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

Good morning, ladies and gentlemen. Welcome to Flow Capital Corp's Earnings Call for the Year-end December 31, 2020. [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 March 29, 2021, which is available on SEDAR. Today's call is being recorded, March 30, 2021. I would now like to turn the meeting over to Alex Baluta, Chief Executive Officer of Flow Capital. Please go ahead.

Thank you, operator. Thank you, everybody, for joining. Good morning, and thank you. I'm joined by Gaurav Singh, our Chief Financial Officer as well. After the market closed yesterday, we released our Q4 and year-end 2020 audited financial results. Details can be found on our website at flowcap.com or on SEDAR. Flow's total IFRS revenue for the year ended December 31, 2020, was $10.38 million up 157% from the $4 million in 2019. In Q4, IFRS revenue increased $3.6 million, a growth of approximately 80% over Q4 2019. Note that IFRS numbers can be volatile and unpredictable due to the unpredictability of our buyouts and changes in unrealized fair value and FX adjustments. Given that, recurring revenue is another perhaps more informative metric to track, and it's the one that we track internally. Our recurring revenue for the year was down slightly at $5.4 million versus $5.6 million, but more significantly, in the Q4 period, it was up from $1.2 million to $1.54 million, an increase of 25% over the prior year. Most importantly, we closed the year with an annualized recurring revenue run rate of approximately $6 million. In 2020, operating income as per IFRS was a positive $6.5 million versus a loss of about $80,000 in 2019. These numbers were better than our internal expectations and were driven by the strength of our portfolio even through COVID, and they were also aided by some recoveries in previously distressed investments. It's interesting to note that several of our portfolio companies continue to experience record revenues, even throughout COVID, validating our investment thesis and business model and the resiliency through -- of our portfolio through things like COVID. Adjusted EBITDA for the quarter was $1.1 million, a year-over-year increase of 133% from the prior quarter. For the year, adjusted EBITDA was $3.4 million compared to $4.2 million in 2019. In 2020, we generated free cash flow of $980,000 compared to $3 million in 2019. The decrease in cash flow was on account of higher onetime receipts from the sale of noncore business in 2019, as you'll recall. We ended the year with a strong balance sheet of over -- with over $25 million in our active investment portfolio that generates our recurring revenues, an additional $4.3 million in equity holdings across public and private investments and over $7 million in cash. Again, in the context of the COVID pandemic, we're very pleased with our 2020 numbers. We had better-than-expected performance on profitability and gains in value of our investments and steady recurring revenues. Contrary to the practice on prior calls, we'll not be reviewing the financials in any more detail than I just did, but we'll focus on a broader business update. The results are summarized in our press release, and they can be found. The full statements can be found on our website and as we file them on SEDAR. I encourage you to review those and e-mail or call if you need any more information. For the formal business comments, I want to highlight the amazing opportunity that lies ahead for the company, and I hope that some of the excitement that I feel for our prospects comes through in our comments -- in my comments. First, in Q4, we reached the point where recurring revenue from our portfolio of investments is now generating meaningful revenue growth and positive free cash flow. Moreover, we've increased the size and quality of our investments and are considering -- sorry, the investments we are considering in our efforts to grow our pipeline are working well. To the point where our near-term pipeline of deals is stronger than it's been in years and equally more -- or more -- if not more important, is the quality of the opportunities we're seeing has increased substantially. Add to that, the equity and warrant positions that we've been building are now worth over 20% of our book value. And we expect that these warrant positions, we'll see some actions in coming years, adding additional book value. These warrants are an important part of the value proposition that we offer for our investors from a long-term perspective. Finally, on the operations side, we've made tremendous amount of progress in the last 2 years in terms of cleaning up the balance sheet, simplifying our structure and streamlining our operations. The net effect has been a simplification of our business, a reduction of costs and the freeing of management's time to focus on continued growth and continuing to increase shareholder value. For those of you that might be new to the story, I'll quickly summarize that Flow Capital is a growth investor. We invest in high -- sorry, in revenue stage, high-growth companies. As we sometimes say, once the company has nailed their value proposition, our minimally dilutive capital can help them scale their business. 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 ours can often be the most cost-effective funding structure that they can use. What's unique about Flow is that we combine exposure to high tech, high-growth companies through cash yielding investments and we get some exposure to the equity side through a growing warrant portfolio. For most investors, high-growth companies -- exposure to high-growth companies and the fact that we invest in is a difficult asset class to get exposure to. Let me give you a few examples of our portfolio based on some of our 2 most recent investments. But first, as a reminder, we generate revenues from 3 sources: one, recurring revenue in the form of interest and royalties; two, buyout revenue essentially a premium paid on buyout when an investee company exits a royalty agreement; and three, equity upside from the equity positions that we take as part of our investments primarily through warrants. As we discussed on our prior calls, increasing our deal flow and investments in the high-quality growth companies is our primary focus for -- was for 2020, it is for 2021 and frankly, it is for the future. We've been very careful in our investment selections. And we've intentionally been focusing on higher-quality investments. These efforts are paying off, and we are pleased that during the quarter, we deployed CAD 6.5 million into 2 investments. First, we did an additional $2 million top-up investment in the Echobox, one of our existing portfolio companies. Echobox is a SaaS software company, helping publishers maximize their returns on their content efforts across multiple channels, including social media. Their growth has been stellar, and we're very excited to be a bigger part of their future. In Q4, we also invested USD 3 million into the Pure company. Pure designs and manufacturers patent-protected commercial air purifiers which safely mimics the way sunlight sanitizes the outside environment. The company's flagship product is an FDA registered Class II medical device that has now been proven to kill 99% of COVID within 20 minutes and further reduce the virus in air to below the detection or limits of detection in less than 80 minutes. The Pure Air purified the -- Pure Air purifiers also reduces surface-bound COVID virus by 99% in 1 hour and further reduces that virus on surfaces to below limits of detection within 3 hours. That company has a very bright future. Flow was a perfect fit for both Echobox and Pure. Both companies are experiencing tremendous growth and Flow provided them with flexible and minimally dilutive growth capital to help them capitalize on their growth opportunities. I don't think I could say the word capital 3x in the sentence again. Note that both of these deals at USD 2 million and USD 3 million are at the larger end of our historical deal size. Increasing our deal size is something that we've discussed in past calls and something that we've been focused on. And frankly, most of the deals in our portfolio today are a size of USD 2.50 million to USD 3 million and higher. So expect this to become the norm going forward. Turning to the pipeline. As I said, it's -- increasing the size of high-quality, high-growth companies is our primary operational focus, and it's the continued drive the -- frankly, the primary driver of continued success. So to that effort, we continue to focus on digital marketing efforts, including SEO, ads, et cetera, network relationships with deal sources like investment bankers and VCs, referral platforms, referral networks, outbound outreach campaigns and brand-building efforts. I think we're also going to be adding some experienced people in the near term to help us further grow our origination capabilities. All these efforts are paying off, and we continue to see more and better quality deals every quarter. In fact, our pipeline of near-term deals is as best it's been in at least the last 2 years. I don't think we'll ever be content with the quality of our pipeline is it's a continuous race to find the best companies, and it is a competitive industry. However, I feel we're in the right space with respect to the balance between price, risk and return as we see more -- and we are seeing more of those relevant deals to fill our pipeline. As for COVID, our portfolio has shown remarkable resilience in the face of the pandemic. Overall, the aggregate revenue for companies in our portfolio increased over 50% in 2020 over 2019. It's well over $0.25 billion, almost $0.25 billion in revenue that our companies generate. This is mostly explained by the technology SKU of our portfolio and the essential nature of many of the products that our portfolio companies provide. We continue to do monthly updates and reviews with all our portfolio companies, and we will continue to monitor this situation and do it best for our investee partner companies and for our shareholders. For us and for most of our investee companies, COVID has been a positive impact on growth. On the competitive pricing front, we're finding that more of our target companies have funding alternatives. To me, that's to be expected, given the size and quality of the companies we're focusing on. But we see no major changes in pricing either up or down in the quarter. We continue to see this as a large market opportunity for the type of capital we provide. It is a very big market. Most of our deals, there's that most -- and several of them, there's no other term sheets that have most -- there's 1 or 2 additional term sheets. Sometimes we're even competing in equity. As for available capital, we continue to rely on our innovative priority return fund structure to source capital for investments, and we are now in our second iteration of the fund or PRF II. The PRF structure is an excellent way for us to increase the velocity of our capital as we free up cash from well-performing existing investments and make that a capital available for new investments while also providing a preferred yield return to the priority return fund investors. Basically, the PRF is like a securitization vehicle for our best investments, where flow capital invests its own capital in subordinated units that represent 20% of the total assets of the fund. These subordinated units provide substantial downside protection in other -- for the other preferred fund investors and is a reflection of the confidence that we have in our existing portfolio. And PRF II fund is now up to almost $20 million in assets, and we expect that we'll be increasing the size of the fund in the coming months as we make more investments and roll them into the fund. We are also hard at work at other initiatives at further reducing our cost of capital. To summarize, as I said earlier in the call, I'm very excited about our future. We're now generating over almost $6 million in recurring revenue for our investment portfolio. We're generating $1 million in free cash flow from this recurring revenue. We have a strong pipeline of large and more mature companies than we've seen in the past. We have a strong balance sheet with $26 million -- $25 million asset portfolio, $4.5 million in equities and $7 million in cash. And most importantly -- or not most importantly, but importantly as well, or warrant position in these high-growth private companies, provides equity exposure that's hard for most investors to get, and we expect that this portfolio of warrants will meaningfully add to returns in the future. And with that, I'll hand it over to the operator to see if there's any questions. Thank you, everybody.

[Operator Instructions] And we have no questions queued up at this time. I will turn the call back over to Alex Baluta for closing remarks.

Thank you, operator. That's it. I'll wrap up right there. Thank you, everybody, for taking the time to participate in the call. And if you have any questions, please feel free to e-mail or call at any time. Thank you.

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