Q4 2023 Rand Capital Corp Earnings Call

Craig Mychajluk: Thank you. Thank you, Craig, and good afternoon, everyone. I appreciate your interest in Rand Capital and for joining us today for our fourth quarter and full year 2023 financial results conference call. On the line with me are Dan Penberthy, our President and Chief Executive Officer, and Margaret Brechtel, our Executive Vice President and Chief Financial Officer. See the release and slides that accompany our conversation are available at RandCapital.com. Following along in 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. Statements apply to future events that are subject to risks and uncertainties and other factors that could cause actual results to differ from where we are today.

And good afternoon, everyone.

Okay, and your interest in Rand capital and for joining us today for our fourth quarter and full year 2023 financial results Conference call.

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

Margaret breakdown, our executive Vice President and Chief Financial Officer.

The release and slides to accompany our conversation is available at Rand capital Dotcom.

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

Are likely aware, we may make some forward looking statements during this presentation.

Statements apply to future events, they are subject to risks and uncertainties.

Other factors that could cause actual results to differ from where we are today.

Craig Mychajluk: 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. These documents can be found on our website or at sec.gov. Today's call will also discuss some non-gas financial measures. I believe these will be useful in evaluating our performance. Do not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting principles, provided reconciliations of non-gap measures, comparable gap measures, and the tables that accompany today's earnings release. Please turn to slide three and I'll hand the discussion over to Dan. Thank you, Craig, and good afternoon, everyone.

A summary of these risks and uncertainties and other factors in the earnings release and other documents filed company with the Securities and Exchange Commission.

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

Today's call will also discuss some non-GAAP financial measures.

These will be useful in evaluating our performance.

Not consider the presentation of this additional information in isolation.

Or as a substitute for results in accordance with generally accepted accounting principles.

We provided reconciliations of non-GAAP measures 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.

Thank you Craig and good afternoon, everyone.

We have delivered another strong year of results as we continue to scale the business through the successful execution of our.

Daniel Patrick Penberthy: We have delivered another strong year of results as we continue to scale the business through the successful execution of our investment strategy previously discussed. We entered 2023 with a strong and flexible balance sheet that was supported by multiple sources of capital. During the year, we monetized some equity investments, exited some of our publicly traded securities, and had loan repayments that provided approximately $10 million of cash proceeds. In addition, we drew down over $13 million from our credit facility.

Our investment strategy previously discussed.

We entered 2023 with a strong influx of balance sheet that was supported by multiple sources of capital.

During the year, we monetize equity investments exited some of our publicly traded securities and had loan repayments have provided approximately $10 million of cash proceeds in.

In addition, we drew down over 13 million from our credit facility.

In total we have put more than $20 million of available cash to work during 2023.

Daniel Patrick Penberthy: In total, we have put more than $20 million of available cash to work during 2023, primarily in income-producing investments. Our debt portfolio now makes up 64% of the total, and this compares with 56% at the end of 2022. This resulted in an improved portfolio yield and drove total investment income growth of 11% for the quarter and 27% for the full year period. This strong performance enabled us to increase our return to shareholders, as highlighted on slide four. During 2023, we paid total dividends of $1.33 per share, which included a $0.38 per share special dividend that was paid in the fourth quarter. Our aggregate total dividends represented an increase of 60% over our 2022 dividends paid, and three times growth over 2021. I would also like to highlight that during the second quarter of 2023, we raised our regularly quarterly cash dividend by 20 percent, or 5 cents per share. We recently announced that our first quarter 2024 dividend will be at the same 25 cents per share amount.

Primarily in income producing investments.

Our debt portfolio now makes up 64% of the total and this compares with 56% at the end of 2022.

This has resulted in an improved portfolio yield and drove total investment income growth of 11% for the quarter and 27% for the full year period.

This strong performance enabled us to increase our return to shareholders as highlighted on slide four.

During 2023, we paid total dividends of $1 33 per share.

Which included a 38 cents per share special dividend that was paid in the fourth quarter.

Our aggregate total dividends represented an increase of 60% over our 2022 dividends paid and three times growth over 2020 one.

I would like to also highlight that during the second quarter of 2023, we had raised our regularly quarterly cash dividend by 20% or <unk> <unk> per share.

We've recently announced our first quarter 2024 dividend will be at the same 25 cents per share amount.

Yeah.

At year end, having put our capital to work and distributing $3 4 million in cash dividends to shareholders.

Daniel Patrick Penberthy: At year-end, having put our capital to work and distributed $3.4 million in cash dividends to shareholders, we still have over $19 million in total availability. This includes our cash on hand, our line of credit, and highly liquid public trading security. These funds are available for future liquidity for investment opportunities, and these will provide higher yields.

We still have over $19 million in total availability. This includes our cash on hand, our line of credit and highly liquid public trading securities.

These funds are available for future liquidity for investment opportunities and these will provide higher yields.

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

Daniel Patrick Penberthy: If you turn to slide 5, you can see our portfolio mix between debt and equity and the changes during the past year. At year-end, our portfolio consisted of investments with a fair value of $77.1 million, and this is spread across 30 highly diverse portfolio businesses. This was up 15.6 million, or 25%, from December 31st, 2022, and reflected new and follow-on investment, and valuation adjustments in multiple portfolio companies. And, as we'll highlight later, we have also successfully sold some of our investments. The portfolio does comprise approximately 64% in debt investments, which have an annualized weighted average yield of 13.6%.

At year end, our portfolio consisted of investments with a fair value of $77 1 million and this is spread across 30 highly diverse portfolio of businesses.

This was up $15 6 million or 25% from December 31, 2022.

And reflected new and follow on investments valuation adjustments in multiple portfolio companies.

And as we I'll highlight later, we have also successfully sold some of our investments.

The portfolio does comprise approximately 64% in debt investments, which have an annualized weighted average yield of 13, 6%.

The remaining mix of the portfolio was comprised 27% and equity investments in private companies.

Daniel Patrick Penberthy: The remaining mix of the portfolio was comprised 27% in equity investments in private companies, and 9% in our publicly traded equity. These do consist of our BDC investments and our ACV auction stocks. During the fourth quarter, we completed two follow-on investments that are highlighted on slide six. The largest investment totaled $2.2 million in BNP Food Service Supply. We refer to this as FSS.

And 9% and our publicly traded equities. These do consist of our BDC investments and our a C V auction stock.

During the fourth quarter, we completed two follow on investments that are highlighted on slide six.

The largest investment totaled $2 $2 million to be M. P. Foodservice supply we referred to this as F. S. S.

FSS is out of Utah and provides design distribution and installation services for commercial kitchens, their renovations and new construction.

Daniel Patrick Penberthy: FSS is based in Utah and provides design, distribution, and installation services for commercial kitchens, their renovations, and new construction. The follow-on debt investment was subsequently partially offset as FSS did make a loan principal repayment of approximately $0.6 million later in the quarter. Rand's total debt and equity investment now in FSS had a fair value of $7.4 million at year end. The other transaction during the quarter was a small equity investment of $73,000 in KTEC, a very interesting pet toy company. The bottom half of the slide highlights some of the notable full-year investments and exits. As I mentioned earlier, we invested a total of $20.3 million in 2023. This was across nine transactions, and they were largely invested in interest-yielding assets. Our investment in DSD did get sold during the second quarter of 2023, which resulted in the full repayment of Rand's subordinated debts, that is, and the sale of our preferred equity investment.

The follow on debt investments was subsequently partially offset as F. S. S did make a loan principal repayment of approximately <unk> 6 million later in the quarter.

<unk> total debt and equity investment now in F. S. S had a fair value of $7 $4 million at year end.

Yeah.

The other transaction during the quarter was a small equity investment of $73000 in K Tec, a very interesting pet toy company.

The bottom half of this slide highlights some of the notable full year investments and exits.

As I mentioned earlier, we invested a total of $23 million in 2023. This was across nine transactions and we're largely invested into interest yielding assets.

Our investment in D. S. D did get sold during the second quarter of 2023, which resulted in a full repayment of brands subordinated subordinated debts that is and sale of our preferred equity investment.

Daniel Patrick Penberthy: In total, we received about $6.7 million of proceeds from the investment, which did include a net gain of $2.5 million. The other notable transaction was that we sold some of our ACB auction securities for $1.7 million in gains during the year. At year-end, we still hold almost 195,000 shares of ECB, which represents approximately 4% of our portfolio's total fair value. We will continue to evaluate these holdings as we consider our future liquidity needs. The charts on slide 7 illustrate the diversity in our portfolio and the change in our industry mix during the period, actually during the year that it occurred. Given the impact of new and follow-on investments, along with other fair value changes, we saw notable changes in this industry mix. Professional Services, which has been our largest industry concentration, increased 11 percentage points to 42% of the total. On the other hand, automotive and consumer products saw mixed declines, and there were a few other smaller industries that were adjusted by minor percentage points.

In total we received of about $6 7 million of proceeds from the investment which did include a net gain of $2.5 million.

The other notable transaction was that we had sold some of our ACB auction securities for $1 $7 million in gains during the year.

At year end, we still hold almost 195000 shares of HCV, which does represent approximately 4% of our portfolio's total fair value.

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

The chart on slide seven illustrates the diversity in our portfolio and the change in our industry mix during the period.

During the year that is.

Given the impact of new and follow on investments along with other fair value changes. We saw notable changes in this industry mix.

Professional services, which has been our largest industry concentration increased 11 percentage points to 42% of the total.

On the other hand, automotive and consumer products on mix declines and there were a few other smaller industries that were adjusted by minor percentage points.

Overall, we continue to value the diversity of our industry mix, which is represented across the 30 portfolio companies.

Daniel Patrick Penberthy: Overall, we continue to value the diversity of our industry, which is represented across the 30 portfolio companies. Slide 8 lists our top 5 portfolio companies at year-end. Tilson continues to remain the largest fair value investment at $10.6 million, or 14% of our total portfolio. The only change was with FSS moving up to the number two ranking following the fourth quarter follow-on investment. Overall, these top five represent 45% of our total portfolio at year-end. With that, I'll turn it over to Margaret to review our financials in greater depth. Thanks, Dan, and good afternoon, everyone.

Yeah.

Slide eight lists our top five portfolio companies at year end.

Hilton continues to ramp and remains the largest fair value investment at $10 6 million or 14% of our total portfolio.

The one change was with FSS moving up to the number two ranking following the fourth quarter follow on investment.

Overall these top five represent 45% of our total portfolio at year end.

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

Thanks, Dan and good afternoon, everyone.

Margaret Whalen Brechtel: I will start with slides 10 and 11, which provide an overview of our financial summary and operational highlights for the 2023 fourth quarter and full year period. Total investment income for the quarter was $1.9 million, up 11% over last year, driven by a 47% increase in interest income. The full-year total investment income grew 27 percent to $7.3 million, which reflects the new debt instruments that we originated from six portfolio companies over the last year. Overall, the total number of portfolio companies contributing to investment income was 26 this year compared to 24 at the end of 2022. For both periods, we did experience lower dividend income, which will fluctuate based upon the profitability of certain portfolio companies and the timing of the distributions or the impact of new investments or divestitures.

Let's start on slide 10, and 11, which provide an overview of our financial summary, and operational highlights for the 2023 fourth quarter and full year periods.

Total investment income for the quarter was $1 9 million up 11% over last year, driven by a 47% increase in interest income.

Full year total investment income grew 27%.

Seven 3 million, which reflects the new debt instruments that we originated from six portfolio companies over the last year.

Overall, the total number of portfolio companies contributing to investment income was 26 this year compared to 24 at the end of 2022.

For both periods, we did experience lower dividend income, which will fluctuate based upon the profitability of certain portfolio companies and the timing of the distributions or the impact of new investments our divestitures.

He did receive a large prior year dividend from a portfolio company, which did not occur in 2023.

Margaret Whalen Brechtel: We did receive a large prior-year dividend from a portfolio company, which did not occur in 2023, and the sale of the company's investment in DSD during the second quarter of 2023 also impacted this year's dividend level. Total expenses were approximately $1 million during the fourth quarter of 2023, compared with $371,000 in the prior year fourth quarter. Adjusted expenses, which include accrued capital gains incentive fees and is a non-GAAP financial measure, were $950,000, compared with $539,000 in the fourth quarter of 2022. This change reflects a $293,000 increase in interest expense on borrowings under the Senior Evolving Credit Facility entered into in June of 2022 to fund growth. The full year total expenses were $4.2 million compared with $1.1 million in 2022.

The company's investment in DSD during the second quarter of 2023 also impacted this year's dividend level.

Total expenses were approximately 1 million during the fourth quarter 2023, compared with 371000.

Prior year fourth quarter.

Adjusted expenses, which includes accrued capital gains incentive fees.

non-GAAP financial measure for 950000, compared with 539 in the fourth quarter of 2022.

This change reflects the $293000 increase in interest expense and borrowings under the senior revolving credit facility entered into in June of 2022 to fund growth.

Well your total expenses were $4 2 million compared with $1 1 million in 2022.

Margaret Whalen Brechtel: Again, when excluding the accrued capital gains incentive fees, total adjusted expenses were up for the year largely due to the usage of the credit facility, fourth quarter net investment income of $962,000 or $0.37 per share, compared with 1.2 million or 48 cents per share in last year's period. On an adjusted basis, which is a non-gap financial measure and excludes the capital gains incentive fee accrual expense at investment income, it was For the full year period, net investment income per share was $1.15, compared with $1.72 per share in 2022. Excluding the capital gains incentive fee accrual, which is a non-GAAP financial measure.

Again, when excluding the accrued capital gains incentive fees total adjusted expenses were up.

For the year largely due to the usage of the credit facility.

Fourth quarter net investment income was <unk>.

962000, or <unk> 37 per share.

Compared with $1 2 million or 48 cents per share in last year's period.

Adjusted basis, which is a non-GAAP financial measure.

And excludes the capital gains incentive fee accrual expense.

Investment income was <unk> 40 per share compared with 41 per share in last year's period.

For the full year period net investment income per share was $1 15, compared with $1 72 per share in 2022.

Excluding the capital gains incentive fee accrual, which is a non-GAAP financial measure.

Margaret Whalen Brechtel: Adjusted net investment income per share increased 11 percent, to $1.40, for sharing. I'm going to move on to slide 12, which provides a waterfall graph for the change in net asset value during the year. Net assets of December 31st, 2023 were $60.8 million, up 5% from the end of 2022. This change reflects net investment income along with realized gains and the net change in unrealized appreciation, which more than covered the $3.4 million in dividend distributions to shareholders during the year.

Adjusted net income.

Income per share increased 11%.

Do you have $1.46.

Sure.

I'm going to move on to slide 12, which provides a waterfall graphs or the change in net asset value during the year.

Net assets at December 31, 2023 were $60 8 million up 5% from the end of 2020 Taylor.

This change reflects the net investment income along with realized gains and the net change in unrealized depreciation which more than covered the $3 4 million in dividend distributions to shareholders during the year.

Margaret Whalen Brechtel: The result, the net asset value per share on December 31, 2023, increased to $23.56 per share, compared with $22.36 at the year-end 2022. As highlighted on slide 13, we continue to have a strong balance sheet and significant liquidity, positions that position us well for future investment. Cash at year-end was approximately $3.3 million.

The net asset value per share at December 31st 2023 increased to $23 56 per ton.

<unk> per share compared with $22 36 at the year end 2020 tail.

As highlighted on slide 13, we continue to have a strong balance sheet and significant liquidity.

Possessions that positions us well for future investments.

Cash at year end was approximately $3 3 million Pax 97, 4 million in liquid BDC in ACD action shares, which can provide near term funding capital for investment.

Margaret Whalen Brechtel: We held approximately $7.4 million in liquid BDC and ACV auction shares, which can provide near-term funding capital for investment, as we have demonstrated in past periods. In addition, based on our borrowing base formula, Rand has $8.8 million in availability under the Senior Secured Revolving Credit Facility at December 31, 2023. In total, our liquidity accounting resources are over $19 million.

As we have demonstrated in past periods.

In addition, based on our borrowing base Formula Rand has eight 8 million in availability under the senior secured revolving credit facility at December 31st 2023.

In total our liquidity counting daystar citizens over $19 million.

Our portfolio transformation to include more income producing investments.

Margaret Whalen Brechtel: Our portfolio 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 second quarter of 2023 that we had raised the regular quarterly cash dividend by 25% to $0.25 per share and then, on a full year basis, increased the dividend to $1.33 per share on February 26. In 2024, Rand declared its regular quarterly cash dividend distribution of 25 cents per share for the first quarter of 2024. The dividend will be distributed on or about March 29, 2024 to shareholders of record as of March 13, 2024. With that, I will turn the discussion back to Dan.

It is expected to support an increased dividend level over time.

In line with that expectation, we announced during the second quarter of 2023 that we raised the regular quarterly cash dividend by 25% to 25 cents per share and then on a full year basis increase the dividend to $1 33 per share.

In February 26, 2024, I ran declared its regular quarterly cash dividend distribution of 25 cents per share for the first quarter of 2024.

The dividend will be distributed on or about March 29, 2024 to shareholders of record as of March 13th 2024.

That I will turn the discussion back to Dan.

Daniel Patrick Penberthy: Thanks, Margaret. Our strategy is to continue to grow and scale our business by focusing on debt and related equity investments and privately held lower middle market companies, in which we can drive investment income growth and increase the dividend paid to shareholders. We do believe the combination of our current sources of capital with potential proceeds from future portfolio exits and continued investment income growth will provide us with the liquidity that will enable us to add these new investments to our portfolio, as well as reinvesting into existing portfolio companies that demonstrate continued growth potential. Equally important to our future growth have been the efforts of our external investment advisors and specifically our investment team, who are part of the Rand Capital Management or RCM team.

Thanks Margaret.

Our strategy is to continue to grow and scale, our business by focusing on debt and the related equity investments in privately held lower middle market companies.

And which we can drive investment income growth and increase the dividend paid to shareholders.

We do believe the combination of our current sources of capital.

With potential proceeds from future portfolio exits and continued investment income growth will provide us the liquidity that will enable us to add these new investments to our portfolio as well as reinvesting into existing portfolio companies that demonstrate continued growth potential.

Equally important to our future growth had been the efforts of our external investment advisors and specifically our investment team who are part of the Rand capital management or RCM team.

We believe that the reputation and experience in the investment community does provide a competitive advantage in originating quality investments that meet our investment objective, which of course is to drive current income and when possible capital appreciation.

Daniel Patrick Penberthy: We believe that their reputation and experience in the investment community does provide a competitive advantage in originating quality investments that meet our investment objective, which, of course, is to drive current income and, when possible, capital appreciation. We will target opportunities with favorable risk-adjusted returns that are appropriate for RAND. They have been leveraging their vast network of referral relationships, and this has resulted in a solid pipeline of investment opportunities for Rand Capital. Going forward, our initial investment into any one portfolio company is expected to be in the range of two to four million dollars, of course, with a focus on current cash yields in order to achieve our income-producing goals, ultimately, with the support of our liquidity position.

We will target opportunities with favorable risk adjusted returns that are appropriate for Rand.

They have been leveraging their vast network of referral relationships and this has resulted in a solid pipeline of investment opportunities for Rand capital.

Going forward, our initial investment into any one portfolio company is expected to be in the range of $2 million to $4 million of course with a focus on current cash yields in order to achieve our income producing gold.

Ultimately with the support of our liquidity position. We believe we can continue to replicate our past success.

Operator: We believe we can continue to replicate our past success and drive strong returns for our shareholders. Thank you for joining us today and for your ongoing interest in Rand Capital. We look forward to updating you on all of our first quarter 2024 results, which will be reported in early May. We hope you have a great day. Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation. www. TheBusinessProfessor.com www.mytrendyphone.co.uk www.thevenusproject.com www.margaretbrechtel.com www.mytrendyphone.co.uk www.margaretbrechtel.com www.thevenusproject.com BF-WATCH TV 2021, www.mytrendyphone.co.uk

And drive strong returns for our shareholders.

Thank you for joining us today and for your ongoing interest in Rand capital. We look forward to updating you on all of our first quarter 2024 results, which will be reported in early may we.

We hope you have a great day.

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

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