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    FW   CA3434492037

FLOW CAPITAL CORP.

(FW)
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Flow Capital : Earnings Document

08/19/2021 | 08:04pm EDT

MANAGEMENT'S DISCUSSION AND ANALYSIS - JUNE 2021

Flow Capital Corp.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") of the financial condition and results of Flow Capital Corp. ("Flow Capital", the "Company", "our" or "we") is for the three and six-months ended June 30, 2021. The information in this MD&A is current as of August 19, 2021 and should be and should be read in conjunction with the interim condensed consolidated financial statements and notes thereto for the three and six-months ended June 30, 2021 and the audited annual consolidated financial statements and MD&A for the year ended December 31, 2021.

The Company's interim condensed consolidated financial statements and notes thereto for the three and six-months ended June 30, 2021 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and are recorded in Canadian dollars. Certain dollar amounts in this MD&A have been rounded to the nearest thousands of dollars.

FORWARD-LOOKING INFORMATION

This MD&A and documents incorporated by reference contain certain "forward-looking information" within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company's beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company's control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or may contain statements that certain actions, events or results "may", "could", "would", "might" or "will be taken", "will continue", "will occur" or "will be achieved". The forward-looking information contained herein may include, but is not limited to, information with respect to: prospective financial performance; including the Company's opinion regarding the current and future performance of its portfolio, expenses and operations; anticipated cash needs and need for additional financing; anticipated funding sources; future growth plans; royalty acquisition targets and proposed or completed royalty transactions; estimated operating costs; estimated market drivers and demand; business prospects and strategy; anticipated trends and challenges in the Company's business and the markets in which it operates; the Company's ability to pay dividends in the future and the amount and timing of those dividends; and the Company's financial position. By identifying such information and statements in this manner, the Company is alerting the reader that such information and statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance, or achievements of the Company to be materially different from those expressed or implied by such information and statements.

An investment in securities of the Company is speculative and subject to a number of risks including, without limitation, risks relating to: the need for additional financing; the Company's ability to pay dividends in the future and the timing and amount of those dividends; the relative speculative and illiquid nature of an investment in the Company; the volatility of the Company's share price; the Company's limited operating history; the Company's ability to generate sufficient revenues; the Company's ability to manage future growth; the limited diversification in the Company's existing investments and the concentration of a significant amount of the Company's invested capital in a small number of investments; the Company's ability to negotiate additional royalty purchases from new investee companies; the Company's dependence on the operations, assets and financial health of its investee companies; the Company's limited ability to exercise control or direction over investee companies; potential defaults by investee companies and the unsecured nature of the Company's investments; the Company's ability to enforce on any default by an investee company; competition with other investment entities; tax matters, including the potential impact of the Foreign Account Tax Compliance Act on the Company; the potential impact of the Company being classified as a Passive Foreign Investment Company ("PFIC"); reliance on key personnel; dilution of shareholders' interest through future financings; changes to the Company's accounting policies and methods; and general economic and political conditions; as well as the risks discussed in the management information circular of the Company dated April 30, 2020 and the risks discussed herein. Although the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in the forward-looking information and forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended.

In connection with the forward-looking information and forward-looking statements contained in this MD&A, the Company has made certain assumptions. Assumptions about the performance of the Canadian and U.S. economies over the next 24 months and how that will affect the Company's business and its ability to identify and close new opportunities with new investees are material factors that the Company considered when setting its strategic priorities and objectives, and its outlook for its business.

Key assumptions include, but are not limited to: assumptions that the Canadian and U.S. economies relevant to the Company's investment focus will remain relatively stable over the next 12 to 24 months; that interest rates will not increase dramatically over the next 12 to 24 months; that the Company's existing investees will continue to make royalty and interest payments to the Company as and when required; that the businesses of the Company's investees will not experience material negative results; that the Company will continue to grow its portfolio in a manner similar to what has already been established; that tax rates and tax laws will not change significantly in Canada and the U.S.; that more small to medium private and public companies will continue to require access to alternative sources of capital; and that the Company will have the ability to raise required equity and/or debt financing on acceptable terms. The Company has also assumed that access to the capital markets will remain relatively stable, that the capital markets will perform with normal levels of volatility and that the Canadian dollar will not have a high amount of volatility relative to the U.S. dollar. In determining expectations for economic growth, the Company primarily considers historical economic data provided by the Canadian

1

MANAGEMENT'S DISCUSSION AND ANALYSIS - JUNE 2021

and U.S. governments and their agencies. Although the Company believes that the assumptions and factors used in preparing, and the expectations contained in, the forward-looking information and statements are reasonable, undue reliance should not be placed on such information and statements, and no assurance or guarantee can be given that such forward-looking information and statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information and statements.

The forward-looking information and forward-looking statements contained in this MD&A are made as of the date of this MD&A, and the Company does not undertake to update any forward-looking information and/or forward-looking statements that are contained or referenced herein, except in accordance with applicable securities laws. All subsequent written and oral forward- looking-information and statements attributable to the Company or persons acting on its behalf is expressly qualified in its entirety by this notice.

NON-IFRS MEASURES

This MD&A also refers to certain key performance indicators, including EBITDA, Adjusted EBITDA, Free Cash Flow, cash returned from royalty payments and royalty buyouts to assist in assessing the Company's financial performance. EBITDA, Adjusted EBITDA, Free Cash Flow, cash returned from royalty payments and royalty buyouts (the "Non-IFRSMeasures") are financial measures used in this MD&A that are not standard measures under IFRS. The Company's method of calculating the Non-IFRS Measures may differ from the methods used by other issuers. Therefore, the Company's Non-IFRS measures may not be comparable to similar measures presented by other issuers. See section "Definition of Non-IFRSMeasures" for an explanation on how they are calculated. These Non-IFRS measures should only be interpreted in conjunction with the most recently audited consolidated financial statements for the year ended December 31, 2020, which are available on SEDAR at www.sedar.com.

2

MANAGEMENT'S DISCUSSION AND ANALYSIS - JUNE 2021

TABLE OF CONTENTS

NEW INVESTMENTS ...................................................................................................................

4

ROYALTY INVESTMENT BUYOUTS AND SALE OF EQUITY HOLDINGS ...............................

4

FLOW PRIORITY RETURN FUND LP .........................................................................................

4

IMPACT OF COVID-19.................................................................................................................

4

GENERAL DESCRIPTION OF THE BUSINESS..........................................................................

5

RESULTS OF OPERATIONS.......................................................................................................

5

PORTFOLIO UPDATE .................................................................................................................

8

OUTLOOK ..................................................................................................................................

11

SELECTED ANNUAL INFORMATION .......................................................................................

12

SUMMARY OF QUARTERLY RESULTS ...................................................................................

12

LIQUIDITY AND CAPITAL RESOURCES ..................................................................................

13

WORKING CAPITAL ..................................................................................................................

14

FINANCIAL INSTRUMENTS ......................................................................................................

14

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS .........

15

TRANSACTIONS BETWEEN RELATED PARTIES ...................................................................

16

INTERNAL CONTROL OVER FINANCIAL REPORTING ..........................................................

16

LIMITATIONS OF CONTROLS AND PROCEDURES ...............................................................

16

CRITICAL ACCOUNTING ESTIMATES AND POLICIES...........................................................

16

RECENT ACCOUNTING DEVELOPMENTS .............................................................................

17

OUTSTANDING SHARES ..........................................................................................................

17

RISK FACTORS .........................................................................................................................

17

APPROVAL ................................................................................................................................

22

ADDITIONAL INFORMATION ....................................................................................................

22

DEFINITION OF NON-IFRS MEASURES ..................................................................................

23

3

MANAGEMENT'S DISCUSSION AND ANALYSIS - JUNE 2021

NEW INVESTMENTS

On July 30, 2021, the Company closed a US$1,500,000 (CA$1,869,300) follow-on investment in The PYURE Company Inc. ("PYURE"), taking the total amount invested in Pyure to US$ 4,500,000 (CA$ 5,813,400). Under the terms of the investment, Flow Capital will earn a fixed interest on the total investment and received warrants at a strike price determined by the recent equity financing raised by PYURE.

On June 14, 2021, the Company closed a US$3,000,000 (CA$3,642,600) investment in Performio USA Inc. ("Performio"), an Irvine- based SaaS software Incentive Compensation Management solution. Under the terms of the investment, Flow Capital will earn a fixed interest on its investment and will receive a success fee as a percentage of the net proceeds in any transaction involving a change of control at Performio.

On June 9, 2021, the Company closed a US$2,000,000 (CA$2,418,800) investment in Jorsek Inc. ("Jorsek"), a SaaS software company providing a cloud-based, highly scalable, and configurable knowledge management solution for the technical documentation market. Under the terms of the investment, Flow Capital will earn a fixed interest on its investment and received warrants at a strike price to be determined by a subsequent equity financing by Jorsek.

On April 27, 2021, the Company closed a US$2,500,000 (CA$3,124,000) investment in Miniluxe Inc., ("Miniluxe"), a brand platform of clean beauty products and services. Under the terms of the investment, Flow Capital will earn a fixed interest on its investment and received warrants at a strike price to be determined by a subsequent equity financing by Miniluxe.

ROYALTY INVESTMENT BUYOUTS AND SALE OF EQUITY HOLDINGS

On July 20, 2021, Sundial Growers Inc. (Nasdaq: SNDL) ("Sundial") announced the completion of its previously disclosed arrangement (the "Arrangement") whereby Sundial has acquired all of the issued and outstanding common shares of Inner Spirit Holdings Ltd. (CSE: ISH) ("Inner Spirit") for consideration per Inner Spirit Share consisting of (i) $0.30 in cash and (ii) 0.0835 of a common share of Sundial. Flow Capital received $3,624,000 in cash and 1,008,680 Sundial common shares. Flow Capital subsequently sold the Sundial shares received for US$820,318. Including proceeds from sales of Inner Spirit shares earlier in the quarter and the sale of Sundial shares, Flow realized a total of CA$ 4,853,479 from exiting its equity position in Inner Spirit.

On June 30, 2021 ConnectandSell Inc. ("ConnectandSell") completed a buyout of Flow Capital's royalty investment for US$3,000,000 (CA$ 3,715,200). Including the monthly royalty payments received by Flow, this represents a cash-on-cash return of approximately 2.89 times the amount invested over 4 years.

On June 18, 2021 Stability Healthcare Inc. ("Stability") completed a buyout of Flow Capital's royalty investment for US$2,850,000 (CA$ 3,539,415). Including the monthly royalty payments received by Flow, this represents a cash-on-cash return of approximately 2.90 times the amount invested over 3 years.

On May 24, 2021, Interiormark LLC., ("Interiormark") completed a buyout of Flow Capital's royalty investment for US$1,925,000 (CA$ 2,320,973). Including an earlier partial buydown and the monthly royalty payments received by Flow, this represents a cash-on-cash return of approximately 2.74 times the amount invested over 6 years.

On April 3, 2021, Spiridon Technologies Ltd., ("Spiridon") completed a buyout of Flow Capital's royalty investment for US$425,000. (CA$ 533,982). Including the monthly royalty payments received by Flow, this represents a cash-on-cash return of approximately 1.8 times the amount invested over 24 months.

FLOW PRIORITY RETURN FUND LP

On August 6, 2021, the Company announced that it had redeemed outstanding units in the amount of approximately CA$ 3,600,000 and raised approximately US$ 2,800,000 from the issuance of G units of its Flow Priority Return Fund II LP (the "Priority Return Fund II" or "PRF II"). PRF II had introduced new Class G units in June 2021, to provide the flexibility to raise US$ denominated funds and better match currency exposure in the underlying assets and liabilities.

On April 16, 2021, the Company redeemed outstanding F units of its Flow Priority Return Fund II LP in the amount of CA$ 217,000.

IMPACT OF COVID-19

During the first quarter of 2020, there was a global outbreak of COVID-19, which has had a significant impact on businesses worldwide through the restrictions put in place by governments regarding travel, business operations and isolation/quarantine orders.

The observed impact on the financial performance of Flow Capital's portfolio companies has been mixed. Some investee companies have reported that their customers are slowing fulfillment cycles and have delayed new purchases. Initially, there were also reports of some delays in order delivery primarily due to short term supply chain disruptions in Asia, which have since recovered in the recently concluded quarter. On a positive note, investee companies in fields related to healthcare and communications infrastructure, or others that offer certain technology-enabled services and software, have observed increasing demand. Financial stress and business uncertainty are pushing businesses to seek alternate sources of credit, which is helping drive more new deal flow to the Company.

At this time, the true extent of the impact the COVID-19 outbreak may have on Flow Capital is unknown as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the ultimate geographic spread of the disease, and the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put, in place by Canada and other countries to fight the virus. Given the uncertainty around the extent and timing of the future spread or mitigation of COVID-19 and

4

MANAGEMENT'S DISCUSSION AND ANALYSIS - JUNE 2021

around the imposition or relaxation of protective measures, the Company cannot estimate with certainty the impact on its investee portfolio businesses and to its own future results of operations, cash flows or financial condition. Infections may become more widespread and the limitation on the ability to work, travel and timely sell and distribute products, as well as any closures or supply disruptions, may be extended for longer periods of time and to other locations, all of which would have a negative impact on any investee company, and hence the Company's business, financial condition and operating results. In addition, the unknown scale and duration of these developments have macro and micro negative effects on the financial markets and global economy which could result in an economic downturn that could have a material adverse effect on its operations and financial results, earnings, cash flow and financial condition.

The Company has assessed these developments up to the date of this MD&A and has estimated the impact of adjusting and non- adjusting events in its financial statements, under the provisions of IAS 10. The Company will continue to review the impact of COVID- 19 on the business, in the ensuing quarters.

GENERAL DESCRIPTION OF THE BUSINESS

Flow Capital makes cashflow-oriented investments using venture debt and revenue-linked royalty financing structures, in emerging growth businesses (individually, an "investee" and collectively the "investees"). A typical investee is a profitable or near-profitable company, at the cusp of rapid expansion, seeking alternative sources of growth capital without significant dilution from equity financing or restrictive covenants of conventional debt. Flow Capital also provides a range of advisory services to assist investees in fulfilling their growth objectives.

Flow Capital creates shareholder value in three ways. First, by investing in high growth potential businesses using financial structures that provide the investee with capital in exchange for regular interest and principal payments and / or recurring revenue-linked royalty payments. By focusing on cash generating investment structures, the Company ensures a stable, continuous accretion of cash returns on its principal investments. Venture debt typically carries a fixed rate of interest and may or may not be amortizing. The revenue- linked structure earns interest like returns that can expand with the growth of the underlying investee revenue-base. Flow Capital's diverse portfolio of cashflow-oriented investments in investees creates the potential for a stable and growing stream of long-term, recurring revenues.

Secondly, Flow Capital's revenue-linked financing structures are constructed to yield a multiple of the aggregate investment amount on an exit event. Investees typically have an option to buydown or buyout the financing structure, after a minimum tenure, at a multiple of the initial investment. As the investees control the timing of the buyouts, it is not possible to precisely forecast exit events for Flow Capital; however, when buyouts do occur, they can realize material cash-on-cash returns for the Company. Flow Capital's portfolio of diverse royalty contracts provides the potential for numerous royalty buyouts, which could in the future provide cash-on-cash returns in excess of the portfolio's investment cost and recurring revenues from the portfolio.

A third source of shareholder value is long-term returns realized from equity and warrant positions, and from success fees. While Flow Capital does not typically make direct equity investments in its investees, the Company has from time-to-time acquired equity or warrants in exchange for providing an investment or advisory services to investees, or in other cases, such as when an existing financing structure is converted into equity. Further, some investment structures include a success fee payable on a liquidation event for the principals (e.g. a stock exchange listing, change of control, acquisition of the business) for the investee company. Precisely forecasting the future value of equity and warrant positions, or the timing of liquidation events that crystalize the success fees, is not possible for Flow Capital; however, these positions have the potential to create significant shareholder value over the long term, through excess of cash flows from royalty payments, buyouts or buydowns, interest and principal repayments.

In summary, Flow Capital creates shareholder value in three distinct ways:

  • Stable, recurring revenues from a diverse portfolio of cashflow-oriented investments in emerging growth companies, over the duration of an active investment, until an exit event is triggered
  • Gains on exit events including royalty buyouts or buydowns, and
  • Gains from residual value in equity and warrant positions, equity-linked success fees, realized over the longer term.

RESULTS OF OPERATIONS

Three months

Three months

Six months

Six months

ended June 30,

ended June 30,

ended June 30,

ended June 30,

2021

2020

2021

2020

Revenues

$

4,922,505

$

1,834,946

7,263,075

$

2,927,883

Profit/(Loss) for the period

3,065,893

27,895

4,373,849

(341,640)

EBITDA (1)

4,105,927

525,094

5,797,576

680,936

Adjusted EBITDA(1)

4,677,937

339,980

6,025,050

654,417

Free Cash Flow(1)

4,493,359

42,140

4,898,550

(34,611)

Basic Earnings/(Loss) per share

0.0979

0.0007

0.1385

(0.0090)

Diluted Earnings/(Loss) per share

0.0948

0.0007

0.1355

(0.0090)

Book Value per outstanding share(2)

0.6970

0.4912

0.6970

0.4912

Weighted basic average number of shares

outstanding

31,301,401

38,245,539

31,578,533

38,161,813

5

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Flow Capital Corp. published this content on 19 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 August 2021 00:03:08 UTC.


© Publicnow 2021
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Sales 2020 10,5 M 8,49 M 8,49 M
Net income 2020 2,12 M 1,72 M 1,72 M
Net Debt 2020 3,08 M 2,50 M 2,50 M
P/E ratio 2020 7,17x
Yield 2020 -
Capitalization 16,2 M 13,2 M 13,2 M
EV / Sales 2019 3,21x
EV / Sales 2020 1,62x
Nbr of Employees 5
Free-Float 85,5%
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Alex Baluta President, Chief Executive Officer & Director
Gaurav Singh Chief Financial Officer
Vernon F. Lobo Chairman
Catherine McLeod-Seltzer Independent Director
Gordon A. McMillan Independent Director
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