Q1 2021 Rand Capital Corp Earnings Call

Greetings and welcome to the Rand Capital Corporation first quarter 2021 financial result.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and.

As a reminder, this conference is being reported.

It is now my pleasure to introduce your host Deborah Pawlowski Investor Relations for Rand capital. Thank you you may begin.

Thank you and good afternoon, everyone. We appreciate your interest and Rand capital and for joining US today for our first quarter 2021 financial results conference call.

And in line with me are Pete Grum, our Chief Executive Officer, and Dan Penberthy, Our executive Vice President and Chief Financial Officer.

You should have a copy of the release across the wire. This morning, as well as the slides that will accompany our conversation today if not they are available on our website at Rand capital Dot com.

If you are following along on the slide deck and would turn to slide two I would like to point out from important information and you are likely aware, we may make some forward looking statements. During this presentation and during the question and answer session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from.

And where we are today you can find a summary of these risks and uncertainties and other factors and the earnings release as well as and other documents filed by the company with the Securities and Exchange Commission.

These documents can be found on our website or at SEC Gov.

During today's call. We will also discuss some non-GAAP financial measures. We believe that these will be useful in evaluating our performance you should not consider the presentation of this additional information and isolation or the substitute for results in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures.

And the tables that accompany today's release with that please turn to slide three and I will hand and discussion over to Pete to begin Pete.

Thank you Dan and good afternoon, everyone.

We started the year and a strong and out as we continue to transform our portfolio from equity investments income producing investments.

For the quarter the number of companies contributing to investment income nearly doubled over the prior year period.

Resulting in total investment income growing approximately 70% to $1 million or 39 cents per share.

Net asset value was up 16, 9% to $20 and 87%.

For sure and that's primarily attributable to the increase and fair value of our investment and a T V auctions, which completed their IPO at the end of March.

We did report and a GAAP net investment loss of 84 cents per share.

And so because during the corner, we accrued $2 6 million and non cash expense.

Related to capital gains incentive fees.

And were primarily attributed to HIV unrealized appreciation.

Absent this expense adjusted net investment income was <unk> 10 per share demonstrating the success of our transformation into an income producing dividend paying BDC.

As you know, we announced and paid our first regular quarterly dividend of <unk> 10 per.

Per share during the first quarter.

And as a combination of our transformation that began in 2019.

The end of April and we announced our second quarter, Devon and also at <unk> 10 per share.

And here, we have paid out $1 53 per share and dividend and.

Clothing, and the dollars 33 per share.

Declared at the end of last share.

Please turn to slide four and we can discuss the progress we have made regarding our evolution of our investment portfolio to support our strategy.

The 31% increase and fair value shown here demonstrates the impact of ACB IPO.

We first invested 163000 and HCV in 2016.

And now has a fair value of over $15 $8 million or shares are now restrict and until September 20th of 2021.

And corner and the portfolio with copper and compromise of approximately 56 per cent and equity investment.

34% and fixed rate debt investments and 10% and dividend paying publicly traded bdcs.

And a lot of activity and our portfolio for the quarter.

And it makes 657 million and no investment, which included 456 and no portfolio companies.

We also received $4 5 million from exits and loan repayments.

Turning to slide five you can see why we invested the quarterly breakout of $6 $7 million.

The largest investment during the quarter was $2 $8 million term loan with warrants from seaborne and failure to supply.

Founded in 1998 favorites carries a wide variety of premium failure and equipment and as the largest distributor of <unk>.

And her billiard cues and the U S.

They have developed front and the leading e-commerce platforms for the billiard category and are known for their quality products and service.

With a capital infusion favorites is planning to expand our social media presence and grow with e-commerce marketing and customer service platform.

And also a participant and with other investment partners to provide acquisition and growth.

Capital and connection with the formation of a full service <unk>.

Fire protection platform under the name of BMP slots and Holdco and the merged companies have offices in Jacksonville, Florida, and Waldorf, Maryland, and offer a suite event and fire protection products and services for the commercial and residential facilities.

Our 1.8 million investment consisted of subordinated debentures and preferred equity.

Lastly, we increased our investments and publicly traded Bdcs, which total approximately $2 $1 million.

These investments continue to provide dividends.

And put our capital to work and are illiquid instruments that we can readily access for other opportunities as we find them.

The fair value of all our bdcs investments at quarter and was $5 $1 million.

Yeah.

Slide six illustrates the diversity of our portfolio and the change and industry makes sense 2020.

So with the investments from recently made and the impact of invest of accents software and health care saw a sizeable increase.

And while manufacturing declined to 10 per cent of the total portfolio.

D C is now make up 10%.

Flex and recent investments and changes in fair value.

We believe that this diversity of our portfolio reduces our exposure to market risk.

Slide seven lists our top five portfolio companies a corner and.

So you were true place S M G and save paying off turned out and exited the portfolio.

There were no changes within the ranking of the top four.

Besides a measurable increase and ACB as fair value given their I P O.

Their valuation and our portfolio increased to $15 8 million and represented 29% of our net assets.

As I mentioned Rand was and early investor and HCV acquire and theories seed to preferred stock.

In August of 2016.

Following the IPO Rand now 590000, and 580 shares of K C V common stock.

And any precedent for us above our initial investment will be a capital gain and treat it as such as it relates to any dividend or distribution.

Well theyre very impossible changes from time, and we are now subject to a 180 day lockup agreement.

With that I will turn it over to Dan Penberthy to review our financials in greater depth.

Thanks, Pete and good afternoon, everyone.

Slide nine provides an overview of our financial summary, and operational highlights.

Total investment income for the quarter was $1 million and approximately 60 per cent increase over last year and.

And reflects the shift and our portfolio profile to more interest yielding assets as Pete explained.

The quarters income also benefited from approximately $180000 of OID income original issue discount, which resulted from loan payoffs as well as the large annual dividend received from our portfolio company.

Total expenses in the quarter were $3 $2 million up $2.6 million, which reflected the addition of accrued capital gains incentive fees during the quarter.

These were primarily attributable to E C d's unrealized depreciation.

The capital gains incentive fee accrual under GAAP is calculated using the cumulative aggregate realized capital gains and losses.

And then adjusting for the aggregate net change in unrealized capital appreciation or depreciation at the close of the period.

It's important to highlight that while we record the GAAP expense related to the capital gains and see no liability or payment is actually do or payable to the external manager and.

Until and actual realized exit of curves.

Net investment loss was $2 $2 million or <unk> 84 per share compared with income of $538000 or 33 cents per share and the prior year period.

Last year's first quarter included a $419000 income tax benefit due to Rand conversion to erect a regulated investment company as well as a tax benefit received under the Federal Cares Act.

Excluding the accrued capital gains incentive fees.

Adjusted net investment income per share was <unk> 16 cents for the first quarter of 2021.

Even with the increase in expenses net assets from operations increased $8 million or $3 and <unk> 11 per share again, largely impacted by E. C vs valuation change.

Slide 10 provides a waterfall graph for the change and N V for the quarter.

The increase was due to the change in fair value of brands investment and AC D.

Which was reflected in the $9 9 million net change in unrealized depreciation and investments.

Also contributing to the and the increase was a net realized gain and the sales and disposition of investment of $311000.

We also did pay out and approximately $260000 of cash dividends.

Slide 11 highlights the strength of our balance sheet.

We have approximately $18 million and liquidity for new investments, which is comprised of $14 9 million net of cash and also our undrawn SBA commitment of $3 million, which is available to invest and as we continue to transition our portfolio.

The $11 million currently owed to the SBA matures over a multiyear period that begins next year 2022 went $3 million is due.

With the support of our strong liquidity position. We believe we can continue to execute our strategy as we grow our portfolio and further drive investment income.

We will continue to distribute a large part of our income to our shareholders in the form of cash dividends as required by our Ric status.

This includes the first and second quarterly dividends of <unk> 10 per share that we announced in February and April.

Our annualized dividend rate of 40 cents is based off our conservative estimates of GAAP net investment income for the year.

The final determination and calculation of a tax basis distributable income will occur at the close of the year and we'll also then consider net investment income.

Our net realized gains or losses, we may recognize during the year.

In addition to any other needed tax adjustments.

Also we did renew our share repurchase program during the quarter authorizing the purchase up to $1.5 million and stock.

This updated plan expires next year and April of 2022.

Lastly, slide 12 summarizes our overall funds position.

As we look forward, we have a number of focused action items, many of which are a continuation of the strategic initiatives that have been underway as part of our transformation.

Well, we believe we have a strong income producing portfolio and.

Equity investments that provide potential for additional capital gains.

We will continue to prudently and adjust our portfolio mix to drive returns and to support a growing dividend.

That completes our prepared remarks.

Pete Let's open up the line for questions.

Okay.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

That's a good question you May press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue.

You May press Star two if you would like to remove your question from the Q4 participants using speaker equipment and it may be necessary to pick up your handset before pressing the star key one moment, while we poll for questions.

There are no questions in the queue I'd like to hand, the call back to Mr. Grum for closing remarks.

Thank you for joining us today and for your interest and Rand capital.

We look forward to updating and all of you on our second quarter results in August and have a great day and stay safe.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.