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Edited Transcript of FW.V earnings conference call or presentation 20-May-20 12:30pm GMT

Q1 2020 Flow Capital Corp Earnings Call

Jun 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Flow Capital Corp earnings conference call or presentation Wednesday, May 20, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander William Baluta

Flow Capital Corp. - President, CEO & Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Flow Capital Corp.'s 2020 First Quarter Results Conference Call. (Operator Instructions)

I would like to remind everyone that today's discussion may contain forward-looking statements that reflect current views with respect to future events. As such statements are subject to risks and uncertainties that 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 information circular dated May 6, 2020, which is available on SEDAR.

Today's call is being recorded, May 20, 2020.

I would now like to turn the meeting over to Alex Baluta, Chief Executive Officer of Flow Capital. Please go ahead.

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Alexander William Baluta, Flow Capital Corp. - President, CEO & Director [2]

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Thank you very much, operator. Good morning, and thank you for participating in today's call. I'm joined by Gaurav Singh, our new Chief Investment Officer, obviously, appropriately social distanced.

After the close of market yesterday, we released our Q1 2020 financial results. Details can be found on our website at flowcap.com or as filed on SEDAR.

For the quarter, our recurring revenue was $930,000, down 39% from the $1.5 million a year ago and down 25% from the $1.2 million we recorded in Q4 2019. As discussed in the previous quarters, the recurring revenue slowdown is simply a function of us not deploying enough capital to make up for the buyouts and the returns of capital that we are seeing. This is largely due to us being selective and focusing on higher-quality investments.

As we discussed on our last call, increasing our deal flow and investments into high-quality growth companies is our primary focus for 2020. Adjusted EBITDA for the quarter was $592,000, a year-over-year decline of 43% from the $1.04 million in Q1 of 2019.

Cash generated from operations was $1.93 million, more than double compared to the $930,000 a year ago. The increase in cash from operations was a result of ongoing recurring revenues, repayment of a $1.5 million note as well as the liquidation of some of our equity positions earlier in the quarter.

So as a reminder, we generate revenue from 3 sources: one, recurring revenue in the form of interest and royalties; two, buyout revenue, essentially a premium paid to us when an investee exits a royalty agreement; and three, equity upside from the positions -- equity positions that we take as part of our investments. Buyouts are an important part of how we generate returns. While they can add substantially to our free cash flow as they did this quarter, they do not -- they did negatively impact our near-term revenue visibility as we lose the revenue-generating investment until such time as we make a new investment to replace the one bought out.

As I mentioned, we did have a $1.5 million note repaid in the quarter, and that reduced recurring revenue. While we had no new investments in Q1, in early Q2, we did deploy USD 1.3 million into Novation Networks. Novation is a highly trained and motivated worker force of former military personnel to deploy 5G infrastructure. We are looking forward to good results under that investment.

I do expect that the trend in declining revenues will reverse in the coming quarters as we deploy our available capital. Please note that contrary to our practice on past calls, we will not be reviewing the financial results in further detail during the call, but we will continue with our broader business update. The financial results are summarized in our press release and detailed in our financial statements and the MD&A that we filed on SEDAR. I encourage you to review those and e-mail us or call us if you need more information.

I would now like to take a few minutes to talk about the business highlights from the quarter and some of the ongoing initiatives that we are working on to continue to improve our performance and ultimately, increase shareholder value. COVID is obviously on everybody's mind. Internally, we adapted quickly, and we've had everyone working from home or from a safe environment for well over a month now. We have seen no change in our productivity, and we expect we'll continue with the remote work profile for the foreseeable future. We've also started a proactive portfolio review process where we check in with our investee companies on a biweekly basis. To date, we've seen only a modest impact on the performance of our portfolio companies, essentially no material change from the last update we provided.

Most of our companies, for now, seem to be weathering the storm. A few of our investee companies are experiencing a decline in revenue and are making the necessary adjustments. While some have seen a slowdown in revenue or collections, others are seeing a slight uptick. Where our investee partners have needed some payment flexibility, if necessary, we've done our best to accommodate them.

If I look ahead, unfortunately, these are unprecedented times and we have only modest visibility into our investee companies' continued expected performance, mostly because they themselves have only modest visibility. Companies that are performing okay today might see that change or vice versa. We will continue to monitor the situation and do our best or do what's best for our investee partners and for our shareholders.

On the deal flow front, we are seeing both improved deal flow and improved deal terms, and I suspect both are a function of COVID. Specifically, we are seeing indications that the availability of equity capital is becoming increasingly constrained and companies are looking for money increasingly from debt type structures. Interestingly, this has led to an increase in our pricing capacity, which, when you think about it, is reasonable, both through capital scarcity and increased uncertainty.

As I mentioned, we did invest $1.3 million early in Q2. One thing we're not seeing yet is any major influx of low-cost capital from government or quasi-government agencies. Here, I'm referring to BDC and EDC, specifically in Canada. While we do applaud the efforts of the Canadian government towards organizing broad-based funding options as money -- companies need them, unfortunately, the funding is not reaching all the segments of the economy that need the help. The government is, via the EDC, BDC infrastructure, trying to deploy significant amount of capital primarily as we understand it, through bank channels. Unfortunately, it is our experience that banks do not know how to invest in the higher risk, higher-return growth segment of the economy, which is where we live. No matter how much of a co-invest or co-loan guarantee they have, if a bank has any principal exposure at all in a higher-risk situation, they will not invest. That at least is our perspective, and that leaves a key segment of the small and medium business, a key segment of the economy unattended.

Flow and others like us are perfectly suited to deploy risk capital, particularly in earlier stage growth companies. We have the skill, experience and the knowledge to make reasonable risk-adjusted investments. Unfortunately, in the current form, the government programs are just not structured to partner with smaller more nimble investors like us. As a result, while the government agencies like to say they'll be providing money to companies that really need it, we've not competed in a single situation where a loan from a competitor was guaranteed by a government agency.

A brief update on our operations. In Q1 and Q2, we saw the departure of 2 of our senior team members, specifically our CFO and our CIO. We wish them both well in their future endeavors. While we have replaced our CFO, we will not be replacing our CIO in the near term, and I'll be taking on the additional CIO responsibilities. We have taken the opportunity afforded by these departures to reevaluate our operating structure and to rightsize the business. We have several ongoing initiatives in the area of reducing overhead and leaning out the business model, and we expect that our operational costs should be significantly lower going forward. These adjustments will help us achieve sustained profitability sooner.

As we discussed on the previous call -- previous quarterly update call in February, we have been actively moving up the quality scale and the deal size scale. While we are seeing substantially larger companies in our pipeline, we are not yet aggressively moving up in deal size. We continue to target deals in the $1 million to $2 million size, both for diversification and as a judicious use of our available capital. We do expect that we will move up in deal size in coming quarters as we raise more capital to invest, but we certainly have been moving up in deal quality and we are seeing that in our pipeline.

Even as we move upmarket, what we will continue to do is offer creative and flexible debt structures, including our royalty structure. Because we are one of the few royalty players in the small and medium enterprise space with access to permanent capital, we can afford true long term or even perpetual royalty structures where appropriate. While we try to tailor our flexible debt solutions to our investee companies needs via debt or royalty, having access to permanent capital is a significant differentiator.

And with that, I'll hand it back to the operator to see if there are any questions.

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Operator [3]

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(Operator Instructions) This concludes today's conference call. You may now disconnect.

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Alexander William Baluta, Flow Capital Corp. - President, CEO & Director [4]

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I did have a summary. Operator, can I just have one quick summary moment? Do we still have the line?

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Operator [5]

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Yes, you do.

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Alexander William Baluta, Flow Capital Corp. - President, CEO & Director [6]

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Thank you. Thanks, everybody, for attending the call. I will summarize by saying that our portfolio has done reasonably well through the uncertain times created by COVID. And while our visibility and that of our investee companies is uncertain, we are cautiously optimistic that we can get through these times with reasonable portfolio performance. And with the deals that we're seeing in our pipeline, we continue to expect 2020 will be a busy year as we scale up to deploy our capital, grow our revenue and ultimately increase shareholder value.

Thank you, everybody, for taking the time to attend our call. Thank you, operator.

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Operator [7]

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