Rand Capital Corporation (RAND) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Rand Capital Corporation’s First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Rand. Thank you. Please begin.

Thank you, [Roya] (Ph), and good afternoon everyone. We appreciate your time today for Rand’s first quarter financial results conference call. On the line with me 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 wire this morning as well as the slides that will accompany our conversation today. If not, they are available on our website at www.randcapital.com. If you look at the slide deck and turn to Slide 2, let me point out some important information. As you are likely aware, we may make some Forward-Looking Statements during this presentation and also 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 apply to future events that are as well that could cause actual results to differ from where we are today. These risks and uncertainties and other factors are provided in the earnings release, as well as, in other documents filed by the Company with Securities and Exchange Commission. In addition there is additional information related to the page of proxy from shareholders in respect to the proposed transaction. We urge you to read the proxy statement and other materials filed with the Securities and Exchange Commission and you could find that information on our website or at sec.gov. So with that, let me turn it over to Pete who is going to summarize the highlights for the quarter and discuss the transformation of Rand, then Dan will follow with more details regarding the financial. Pete.

Good afternoon everyone. Thank you for your time today as we discuss the proposed transaction and update you on our first quarter results. I'm going to start with Slide 3 to platform some of the key developments thus far this year. Most significant event is the filing of our definitive proxy statement and the scheduling of a special meeting of the shareholders, requesting approval for the proposed $25 million investment by East Asset Management. I will cover the proposed transaction more in the next few slides. But also wanted to point out the Rand and the East and the Rand Board of Directors have elected to repeat all stock in the proposed special dividend as a testament to our belief and the potential for the future of Rand following the transaction. As for the quarter, we received $3.5 million from eHealth Global Technologies for the repayment of their loan. As Dan noted in the press release, this is a rather short-term investment for us at less than three years and provided a nice yield. We also had two follow-on investments totaling $650,012. We invested $500,012 in Tilson Technology Management as part of our larger investment by other parties to support their growth. We also have invested $150,000 in KnowledgeVison Systems as they expand their product portfolio. At the end of the quarter, our net asset value or NAV increased to $5.06 per share at the end of March up from $4.99 at the end of December. The increase was driven by the net appreciation of our portfolio investment. Dan will provide further details on those. Investment income almost doubled to 719,000 mostly from the eHealth loan repayment. Excluding the loan repayment, the investment income was up 36%. This quarter we also drew down $2.25 million of our SBA leverage, our investment plan, including those made in this last quarter. Again let us turn to Slide 4. I want to take this opportunity to provide a review of the potential for creating value for our shareholders through the transformation of Rand. The proposed $25 million strategic investment by East Asset Management can make this possible, they are purchasing 8.3 million shares at a price of $3 per share. Those of you who have followed our stocks, that represent $0.30 premium for our closing price a day prior to the announcement. As part of the transaction, we plan to externalize management and elect to be treated as a regulated investment company or RIC for tax purposes. These actions align us better with the majority of BDC. There are 50 [indiscernible] side of BDCs and we are the smallest in market cap and NAV. Of those 50, the number of non-divided paying BDCs has declined to now just five including us. There is no reason there are only five remaining and that is because of not a preferred business battle. Slide 5. I would like to go through why we believe shareholders to support our proposal. There are several reasons that we believe that transformation creates the opportunities for greater and future total return for our shareholders. As I was discussing regarding the change in our business model and tax status, we believe this could improve our market valuation. Through my conversations, I realized many shareholders do not understand the value of externalized management. By adopting the more standard business model BDCs, we create a fixed percentage fee for our operating expenses related to the management of our portfolio. Even if the portfolio expands, which is our plan, the 60% percentage does not change. For us to make step changes in growth, we believe we need to invest in staffing ahead of this expansion in our portfolio. To grow, we need additional capital also and that has not been easy to come by. As a very small BDC, the opportunities to increase our SBA leverage have been limited. The investment value provides additional capital to grow our portfolio and to increase our return. And the assets being contributed these are immediately accretive to investment income. We expect at the greater scale with the infusion of capital, better positions us in the capital market with an increase of shareholders equity and total assets. To elect RIC status, we have to distribute our accumulative earnings and profit [indiscernible] and we estimate to be about $22 million. We plan to make those distribution enabled by a portion of these investments as a special dividend of approximately $1.5 per share. To maintain this advantageous tax status, we will be require to distribute greater than 90 of our net investment income and dividend to shareholders and that is subject to board approval. Importantly, this transformation enable us to be well positioned to drive greater potential returns for our shareholders by building a larger portfolio of income producing assets, growing our capital base, increasing our bottom line and providing ongoing dividends to our shareholders. Slide 6. If you turn to that summarizes the benefits we believe shareholders will derive from the transaction. We believe that the Board and Management went through a process that resulted in a thorough review of strategic alternatives over perhaps last nearly four years, and we have evaluated a number of alternatives. We have consulted with experts in this industry and resolute in our conviction to this transaction is in our shareholders best interest. If you turn to Slide 7. I can delve further into the externalization process. There seems to be an impression that Dan and I somehow benefit from the change. I suggest you that we see it differently. We are significant shareholders and a large portion of our net worth is tied up in the Company. We believe that our interest is directly aligned with the shareholder. The externalization is noted in the proxy statement is expected to reduce annual expenses to the percentage of portfolio assets. We also see the potential of a broader pipeline of investment opportunities through the advisors expected access to a network of family offices. The Investment Committee will have the benefit of added talent from East affiliate. Another benefit from the strategic investment is we will receive new portfolio investors having a fair value of $11.6 million. Rand management and the Board evaluated the assets using the process we used for our own portfolio to come up with an agreed fair value. These assets are income producing with a current interest rate of 12%. This is consistent with our current portfolio. As an example eHealth which we talked about previously had an interest rate of 13%. There is the idea that we were forced to accept whatever loans offered by East without our approval is incorrect. I should note that when we closed the deal, the fair value assigned to these assets is agreed upon, any variation to the value from our current assessment is an adjustment to the cash positive or negative. It is important we evaluate the alternatives as shown on Slide 8. We have a large investor that is adamantly opposed to this transaction. But after many conversation and there are in their early knowledge of the plan, they fail to provide an alternative. Most recently, they suggested liquidating of the portfolio and that somehow shareholders could get a better return on their investment. They failed to provide a plan to execute a liquidation or to substantiate as to how they derive that value. We would suggest their alternatives demonstrate the lack of understanding of our current portfolio and the challenge of liquidation whether quick or over a long period. In fact, our Board consider this alternative and many others and we deemed they would destroy current value and future value to you. More importantly, this option destroys a future potential total return for shareholders as a transformed organization. There were factually inaccurate season time supported statements in their SEC filings, which we have brought to the SEC's attention. The most significantly which User-Friendly Phone Book to the wholly owned subsidiary as a User-Friendly Holding, who’s Board and Managers is controlled by Stevenson. To-date User-Friendly has failed its close in the SEC filing, and Mr. Stevenson was ordered by the SEC to seize [indiscernible] from making fraudulent or miss leading disclosures in order to pay a several money penalty to the SEC in the amount of $200,000 in 2018. If you turn to Slide 9, we are proposing that what we believe can be a long and fruitful venture future for Rand and its shareholders. We want to create value, not destroy it and we firmly believe that the route we are proposing will offer that opportunity to you. If you turn to Slide 10. In the interest of time I’m going to briefly pass on our portfolio company Tilson. As a result of an investment by us and other, the fair value of our investment nearly doubled from year end to $5 million from $2.6 million. Based in Portland Main, Tilson is expanding its nationwide network, infrastructure design, build services enabling a spin on the capitalization of its asset ownership affiliate SQF, which will maintain authority to own and develop telecommunication efforts and public right-of-way throughout the U.S. SQF is a leading whole owner and solutions provider for 5G. supported by Tilson’s real estate entitlement, engineering construction and operational capability. SQF provide customers with the range of infrastructure options from single site design build services to fully outsourced deployment in management nationwide. Slide 11 provides the industry mix of our diverse portfolio. Year-over-year comparisons as of March 31st, show an increase of software which was driven by the addition of Tech 2000 to our portfolio. You can turn to Slide 12. It depicts our mix of investments in equity index. The debt investments provide the needed cash flow, to fund operation, while equity provides future upside potential. Looking forward, anticipating to propose these investment in Rand, we anticipate helping around focus on debt related investment to support an ongoing dividend. Now to Slide 13 please. The snap shot of our top five investments in our portfolio based on the value at the end of March. Our portfolio is valued at nearly $32.5 million and in close 29 active companies. Since we last reported eHealth is no longer part of the portfolio with the repayment of our loan. Tilson is elevated to the top five with our recent investment and Rheonix moved back into the top five. Now, I would like to turn it over to Dan Penberthy, our Executive Vice President and Chief Financial Officer, who is going to cover the financial results.

Thanks Steve and good afternoon everyone. If you could please turn to Slide 15 and I will start with the net asset value per share or NAV. As Pete mentioned, we finished the quarter with net asset value at $5.06 per share. As you can see on the chart NAV did increase $0.07 per share over the trailing quarter. This increase is primarily attributable to a net increase in the valuation of certain of our portfolio investments primarily driven by the appreciation of [indiscernible]. On Slide 16, your next slide is a summary of our operating performance for the first quarter of 2019 and 2018. Investment income increased significantly to $719,000 in the first quarter. This is a 98% increase over the prior year's quarter. The $356,000 increase was primarily related to a $225,000 non-recurring fee income from the eHealth loan repayment. Our first quarter expenses of $690,000 were above $100,000, mostly from professional fees related to the proposed strategic investments by East. Net investment gain before income taxes refers to the difference between our investment income and our expenses. This is prior to changes in valuations of our investment. Our goal is to reach a breakeven level as that line and we are happy to say we achieved that during the quarter. Below that line, the net realized and unrealized gains or losses on investments contributed to the $0.07 increase in the NAV in the first quarter. Now, please turn the Slide 17. And you could see we have a solid balance sheet. It's important to note that of our total cash, only $1.9 million is available for corporate use, while $6.8 million is in our SBIC subsidiary restricted for investments. That also includes the $2.25 million draw we made during the quarter. Our portfolio investments are valued at $5.14 per share at the end of the first quarter. Our portfolio growth has benefited from our past SBA loans. As of the quarter ends, we have $1.74 per share that we owe to the SBA. We also have $0.28 per share of other assets net of liabilities. This comprises our NAV per share of $5.06. So with this Pete, shall we open up the line for questions?

Yes, we should. We are ready for question.

Thank you very much for your time and attention that this afternoon. We are very excited about the proposed investment by you, which we will believe will transform our organization for the benefit of all shareholders. We ask that you vote for the proposals being presented at our special meeting. And again, thank you for your time.

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.