for closing comments.

Thank you, operator. I appreciate that. Thank you, everybody, for checking in. If you do have a question, feel free to call us at our office or e-mail us. We really do appreciate your ongoing support and interest, and we look forward to an excellent Q4 and a strong 2021. Thank you very much, everybody.

This concludes today's conference. You may now disconnect.