Rand Capital Corp Q2 FY2020 Earnings Call

Greetings everyone and welcome to Rand Capital's Second Quarter 2020 Earnings Conference Call. It is my pleasure to introduce your host, Deb Pawlowski from Investor Relations. Thank you. You may start.

Thank you, Jan, and good morning, everyone. We appreciate your interest in Rand Capital and taking the time to join us this morning. On the line with me today 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 across the wire this morning as well as the slide that will accompany our conversation today. If not, they are available on our website at www.randcapital.com. Please note that in our discussions today, all per share values in the release and slides will reflect the 1 for 9 reverse split that was effective on May 21 this year. If you would turn to Slide 2 on the slide deck, I would like to point out some important information. As you are likely aware, we may make some forward-looking statements during this presentation and 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. You can find some of these risks and uncertainties and other factors in the earnings release as well as in other documents filed by the Company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. So if you turn to Slide 3, I’ll hand the discussion over to Pete.

Good morning, everyone, and thank you for your time today. I sincerely wish that I could say that the COVID-19 pandemic was behind us all. But it looks like that will not be the case for some time. I hope that you and your families are healthy and safe. At Rand, we continue to work remotely and alternate everyone's presence in the office. Even while we operated in the COVID-19 altered working environment, we were able to leverage the success of our transformation strategy to deliver solid financial performance. In fact, total investment income increased almost 16% over last year. The effectiveness of the externalization of the administration and management of our portfolio to Rand Capital Management, LLC or RCM contributed to lowering expenses by $80,000 compared with last year’s second quarter. The combination of growth in investment income and lower cost drove net income higher to $199,000 or $0.08 per share compared with a $0.20 per share loss in the second quarter last year. In May, we distributed $23.7 million as a special dividend consistent with the intent to maintain Regulated Investment Company or RIC status with the IRS. As you know, the dividend was paid in both cash and shares of stock. The $4.8 million cash portion of the dividend payment was the primary reason our net asset value was down by a little more than $4 million to $49.7 million at the end of the quarter. The approximately 960,000 additional shares issued as part of the dividend impacted the per share value of NAV. NAV was $19.21 per share compared with $33.2 per share at the end of March 2020. Dan, in his presentation, will provide a more detailed analysis of the change in NAV per share. Also during May, we executed the 1 for 9 reverse stock split Deb mentioned in her comments. In June, we repurchased 1,300 shares under our current 1.5 million share repurchase authorization at an average price of $10.99 per share. In addition, the board authorized a 10b5-1 plan for the share repurchase program. By having program purchases established with the banker or brokers that identifies the amount of shares to repurchase at certain prices, we are allowed to repurchase shares at times when we might otherwise have been prevented from doing so by securities law or because of self-imposed trading blackout periods. We closed the quarter with $22 million in cash and cash equivalents as of June 30, 2020, which represents 44% of our net assets. We also have an additional $3 million available on the SBA loan program. This allows us to have a unique construct position for building our portfolio and to continue executing our transformation strategy. It was a busy quarter for us. Everyone can turn to Slide 4. You can see that we invested 58% equity and 42% debt at the end of the quarter. This reflects our investment objective to generate current income and when possible complement income with capital appreciation. Our future investments will continue to focus on yield investments, primarily debt and loan instruments. We also will evaluate equity investments as alternative instruments that can provide income through dividends. During the second quarter, Rand invested approximately $1.5 million in a portfolio company SciAps with a fixed rate senior promissory note at 12% to 2023. I will tell you a lot more about this portfolio company later in the presentation. Interest provided by our portfolio companies increased to 81% from 2019, and our net investment income was $199,000 compared with a loss of $241,000 a year ago. We also invested $750,000 into Tilson Technology during the quarter. Tilson pays a regular dividend to Rand. The charts on Slide 5 demonstrate the increased diversity and growth in our portfolio. We believe that the diversity reduces our exposure to market risk and will benefit us during the challenging economic times in which we find ourselves. We continue to engage in active discussions with the management teams of the companies within our portfolio regarding actions they have undertaken to limit the spread of COVID-19. We believe that our portfolio companies are taking the necessary actions to ensure the safety of their employees, customers, and suppliers by enacting such procedures as work from home processes, staggered schedules, and increased sanitation efforts as well as social distancing. In addition, most of the portfolio companies are qualified and have received loans under their paycheck protection programs and are applying for other federal support programs when applicable. We do not know the timeline of the pandemic and the resulting economic downturn may impact our portfolio companies, but we are actively monitoring them, their liquidity, and operational status. We've been encouraged frankly by the resiliency of the portfolio. If you turn to Slide 6, you can see our top five portfolio companies. I mentioned earlier that two of the investments during the quarter; we also purchased 57,000 additional shares of Golub Capital BDC through rights offering. Including this investment, the portfolio value of our public BDC securities in our portfolio increased by approximately $269,000 during the quarter. Let's spend a minute talking about SciAps. This company is located just outside of Boston, MA, and is a leading manufacturer of handheld analyzers that provide instant elemental analysis of many industrial materials, including alloys, ores, mineral powder, and other materials that are widely used in the heavy industry including oil and gas, mining, heavy transportation, chemicals, pharmaceuticals, and primary metal products. The companies' analyzers offer rapid results on a variety of allied materials, including the measurement of carbon content in steels and stainless. We are pleased with our support of SciAps in providing more efficient analysis equipment. I should note before handing the call over to Dan that during the past two quarters, with social distancing requirements throughout the economy, our ability for diligence continues to be impeded. So our investment pipeline remains robust. It has made it difficult to be active in our funding process, but we continue to prepare our due diligence so that we can complete our site visits as our restrictions ease. Let me turn it over to Dan to review our financials in greater depth.

Thanks, Pete. And good morning, everyone. If you could please turn to Slide 8, you can see that the total investment income in the second quarter of 2020 was $675,000, which is up 16% from last year’s second quarter. This was largely due to an 81% or $255,000 increase in interest income, resulting from the change in our portfolio profile to more debt investments. As Pete mentioned, the externalization of the administration and management of the Rand portfolio contributed to $80,000 in savings. Last year’s second quarter was also heavily impacted by higher professional fees and stockholder costs because of the proxy contest during that period. Second quarter expenses were more than 40% lower than the same period last year. Our strong investment income and significantly reduced expenses during the quarter resulted in a net increase in net assets from operations of $424,000 or $0.20 per share. The waterfall graph on Slide 9 visually shows the sequential impact of several items affecting NAV during the second quarter. While we increased net assets from operations by $400,000, this was more than offset by returning $4.8 million to our shareholders in the form of a cash dividend. Additionally, we repurchased 1,300 shares of stock during the quarter, which also had an impact on NAV. If you turn to Slide 10, you can see our net asset value per share compared with last quarter. As part of a special dividend we paid in the second quarter, we distributed approximately one million shares of Rand stock. This was a 59% increase in shares outstanding, which also impacted NAV on a per share basis by $11.29. This explains the larger decline in the NAV per share. If you would now turn to Slide 11, I will discuss the strong position we remain in during this COVID-19 influenced economy. We continue to have a high level of cash at $22.1 million, of which $10.6 million was available for corporate purposes, providing significant liquidity for us. $11.4 million is reserved for investments by the SBIC subsidiary. Our total liquidity also includes $3 million of additional available leverage, which is our remaining commitment from the SBA. The $11 million debentures owed to the SBA mature over a multiyear period that does not begin until 2022. In 2022, we have our first $3 million installment due to the SBA. That completes our prepared remarks. Operator, please open the line for questions.

Thank you. Your first question comes from Sam Rebotsky with SER Management. Please proceed with your question.

Yes. Good morning, Pete and Dan. I'm a little behind because my computer equipment is not working well. But I've heard everything that you've said. And as far as what Rand looks like today. So as far as the dividend, with the $0.08 in the covering quarter we would give 90% of the $0.08 assuming that was what the earnings were?

The requirements are that we give a minimum of 90% of our net investment income where we are evaluating that in the third quarter, and we'll be able to provide further guidance. But you are correct that's the tax rule.

Okay. Further in addition, you filed the document that indicated you're looking for more money, combining this with the largest shareholder. What is your progress relative to raising additional funds? And how will this benefit the Rand Capital shareholders?

I'm not sure what document you're referring to, Sam.

You – as far – I don't have it in front of me, but you speak – well do you have a plan to raise additional funds?

At this point, we don't have one. I don’t believe we filed anything regarding that. Deborah, are you aware of anything we filed?

No. No, I'm not quite sure what you're referring to, Sam.

With the SEC disclosure, when my computer equipment is better working, I'll come back to you on that.

Unless you are referring to – I mean, so we have right now a lot of cash. We have $22 million in cash. We still have $3 million available to draw on the SBA loan. So it's not like we need additional funds at this point. We need to put that money to work.

Okay. I will come back to you after my equipment is better working. At this point with the $22 million, what are your plans on investing this money? Are you seeing a lot of opportunities where we can earn more than we're currently earning on the $22 million? And what is our time frame for the earnings?

We continue to seek investments; we continue to execute on investments. In the next quarter, I believe that you will see that we've put some of this money to work. And as we address, that's a little bit difficult because part of our due diligence is meeting with the companies, which sometimes is problematic. But now we continue to invest the money, and our goal is to increase our investment income through debt instruments. And you'll see more of that as we go forward.

Well, that sounds good. And one part of the question, to get more exposure to potential shareholders, how do you expect to participate? Unfortunately, you have to do it in virtual conferences. Do you have any plans on doing something like that?

We have not signed up for any in the near future, but we're certainly going to evaluate that. Part of what we are doing, Sam, as you know, we had people that were interested in Rand because of our equity investments. And we are transforming them over to have active conversations with people that are invested and interested in getting a dividend yield.

Well, good luck. Hope you find some new investments because with the stock’s book value over 19 and with $22 million in cash and the stock currently in the $11 range, it would appear that with bigger exposure you might be able to trade at a higher level. Okay. Good luck guys.

Thanks, Sam. And call me about that filing you had referenced.

Okay. I'll come back to you on that next week.

Thank you. Our next question comes from the line of an indiscernible speaker. Please proceed with your question.

Yes. Thank you. I was curious if the recent developments with Eastman Kodak would have any beneficial effect on Rand?

Not that I'm aware of. You are referring to how that talk spiked up because of some government contract?

No. The government lent Eastman Kodak $750 million to produce medical ingredients, eventually 25% of the needs of the United States. I thought it would help New York State, Upstate New York. I know you are in Buffalo, but I would think that anything that helps Upper New York State would help you. No?

I am not aware of any of our companies that have exposure to Eastman Kodak.

Okay.

As that money gets deployed, it may impact some of our companies.

Okay. Thank you.

There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Thank you for your participation this morning and your interest in Rand Capital. We look forward to connecting again soon.

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time.