Rand Capital Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 3 speakers on the call.

Operator

And welcome to the Rand Capital Corporation First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Craig Mychajluk, Investor Relations for Rand Capital Corporation. Thank you.

Operator

You may begin.

Speaker 1

Thank you, and good afternoon, everyone. We appreciate your interest in Rand Capital and for joining us today for our Q1 2023 financial results conference call. On the line with me are Dan Pemberthy, our President and Chief Executive Officer and Margaret Brechtel, our Executive Vice President and Chief Financial Officer. A copy of the release and slides that accompany our conversation is available at randcapital.com. If you're following along in the slide deck, please turn to Slide 2, I'd like to point out some important information.

Speaker 1

As you are likely aware, we may make some forward looking statements during this presentation. 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 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@sec.gov. During today's call, we'll also discuss some non GAAP financial measures.

Speaker 1

We believe these will be useful in evaluating our performance. 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. We have 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 3, and I'll hand the discussion over to Dan. Dan?

Speaker 1

Thank you, Craig, and good day, everyone. We kicked off the year with a strong Q1, demonstrated by continued earnings momentum, Driven by the improvement of our portfolio competition as well as the overall favorable performance of portfolio companies Amidst the challenging economic business climate, we delivered total investment income growth of 65% for the quarter, which reflected strong growth in interest from portfolio companies, dividend income that more than doubled and higher fee income. For the quarter, net investment income per share was $0.28 compared with $0.30 in the prior year period. The change was largely driven by the accrual of additional capital gains incentive fees, which Margaret will review in greater detail. We paid a regular quarterly cash dividend of $0.20 per share during the Q1.

Speaker 1

And just over a week ago, on April 26, Rand increased its regular quarterly cash dividends for the 2nd quarter by $0.05 per share or 25%, Making it $0.25 per share for the quarter. We have continued to execute our strategy by growing our income producing portfolio, which has enabled us to increase the dividend. We believe that our deal flow and our unique position in the market Will help to continue to support future dividends. Other notable highlights during the quarter included $5,600,000 in new and follow on investments, While receiving $500,000 from portfolio investment sales and repayments, Rand's Board of Directors also renewed the share repurchase program, Authorizing the company to purchase up to $1,500,000 in additional Rand's common stock. If you could please turn to Slide 4.

Speaker 1

You can see our portfolio mix between debt and equity and the changes during the past quarter. As of March 31, 2023, Our portfolio consisted of investments in 30 companies, up 1 since year end 2022. The portfolio comprised approximately 58% in fixed rate debt investments, 31% in equity investments in private companies 11% in publicly traded equities consisting of other BDCs and our ACV stock holdings. The fair value of these investments totaled $68,200,000 This expanded 11% or 6,700,000 From the sequential 2022 Q4 and reflected recent investments and a $1,500,000 valuation adjustment on CV Auctions. We made an investment in 1 new portfolio company and also 2 follow on investments that totaled 5,600,000 Those transactions are highlighted on Slide 5.

Speaker 1

The largest investment in the quarter With $3,000,000 to PressurePro, which consisted of subordinated debt at a 15% interest rate and also included a 10% warrant. Pressure Pro is a family owned and operated company that has established itself as a market leader for branded tire pressure monitoring systems, consisting of a suite of proprietary hardware and software. We made a follow on debt investment of $2,300,000 in foodservice supply In combination with an equity sale of $210,000 Brand's total debt and equity investment in FSS At a fair value of $5,200,000 at quarter end. We also funded an equity investment of $250,000 in Tilson Technologies Asset Ownership, which is an affiliate of our SQF LLC Holding. This investment supports Tilson's expansion By both driving the continued growth of its nationwide network infrastructure design build services and supporting SQS, Which develops Tenela Communications assets in public right of ways throughout the U.

Speaker 1

S. And is a leading poll owner And solution provider for 5 gs wireless installations. The charts on Slide 6 the diversity in our portfolio and the change in industry mix during the Q1. With the impact of these investments, sales and fair value changes, And the 1% decrease in consumer products and automotive, we continue to value this diversity in our portfolio. Slide 7 lists our top 5 portfolio companies at quarter end, representing almost half of our total portfolio.

Speaker 1

Since last quarter, FSS moved into the top 5 ranking at the number 4 spot, given our first quarter investment, Which shifted KTEC out of the top 5, Tilson continues to remain the largest fair value investment. With that, I'll turn it over to Margaret to review our financials in greater depth.

Speaker 2

Thanks, Dan, and good afternoon, everyone. I will start on Slide 9, which provides an overview of our financial summary and operational highlights for the Q1 of 2023. Total investment income was $1,800,000 and this is up 65% over last year, driven by 42% increase in interest from portfolio companies and higher dividend and fee income. Of our 30 total portfolio company investments, 23 contributed to our total investment income during this Q1. Total expenses were approximately $1,500,000 during the Q1 compared with $345,000 in the prior year quarter.

Speaker 2

This increase includes a $531,000 increase in our capital gain incentive fee accrual payable to the company's Sternl Investment Advisor, Rand Capital Management, LLC. It also reflects 100 Gains and losses at the close of a period. Excluding the capital gains incentive fees, adjusted expenses, which is a non GAAP financial measure, approximately $757,000 compared with $585,000 in the Q1 of 2022. 1st quarter net investment income was $715,000 or $0.28 per share compared with $772,000 or $0.30 share in last year's period. On an adjusted basis, which is a non GAAP financial measure, Net investment income was $0.39 per share, and this is up 86% from $0.21 per share at last year's period.

Speaker 2

Slide 10 provides a waterfall graph of the change in our net asset value for the quarter. Net assets for March 31, 2023 were $59,400,000 up from year end 2022. This change reflects solid investment income and positive fair value changes across a number of portfolio companies, partially offset by 1,000 in dividend distributions to shareholders during the quarter. As a result, the net asset value per share was $23 compared with $22.36 at December 31, 2022. As highlighted on Slide 11, we have a strong balance sheet and significant liquidity that positions us well in a volatile market.

Speaker 2

Cash at quarter end was approximately $1,800,000 We did not repurchase any shares in the quarter. So as Dan mentioned, the Board of Directors renewed the share repurchase program, which now expires on April 19, 2024. We held approximately $7,800,000 in liquid BDC and ACV auction shares, which can provide near term funding capital for investments as we have demonstrated in past periods. In addition, based on our borrowing base formula, Rand has a $17,100,000 of availability Under the senior secured revolving credit facility at March 31, 2023. Our total outstanding borrowings $7,950,000 carried an interest rate of 8.05 percent at quarter end.

Speaker 2

Subsequent to quarter end, on April 26, 2023, Rand's Board of Directors declared a quarterly cash dividend of $0.25 per share. Cash dividend will be paid on or about June 14, 2023 to shareholders of record as of May 31, 2023. With that, I will turn the discussion back to Dan.

Speaker 1

Thanks, Margaret. The Q1 did show continued growth as we scale the business By focusing on debt and related equity investments in privately held lower middle market companies. Looking ahead, we believe we can Continue to replicate our success by leveraging our multiple sources of capital to grow our portfolio and drive investment income growth well into the future. Thank you for joining us today and for your continued interest and support of Rand Capital. We look forward to updating all of you on our Q2 20

Operator

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful afternoon.

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Earnings Conference Call
Rand Capital Q1 2023
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