Flow Capital Corp. ($FW)

Good morning, ladies and gentlemen. Welcome to Flow Capital's Earnings Call for Q4 and year-end 2025. [Operator Instructions] I would like to welcome everyone -- 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 YE 2025 company's management discussion and analysis, which is available on SEDAR. Today's call is being recorded on Friday, April 17, 2026. I would now like to turn the meeting over to Alex Baluta, Chief Executive Officer of Flow Capital.

Thank you very much, Joelle, and thank you, everybody, for joining here for our Q4 and 2025 year-end financial results. I am joined by our CFO, Michael Danny. You can find our results filed on SEDAR or in the Investor Relations section on our website. For the 12 months ended December 31, we recorded $13.2 million in revenue, that's up 41% from the year earlier period. We had a 79% increase in recurring free cash flow to $3.4 million. On a per share basis, that was $0.11, up from $0.06. We also deployed almost $28 million in new capital during the year, and book value per share is up to $1.27 from $1.20 at the end of the prior year. All in all, it was an excellent year. That is the highest growth rate we've reported in revenue and the highest revenue that we reported since we transitioned to actually forever since our entire history. But if you recall, in late 2018, we transitioned to venture debt away from what the prior company used to do, which was royalties, and that's been a very successful transition. For the 3 months for the fourth quarter, Revenue was up 33% to $3.6 million. Recurring free cash flow was up 66% to $900,000, and we deployed $4.5 million in new investments in the quarter. Overall assets at the end of the year, invested in the investment assets has grown to 22% to $73.5 million. And those assets are primarily in loans, but I'll mention later on in the call that we are starting to increasingly do small equity investments. One thing I did want to highlight is you'll note that the presentation of our financial statements has changed somewhat. We've tried to simplify it. And we also want to mention that we have a new auditor this year in Pricewaterhouse. And that has been an excellent [indiscernible] for their guidance and the hard work that they put in. For the year, we deployed $27.5 million. Of that, $17.7 million was into new investments and $9.8 million was into follow-on investments or existing tranches into existing investments. I do want to point out that, that's an important part of our model, which is those follow-on investments and become an increasingly important part of our model. We do small initial tranches might be $2 million or $3 million or $4 million. And then as the company continues to deliver, we then may add, in some cases, up to 4 additional tranches. From our perspective, that is actually a derisked investment in that we've watched the company perform and we're very comfortable with their capabilities. And therefore, we're very comfortable investing additional capital into the business. And so almost $10 million of our deployments last year were in to exist -- follow-on investments into existing companies. It's also worth noting that a small portion of our investments are now going into actual direct equity. For the year, we did about $1.2 million of equity. This is not a core part of our business, but often what we'll do is take larger equity positions in some of the existing investments that we have. Again, it's because of the quality of the investment. It's because of our comfort with the company, with their growth and with management. And that adds upside to our overall performance as we go forward. Repayments in the year was $12 million. That was across 4 deals. Of those $12 million and 4 deals that we paid, about $470,000 cash came in, in the form of early prepayment fees, again, an important part of our overall model. 3 of those transactions had IRRs, I should say, 2 had IRRs north of 23%. 1 had an IRR north of 30%. And 1 had a slightly negative IRR. However, it's interesting to point out that, that company continues to exist, it has been restructured. We have a meaningful position not only in a debt instrument to that company, but also in equity. And it's another important part of our model is that we spend a lot of time working with our investee companies to ensure that there is a good outcome even if that takes multiple years. In fact, there was another deal this year that we exited after 4.5 to 5 years post investment that was an investment that years ago didn't work and was written off. But we continued to work with management. We continued to provide them guidance. And in the end, it was a very successful outcome. And from that from that deal, we actually continue to have equity upside. So it's a part of our strategy not only to ensure we get better returns, but also to work with all stakeholders in the companies that we invest in. Looking at the overall portfolio, I mentioned it's $73.5 million in invested assets and invested capital. There's 13 loans, which I call 4 loans. There's also 3 noncore loans, a very, very small amount of assets in that, but 16 loans in total. We have 22 warrant it's called them equity-like positions. And we have 16 either private or public equity positions. Again, this is a very, very important part of our model is that in the 38 positions that we have that are equity like, and when I say equity like sometimes we have what's called an exit fee or a success fee, so it's not a warrant. It's actually a success fee that is paid upon the exit of the company, and that may happen well after our loan is repaid. These warrants and equity positions represent an important part of our overall return but also an important buffer for us. So by that, I mean -- not all the equity positions will turn into positive outcomes. In fact, my -- the way we evaluate it is probably less than 1/3 of our warrant position ever translated into anything. However, when they do work, they work meaningfully well, meaning that they do make up for our losses. And that's historically been our experience. To the extent that we do have a principal loss, which is very rare in 1 of our underlying entities, the warrants on our other entities more than makes up for those losses. What that means is that in real numbers is that over the last 7 years, more than 7 years, our top line portfolio IRR is about 24%. That is a really strong track record. They're quite frankly, I'm proud of us. I'm proud of the team and proud of our structure and our approach to achieve 24% portfolio level IRR is pretty marketable. And I think it's now well proven in terms of our approach to quality underwriting, our approach to risk management, risk assessment. And so it's something that we hope to continue in the future. Overall, the health of the portfolio, I think, is very good today, probably as good as it's been over the last several years. Now I want to talk a little bit about industry. You probably heard some industry headlines of private capital, private credit bubble. And to be honest, there's lots of moving pieces. I look at it as if you go back into the '22, '23, '25 time frame, a lot of capital made its way into a lot of extra capital made its way into private credit. In some instances, more than doubling or tripling the gun of capital available in the entire credit sectors like the BDCs in the U.S., for example. So that led to pricing pressure. That led to aggressive loans. Eventually, that led to some bad news. And you've seen some of those -- some bigger bad news stories in the broader private credit sector. That led to fear, uncertainty and not on an investor's perspective, and that led to redemptions, which has finally led to gating. And so what you saw was positive headlines in the '22, '23, '24 time frame. Concerned headlines in '25 and now more concerned headlines in '26. And many of these private credit funds who are open to investors have been gated, meaning they've stopped redemptions in order to ensure that they don't have a mismatch between their assets and the liabilities. So that pricing -- we're a small section of the private credit space, specifically focused on venture debt and growth venture debt, and we have seen pricing pressure in our space. headline interest rates have come down. IRR overall has come down. Now for us, we're in a unique position. And when I say come down, it's by no means they're still in the low teens, but it's come down from where it was before. I don't think there's a level. And frankly, I don't have the expertise or insight to prove otherwise. But we are seeing some pressure, but it's not overwhelming pressure. But it's important to point out our model and our approach -- we are an evergreen fund, meaning the money comes with $38 million in equity, the money from a return transaction or a repayment of a loan comes back into our balance sheet and then we generally redeploy that. What we don't have is deployment pressure because we also have lines of credit that are payable lines of credit, essentially warehouse lines. So we can pay down our warehouse line without having to keep excess capital on our balance sheet, which means we don't have -- we're not paying for excess capital, which means we don't have price margin erosion pressure based on paying interest on line of principal or I should say, capital that is undeployed. And that's a unique benefit of our model. It's important because it allows us to continue to be very selective to continue to maintain our high standards in underwriting and continue to, therefore, try and generate very strong top of the funnel or I should say, top of the portfolio returns. So we are being very selective. We continue to be selective and will always be selective. But that does mean that we may not close as many deals as we may have wanted to or we may have been able to in the past. Nevertheless, I do feel that the price -- given that a lot of the major funds are gated. That means they're not going to be deploying capital as aggressively. And I think that what we saw was a trickle down of pricing pressure over the last several years, I suspect and expect that, that's going to reverse over time over the coming quarters and pricing pressure will ease and deployment of capital will continue. So 1 thing is certain is that high-growth companies the type that we invest in and really if we solve for 1 thing that we look for when we invest in, and that is growth. We invest in growth companies that are growing greater than 20%. And doing revenue usually above $5 million, and we'll invest anywhere from $2 million to $10 million into those companies, and we sell for growth. And while that industry itself, that -- not the industry, that sector has also seen uncertainty with AI. There continue to be deals underwritten and I expect that the volume of deals underwritten that could use minimally dilutive growth capital will recover over the coming quarters. Lastly, those are really wrapping up my formal comments. I do want to mention that we continue to have, as many of you know and many of you have invested in our SAFR is a form of yield security that we provide to investors. For Canadian dollar-denominated safer, the return is 8%. That's a floor. It's actually a floating rate. The floor is 8%, the consuming is 12 -- if -- for investors with more than $1 million, the floor rate is 8.5%. For our U.S. dollar-denominated safer investors, the current yield on sub-million-dollar investments is 9.14% and on investments greater than $1 million, it's 9.64%. And the investors are invested in the yield, please feel free to call us at any time. With that, I'll pause my commentary and open it up for questions.

[Operator Instructions] Your first question comes from Ed Solbach with Spartan.

Alex, congrats on the quarter and the year. I joined late. Did you mention the book value per share?

Yes. Book value per share was $1.27, up from $1.20 to prior year.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Alex for closing remarks.

Operator, it looks like there's one other question that just popped up from [indiscernible]. Can we allow me to ask that question, please?

Can you hear me?

Yes.

One -- couple of quick questions. Can you characterize what drove the big increase in revenue this year? I think that's great. And can you characterize the 3 main things that drove that?

Yes, it's -- really, it's just additional employment of capital. It's -- our objective is -- well, really 2 things: one, new deals and 2 follow-on investments into existing deals. This is our average duration of the loans that we issue is 3 years, 36 months. or at least that's at the time of issues. The average duration we're usually repaid early on many of them. So let's assume that that's 30 months on average, average deployed. And then -- so if we're deploying more capital per year than we're getting repaid, and the average duration is 2.5 to 3 years, you'll see us continue to grow our portfolio. So it's really a function of the deployment of capital and both into new deals and existing deals. So there's no -- we've been squarely focused on that market now for 8 years. It's our core business. We are doing slightly more. And when I say slightly, just on the order of less than 5% of our total assets into equity, which are nonyielding investments, but we're squarely focused on making investments into cash-yielding, monthly pay loans to high-growth companies, and we're simply deploying more than we've had repaid. That it's actually Trevor a very simple business, source, find, high-growth companies, they very strong risk-adjusted credit decisions, monitor those companies, work with those companies. And it's -- in the vast, vast majority of cases, those companies refinance us through either an exit. They sell the company, they refinance us with super credit or they do a large equity raise -- and over this year, I expect you'll see 1 or 2 of those. That's a natural progression of our portfolio, but it's pretty straightforward. No magic. It's just hard work.

Yes. No, that's great. And then my follow-on to that is what's the challenges in terms of keeping that growth going?

Yes. So I mentioned sort of the industry headwinds that is it's a challenge where with pricing pressure, we want to be careful that we don't make investment decisions and on a risk-adjusted basis don't have the necessary hurdles. So one of the challenges is kind of staying the course of quality and slowing down deployments when the industry is -- I don't want to use the word irrational, but when the industry is behaving in a manner that is that puts us outside of our comfort zone from a risk return perspective. So we have to be careful. We don't have deployment pressure. But if deployment slows down, you'll see our top line revenue slowdown, so the gross slowdown. And if we have early repayments, which we have had, as I said, our average duration is less than 36 months. And usually, those early repayments are good. It's because companies get funded by -- something good has happened to that company. We've grown. They've gotten cheaper. They've grown into an equity round. And those repayments come with prepayment fees. And so there's upside to our book value per share, in particular with early repayments, but that then comes with a reduction in revenue. and we have to deploy. So the challenges are making sure that we see enough deals and invest in high-quality companies and in a market where there is pricing pressure because of excess capital that flowed into the market in '22, '23 and '24, I wouldn't be surprised to see a slower growth rate in the coming quarters just because we're being more comfortable in deployment.

Yes. Great. I got one other question, but I don't want to...

No, go ahead. There's no other callers. So go ahead and ask.

I think you've covered the private markets and the challenges that reflected with that. I don't see this company having the same exposure. It's not the same -- but what is -- what you spoke to is managing the risk of the portfolio. And I think your -- the way that you provision your loan loss and look at your expected loss in the different phases is good. And that's where my question is in terms of how you're managing that process because the quality of it is going to be key.

Yes. So the 24% 7-year IRR that I mentioned includes losses and write-downs. We're pretty aggressive or maybe it's the opiate conservative. We tend to write down our loans and warrants quickly. Like we don't like writing them up. They're uncertain. They're long term. So we try to be very careful -- but how it really comes down to a philosophy, I mentioned earlier, we had 4 repayments. We actually had 5. The fifth though, was a deal that had been written down to 0 years ago, but we continue to work with management. And it's very important to be focused on -- well, let me step back. We monitor all our companies monthly. Every company always has to provide its monthly financial statements. We monitor trends. We have covenants. We talked to all of our management teams monthly, if not more. And we will often give them a heads up on their performance because let's be honest, management of growth companies are optimists. They have to be. And we have to be focused on the non-optimistic scenario and we will often say, hey, guys, this metric is starting to get offside, are you concerned? What can we do about it? How do we manage? And so the point of having covenants is to be able to provide stronger guidance to management. But even before a covenant is trip, it doesn't happen that often, but it does happen. We're watching and monitoring behavior of companies. And without overstating, we're experts in -- particularly on our credit team in understanding growth in high-growth companies. And often, management teams aren't -- and so we spend a lot of time. We spent a big -- a lot of time building a sort of an infrastructure to track the behavior and the performance of companies -- and then we stay on top of it. So you'll find many of our companies will Frankly, they've said to us, you give us better feedback than our Board does. And I don't mean to disparage board members, that's not always the case in a growth company. But what we find is that we're very helpful. The feedback is that we're helpful because of our knowledge, because of our over of our monitoring and will help them manage their businesses. That is super important for us to manage our risk because if a company is missing on metrics, but they can slow down their growth rate and reduce their burn -- that not only helps us, that helps them and their stakeholders. So there is an entire process that we have in place of monitoring, reporting management, communication, et cetera. If something does at the rails, we then continue to work with those teams. It has been a long-term investment of our time to work with those companies that have gotten into trouble, we'll write them off in terms of our own carrying value in our asset base. But ultimately, we saw a successful exit this year, late in the year of a company that was struggling and working to repair itself for over 4 years. That's important that it represents upside to us. That also represents a safe exit for the other stakeholders. And it's just our philosophy. What we won't do is unless we absolutely have to. We just won't walk away from a company. So it's a long answer to there is heavy lifting in this business, but it served us very well. We'll continue to behave that way. And at the end of the day, the other thing that I mentioned earlier is that the upside on our equity positions has historically more than made up for the downside in modest principal loss that we may have experienced in some of your prior investments. One other point to mention, and another one of our portfolio companies that that had struggles, we returned $0.92 on the dollar. We continue to have a position that the assets were then sold to another entity, and we have a meaningful common equity position in that entity plus kind of a loan that is repaid through revenue. It's not a royalty. It's just, call it, a deferred purchase price and so already, we made $0.92 on the dollar. That company and the asset lives to fight another day, and we continue to have upside. So -- so it's a long answer to monitoring companies, managing risk, working with management teams not having pressure to deploy -- and it's a full -- sorry, it's a full circle in our -- all the component pieces of our strategy and our approach.

Fantastic. It sounds like you've lots of good management going on, lots of use of the flexibility that you got.

Yes. And thanks again for your support, Trevor and your question.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Alex for closing remarks.

Thank you very much, Joelle. Thank you, everybody, for listening. As I said, you can find our results on our website on SEDAR. Our Q1 numbers will be out within 4 to 6 weeks. And so we'll be talking to you relatively shortly again. Thank you all for your time.

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