Rand Capital Q4 2023 Earnings Report

Rand Capital EPS Results

• Actual EPS: $0.40
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Rand Capital Revenue Results

• Actual Revenue: $1.93 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Rand Capital Announcement Details

• Quarter: Q4 2023
• Date: 3/5/2024
• Time: N/A
• Conference Call Date: Tuesday, March 5, 2024
• Conference Call Time: 1:30PM ET

Rand Capital (NASDAQ:RAND) is a business development company specializing in subordinated debt with warrants or preferred equity and venture capital investments. Within private equity, the firm specializing in capital growth and lower middle market investments. Within venture capital, it specializing in early to late-stage private businesses. It does not prefer to invest in real estate sector. It prefers to invest in software, professional services, manufacturing, consumer, healthcare, automotive and public d stocks. It prefers to invest in East or Midwest U.S. operations sectors. It typically invests between $0.75 million and $5 million with initial target size of $1.5 million. It seeks to invest in companies having more than $2 million in revenue or having excess of $1.5 million and up to $5 million in EBITDA. It prefers to be a minority stake and seeks to take a Board seat in its portfolio companies. It typically holds its investments for a period up to five years.

Rand Capital Q4 2023 Earnings Call Transcript

[Operator]

Greetings. Welcome to Rand Capital Corporation 4th Quarter Fiscal Year 2023 Financial Results. At this time, all participants are in a listen only mode. Please note this conference is being recorded. I will now turn the conference over to Craig Mychajluk, Investor Relations.

[Operator]

Thank you, Craig. You may begin.

[Speaker 1]

Good afternoon, everyone. Appreciate your interest in Rand Capital and for joining us today for our Q4 and full year 2023 financial results 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. Following along in the slide deck, please turn to Slide 2, where I'd like to point out some important information.

[Speaker 1]

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 with 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 with the Securities and Exchange Commission. These documents can be found on our website or atsec.gov. Today's call will also discuss some non GAAP financial measures.

[Speaker 1]

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. We provide reconciliations of non GAAP measures, comparable GAAP measures in the tables that accompany today's earnings release. Pat, please turn to Slide 3, and I'll hand the discussion over to Dan.

[Speaker 2]

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 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 of our equity investments, exited some of our publicly traded securities and had loan repayments that provided approximately $10,000,000 of cash proceeds. In addition, we drew down over $13,000,000 from our credit facility.

[Speaker 2]

In total, we have put more than $20,000,000 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 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 4. 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 4th quarter.

[Speaker 2]

Our aggregate total dividends represented an increase of 60% over our 2022 dividends paid and 3 times growth over 2021. I would like to also highlight that during the Q2 of 2023, we had raised our regularly quarterly cash dividend by 20% or $0.05 per share. We've recently announced our Q1 2024 dividend will be at the same $0.25 per share amount. At year end, having put our capital to work and distributing $3,400,000 in cash dividends to shareholders, we still have over $19,000,000 in total availability. This includes our cash on hand, our line of credit and highly liquid public traded securities.

[Speaker 2]

These funds are available for future liquidity for investment opportunities and these will provide higher yields. 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 $77,100,000 and this is spread across 30 highly diverse portfolio businesses. This was up $15,600,000 or 25 percent from December 31, 2022, and reflected new and follow on investments, valuation adjustments in multiple portfolio companies, and as we will 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%.

[Speaker 2]

The remaining mix of the portfolio was comprised 27% in equity investments private companies and 9% in our publicly traded equities. These do consist of our BDC investments and our ACV auction stock. During the Q4, we completed 2 follow on investments that are highlighted on Slide 6. The largest investment totaled $2,200,000 to BNP Food Service Supply. We refer to this as FSS.

[Speaker 2]

FSS is out of Utah and provides design, distribution and installation services for commercial kitchens, their renovations and new construction. This follow on debt investment was subsequently partially offset as FSS did make a loan principal repayment of approximately $600,000 later in the quarter. Rand's total debt and equity investment now in FSS had a fair value of $7,400,000 at year end. The other transactions 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.

[Speaker 2]

As I mentioned earlier, we invested a total of $20,300,000 in 2023. This was across 9 transactions and were largely invested into interest yielding assets. Our investment in DSD did get sold during the Q2 of 23, which resulted in the full repayment of Rand's subordinated debts that is and sale of our preferred equity investment. In total, we received about $6,700,000 of proceeds from the investment, which did include a net gain of $2,500,000 The other notable transaction was that we had sold some of our ACV Auctions securities for $1,700,000 in gains during the year. At year end, we still hold almost 195,000 shares of ACV, which does represent approximately 4% of our portfolio's total fair value.

[Speaker 2]

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 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 saw mixed declines, and there were a few other smaller industries that were adjusted by minor percentage points.

[Speaker 2]

Overall, we continue to value the diversity of our industry mix, which is represented across the 30 portfolio companies. Slide 8 lists our top 5 portfolio companies at year end. Tilson continues to and remains the largest fair value investment at $10,600,000 or 14% of our total portfolio. The one change was with FSS moving up to the number 2 ranking following the 4th quarter follow on investment. Overall, these top 5 represent 45% of our total portfolio at year end.

[Speaker 2]

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

[Speaker 3]

Thanks, Dan, and good afternoon, everyone. I will start on Slides 1011, which provide an overview of our financial summary and operational highlights for the 2023 Q4 and full year period. Total investment income for the quarter was $1,900,000 up 11% over last year, driven by a 47% increase in interest income. The full year total investment income grew 27% to $7,300,000 which reflects the new debt instruments that we originated from 6 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.

[Speaker 3]

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 for the impact of new investments or divestitures. 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 Q2 of 2023 also impacted this year's dividend level. Total expenses were approximately $1,000,000 during the Q4 of 2023 compared with $371,000 in the prior year Q4. Adjusted expenses, which includes accrued capital gains incentive fees and is a non GAAP financial measure, were $950,000 compared with $5.39 in the Q4 of 2022. This change reflects the $293,000 increase in interest expense on borrowings under the senior revolving credit facility entered into in June of 2022 to fund growth.

[Speaker 3]

Full year total expenses were 4 point $2,000,000 compared with $1,100,000 in 2022. 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. 4th quarter net investment income was $962,000 or $0.37 per share, compared with $1,200,000 or $0.48 per share in last year's period. On an adjusted basis, which is a non GAAP financial measure and excludes the capital gains incentive fee accrual expense, net investment income was $0.40 per share compared with $0.41 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.

[Speaker 3]

Excluding the capital gains incentive fee accrual, which is a non GAAP financial measure, adjusted net investment income per share increased 11% to $1.46 per share. 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 at December 31, 2023 were $60,800,000 up 5% from the end of 2022. This change reflects the net investment income along with realized gains and the net change in unrealized depreciation, which more than covered the $3,400,000 in dividend distributions to shareholders during the year. As a result, the net asset value per share at December 31, 2023 increased to $23.56 per share compared with $22.36 at the year end 2022.

[Speaker 3]

As highlighted on slide 13, we continue to have a strong balance sheet and significant liquidity positions that positions us well for future investments. Cash at year end was approximately $3,300,000 We held approximately $7,400,000 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 $8,800,000 in availability under the senior secured revolving credit facility at December 31, 2023. In total, our liquidity accounting resources is over 19,000,000 dollars 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 Q2 of 2023 that we 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.

[Speaker 3]

On February 26, 2024, Rand declared its regular quarterly cash dividend distribution of $0.25 per share for the Q1 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. Thanks, Margaret.

[Speaker 2]

Our strategy is to continue to grow and scale our business by focusing on debt and related equity investments in 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 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. 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, 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.

[Speaker 2]

Going forward, our initial investment into any one portfolio company is expected to be in the range of $2,000,000 to $4,000,000 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 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 Q1 2024 results, which will be reported in early May. We hope you have a great day.

[Operator]

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