Q3 2023 Rand Capital Corp Earnings Call

Speaker 1: Greetings and welcome to Rand Capital Corporation, third quarter fiscal year 2023 financial results.

Greetings and welcome to Rand Capital Corporation third quarter fiscal year 2023 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.

Speaker 1: If anyone should require operator assistance during a conference, please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce Craig Mahalik Investor Relations. Thank you you may begin.

Speaker 1: It is now my pleasure to introduce Craig Mahalik, investor relations. Thank you.

Speaker 2: Thank you and good afternoon everyone. We appreciate your interest in Rand Capital and for joining us today for our third quarter 2023 financial results comp.

Thank you and good afternoon, everyone. We appreciate your interest in <unk> capital and for joining US today for our third quarter 2023 financial results Conference call.

Speaker 2: On the line with me are Dan Pemberty, our President and Chief Executive Officer, and Margaret Brekko, our Executive Vice President and Chief Financial Officer.

On the line with me are Dan Penberthy, our President and Chief Executive Officer.

Hey, Margaret Bracco, our executive Vice President and Chief Financial Officer.

Speaker 2: A copy of the release and slides that accompany our conversation is available at RandCapital.com.

A copy of the release and slides to accompany our conversation is available at Grand capital Dotcom.

Speaker 2: If you're following along in the slide deck, please turn to slide two, where I'd like to point out some important information.

If you're probably along in the slide deck, please turn to slide two.

I'd like to point out some important information.

Speaker 2: As you are likely aware, we may make some forward-looking statements during this presentation.

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

Speaker 2: 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.

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.

Speaker 2: 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.

Can find a summary of these risks and uncertainties and other factors in the earnings release and <unk>.

Other documents filed by the company with the Securities and Exchange Commission.

Speaker 2: These documents can be found on our website or at fcc.gov.

You got your hands can be found in our website or SEC Gov.

Speaker 2: During today's call, we'll also discuss some non-GAAP financial measures. We believe these will be useful in a...

During todays call well also discuss some non-GAAP financial measures.

We believe these will be useful in evaluating our performance.

Speaker 2: should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting.

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.

Speaker 1: We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's earnings relief. With that, please turn to slide 3 and I'll hand the discussion over to Dan. Dan? Thank you, Craig.

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

With that please turn to slide three and I'll hand, the discussion over to Dan Dan.

Thank you Craig and good afternoon, everyone.

Speaker 1: There was a recurring theme as our results once again reflected the strength and execution of our strategy as we continue to deploy capital largely centered on high quality debt investments.

There is a recurring theme as a result, once again reflected the strength and execution of our strategy.

We continue to deploy capital largely centered on high quality debt investments.

Speaker 3: Total investment income grew 12% for the quarter, and it was driven by the sustained growth in interest income from our portfolio companies.

Total investment income grew 12% for the quarter and it was driven by the sustained growth in interest income from our portfolio companies.

Speaker 3: For the quarter, net investment income per share was 31 cents, which was down year over year, the contributing factor of which affecting this decline were higher expenses tied to our debt financing, which has been put to work to fund future growth.

For the quarter net investment income per share was 31 cents, which one.

Was down year over year.

Contributing factor of which affecting this decline were higher expenses tied to our debt financing.

I would put to work to fund future growth.

Speaker 3: Our net asset value per share of $23.77 was relatively flat for the quarter, but up 6% since year end 2022.

Our net asset value per share of $23 77 pence was relatively flat for the quarter.

But up 6% since year end 2022.

We've completed two new investments during the quarter they totaled $7 8 million.

Which I will highlight in a few slides.

Speaker 3: and even after those investments, we continue to end the quarter with significant liquidity to put to work for future investments.

And even after those investments we continue to end the quarter with significant liquidity to put to work for future investments.

Speaker 3: The company paid a quarterly cash dividend of 25 cents per share during the third quarter.

The company paid a quarterly cash dividend of 25 cents per share during the third quarter we.

Speaker 3: We believe that our deal flow and unique position in the market will continue to support future dividends and following past practice, we expect to announce our fourth quarter dividend in early December .

We believe that our deal flow and unique position in the market will continue to support future dividend and following past practice, we expect to announce our fourth quarter dividend in early December.

Speaker 3: If you turn to slide 4, you can see our portfolio mix between debt and equity and the changes during the past quarter.

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

Speaker 3: At quarter end, our portfolio consisted of investments with a fair value of nearly $75 million across 30 portfolio businesses. This is up one given the two new investors.

At quarter end, our portfolio consisted of investments with a fair value up nearly $75 million across 30 portfolio businesses. This is up one given the two new investments and was offset by one of our former equity investment that was previously listed at.

Speaker 3: and was offset by one exit of a former equity investment that was previously listed at no fair value and which provided a tax law.

No fair value and which provided the tax law.

Speaker 3: The portfolio comprised approximately 63% in fixed rate debt investments, which has continued to increase since the past quarter and the year ended 2022.

The portfolio comprised approximately 63% and fixed rate debt investments.

She has continued to increase since the past quarter and the year ended 2022.

Speaker 3: The annualized weighted average yield of those debt investments was 13.45%.

The annualized weighted average yield of those debt investments was 13.45%.

Speaker 3: The remaining mix at the end of the quarter comprised 27% in equity investments in private companies.

The remaining next at the end of the quarter comprised 27% and equity investments in private companies.

Speaker 3: and 10% held in publicly traded equities, primarily consisting of our other BDC investments and our ACB auction stocks.

And 10% is held in publicly traded equities.

Merrily consisting of our other BDC investment.

And our ACB auction stock.

Speaker 3: At quarter-end, we still held almost 195,000 shares of ACV, which does represent approximately 4% of our portfolio's total fair value.

At quarter end, we still held almost 195000 shares at a C D, which does represent approximately 4% of our portfolio's total fair value.

Speaker 3: We had our ACB shares valued at $15.18 at quarter end.

We had our AC b shares valued at $15.18 at quarter end.

Speaker 3: and we will continue to evaluate these holdings as we consider our future liquidity needs.

And we will continue to evaluate these holdings as we consider our future liquidity needs.

Speaker 3: As I mentioned, during the quarter we completed two new investments that fit well within our investment objectives and demonstrate our ability to attract opportunities in the current market environment. These transactions are high in the market.

As I mentioned during the quarter, we completed two new investments that fit well within our investment objectives and demonstrate our ability to attract the opportunities in the current market environment.

These transactions are highlighted on slide five.

The largest investment totaled 4.1 million to all about people.

Speaker 3: The largest investment totaled $4.0 million to all about people. This included $3 million of senior debt at a 16% interest rate, which also includes a PICC, or payment in kind, interest.

That's included 3 million of senior debt at a 16% interest rate, which also includes a pick or payment in kind interest.

Speaker 3: and a $1 million preferred equity investment that also carries a 12% dividend.

And a $1 million preferred equity investment, but also carries a 12% dividend.

All about people as a full service staffing an executive search firm with a growing focus on the health care industry.

Speaker 3: All About People is a full-service staffing and executive search firm with a growing focus on the healthcare industry.

Speaker 3: The other investment was $3.8 million in First Coast malt.

The other investment was $3 8 million in first coast mulch that consist of a $3 4 million subordinated note at 13%.

Speaker 3: This consists of a 3.4 million subordinated note at 13%.

Speaker 3: and also an interest earning convertible note of $420,000 convertible to future equity.

And also on the interest, earning convertible note of $420000 convertible to future equity.

Speaker 3: First Coast Mulch is a commercial mulch installation company that covers northern and central Florida markets.

First grow small chairs the commercial mulch installation company that covers northern and central Florida market.

The charts on slide six illustrates the diversity in our portfolio and the change in industry mix during the third quarter.

Speaker 3: The charts on slide six illustrate the diversity in our portfolio and the change in industry mix during the third quarter.

Speaker 3: Given the impact of the new investments in All About People and First Coast Mulch, along with other fair value changes, we saw notable changes in this industry.

Given the impact of the new investments and all about people and first coast mulch.

Along with other fair value changes, we saw notable changes in this industry mix.

Speaker 3: Professional Services, which has been our largest industry mix, increased 8 percentage points to now 40% of the total.

Professional services, which has been our largest industry mix.

Increased eight percentage points to now 40% of the total.

Speaker 3: Manufacturing went down three points, consumer products down two points, and there were a few other smaller industries that were adjusted by a percentage.

Manufacturing went down three points.

Tumor products down two points and there were a few other smaller industries that were adjusted by a percentage point.

Speaker 3: Overall, we continue to value the diversity of our industry represented across this total portfolio.

Overall, we continue to value the diversity of our industry represented across the total portfolio.

Speaker 3: Slide seven lists our top five portfolio companies at quarter ends. There was no change in the ranking.

Slide seven lists our top five portfolio companies at quarter end.

There was no change in the ranking since last quarter.

Speaker 3: Tilsen continues to remain the largest fair value investment at $10.6 million, or 14% of our total portfolio.

Telephone continues to reign remain the largest fair value investment at $10 6 million or 14% of our total portfolio.

The one change you may notice is that our top five now represent 42% of our total portfolio versus 47% last quarter.

Speaker 3: The one change you may notice is that our top five now represent 42% of our total portfolio versus 47% last quarter.

Speaker 3: This reflects the overall failure value growth of the total portfolio.

This reflects the overall fair value growth of the total portfolio.

Speaker 3: With that, I'll turn it over to Margaret to review our financials in greater depth.

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

Speaker 4: Thanks, Dan, and good afternoon, everyone. I will start on slide nine, which provides an overview of our financial summary and operational highlights for the third quarter of 2023.

Thanks, Dan and good afternoon, everyone.

Let's start on slide nine which provides an overview of our financial summary, and operational highlights for the third quarter of 2023.

Speaker 4: Total investment income was 1.7 million, which is up 12% over last year, driven by a 40% increase in interest income from portfolio companies.

Total investment income was $1 7 million, which is up 12% over last year, driven by a 40% increase in interest income from portfolio companies.

Speaker 4: The higher interest from Portfolio Company reflects seven new data instruments that we originated over the last year.

The higher interest from portfolio company reflects seven new debt instruments that we originated over the last year.

Speaker 4: Of our 30 total portfolio investments, 23 contributed to our total investment income during the third quarter.

About 30 total portfolio investments 23, contributing to our total investment income during the third quarter.

Speaker 4: We did see lower dividend income during the quarter, which was largely due to a large prior year dividend from Carolina's skip, which did not repeat in the third quarter of 2023.

We did see lower dividend income during the quarter, which was largely due to a large prior year dividend from Carolina, Skiff, which did not repeat in the third quarter of 2023.

Speaker 4: Also contributing to the decline was the sale of the company's investment in dealer solutions and design during the second quarter of 2023.

Also contributing to the decline with the sale of the company's investment in dealer solutions and design during the second quarter of 2023.

Speaker 4: Total expenses were approximately 810,000 during the third quarter, compared with 499 in the prior year of third quarter.

Total expenses were approximately 810000 during the third quarter compared with 499 in the prior year third quarter.

Speaker 4: This increase largely reflects a $264,000 increase in interest expense on borrowings under the Senior Revolving Credit Facility entered into in June of 2022 to fund growth.

This increase largely reflects a $264000 increase in interest expense and borrowings under the senior revolving credit facility entered into in June of 2022 to.

To fund growth I'll.

Speaker 4: also contributing to the total expense increase with a $43,000 increase in base management fees, which is calculated on our total assets last cast.

Also contributing to the total expense increase was at $43000 increase in base management fees, which is calculated on our total assets less cash.

Speaker 4: So as we deploy more capital into investments, that fee increases accordingly.

As we deploy more capital into investments.

The increases accordingly.

Speaker 4: partially offsetting with a change in accrued capital gains and center fees to the company's external investment advisor.

Partially offsetting was the change in accrued capital gains incentive fees to the company's external investment advisor.

Speaker 4: The current period did include a credit of 41,000 of capital gains and centipedes compared with an expense of 22,000 for the third quarter of 2022.

Current period did include a credit of 41000, a capital gains incentive fees compared with an expense of 22000 for the third quarter of 2022.

Speaker 4: As a reminder, we are required to accrue capital gains and center fees on the basis of net realized capital gains and losses and net unrealized capital gains and losses at the close of the period.

As a reminder, we are required to accrue capital gain incentive fees on the basis of not realized capital gains and losses, and net unrealized capital gains and losses at the close of the period.

Speaker 4: excluding the capital gains incentive fees, adjusted expenses, a non-GAAP financial measure were $851,000 compared with $477,000 in the third quarter of 2022.

Excluding the capital gains incentive fees adjusted expenses, our non-GAAP financial measure.

We're at 851000 compared with 477000 in the third quarter of 2022.

Speaker 4: Third quarter net investment income was $799,000 or 31 cents per share, compared with $1 million or 39 cents per share in last year's period. On an adjusted basis, which is a non-GAAP financial measure and excludes the capital gains incentive fee accrual expense.

Third quarter net investment income was 799000 or 31 cents per share compared with 1 million or <unk> 39 per share in last year's period on an adjusted basis, which are non-GAAP financial measure and excludes the capital gains incentive fee accrual expense now.

Speaker 4: Net investment income was 29 cents per share compared with 40 cents per share in last year's period.

Investment income was 29 pence per share compared with 40 cents per share in last year's period.

Speaker 4: Again, this change reflects the expense changes I highlighted, largely due to the use of the Senior Evolving Credit Facility.

Again this change reflects the expense changes I highlighted largely due to the use of the senior revolving credit facility.

I'm going to move on to slide 10, and slide 10 provides a waterfall graph for it.

Speaker 4: I'm going to move on to site 10 and site 10 provides a water fog graph for the change in that asset value for the quarter.

The change in net asset value for the quarter.

Speaker 4: Net assets at September 30th, 2023 were 61.4 million, comparable with the end of the second quarter.

Net assets at September 30th 2023 were $61 4 million comparable with the end of the second quarter.

Speaker 4: Net investment income and the net change in unrealized depreciation offset the net realized loss on sales along with the $645,000 in dividend distributions to shareholders during the quarter.

Net investment income and the net change in unrealized depreciation offset the net realized loss on sales along with the $645000 in dividend distributions to shareholders during the quarter.

Speaker 4: As a result, the asset value per share of September 30th, 2023, was $23.77, compared with $23.79 in June 30th, 2023.

As a result, the net asset value per share at September 32023 was $23 and 77% compared with $23 79 turns at June 32023.

Speaker 4: As highlighted on slide 11, we continue to have a strong balance sheet and significant liquidity that positions us well for future investments. Cash at quarter end was approximately three...

As highlighted on slide 11, we continue to have a strong balance sheet and significant liquidity that positions us well for future investments.

Cash at quarter end was approximately $3 5 million.

Speaker 4: We held approximately $7.2 million in liquid BDC and ACV auction shares, which can provide near-term funding capital for investments, as we have demonstrated in past periods.

We have approximately $7 2 million in liquid BDC in a C. D auction chairs, which can provide near term funding capital for investments as we have demonstrated in past periods.

Speaker 4: In addition, based on our borrowing base formula, Rand has the 11.3 million in availability under the senior secured revolving credit facility at September 30th, 2023. So in total, our liquidity counting these three sources is approximately 22 million.

In addition, based on our borrowing base Formula ran at $11 3 million in availability under our senior secured revolving credit facility at September 32023.

Our liquidity counting these three sources, there's approximately 22 million.

Speaker 4: Our outstanding borrowings of 13.8 million at quarter end carrying an interest rate of 8.8%. With that, I will turn the discussion back to Dan.

Our outstanding borrowings of $13 8 million at quarter end carrying an interest rate of eight 8%.

With that I will turn the discussion back to Dan.

Thanks Margaret.

We have delivered another quarter of strong performance.

Speaker 3: Looking forward, we believe we can continue to execute on the strategy and do remain focused on generating strong and consistent returns for our shareholders.

Looking forward, we believe we can continue to execute on the strategy and do remain focus on journey are generating strong and consistent returns for our shareholders.

The expansion of the portion of our portfolio and the best investment into these debt instruments.

Speaker 3: The expansion of the portion of our portfolio investments into these depth instruments has proven to be a cornerstone of the expansion of the production of these instruments.

He has proven to be a cornerstone of our success.

Speaker 3: And we do expect to continue this trajectory of this growth in order to drive our earnings potential and support a growing dividend well into the future.

And we do expect to continue this trajectory of this growth in order to drive our earnings potential and support a growing dividend well into the future.

Speaker 3: Thank you for joining us today and for your continued interest in Rand Capital. We look forward to updating all of you on our fourth quarter 2023 results, which will be reported in March.

Thank you for joining us today and for your continued interest in Rand capital. We look forward to updating all of you on our fourth quarter 2023 results.

Which will be reported in March.

We hope you have a great day.

Speaker 1: Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time.

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.