Q3 2021 Rand Capital Corp Earnings Call

Greetings and welcome to the <unk> Capital Corporation third quarter, 2021, and financial results Conference call. At this time, all participants are in a listen only mode.

<unk> 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 as a reminder, this conference is being recorded.

Now I'd like to turn the call over to Craig Mahalik of Investor Relations. Thank you you may begin.

Yes, Thank you Darryl and good afternoon, everyone. We appreciate your interest in Rand capital and joining us today for our third quarter of 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.

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

If you are following along in the slide deck, please turn to slide two.

I'd like to point out some important information around our safe Harbor as you are 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.

Can find a summary of these risks and uncertainties and other factors in the earnings release as well as 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'll also discuss some non-GAAP 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 as a substitute for results.

In accordance with GAAP, we've provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and in the slides so with that if you'll turn to slide three and I'll hand, the discussion over to Pete to begin Pete.

Thank you Craig.

Good afternoon, everyone.

Before we get into the financials and our results I wanted to take a moment to acknowledge they yesterday I'll never fourth.

That marked 50 years of Rand capital trading on the NASDAQ.

We were one of the inaugural group of people that trade at on that.

We celebrated this milestone earlier and shaped by ringing the closing valid takes change.

I have probably served as CEO for 25 of these years.

A period in which we transformed brand from a small venture capital business, so growing dividend paying business development company.

Part of my planned retirement, we announced about two weeks ago, our leadership and board transition that I believe will allow us to continue to execute on the strategic plan.

Effective December 1st and will take over as President and CEO.

And Margaret break Tao.

Our VP of finance will be promoted to executive Vice President CFO, and Treasurer and secretary of the company.

Additionally, Robert Basketball Theater, Agate Cowboy aren't as board chair.

It's been my honor to serve as CEO for the last 25 years and I will continue as vice chair of the board.

I look parts of supporting Diana Margaret as they continue our strong legacy and tank Grand to the next level.

The success of our strategy to transform Rand into an income producing.

Business development company is evident in our results.

We continue to move our portfolio from equity investments and the income producing investments.

As a BDC, we intend to drive investment income and grow our shareholder dividends.

Let's turn to slide five and we will get into our results.

For the quarter, our total investment income grew by 37%.

So 1 million over the prior year period.

Net asset value per share of $22 31 as well.

It's also up 4% sequentially and 31% for a year to date period.

The sequential increase largely reflects the realized gains from the sale of our equity positions and some Tivo Corporation.

And then an increase in unrealized appreciation.

Our investment in Tulsa technology.

All set by a reduction of HCV auctions.

This increase from year end was mostly due to the fair market value increases in divestments and hoping exchange tell.

Telephone technologies and a T V auctions.

As previously announced at the end of September we exited our position in sand Tivo had a health care company Randy originally invested in 2018.

As a result, we recognized a gain of $1.6 million during the third quarter.

This is consistent with our strategy to exit our equity positions.

Opportunities exist and reinvest those proceeds into income producing vehicles.

During the quarter, we incurred 454000 of capital gains incentive fee accruals.

Which were primarily a result of the realized gains from the sale of sudden tivo and an increase in unrealized appreciation also related to itself.

As a result, we reported a GAAP net investment income of two cents per share.

Excluding the capital gains incentive fee accrual adjusted net investment income was 27 per share compared to 11 cents per share in last year's period.

We paid our regular quarterly dividend of 10 pence per share turning to the third quarter.

And so far this year, we have paid to shareholders.

<unk> 63 per share in dividends and clothing of dollars 33 per share that was paid in January.

After the quarter closed we have paid off for $11 million S. P. I C loan with an attached to simplify our regulatory lending portfolio reporting process.

Our $15 million in highly liquid BDC, an ACB, a sock and they continue and liquidity of Rand's legacy investment portfolio is expected to provide the near term capital for investments.

Ultimately, we believe our actions will provide more investment capital to drive our growth.

If you turn to slide six we can discuss the progress we have made regarding the evolution of our investment portfolio to support our strategy.

The 55% increase in fair value. This share reflects valuation adjustments had no investments offset by sales and payoffs.

At quarter end, our 34 portfolio companies comprised of approximately 40% of fixed rate debt investments 35 per cent and equity investments, 16% of the Navy's P. C V stock and 9% and dividend paying publicly traded.

D CS.

During the quarter, we made one new investment of $3 $8 million.

And received $3 $8 million from one axis, we just passed another alone right.

Prepayments transactions highlighted.

In slide seven.

They invest I wasn't dealers a lot solutions and design, our DST had a total of $3 8 million consisting of $2.7 million and 12% of term notes and 1.1 million of equity.

D. S. T is a proven leader in fixed operation design development and equipment specification and installation as well as the project manage for auto dealers.

On the bottom half of the slide lets say exit some fabs.

We saw 50000 shares of 18 during the quarter at an average price of $19.44 per share for total process proceeds excuse me at 972000.

This represented a gain of approximately 958000.

As a reminder, any proceeds for us above our 163000 initial investments will be at <unk>.

The game had traded as such as it relates to any dividend or distribution.

At quarter end, how many T V holdings consisting of 540000.

580 shares of class, a common stock which is freely tradable.

Yes.

The chart on slide eight illustrates the diversity of our portfolio and the change in the industry mix since climbing 20 year end.

With the investment we recently made the impact of accents and fair value changes.

Professional services and automotive so notable changes, but most of the other industries were relatively consistent with that of pointed to.

We like the diversity of our portfolio and believe it reduces our exposure to market risk.

Slide nine less our top five portfolio companies as of quarter end.

Which represent more than half of our total portfolio assets.

These five are the same as the second quarter ranking, although Tulsa and moving up to the second spot after a fair value adjustment during the third quarter.

Based on our significant equity financing the company received.

And C V maintained the top spot.

So it's fair value came down $4.3 million during the corner.

Their valuation of our portfolio represents 16% of our net assets.

With that I'm going to turn it over to Dan to review our financials in greater depth.

Yeah.

Thanks, Pete and good afternoon, everyone.

Slide 11 provides an overview of our financial summary, and our operational highlights.

Total investment income for the quarter was just north of 1 million or 37% increase over last year and reflects the continued shift in our portfolio profile to more interest yielding assets.

In total 23 portfolio companies generated income compared with 20 in the prior year prior year period.

This quarter's total investment income also benefited benefited from approximately $230000 of dividend income, which was up 146% over last year's third quarter.

This was primarily comprised of dividends received from our BDC investment portfolio and our software.

Total expenses in the quarter were 962000 up from 456000 in last year's third quarter, largely reflecting the capital gains incentive fee accrual, which Peter has already discussed.

Again as a reminder, our capital gains incentive fee accrual under GAAP is calculated using the cumulative aggregate realized capital gains and losses in the aggregate net change in unrealized capital appreciation and depreciation at the close of the period.

Operating expenses, which is a non-GAAP financial measure and excludes the capital gains accrual increased $52000 or 11%.

Mostly due to the increase in the base management fee payable to <unk> investment adviser, resulting from the increased portfolio asset values.

Even with the increase in expenses net assets from operations increased to $2 3 million or <unk> 90 per share.

Yeah.

Slide 12 provides a waterfall graph for the change in N V for the year to date period.

This increase was largely due to the change in fair value of ramped investment in open exchange Tilson and D. C D.

Which were reflected in the 13 million net change in unrealized depreciation on our portfolio investments.

Also contributing to the increase was the net realized capital gains on the sale of some tivo, which Pete has already discussed and our second quarter sale of gift gap.

We have also declared and paid out approximately 770000 of cash dividends.

Slide 13 highlights the strength of our balance sheet.

Cash and cash equivalents at the end of the quarter was $13 3 million, an approximate 22% of net assets.

As Pete mentioned earlier this week, we used our excess liquidity to repay our $11 million of SBA obligations.

In addition ran submitted a request to S. P. A to surrender its S. P I see license.

This will also terminate the availability of the $3 million of available Undrawn SBA leverage.

We believe that these actions.

We'll simplify our regulatory reporting and our lending processes by eliminating these heavy regulatory burdens of operating as an S. P. I C.

As highlighted in the table on the slide we have well over $15 million in liquid BDC stocks E. C V stock, which can provide near term funding capital for these investments.

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.

Ran has distributed 10 cents per quarter through September 30th which was based off our initial conservative estimates of our 2021 net investment income.

We do review these calculations quarterly based on our actual year to date, GAAP and estimated tax rate tax results.

I will note that during the fourth quarter, we expect to record.

Significant one time write off costs related to the SBA debt repayment and final interest payment and this is all part of the SBA debt repayment process.

Later this fourth quarter, we will again review all sources up 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 regularly quarterly 30 cents of cash dividends that were paid out.

The final determination and calculation of our tax base distributable income for each year is finalized in September of the following year in conjunction with our tax return filings.

This is commonly referred to as the spill back to dividend.

Our current share repurchase program has authorized the purchase of up to $1 5 million in stock and expires next year in April of 2022.

We did purchase 1148 shares during the third quarter at an average purchase price of $18 nine per share total cost of about $21000.

That completes our prepared remarks.

Operator, please open the line for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue you.

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

As a reminder that is star one if you would like to ask a question.

There are no questions at this time I would like to hand, the call back over to management for any closing comments.

Thank you everyone for joining us on today's call and for your interest in Rand capital.

As always please feel to reach out to us at any time and we look forward to talking with you all again after our fourth quarter 'twenty 'twenty. One results. Thank you for your partition participation and have a great day.

This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.

Have a great day.

Okay.