Rand Capital Corporation (RAND) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Rand Capital Corporation Fourth Quarter 2019 Financial Results. At this time, all participants are in a listen-only mode. A 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 your host Karen Howard, Investor Relations for Rand Capital Corporation. Thank you. You may begin.

Thank you, Melissa, and good afternoon everyone. We appreciate your time today for Rand's fourth quarter 2019 financial results conference call. On the line with me today are Pete Grum, our Chief Executive Officer; and Dan Penberthy, our Executive Vice President and Chief Financial Officer. If you 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 both available on our website at randcapital.com. If you would turn to 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 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 the Securities and Exchange Commission. You can find the information on our website or at sec.gov. And with that, let me turn over to Pete, who is going to give an update on the status of the transactions with East Asset Management and then summarize the 2019 performance including providing some color on the newest investments in our portfolio that were contributed by East. Then Dan will follow with more details regarding financials. Pete?

Good afternoon everyone. Thank you for your time today. We are happy to have this opportunity to summarize 2019, which proved to be a very exciting year. You can turn to Slide 3 where I highlight the transaction with East Asset Management for East as we refer to it and the current status of the related activity. As you know, we closed on the transaction in November. We issued about 8.3 million shares of Rand common stock to East exchange of 25 million of asset. The 25 million consisted of approximately 9.5 million of investments and about 15.5 million in cash. We have also established Rand Capital Management or RCM to serve as the external registered investment adviser to Rand. The Rand employees have become employees of our RCM. We also during the this private transaction added two new board members Adam Gusky and Ben Godley while two of our longstanding board members finished their terms and Shane [indiscernible] and Ross Kenzie. We're continuing the process to transform Rand into a regulated investment company or RIC. Recall the one of the benefits of being a RIC is our investment income and capital gain will no longer be subject to U.S. federal income tax. To accomplish this, we need to distribute our excess earnings and profits to our shareholders. Last week, our board declared a special dividend of $23.7 million or $1.62 per share, which will be payable on a combination of cash and shares of Rand common stock. As we previously communicated an indication of confidence that has potential value, the members of the Rand Board, management and East intend to elect to receive an all stock dividend. Shareholders as of the April 2nd record date, will receive a mail with the details included in there an election form on which they can designate their preference for cash or stock and as subject to the limitation. The limitation is of total cash payout is limited to 20% of the total dividend. We expect the dividend will be distributed on or about May 11. Once that process is complete, our board expects to affect the reverse stock split that is approved by our shareholders at the 2019 Annual Meeting in December. And then going forward to maintain our risk status, our board intends to establish an ongoing regular cash divestiture policy. Let's turn to Slide 4 and I'll provide you with some of the 2019 operational highlights. Total assets grew by 24.3 million or 64% to a total of 64.8 million, benefiting from the $25 million East investment. We ended the year with 25.8 million of cash, some of which will be used for a dividend and future investments. In 2019, we invested 2.8 million of follow-up capital in six of our portfolio companies, which I will review on the next slide. At the end of the year, we sold our equity interest in Microcision LLC, and from that we received 1.5 million of proceeds and realized a 1.5 million pre-tax gain. Additionally, Microcision we've paid 453,000 of principals to it. Then in the first quarter, we updated our 1.5 million subordinated no do for Microcision to reflect an 11% interest rate for the five-year maturity and received the award for 5% of their equity. Our 2019 investment income increased 29% over 2018. Due to our investment focused on investment income generating instruments as well as some variations and non-recurring investment income in each period. At the end of the year NAV or net asset value decreased to 3.66 while we've benefited from the gain on the Microcision access. The decline was impacted by an $0.83 per share dilutive effect of the shares issued to East. Please turn to Slide 5 and you have a summary of the six follow-on investments we made during 2019 as well as the assets contributed by East. Follow-on investments we made during the fourth quarter were 1.5 million to GoNoodle and 250,000 to Lumious, which we previously referred to as Tech 2000. I'll highlight the four companies contributed by East in the next few slides. Slide 6 is a snapshot of the top five investments in our portfolio based on our year-end portfolio value. Our total portfolio is valued about 37 million consisting of 32 active companies. The value of our top five investments consistently comprises of about half of our portfolio. Compared with our top five at the end of the third quarter, ACV Auctions is now number one, valued at approximately 6.5 million or 18% of our portfolio, driven by its innovative solution in market penetration. Two of the assets contributed by East are now in our top five, Andretti at number 2 and Filterworks at number 4. I will touch on them in more detail in the next few slides. Now turning to Slide 7, as I do each quarter, I want to take the opportunity to feature the name of the Company within our portfolio and give you more insights to them. This quarter I'm featuring the four companies contributed by East, all of which includes a subordinated note to provide its current income. Let's start with Andretti Indoor Karting & Games refer to the size AIKG. Headquarters in Orlando, Florida, company out for go karting, games, rides and excitement-filled activities all under one room and each of its locations in Marietta, Georgia, Orlando and Florida, also in San Antonio, Texas. They provide adventure activities such as zip lining, rock climbing and a rope obstacle course. And their venues also offer food, full service bar, catering to parties meetings and special events. Our investments consist of a term note with a 12% coupon and a 4% pick and as of December 31st, we valued at 4.4 million. Turning to Slide 8, let me tell you a little about Filterworks Acquisition USA, which is headquartered in Deerfield Beach, Florida. They are licensed Florida's general and mechanical contractor, providing spray booth equipment, frame repair machines and paint booth filter services. They had been found in the 1980s. The Filterworks team have installed over 1,500 paint booths. Our investments include the term of 12% coupon and 2% PIK as well as some collect Class A units. Collectively, our investment carried a fair market value of 2.9 million at year end. Slide 9 introduces Hilton Displays Inc referred to as HDI. This company headquartered in Greenville, North Carolina, is a nationally recognized manufacturer of signage and branding products. They were formed in 1981 and have emerged as an industry leader with emphasis on primary brand identification, architectural, retail, interior, wayfinding and digital display products. Our investment consists of a term loan with a 12% coupon and 2% PIK, buying that 1.2 million at year end. The last asset contributed by is as on Slide 10 headquartered in Dallas, Texas. Mattison Avenue provides a new way of working in the beauty industry and an upscale professional setting. They currently leave high quality Salon suites in the Dallas, Houston and Tampa Mattison. High investment consists of a promissory note with a 14% coupon and a 2% PIK, carrying a fair value of 1 million at December 31st. Please turn to Slide 11 and you see the industry mix of our portfolio at the end of 2019 and '18. Year-over-year comparison showed a more diverse portfolio at the end of 2019 with some significant changes during the year. The decrease in healthcare was affected by the sale of our equity interest in Microcision and a reduction in the value of Genicon. The growth in software was driven by the increased value and our investment in ACV Auctions. The growth in professional services was driven by an increased valuation of Tilson and the addition of Mattison Avenue from East entertainment and automotive -- excuse me, entertainment and automotive are new to the pie. Due to the East contributing assets, today I take [indiscernible] and Filterworks. Slide 12, we describe our new target and investment structure have established by the investment committee of RCM. To support our desired RIC status, we will need to evolve our portfolio to be more cash generating than it has historically been. Accordingly, we will place more emphasis on subordinated debt instruments with warrants for preferred equity. We will complement that with expansion capital and we will continue to co-invest with institutional funds typically as a minority owner. The current interest combined with equity interest will become more important to us. A year-end as shown here a $37 million portfolio consists of about 21% debt, 59% equity. Going forward, I anticipate that it will evolve into a higher portion of debt instruments. Slide 13 is our updated investment criteria and targeted investment with terms and established by the investment committee of RCM. Our investment criteria include companies more advanced in their evolution than our historic in the initial investment. We're looking for businesses with at least 2 million revenue and 5 million of EBITDA facilitating their ability to generate cash flow. We want private businesses in the early or late-stage and we now have a little bit broader geographic area. As in the past, we're interest in strong management and differentiating products. We expect the product will have already gained market acceptance. With respect to our new targeted investment terms, we have increased the amount of both our initial investment size and follow on to the levels notice here. We have targeted a 5 to 7 year old period and as in the past would have some board involvement for oversight. Thank you and next I'd like to turn it over to Dan Penberthy, our Executive Vice President and CFO to cover the financial results.

Thanks Pete and good afternoon everyone. If you could please turn to Slide 15, I'll start with the net asset value per share or NAV. As Pete mentioned, we started the year with a net asset value at 366 per share. As you can see on the chart, NAV decreased $0.73 per share over the last year. The decline is primarily attributable to the $0.83 per share dilutive effect of issuing the 8.3 million shares to East. This is partially offset by the gain on the sale of our equity investment in Microcision. Slide 16 as a summary of our operating performance for the 2019 and 2018 fourth quarters and the full calendar years. Total investment income in the fourth quarter of 2019 was $985,000, up from 668,000 in the same period last year. The $317,000 increase or 47% included approximately 76,000 of incremental interest income, 70,000 of incremental dividend income and a 170,000 of incremental non-recurring fee income. For 2019, investment income was up 29% over 2018. Our fourth quarter expenses were $726,000 in 2019 and $684,000 in 2018. Excluding the costs related to the East transaction, fourth quarter expenses were $645,000 in 2018 and $581,000 in 2018. The 2018 period benefited from a $50,000 bad debt recovery I should note. Also I want to point out that the 2019 fourth quarter includes cost for the base management fees payable to RCM, our newly established external registered investment advisor of which we are now employees. Going forward into 2020, this will be a regular fee and certain expenses previously incurred by RAMs are now incurred by RCM. These would include such things as compensation and general office expenses. For all of 2019, total expenses were 2.8 million this compares with 2.2 million in 2018. Excluding costs related to these transactions, total expenses were 2.2 million and 2.1 million in 2019 and 2018, respectively. The net realized and unrealized gain on investments was 1.4 million and $1.0 million in the fourth quarter of 2019 and 2018 respectively. The 2019 gain was driven by the Microcision transaction as Pete previously mentioned as well as a favorable valuation adjustment for our portfolio holding and ACV auctions. For the year, we had a 2.2 million net realized and unrealized loss, this compares with $326,000 loss in 2018. The 2019 results were driven by unrealized losses recorded in the prior quarters partially upset by the fourth quarter gains as Pete mentioned. To summarize, the 2019 fourth quarter resulted in an increase in net assets from operations of $0.13 per share, which compares with the $0.15 per share in the 2018 fourth quarter. The full year of 2019 and 2018 resulted in $0.30 and $0.06 to offer per share respectively. As you can see on Slide 17, we do continue to hold a strong balance sheet, which is well positioned for growth. This is a direct result from the East transaction and now we have a historically high level of cash at your end. Cash represents $1.76 per share at your end. Our portfolio investments are also at a historic level. These are valued at $2.53 per share and we had $0.75 per share that remains owe to the SBA for their previous debenture drop. We also have $0.12 per share of other assets net of liabilities. This comprises our NAV per share of $3.56. So with that, Pete, shall we open the line for questions?

Yes.

Thank you for your time and attention this afternoon. I know it's [indiscernible] market, I want to thank everyone and to appreciate your support and we're excited about 2020 what it holds for Rand. Thanks again and have a great day.

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