Q4 2022 Rand Capital Corp Earnings Call

Greetings and welcome to <unk> Capital Corporation fourth quarter 2022 financial results at this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now.

I will turn the conference over to Craig Mihalik Investor Relations. Thank you you may begin.

Yeah. Thank you and good morning, everyone. We appreciate your interest in Rand capital and for joining US today for our fourth quarter full year 2022 financial results Conference call.

On the line with me are Dan Penberthy, our President and Chief Executive Officer, and Margaret breaks out our executive Vice President and Chief Financial Officer.

Copy of the release and slides that accompany our conversation is available at Rand capital Dot com.

Following along the slide deck, please turn to slide two where I'd like to point out some important information.

As you are likely aware, we may make some forward looking statements during this presentation.

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 in the earnings release and other documents filed by the company with the Securities and Exchange Commission.

Documents can be found on our website or at SEC Gov.

During today's call will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance you.

You should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting principles.

We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's earnings release.

Please turn to slide three and I'll hand, the discussion over to Dan Dan.

Thank you Craig and good morning, everyone.

The fourth quarter capped off a strong year for brand as we continue to execute our strategy by focusing on current cash yields in order to achieve our income producing goals.

We advanced our investment portfolio composition towards more debt instruments with the addition of four interest yielding investments over the past year.

In total our debt portfolio now makes up more than half of our total portfolio mix sitting at 56% compared with 46% at the end of 2021.

We delivered total investment growth of 40% for the quarter and over 41% for the full year period.

Which reflected increase in interest income from portfolio companies and higher portfolio dividends.

While we have made great strides building out our portfolio that is delivering strong total investment income growth.

Equally focused on prudent expense management, which was demonstrated in the measurable improvements of our net investment income per share of 48 cents for the quarter.

Up four times from last year's fourth quarter.

For the full year net investment income per share was $1 72, compared with a loss of $1 one per share in 2021.

These improved results enabled us to increase our return to shareholders. During 2022, we paid out total dividends of 83 per share, which represents an increase of nearly 90% over 2021 distributions.

This included raising our quarterly dividend cash by 33% or <unk> <unk> per share.

Bringing it to <unk> 20 per share for the fourth quarter of 2022.

And at the same time paying a supplemental dividend of <unk> 18 per share.

During the year, we invested over 7 million across seven transactions, which largely consisted of interest yielding assets.

I will highlight our fourth quarter investments in a moment.

If you turn to slide four you can see our portfolio mix between debt and equity and the changes during the past year.

Fixed rate debt net debt investments made up 56% as we made progress in shifting our investment portfolio composition towards more debt instruments.

And we do expect that trend to continue as we further execute upon our strategy.

The rest of the portfolio comprised of 34% and equity investments in private companies and.

And 10% in dividend paying publicly traded bdcs and our HCV auction securities.

The fair value of our investments totaled approximately $61 5 million expanding 3% from the sequential 2022 third quarter.

We saw some contraction of the fair value when compared with 2020 one's year end, which was primarily due to the BDC stock sales made during the year and lower valuations for ACB options and open exchange helping.

Helping partially offset this decrease with our new and follow on investments.

As of December 31, 2022, our portfolio consisted of investments in 29 companies down five since 2021.

We exited two BDC investments, along with social flow Empire, Mike Rescission, and new monarch during the course of the year.

The one New addition, with foodservice supply, which was done during the fourth quarter and as highlighted on slide five.

We utilize existing cash and our senior secured revolving credit facility to fund these investments.

$3 1 million investment in foodservice supply.

Instead of a $2 5 million of senior subordinated debt at 12% interest and 600000 of preferred equity.

FSS is out of Utah and provide design distribution and installation services for commercial kitchens, as well as renovations and new commercial builds.

We also made a follow on that investment of $590000 in sign ups and instrument instrumentation company that is specializing in portable analytical instruments, which have the ability to identify chemical compounds minerals and elements.

We have been an investor in sign ups for nearly 10 years, consisting of both debt and equity investments along the way.

Our total fair value of these investments was $5 $2 million at year end.

We have also made a $194000 follow on equity investment into <unk> Billiards Corporation, raising the total fair value of this investment to $5 9 million, which.

Which was largely comprised of five six in that that does accrue at 14% at 14% includes a 12% current Fe and a 2% Pic accrual.

Fiber to the retail company that specializes in billiards equipment and accessories and its fairly typical of the types of investments which were making these days.

We had one exit during the quarter. This was empire genomics, which repaid for $1 $4 million loan.

The charts on slide six illustrates the diversity in our portfolio and the change in industry mix year over year.

Given the impact of investments sales and fair value changes, we saw the largest changes in the software sector, which decreased 10% while professional services increased to 31% and manufacturing also increased to 23%.

We continue to value this diversity of our portfolio as we do feel that this mitigates the ultimate market risk impact.

Slide seven does lift out our top five portfolio companies at year end, which represents almost half of our total portfolio.

Since last quarter <unk> has moved into the top five ranking as the number three spot given our fourth quarter investment into the company.

Hilton remains the largest fair value investments and both open exchange and Ikea had moved out of this top five given our valuation changes during the quarter and also we had shifts in DSD to the Forest Park and also moved <unk> into the top five portfolio mix.

At year end, we still held nearly 320000 shares of ACB and represents about 4% of the total portfolio of fair value.

With that I'll turn it over to Margaret for a review of our financials in greater depth.

Thanks, Dan and good afternoon, everyone I will start on slide nine and 10, which provide an overview of our financial summary, and operational highlights for the 2022 fourth quarter and full year period.

Total investment income for the quarter with over one 7 million up 40% over last year.

And by increased.

Interest income from the four new debt instruments originated over the last year and higher dividend income.

For the full year total investment income grew over 41% to $5 8 million for similar reasons as the quarter.

The number of portfolio companies contributing to investment income was 24 at year end.

Total expenses were approximately 371000 during the fourth quarter compared with 923000 and the carrier quarter.

This decrease reflects lower interest expense and a credit of accrued capital gains incentive fees given the decrease in unrealized depreciation on our publicly traded securities and.

An open exchange and valuation changes.

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.

Excluding the capital gains incentive fee adjusted expenses are non-GAAP financial measure.

Were approximately 539000 down 36% from the prior year period due to continued expense management and lower interest expense.

Full year 2022, total expenses decreased to $1 1 million from $6 7 million, partially due to an approximate $5 $3 million swing within the capital gains incentive fee accrual.

Specifically 2021 included $4 2 million of capital gain incentive fees. There is in 2022 and included a reversal of $1 million of these themes.

The total expense decrease.

Flex the elimination of interest expense payments for the SBA obligation, which was paid in full in November 2021.

When looking on an adjusted basis, which is a non-GAAP financial measure 22, 2022 expenses were down 12% year over year.

Fourth quarter net investment income was approximately $1 2 million or <unk> 48 per share compared with approximately 320000 or <unk> 12 per share in the prior year quarter.

On an adjusted basis, which is a non-GAAP financial measure net investment income more than doubled $2 41 per share.

For the full year period net investment income per share was $1 72, compared with a net investment loss of $1 one per share in 2021.

Excluding the capital gains incentive fee accrual, which is a non-GAAP financial measure adjusted net investment income per share was $1 31 for 2022 again more than double the 2021 results.

Slide 11 provides a waterfall graph for the change in net asset value for the year.

December 31, 2022, net assets were 57 7 million down 5% from year end 2021.

The change reflects the new and follow on investments.

Offset by fair market value changes across a number of portfolio companies and the over $2 1 million in dividend distributions to shareholders during the year.

As a result, the net asset value per share was $22 36.

Compared to $23 54 per share at December 31, 2021.

Slide 12 highlights our strong balance sheet cash at year end was approximately one 4 million compared with 834000 at the end of 2021.

We still held approximately $6 4 million in liquid BDC and ECB auction shares, which can provide near term funding capital for an investment as we have demonstrated in past periods.

Also as a reminder, during the second quarter of 2020 to be closed on a five year $25 million senior secured revolving credit facility at.

At year end, we had outstanding borrowings of $2 6 million, which was used to fund the investments that Dan highlighted earlier.

During 2022 ran paid a total of $2 1 million of cash dividends, which includes the four regular quarterly dividends and the year end 2022 supplemental dividend.

Our portfolio transformation transformation to include more income producing investments is expected to support an increased dividend level over time.

In line with that expectation, we announced during the fourth quarter of 2022 that we raised the regular cash quarterly cash dividend by 33% to 20 per share.

And February 28, 2023 ran declared its regular quarterly cash dividend distribution of <unk> 20 per share for the first quarter of 2023, the dividend will be distributed on or about March 27, 2023 to shareholders of record as of March 13th 2023.

In April 2022, the board of directors approved a new share repurchase plan.

Which authorizes the company to repurchase shares of our outstanding common stock with an aggregate cost of up to $1 5 million during the past year, we did not repurchase any shares.

With that I will turn the discussion back to Dan.

Thanks Margaret.

We entered 2023 with momentum on our side.

We believe we have a strong and flexible balance sheet that is supported by multiple sources of capital.

Beyond our cash on hand, our line of credit availability. We also still have highly liquid publically traded ACB and our BDC stocks potential proceeds from portfolio exits.

And of course, our perspective investment income.

We are actively building a pipeline of investment opportunities in order to put this capital to work.

Our focus on investing in higher yielding debt instruments and related equity investments in these privately held lower middle market companies, which have a committed and experienced management team across a broad variety of industries.

This may include <unk>.

Follow on investments in existing portfolio of companies as well that continue to demonstrate and perform and exhibit great and exceptional growth potential.

Overall, we are excited about our future and believe we can continue to execute our strategy to drive investment income growth in order to enable us to further grow our distributable dividends over time.

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

We look forward to updating you on all of our first quarter 2023 results, which will be reported in may.

We hope you have a great day.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

Okay.

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