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

Good day, and thank you for standing by. Welcome to the Flow Capital's 2021 Year-End Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Alex Baluta. Please go ahead, sir.

Thank you, operator, and thank you, everybody, for joining or listening in on the recording. After the close of market yesterday, we released our audited financial results for the year ended December 31, 2021. Details can be found on our website at flowcap.com or as filed on SEDAR. Please note, I'm only going to provide a cursory review of the numbers on this call. We're going to focus on the highlights. However, if you want to have more details, please visit our website or download the results on SEDAR to see the detailed results. We had an excellent quarter to cap off an excellent year. Book value for the year grew at 33.7% to approximately $0.75 per share. IFRS net income grew by 164% to $5.6 million in the year. Note that IFRS numbers can be volatile due to unpredictable timing of buyouts and/or unrealized FX and fair value adjustments. Given that, recurring revenue is a more informative metric to track, and it's the one that we use to manage our business. Recurring revenue from royalties and interest grew by 13.4% in the year to approximately $6.1 million. Total revenue under IFRS was $10.4 million or -- sorry, 2021, a slight year-over-year growth of 0.5%. In 2021, Flow completed over $40 million in transaction value, including $23 million in new deployments across 7 investments, $5.5 million in equity sales and $12.3 million across 5 royalty repayments, redemptions and recoveries from previously distressed investments. Realized gains from the sale of investments was $8.7 million under IFRS for the year compared to a realized gain in 2020 of just under $1 million. 2021 represented a significant transition year for us. During the year, we experienced a very rapid transition of our business away from royalties, which is our legacy business and firmly into venture debt. We define venture debt or growth debt as a lower-risk, higher-quality senior secured debt investments into high-growth companies, primarily into SaaS software technology companies. This is in contrast to the unsecured perpetual royalties in all types of businesses that were the company focused in 2014 to 2018. This transition to higher-quality investments has been part of our strategy for the past 3 years, and the transition actually happened much faster than we expected. During the year, 5 of our best-performing legacy royalties bought us out. In fact, all these buyouts happened in a very short period of time in late Q2 and early Q3. This was somewhat unusual as we would expect that the buyouts to be spaced out over several quarters or even a couple of years. These legacy royalties represented $12 million in repaid capital, and they're generating over a 30% yield. These are some of our best legacy investments. And we're generating over $3.5 million in revenue for Flow at the time of the buyouts. However, during the year, we also redeployed just over $23 million in new capital into new investments, all of which were senior secured venture debt investments with warrants and/or exit bonus upside, fully replacing the revenue loss from exited legacy royalties. The ability to redeploy this capital was a culmination of years of effort to build our origination platform and capabilities. In 2021, we reviewed 982 deals and invested in 6 companies plus 2 follow-on investments into existing portfolio companies. Note that, that is a less than 1% close rate and as it highlights out of session, we're focusing on high-quality companies. Not only did we see more leads in 2021 over 2020, we also saw bigger and better quality companies. Our origination platform is one of the core pillars that will support our continuing growth looking forward. So let me give you a few more rapid fire highlights from 2021. As I said, we had $12 million in repayments, but we also had an exit from one of our equity investments, that being InnerSpirit which returned almost $5 million in cash flow balance sheet. As I said, we also deployed $22 million into new loans in the companies, including Everwash, Performio, Jorsek, Miniluxe, AskVet, and Kovo. Everwash in the Saas subscription software platform targeting car washes. There are over 67,000 carwashes in North America, and they've just deployed 500 units. And they have 2 million subscribers on their consumer side. And they just raised additional equity from venture capitalists after our investment. Performio is the SaaS-based sales compensation platform, growing tremendously. Miniluxe, which recently went public after our investment is disrupted in both by technology and retail, the personal mailcare space and doing a lot more to improve the working best conditions for over 400,000 primarily female workers in that sector. Jorsek is a SaaS cloud-based B2B component content management system. AskVet is a subscription-based veterinary service with strategic partnership with KONG pet toys, and that includes the Kong Box subscription service. And Kovo is a tech-based domain solution provider that is consolidating a fragmented health care billing service in the U.S. This is an excellent group of companies and investments and we're proud to be associated with these companies. And these were the kind of companies that we continue to search for and we rely on the developments in our capabilities in our origination platform to find these companies. To continue with highlights, we generated strong adjusted recurring cash flow from recurring operations of over $1.6 million in 2021. This represented the second full year of positive free cash flow or adjusted free cash flow. And just to help you understand what we mean by that, look at our business very simply, revenue from recurring interest and royalties, less OpEx, less interest, and that's our recurring cash flow. So it helps us avoid the movements that we get in our IFRS statements that don't help you really understand the business. We grow our business down to simple recurring revenue. We've now had positive recurring cash flow, positive EBITDA and strong revenue performance for 2 years in a row. We transitioned to over 2021 and transitioned our portfolio away from royalty focused and towards venture debt focused. Today, over 85% of our invested assets are in venture debt loans and only 14% are in royalties. We're seeing an increase in venture sponsored companies in our pipeline and in our portfolio. Today, over 58% of our invested assets have a VC sponsor or otherwise VC investment is probably the way to explain it. I should add, I'm very proud of this number, but we continue to focus on building our relationships with more VCs, but we continue to focus on embracing investments in bootstrapped companies, so in companies that don't have a VC investor or a VC sponsor. So unlike many of our competitors, we don't shy away from these kind of deals. And in many ways, we prefer them that being bootstrapped companies as the return of such investments are often much better. We do manage the risk of these investments by ensuring we do in-depth due diligence and ensuring those appropriate levels from governance in these companies. But I think for us, going forward, you'll probably see a mix of 50% VC sponsored and 50% bootstrapped companies in our investments over time. On the referral side, we're seeing increased referral traffic from various partners in the U.S. the U.K. and Canada as we have built up our referral network, and we continue to build that going forward. Another highlight is the growing warrant and equity portfolio. Since we transitioned away from royalty Investment and into venture debt, we have built up a portfolio of 11 warrant positions, 2 bonus on active positions and 2 were common equity position. Building this more in equity portfolio is a very important part of our strategy, and it's very much worth highlighting. So let me take a shot diversion here and tell you why we have invested in growth companies and how that's related back to our warrants. First, the equity growth companies provides us with substantial downtime cushion. In fact, the average loan to value of our portfolio of investments is well below 10%. That means our debt represents below or less than 10% of the total enterprise value of our investment companies on average. Second, high-growth companies have more asset alternatives, be it M&A, eventual investment and lower cost of capital, bank finance and IPO, in many different ways that they can raise capital. And this is important for us and how we exit our investment. And then finally, the third issue to ties this back to my point about warrants. The third reason we focus on investing in growth companies is for the more upside. The equity mean types of companies increases disproportionately faster as they grow, not both just through growth in revenue, but also through multiple expansion. So this warrant and equity portfolio that we currently have will become a strong driver of continued shareholder value growth for Flow Capital. Not only the warrant gains offset portfolio losses that we might have like some of our competitors are learning, it's pretty hard to make up a small -- even a small portfolio loss with only net interest. But we expect that these warrants will be substantial net contributors to our overall shareholder value growth and profitability over time. I really cannot overemphasize that these warrants are a big deal. We manage our day-to-day business by focusing on a profitable -- sorry, by focusing on being profitable, based on only recurring interest revenue, as I mentioned earlier. But by the time we get to $100 million assets, which is in too far from today, we expect that we'll have 25 to 30 warrant positions and returns from that warrant portfolio should be meaningful over time. And this is actually a fairly big differentiator between us and our competitors. Back to highlights. I mentioned the growth of our origination capabilities, not just in terms of number of deals, but also in terms of quality and investing in company size. In 2021, we made some of our largest investments to date, including a $5 million investment into Everwash, and you should expect this trend to larger and better quality deals will continue. On the operations side, over the past several years, we've cleaned up most of our legacy distressed deal backlog that were left over from the 2014 to 2018 era of the company. And you'll see that we had a fairly significant reduction and associated legal expenses in 2021, which helped us significantly reduce OpEx. On -- continuing on the legal side, we did have a major legal win in the material dispute. This dispute is going to appeal, but we are very positive about the prospects for this outcome over the next couple of years. Our portfolio continues to see excellent revenue resiliency through Covid. We invest in the kind of companies, frankly that aren't affected by Covid or if they are, it's positive. But these kind of companies performed well, the digital technology-enabled companies performed well in Covid or outside of Covid. Other highlights, we continue to clean up the balance sheet and particularly eliminating overhang associated with the past mergers and leases, et cetera. And finally, a highlight for me in 2021 was the deal we won with the team that we've managed to assemble. I'm proud to be working with these folks. And with the team we have in place, we have the capacity to scale our business to over $100 million in assets. All of these highlights demonstrate the resilience of our business model, and it's really the outcome of over 3 years of hard work. And so to summarize, we're seeing improving deal origination, we're seeing reduced process streamline operations. We're seeing increase in investment quality and size. We're simplifying our deal structures and we're cleaning up our balance sheet. The bottom line is we had an excellent year, and I'm going to resummarize that in a couple of key numbers. First, our ongoing free cash flow generation, which I already mentioned, is $1.6 million. And secondly, our booked value growth during the year increased by 35%, I should say, 34% to $0.75 a share. And so not only did we have a good 2021, but this grows on the -- this was on the back of a very strong 2020. And I should highlight that over the past 9 quarters, book value growth -- books value has grown per share by 65%. Final comment. You may have noticed or observed there are such a -- we got a significant discount to book value. We believe this offers a very compelling opportunity for us to purchase high-quality undervalued stock that being our own stock. So it should come in with no surprise, during the year for repurchased almost 1 million shares. And our ongoing NCIB from an average price of $0.43 a share. And so with that, I'll pause my scripted comments and turn it over to the operator and see if you have any questions.

[Operator Instructions] And there are no questions at this time. I would now like to turn back the call to Mr. Alex Baluta. Please go ahead.

Great. Thank you, operator. Again, I'll summarize, we had a great 2021 on the back of a great 2020. We've been working hard at building our capabilities, including origination execution. We feel we're on a cusp of significant growth. And we expect 2022 will be a busy year as we continue to scale up into core capital, grow our revenue, grow our free cash flow and ultimately increase shareholder value, which is our primary focus. Thank you, everybody, for your time. As usual, if you have any questions, feel free to call us, e-mail us and we'll respond as quickly as we can. Thank you, everybody.

And this concludes today's call. Thank you all for participating. You may now disconnect.