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Edited Transcript of FW.V earnings conference call or presentation 14-Feb-20 1:00pm GMT

Q4 2019 Flow Capital Corp Earnings Call

Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Flow Capital Corp earnings conference call or presentation Friday, February 14, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander William Baluta

Flow Capital Corp. - CEO

* Donnacha Rahill

Flow Capital Corp. - CFO

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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 Fourth Quarter and 2019 Year-end Results Conference Call. (Operator Instructions)

I would like to remind everyone that today's discussions may contain forward-looking statements that reflect current views with respect of 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 information circular dated May 2, 2018, which is available on SEDAR.

Today's call is being recorded on February 14, 2020.

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

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

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Thank you very much, operator. Good morning, and thank you, everybody, for participating in today's call. I am joined by Donnacha Rahill, our Chief Financial Officer.

After the close of market yesterday, we released our Q4 and year-end 2019 financial results. Details can be found on our website or as filed on SEDAR.

For the quarter, our recurring revenue was $1.23 million, up 2%, and over the same quarter last year. And for the year, revenue was $5.6 million, up 21%. Both revenue and the growth rate of our revenue were down slightly from the prior Q3 and Q2. Revenue slowdown is simply a function of us not deploying enough capital to make up for buyouts and return of capital that we are seeing. Increasingly -- I should say, increasing our deal flow and investments in high-quality growth companies is our primary focus for 2020, more on that later.

Adjusted EBITDA for the year was $4.2 million and free cash flow for the year was up substantially at just under $3 million, both were up well over 100% compared to prior year. The increase in profitability and free cash flow were the result of 2 buyouts we experienced during the year as well as the liquidation of some of our equity positions.

Just as a quick reminder, we generate revenue from 3 sources: one, recurring revenue in the form of interest and royalties; two, buyout revenue, essentially a premium that the investee company pays to us when they want to exit from a royalty agreement; and three, equity upside in the form of warrants that we are increasingly taking as part of our investment. Buyouts are an important part of how we generate returns. Where they can add substantially to our free cash flow, they do negatively impact future revenue as we lose revenue-generating investments.

Donnacha will give you a thorough review of the financials in a moment, but I'd like to take a few minutes to talk about the highlights from the year and some of the ongoing initiatives that we're working on to continue to improve our performance and ultimately increase shareholder value.

Let's start with the highlights. During the year, we had 2 buyouts, including mCloud and Factor75. Factor75 is a textbook example of how royalty investment structure can work. For a $1 million investment, we saw a return of our principal and a 1.9x return in just under 3 years while the company used our capital to grow and to bridge themselves to a new equity investment round. It was a big win-win for both parties. Our capital when deployed in growth situations is dramatically lowering cost and less dilutive than traditional equity.

To continue the highlights. During the year, we also sold our LOGiQ Global Partners business for $12.4 million. We used the proceeds from that sales as well as the cash generated in our core business to repay our $17 million debenture at the end of the year.

During the year, we also added to our most important asset base, that being our people. We added several new team members to help with origination, marketing and due diligence and they are already having a positive impact.

It's worth highlighting that we successfully raised $10 million in our innovative Priority Return Fund structure. The PRF, as we call it, is an excellent way for us to increase the velocity of our capital as we liberated $10 million from well-performing existing investments and make that capital available for new investments.

We plan on using the structure again at some time in the future when we need to raise additional capital, which points to another highlight. We continue to have several excellent long-term investments in our portfolio that are generating sizable cash flow and represent significant future buyout and future equity value.

During the year, we also used approximately $1.7 million to buy back our own shares, given that the share price of our stock when compared to our book value is quite low. Buying back shares represented an excellent return to our shareholders. I will note that while we had a modest decline in our book value during the year from $0.25 to $0.23, there is still a significant discrepancy relative to our share price. And we have reinstituted our NCIB to give ourselves the option to purchase up to 6 million more shares in 2020.

Finally, as a highlight, looking forward to 2020, we have over $10 million in cash available to deploy in new investments.

Unfortunately, the year was not without a few challenges. In particular, we had a few investments into receivership, notably Kare and DionyMed. As we've pointed out in the past, we are risk investors and the occasional distressed situation is to be expected. But like any other well-structured and diversified portfolio, our winners should more than make up for our losers.

Nevertheless, in spite of enduring receivership, it's worth pointing out that we did see a return of approximately 60% of the principal we invested into Kare and DionyMed prior to them running into trouble. So in fact, even in distressed situations, we often recover a sizable percentage of our invested principal, one of the benefits of our strategy of making flexible debt cash-generative investments.

So on the challenge front, as I mentioned earlier, our deployment rate of capital into new investments has been below expectations. While we are focusing on higher-quality investments, we have not deployed at the pace that we are forecasting, increasing our capital deployment rate and continuing to work on building a world-class origination expertise is our biggest challenge and our key focus for 2020. But the good news is we have a lot of capital available to invest.

In terms of our target market, we are implementing some adjustments and tweaks to our approach. In particular, we are deploying -- planning on deploying larger amounts of capital per investment and invest in larger companies. Our average deal size, since late 2016, has been approximately $1 million. Our plan is to increase that average deal size to over $2 million in the near term and then continue to increase the average deal size over time to over $5 million in anticipation of having more capital available in the coming quarters and years.

By moving to larger investments, we can deploy more capital more quickly and leverage our overhead better. And will also allow -- it will also lower the average risk profile of our investments. Essentially, it's critical to helping us scale and maintain a strong risk-adjusted return. In particular, we're also seeing the pricing for larger low-risk deals is not dramatically different than the pricing for smaller, new investments.

Even as we move upmarket, what we will continue to do is offer creative and flexible debt structures to the market, including our royalty structure. Because we are one of the few loyalty players in the $2 million to $6 million deal size category with access to permanent capital, we can offer true long-term or even perpetual royalty structures when appropriate. While we try to tailor the flexible debt solutions to our investee companies' needs, be it term debt or royalty, having access to permanent capital is a significant differentiator.

Before I turn it back to Donnacha, I want to highlight a couple of other initiatives that are underway for 2020, including deploying a new internal portfolio-monitoring dashboard. We're rolling out a proprietary risk scoring tool. We're increasing our digital marketing efforts as we've seen excellent return from our 2019 investments in our digital marketing efforts, and we're aggressively increasing channel partnerships to increase deal flow.

I will summarize by saying that Flow Capital is in the strongest position it's been in several years. It will take some time to replace the lost revenue -- that we've lost due to recent buyouts and a few distressed investments, but we have substantial cash available for new investments. We have an excellent team, significant capital and large and growing opportunities to invest in growth companies. All in all, I expect 2020 will be a busy year as we scale up to deploy and grow our revenue and ultimately increase shareholder value.

And with that, I'll turn it back to Donnacha, for a review of our financials.

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Donnacha Rahill, Flow Capital Corp. - CFO [3]

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Thank you, Alex. Recurring revenue from royalties and interest was $1.2 million in Q4 2019, a 2% decrease compared to the same period in 2018. The increase was driven primarily by the new investments made in the last 12 months and an increasing warranty return from other investments.

Nonrecurring revenues from royalty buyouts and equity returns was $266,000 in the quarter compared to $357,000 in the same period in 2018.

Revenues, as reported under IFRS, were $2 million in Q4 2019 compared to negative $1.8 million in the same period in 2018. Revenues in the quarterly period were impacted by debt noncash items of $600,000 compared to negative $2.5 million in the same period last year. This noncash amount consisted primarily of $2 million for adjustments to fair value, negative $1.2 million for an investment written off, a negative $150,000 for foreign exchange differences.

Included in the adjustments to fair value was negative $0.8 million and $1.5 million relating to adjustments to the equity investments and royalty investments portfolio, and finally, $1.2 million for the fair value adjustment reversal for the investments written off.

Total operating expenses were $1.2 million in Q4 2019 compared to $750,000 in the same period in 2018. The change is due to higher restructuring costs, staffing costs and professional fees for $294,000, $119,000 and $86,000, respectively.

We estimate operating expenses to run between $250,000 to $350,000 per month in Q1 2020.

We recorded adjusted EBITDA of $470,000 in Q4 2019 compared to $411,000 in the same period in 2018.

Free cash flow was $823,000 compared to $703,000 in the same period in 2018.

In Q4 2019, Flow recorded a noncash charge of $9.4 million for a deferred tax expense. This charge related to a derecognition of a previously recognized deferred tax assets. The derecognition was required under IFRS because of recent tax losses.

There are $38.7 million tax losses available for carryforwards for the next 20 years, and the company anticipates that these losses will be utilized before expiry.

As of February 13, 2020, we believe recurring revenue from royalties and interest and free cash flow for the month of January 2020 will be approximately $300,000 and $100,000, respectively.

As of December 31, 2019, the total value of investments were $22.4 million, down from $21.1 million at the end of 2018.

Cash returned from the investment portfolio was $2 million in the quarter and $10.9 million in the last 12 months. Our cash position was $10.3 million at the end of December and remains at $10.3 million today.

I will now turn it back over to Alex.

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

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Thanks, Donnacha. Just wanted to make one point clear. The tax asset that we wrote off during the -- at the end of the year was something that was required by IFRS. It doesn't change the availability of our tax assets for future -- sheltering of our future income. It's just not an asset that we recognize on our balance sheet.

With that, I am going to close off the formal part of the -- of our meeting and turn it back to the operator for questions. Thank you very much.

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Operator [5]

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(Operator Instructions) And we appear to have no questions at this time.

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

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Thanks, operator. So with that, we will wrap up the call. If anybody has any questions or comments, they're always welcome to call us or e-mail us. We are available at any time.

Thank you, everybody, for tuning in, and I look forward to another update in 3 months. Thank you.

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Operator [7]

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Ladies and gentlemen, this concludes today's meeting. Thank you all for joining, and you may now disconnect.