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

Good morning, ladies and gentlemen, and welcome to Flow Capital's 2022 Year-End Conference Call. [Operator Instructions] This call is being recorded today, March 29, 2023. I would now like to turn the conference over to Alex Baluta, CEO. Please go ahead, sir.

Thank you very much. Good morning, everybody, and thank you for participating in today's call, either live or listening to the recording afterwards. I'm joined by Gaurav Singh, our Chief Financial Officer. After the close of the market yesterday, we released our financial results for the year ended 2022. Details can be found on our website at flowcap.com or as filed on SEDAR. I'd like to remind everybody that today's discussion 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 in any forward-looking statements. For more information on risks and uncertainties related to forward-looking statements, please refer to the management discussion and analysis, which was recently filed on SEDAR. We had a very good year culminating what is now 4 years of very strong performance, and I'm very proud of the performance of June. Some of the highlights, revenue from royalties and interest in the quarter were $2.26 million. For the fiscal year, royalties from -- I should say, revenues from royalties and interest were $7.8 million, that's year-over-year growth of 28%. Book value, excluding the re-recognition of our tax asset -- our tax loss asset was up to $0.97, that's a 29% growth year-over-year. If you include roughly $0.25 of tax loss re-recognition under the balance sheet, that gets our book value up to $1.22. And I'll talk about that more in a minute, representing year-over-year growth of 63%. I've said this before, IFRS numbers, while important, can be misleading or at least difficult to understand because changes in balance sheet tend to flow through the income statement under IFRS rules. Nevertheless, you can see all the details, and I'm not going to go through them here on the call, but you can see the details as all SEDAR about our IFRS numbers and they include year-to-date income of $14.5 million, again, hard to parse because some of that is due balance changes. But adjusted recurring free cash flow, which is something we've talked about in the past, it's the way that we use to track our business, which is really recurring revenue, less cash expenses, less interest expense was $882,000 in the quarter. That's compared to $313,000 last year same time. The adjusted free cash flow for the year was $2.9 million, which is a growth of 76%, another great quarter in terms of cash flow or a year in terms of cash flow growth. Importantly, cash collections from various types of upside in bonus payments, including prepaying of interest on early exit, warrant exercise, other types of bonus payments not related directly to interest and royalty payments generated about $3.2 million in cash in the year. This is important. It's something that I don't think we've done as good a job as we could of explaining to people is that we have recurring revenue from our royalty and interest, but then on all of our investments, we take royalties or other forms of bonus payments depending on the performance of the company that we run to. And those will be a material part of shareholder value generation in the coming years. And as an example, in this past year, we collected $3.2 million in cash -- actual cash from those kind of bonus payment. In particular, almost $2 million of that was from one exit from a very successful investment that we had called Performio. Total assets were all approaching $60 million compared to $44 million in the year-end last year. And cash at the end of the year was $9.5 million compared to $4.1 million in cash as in last year. I'll dig into some of these in a little bit more detail. Q4 -- actually all of '22 really capped what I think is a truly remarkable performance from the team over the last 3 and 4 years. We'll start with the book value performance, not only was it up 29% year-over-year, but it was up 113% year-over-year. I should say, over 3 years from a low of about $0.44 to $0.97 today. And it's because of the strong performance over the 3 years that we were allowed to re-recognize the tax asset. And so the tax losses are in the range of $30 million, but on an after-tax basis, that represents a cash asset to the company, saving us in terms of cash that we have to -- cash taxes we have to pay off just about $8 million. And that asset is now on the balance sheet, taking our aggregate book value to $1.22. But it's because we've had regular and consistent profitability over the last 3 years and we're allowed to recognize that tax asset. We had it on our balance sheet a couple of years ago. We had to derecognize it because of the losses and because of the turnaround the company and our performance, we're now allowed to re-recognize it. And it's partly because of the transition in our business model. I've talked about this almost every conference call, some riskier permanent royalties to a portfolio now predominantly of senior secured loans made to high growth primarily tech companies. And it's important because those high-growth tech companies not only provide us secure senior interest revenue streams, but they tend to generate significant upside as they grow. And that's where we're getting some of the upside in our bonus payments and warrants, as I mentioned earlier. And so every one of our loans that we did today is not only senior secured on the balance sheet of the company and includes cash interest, it also generally includes warrants or if it's a complicated capital structure, something called a bonus on exit. So when a company itself is sold, we get the equivalent of a warrant like upside through the bonus on exit. So while we've had an excellent year, I'm going to go through a couple other highlights. We've had no defaults in the year, no new defaults other than things that have already been impaired in prior years. So for me, this is a reflection of the quality of our not only our due diligence in selection process, but also our management process of managing our ongoing portfolio investments. We have 2 excellent exits; one was Performio, which was a relatively short investment. It had a bonus on exit of almost CAD 2 million. That was a route, like I said, a relative short investment Jorsek or Heretto was another exit, they reached $17 million in equity towards the end of the year. And on that investment, we still have warrants representing a couple of percentage points of the total equity of the company that have 4 years remaining to expiry. So no bonus recognized on that yet, but over time, we expect that company will continue to perform. We did restructure one of our investments that had to go through a restructuring and ended up at the other side as the sole debtholder in a company to raise additional equity. It just shows the value being senior secured. We have -- one of the highlights for me is the excellent team in place. We had a really good group of individuals who contribute to -- who have contributed and I expect will contribute to the continued success of the company. And then as far as [indiscernible] go, the one thing I think we can do better and need to focus on is deploying more capital. Last year, we only deployed $7 million -- just over $7 million in additional capital into new investments, that's below the $23 million that we did before. And as we have exits without deploying that capital, that will slow our revenue growth. So it's basically the core skills that we need to continue to focus on. Now we had a good pipeline performance in terms of aggregate numbers, over 900 leads in the year, close to the -- a little bit down from 2021, but still a sizable number of leads, but we really are focusing the 2 areas of focus that we're looking towards in 2023 are to increase the aggregate number leads at the top of the funnel. I mentioned this before, our close rate on the leads that we see is less than 1% which is good. We're very selective. In fact, we've walked away from 5 or 6 deals in the last 6 months when they failed in due diligence. The risk profile just wasn't appropriate for what we were looking for. And so part of the way that we get to close more deals is we need to basically double the top of the funnel, but keep our focus on quality and to increase the number of aggregate deals that we lend to. So that's one issue. The second is to increase our focus on -- well, I should say there's 2 ways that we're going to do that: One is continuing to focus on digital lead generation, which has been doing very well for us, but the second is to improving our referral relationships. We have to build up the network of referral partners that we have, and we've been doing a good job. We've got to do that more. But I think with both of those -- we're focusing on both those initiatives that should help us grow are talking me leads at the top of the funnel. And then to continue to scale the business, I think we're -- with the headcount and the people we have now, we've can scale the business fairly dramatically from here, which should help us improve our profitability. We'll scale our revenues substantially faster than we increase our costs. We have to raise more capital from a strategic partner in particular, is what we're looking for. We have access to, as I mentioned earlier, $9.5 million on the balance sheet. We have some room in our preferred share. We issued a preferred share last year. So take 9.2%, it's a 6-year preferred share, with some liquidity covenants in it. For the investors, we have $4.2 million in capacity that preferred share and we have a funding vehicle that we use called the Priority Return Fund, but we are looking to replace the Priority Return Fund with a longer-term strategic relationship with a large term funder, and we're doing a lot of efforts on that end. And we're looking for somebody that can help us scale from the $50 million in assets that we have another $150 million and then the $500 million. And so those are the 2 focuses, more investments through continued pipeline development and better access to capital. And really, I think that's the end of my prepared remarks. Excellent year, excellent team, excellent 4 years, good balance sheet growth, book value growth, good revenue growth, a little disappointed in the number of deals that we did in the year, and we're working on fixing that with pipeline development. And with that, I'll pause and turn it over to the operator to see if there's any questions.

[Operator Instructions] Mr. Boluda, there are no questions from the phone, sir.

Thank you, operator. Again, thank you, everybody, for listening to the call, either live or recorded. We're always available to answer your questions. We appreciate your support over the years, and we look forward to continued performance of this nature over the coming years. Thank you very much.

Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.