Q2 2021 Rand Capital Corp Earnings Call
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Greetings and welcome to the Rand Capital Corporation second quarter 2021 financial results Conference call. At this time, all participants are in a listen only mode.
You didn't answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded on.
Now I'll turn the conference over Joe's Deborah Pawlowski Investor Relations for Rand capital you may begin.
Thank you and your Molly and good afternoon, everyone. We appreciate your interest and Rand capital and for joining US today for our second quarter 2021 financial results Conference call.
Here with me today are Pete Grum, our Chief Executive Officer, and Dan Penberthy, Our executive Vice President and Chief Financial Officer.
And you should have a copy of the release that crossed the wire. This morning, as well and the slides that will accompany our conversations day, if not they are available on our website at Rand capital Dot com.
If you're following along on the slide deck and would turn to slide 2 I would like to point out 2 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 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 measures. We believe that these will be useful in evaluating our performance you should not consider the presentation of this additional information in isolation or.
Our 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 and and the slides.
So with that if you would turn to slide 3 I will hand and discussion over to Pete to begin Pete.
Thank you Deb and good afternoon, everyone.
We continue to execute our strategy and as we focus on evolving our portfolio from equity investment income.
And investments.
The goal of driving investment income.
And ultimately delivering and higher cash distributions.
For the quarter, our total investment income grew 20%.
And on and 11000.
Net asset value per share of <unk>.
$2 and 51 cash was up 7.
And 7% and 26% from the sequential first quarter and year end period.
<unk>.
The sequential increase largely reflects unrealized appreciation of our investment and an open exchange.
Following their equity financing.
Non.
Strategic outside investors.
From Euro and reflects the increase and fair value.
Our investments and ACB auctions.
Each completed their IPO at the end of March.
During the quarter, we sold our investment and give GAAP.
Software company that we've owned since 2015.
Our equity investment of $616000 netted us a recognized gain of $1.8 million.
And so consistent with our strategy of transforming our portfolio from equity and the debt.
During the quarter, we accrued $1.1 million and non cash expenses.
And at the capital gains incentive fees.
And for primarily result of realized gains from the sale of GAAP GAAP.
And the increase and unrealized appreciation mostly related to open exchange.
The accrual will be adjusted on a quarterly basis.
As a result.
And on a GAAP net investment loss of 31 cents per share.
<unk> expense.
Adjusted net investment income was <unk> 10 per share.
Yeah.
We announced and paying a regular quarterly dividend distribution.
Ted statutory share during the second quarter and.
And at the end of July.
And that's our third quarter dividend and distribution also at the time cents per share.
So far this year, we have declared on dollars 63 per share and dividends and cash.
And the $1.33 per share that was declared at the end of last year.
<unk> and 'twenty 'twenty 1.
If you turn to slide 4.
And discuss the progress we have made regarding the evolution of our.
Our investment portfolio to support our strategy.
A 14% increase on fair value is shown here reflects the impact have often exchange, which now has a fair value of $5.6 million.
And increase of $4.9 million during the year.
The fair value of all of our investments increased by $7.5 million.
At quarter, and our portfolio was comprised of approximately 55% equity investments.
<unk>, 6 and fix rate debt investments and <unk>.
And 9% and dividend paying publicly traded bdcs.
During the quarter, we made $4.6 million and new and follow on investments.
Henry seem to point $4 million from the 1 accident and we just passed and the other loan repayments.
These transactions are highlighted on slide 5.
Yes.
The largest investment turned a corner with for <unk>, Inc, and.
Totaled $3.9 million.
$3.4 million consisted of 12% of term notes and 500000 was on equity.
I T a manufacturers of bright wide broad variety.
Window, covering and components and finished wood treatment, including wood <unk>.
Good.
And fabric changed shutters and blinds for residential and commercial applications.
The follow on investments provided the Madison Avenue all day.
And I'll say, a high and Salon suite business.
And it provides customized fully furnish salon and spa studio space for lease and prime locations per individual stylists barbers massage therapist.
Our technicians and best petitions.
This works as well as for other and of our individualized services.
Such as acupuncture.
Our 667000 and follow on and vessels consisting of about 14% promissory note.
In total we now have $1.8 million investment and Madison up day end of the quarter.
The charts on slide 6 illustrates the diversity of our portfolio and the change and industry mix since 2020 year and.
With the Investor and we recently made the impact on the investments and fair value changes.
Software and healthcare saw notable changes.
And most of the other industries were without a point or so on.
And during that period.
We like the diversity of our portfolio and believe it reduces our exposure to market risk.
Yeah.
Slide 7 lists our top 5 portfolio companies a corner and.
There are 2 new companies on the list.
And exchange with a measurable increase and its fair value and.
And I P a with a new investment.
And the T V's fair about it came down about 1.7 million dollar turned the corner.
Which followed and the significant jump starting the first quarter given their I P O.
Their valuation on our portfolio represents 24% on that asset.
R. A T V holdings consists of 147000.
645 class a common stock and 442935 of class B common stock.
The class a shares are freely tradable.
And the class V are still restricted and non trade evolved through the September 20th 'twenty 'twenty 1.
We have discounted and our valuation due to these current restrictions.
As a reminder, and he proceeds for us above our 163000 and.
Initial investment will be a capital gain and traded and insights as it relates to any dividend or distribution.
With that I'm going to turn it over to Dan to review our financials in greater depth.
Thanks, Pete and good afternoon all.
Slide 9 provides an overview of our financial summary, and our operational highlights.
Total investment income for the quarter was 811000, a 20% increase over last year and does reflect the shift and our portfolio profile to more interest yielding assets.
And total 23 portfolio companies generated income compared with 13 and the prior year period.
This quarter's total investment income also benefited from approximately $137000 of dividend income.
Which was up 45% over last year's second quarter.
This was primarily comprised of dividends received from our BDC investment portfolio.
Total expenses in the quarter were $1.6 million up from 476000 and last year's second quarter the.
The change was largely due to the addition of $1.1 million of accrued capital gains incentive fees during the quarter, which Pete had already discussed.
This incentive fee accrual was a result of the sales give GAAP and the unrealized depreciation on the open exchanges portfolio value.
As a reminder, our capital gains incentive fee accrual under GAAP is calculated using the cumulative aggregate realized capital gains and losses.
And the aggregate net change in unrealized capital appreciation and depreciation at the close of the period.
Operating expenses and the quarter.
Which are non-GAAP financial measure excludes the capital gains incentive fee accrual.
Increased $84000 or 18%, mostly because of the increase and the base management fee payable to <unk> investment adviser, resulting from the increased portfolio asset values.
Net investment loss was 811000 or 31 per share.
Excluding the accrued capital gains incentive fees adjusted net investment income per share was 10 cents compared with 8 cents per share in the prior year period.
Even with the increase in expenses net assets from operations increased $4.5 million.
Dollars 74 per share.
Slide 10 provides a waterfall graph for the change and NAV for the quarter.
The increase was primarily due to the change and the fair value of brand investment and open exchange, which was reflected in the $3.5 million net change in unrealized depreciation on our portfolio investments.
Also contributing to the NAV of the increase was a net realized gain on the sale of give GAAP, which Pete had discussed.
We also paid out approximately 260000 of cash dividend.
Slide 11 highlights the strength of our balance sheet.
We have approximately $16 million and liquidity for new investments. This does include $3 million of availability for borrowing under our Spic's debentures.
The $10.8 million currently owed to the SBA matures over a long multi year period. However that begins next year and September when 3 million is due.
As required to maintain our Ric status, we will continue to distribute at least 90% of our calendar year qualified income to our shareholders in the form of dividends.
Our annualized dividend rate of <unk> 40.
And is based off our initial conservative estimates of our 2021 net investment income and is reviewed quarterly based on our actual year to date GAAP and estimated tax results.
Later in the fourth quarter. We will then review all sources of GAAP and tax based income, including those from short and long term capital gains, which May result in additional 2021 distributions over the previously distributed regular quarterly cash dividend estimates.
The final determination and calculation of our tax based distributable income for each year is finalized in September of the following year in conjunction with our corporate tax return filings.
This is commonly referred to as a spill back dividends.
Our current share repurchase program authorizing the purchase of up to $1.5 million and stock and expires next year and April of 2022.
We did not repurchase any stock during the second quarter.
As we look forward with the support of our strong liquidity position.
We believe we continue to I'm sorry, we believe we can continue to execute our strategy to grow our portfolio.
Drive investment income and support a growing dividend.
That completes our prepared remarks, operator, please open the lines for questions.
And at this time, we will be conducting a question answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad and <unk>.
And tone will indicate your line is and the question queue. You May Press Star 2 if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before Christmas turkeys.
1 moment, please while we poll for questions.
Our first question is from Sam <unk> with <unk>.
And so you are asset management police force.
<unk>, what's your question.
And good morning, Pete and Dan.
The AC VA, which is currently.
Valued at $23.62, and what was the value on June 30 that we use.
And it was well we wrote it down $1.7 million.
And some of that was due to changes and the market value on some of that.
Changes and the discounts that we use.
And kind of on them or lack of because of lack of.
And mobility at a time.
Family.
The class a at June 30 was $24.85, and the class B with $23.61.
Okay. Thanks.
So of the 1 million 60 capital gains.
And that.
We paid.
And 3 million 6 how much is that attributable to the AC VA.
Well I don't think we've paid anything we've accrued for crude right. Okay.
And what amount that we accrued would you say is and for bureau to the.
C V a.
Okay.
Can't do that out on my head, but I'll certainly update.
And I think you're maybe mixing up.
A couple of items here, the $1.6 million of the gains and those.
Those were primarily driven off give gas.
So on.
The realized gains I'm, sorry, there is a capital gains incentive fee, which was a $1.60, which was accrued during the quarter. Most of that is attributable to unrealized appreciation on open exchange and also some offset by depreciation actually and ACB during the quarter because if you remember.
We had HCV valued at $26.79.
At the end of the March 31st quarter and.
<unk> was adjusted downward based on their closing stock price at June 30 to.
The $24 numbers that Pete had mentioned.
Okay, and the 3 million 6.
And that includes the net debt is the total capital gains incentive fee. If in theory, the portfolio were to liquidate and its closing values at June 30, based on the realized gains and losses unrealized activity. Okay. Okay.
So.
Uh huh.
Yeah.
Are we happy.
Do we do we have another AC VA.
And our portfolio.
Share of course, we do Sam.
Okay.
Yeah.
Sam that the portfolio is mark to market quarterly.
And those are the corporation's estimates of what the fair value is at that time period.
We can't get out the Crystal ball until you where things will end up on September 32021, much less where theyre going to be 2 or 3 or 5 years down the road, okay. When the stock ran up.
<unk> 627, what was that attributable to.
We are we were and Advair.
Responsible for that we didn't have any news and there.
And its happen periodically during my life here.
A thinly traded stock and.
And people start talking about it and if we don't have any idea.
There are certainly we've talked to NASDAQ surveillance. There is no information that we've put into the market.
And I don't know, Sam and I didn't get any calls price.
Prior to that or.
After that.
Yeah, Yeah, okay.
And I heard somebody attributed due to another 1.
The Warren Buffett stock.
Berkshire Hathaway.
Did you hear those rumors.
No.
Okay, Alright, well good luck guys.
Thanks, Sam and we appreciate your support.
And our next question is from Brett Davidson, who is a private investor. Please proceed with your question.
Good afternoon.
And I Hope you guys are inside their day.
Yes.
And forget about whether you heard the rumors are they true.
[laughter], you mean and where are the next time the next Warren Buffett.
There you go.
And that's important to answer I wanted to hear is it true.
I got a couple of questions.
So.
And I heard and the presentation and try.
And.
Taking all into account as far as adjusting the dividend.
And.
So it looks like.
Yearly it's gonna be done after the close of the year.
And he adjustment.
And would be done later, but subsequent year.
How will be on play into adjusting the quarterly dividend.
Or.
Are most of these adjustments is going to be done on a 1 time special sometime later in the subsequent year.
Oh.
I'll answer it and I thought I heard it.
Quarterly dividend we believe.
And its design on a conservative basis to match, our net investment income of what we'd see in the future and.
And we forecast out and look at pad.
Bard and the man and the management company analyze that to make sure it's a sustainable.
Dividend and I hope to grow on overtime I'm on it.
Turning it over to Dan to talk about.
And work that goes through because on the capital gains because that's also and I on a tax basis as most of this is so.
So there can be some differences and differences in timing.
Yes, so at the beginning of the year, we we project out what we think were going to happen for the year based on our investment portfolio.
We are on a debt portfolio, we do experience more debt repayment, which often happens unexpectedly which does have a negative effect to deterioration of our income obviously and so we monitor that quarterly and we prepare and analysis and determine where we think the year will end up.
And then so that is done each quarter and then as we get to the fourth quarter will then.
Tightened and those numbers down as we prepare and initial tax estimate based on our actual projected results for the.
For the full calendar year 2021 day.
As Pete mentioned those will have 2 components. The first will be a capital gains component, which will be more kind of just a 1 time type dividend annually, because thats based on capital gains and.
Net capital gains offset by losses, obviously that we may have had.
And then we also look at operating income for the year and we do and initial tax calculation with our third party tax advisors trying to get.
And as precise a tax model as you can on your income because we strive to make sure we distribute out at least 90% of our income on a during the calendar year or in the immediately January following the conclusion of the year and all day. It is attributable to 2021 and.
And then what happens is when the final tax returns are done and hopefully we've done our job well enough with our outside advisors that there's minimal adjustment that's needed for 2021 on a tax basis based on our final tax return calculation.
And that work will be done is being done currently with an expectation of our tax returns being filed typically in September.
And that is what I referred to as debt.
Bill.
And to make sure I spilled back dividend.
And we would think that would be a minor amount, but we don't know until we're till the conclusion of the tax returns and that would be included as a 1 time adjustment to this upcoming quarters tax numbers.
This is now the first time through all these Rick calculation process on a tax basis.
So some of this is still sub debt could change, but that is the fundamental thesis well.
When we look at it quarterly and we tightened it down and in December for the calendar year, and then we go back and prove our numbers and August and September to see if there is a plus or minus adjustment that needs to happen for tax purposes.
Okay.
My My particular interest that is and how that's going to be paid so.
So capital gains and that's going to be a 1 time thing. So I'd say that the estimate for the income that was used to base debt.
10, 10 cent quarterly dividend.
As Ron by by a day, so is that kind of result, and a onetime.
10 said dividend or is that going to be spread over the subsequent.
Subsequent years quarterly.
And you mean.
And I believe that it.
And it has to be paid during that year.
Lose your Ric status.
It would be paid and.
And it's not spread over the next I don't.
Believe it will be spread however, again and I'll stress again that this is and consulting session with our third party Ric tax advisors.
And so.
I need to take that into consideration, but I also believe it would be a onetime adjustment to the dividend and the board and its election can determine whether that be a cash stock or other form distribution.
Well I would think it would need to be a cash wouldn't it if it requires that the distribution of the earnings.
Yes.
And you can see.
And you can do cash.
And do a combination of cash and stock with some limitations there is minimum cash requirements that they have to go out.
But that is all to be discussed at the board level on a quarterly and annual basis.
Alright, so so correct me if I'm wrong here both on the dividend.
For the subsequent year it'll be set prior.
Prior to that at year and.
And it will result, and are up or down adjustment and the quarterly dividend.
And then.
For this spill back and any capital gains those would ordinarily result, and 1 time dividends.
Yes, it would be and adjustment to the third quarter dividend most likely.
Okay, so it'll be adjustment to 1 quarter's dividend.
Got it and so will differentiate when we that's right yeah, we'll make it very clear. This is the regular quarterly bright and here's our 10th plus whatever the adjustment is.
Got it and.
And since we just issued in July.
10, plus the extra amount or where we have to offset the number because the net real number for last year was you know makeup subtract a penny we don't know what the number is until the final tax escalation there.
Yep.
Good.
Okay.
The next question and I'm interested and is there any kind of exit strategy for HCV.
Ah, Yes week and.
And we highlight and look at that with our liquidity upcoming needs, where we think.
Yeah.
This will go.
And of our own little algorithm that we have and yes, we.
Or not and the business of owning public shares and I think over time as we have historically done and we will exit.
So you said over time that means this isn't like and all or non op.
Operation here.
And of course, you wouldn't want us to give you insider information.
No no no no I'm just talking about the character of the transactions I'm not looking for for you know specifics regarding timing, but yes. So here's what areas are our goal is to take equity investments like that.
Liquefy them.
And first time cash into interest.
Same <unk>.
Debentures or loans or.
A variety of other things so that we can create and our goal is to increase.
Our ongoing dividend and.
Part of that has changed and equity into debt.
Yeah and.
And so I mean from the all or none perspective, I mean, this isn't going to be we're gonna decide we're going to exit ACB and it's going to happen you know over the course of a day or a couple of days.
This could be.
On a period that you know runs from.
Beginning on 1 year and at the end of the mix.
Is that fair characterization.
I would.
And I am uncomfortable and characterizing and either way.
And you know we on 500000 shares.
Our $4 billion company and Tom.
And it'll be based on our alternatives to put the money out where.
Where we think the prices compared to where we think it should be.
Alright, let me let me rephrase. It is there a certain time period that this fast do occur over or is there a is there and.
And it just has to occur right.
No.
Okay. So this could conceivably take place over a period of time and that.
Necessarily once you decide to sell it yes. It has.
It has to be completed within a week or whatever.
Right.
Yeah.
Okay.
Are you aware of any other.
Investments that are currently looking to take advantage.
The atmosphere atmosphere, and the public equity markets and is there anybody that you got feedback from that's looking too.
Maybe do on IPO or its something you guys would ordinarily be privy to.
Okay.
Well, we wouldn't disclose it on a conference call.
Got it.
And my last 1.
Is I'm looking at is there can you give some clarity as to what the transaction was.
Yeah.
Precipitated.
And the sale of the gift gab.
And position was it something that they did or you guys were just able to find a buyer for your investment.
Well the company salt and in totality and that was our purpose.
And all.
So that's our proportion that we received.
And as you can imagine Covid hits.
Each company and a little bit different.
And we're on the business of online fundraising.
And they have been having a nice trajectory of growing anyway.
They were and then I had a nice spot and.
And a number of opportunities and.
So to provide liquidity and they picked us on until the whole company was home.
Is that is that information available on line or can you give some idea of what the transaction involved was it private equity or.
It was acquired by it is all available online if you just Google.
Give gab and do a search every action acquires a this is and April 15th from the nonprofit time, just Google who knows you're on the phone.
And to continue shopping a quarters give GAAP net.
Transaction flow.
But I'm sure if you.
You're a flow.
You can find out a lot.
Yeah, Yeah, I think I could probably figure that went out and so thanks much.
<unk> and that's pretty much all I got thanks, guys.
Thank you Brad.
And as a reminder, if you have any questions you May press star 1 on your telephone keypad.
This week and.
And through the question and I would say Q.
Our next question is from Ross Haberman with <unk> investments. Please proceed with your question.
Hello, gentlemen, nice quarter had just just 2 follow up questions.
ACB.
And I come on a little late.
On a stand right you have about 353000 of the B shares currently.
And then.
I am not a price.
And I'm going to tell you exactly we have.
147645 shares of the class a.
And 442935 of the class B.
And when can you registered the beta cell.
Hi, and believes that these sales will become freely tradable and.
After September 20th.
Okay, and if I could.
Excuse me and if I understood it right.
U U.
You Mark.
The whole position of roughly on.
23, and a half of 'twenty 4.
$24 ads at the end of the quarter.
Is that correct or or what.
And Mark.
Using the last 3 trading day, this quarter and class a and we don't have any discount because that's freely tradable and <unk>.
<unk>, we have a 5% discount.
To reflect and slack.
Tom will reflect creates friction.
Oh, I see what you're saying and and older and both of those marks are total your 14 million hole.
Uh huh.
Carrying value you ended the quarter.
Yes, yes, Sir.
Got it okay.
It was all my questions. Thanks again.
Thank you.
Okay.
Yeah.
Yeah.
Yes.
Okay.
Good morning.
Operator.
Yeah.
Okay.
We have reached the end of <unk>.
And have reached the end of the question and answer session and I will now turn the call over to Pete Grum for closing remarks.
Thank you very much and thank you for joining us today and for your interest and Rand capital.
Ethane and all of you on our third quarter, 2021, and resolved and November and have a great day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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