Rand Capital Corporation

Greetings and welcome to the Rand Capital Corporation Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Deborah Parlovsky, Investor Relations. Thank you. You may begin.

Thanks, Diego, and good morning, everyone. We certainly appreciate your interest in Rand Capital and for joining us for our third quarter 2020 financial results conference call. On the line with me today are Pete Grum, our Chief Executive Officer, and Dan Pemberthy, our Executive Vice President and Chief Financial Officer. You should have a copy of the release across the wires this morning discussing our results, as well as the slides that will accompany our conversation today. If not, you can find them both on our website at randscapital.com. If you are following along on the slide deck and would turn to slide two, 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 materially from where we are today. You can find a summary of these risks and uncertainties and other factors in the earnings release, as well as in other documents filed by the company with Securities and Exchange Commission. These documents can be found on our website or at sec.gov. Now, if you'll turn to slide three, I will hand the discussion over to Pete to begin. Pete?

Good morning, everyone. Thank you for your time today. As you all know, the COVID pandemic remains as part of our daily lives. We continue to work remotely and alternate everyone's presence in the office for the health and safety of our personnel. But I am pleased to say that even in this environment, we delivered solid financial performance during the third quarter. That investment income was $280,000, or 11 cents per share. We had announced in September that Rand Capital established a 10B51 stock repurchase plan to facilitate the purchase of shares under our 1.5 million share repurchase program. The 10V51 trading plan allows us to repurchase shares at times when we might not otherwise be able to because of self-imposed trading blackout periods and other securities laws. Under the plan during this quarter, we repurchased 2,090 shares of Rand stock at an average price of $11.29 per share. We are in a strong position with relatively significant liquidity of $22 million, which is a compromise of $19 million in cash and $3 million in available leverage from the SBA. With this liquidity, we intend to build our portfolio and to continue to execute on our strategy. I would mention that last week we filed a preliminary proxy with the SEC for a special meeting of shareholders to approve a new investment advisory and management agreement. The agreements are being renewed as a result of the change in ownership of RAND's investment advisor, RAND Capital Management. The terms are not changing and the services provided by RCM and investment processes are not changing. You can find the details of the change in ownership in the filing. If you could all turn to slide four, you can see that the debt investments now compromise 44% of total investments, an increase of 33% from a year ago. The shift in our portfolio is intentional, and we intend to elect to be a regulated investment company for tax purposes, which requires us to distribute at least 90% of our qualified income to our shareholders. The intention is to grow our investment income to support a regular distribution. The remaining 56% of the portfolio are equity investments and primarily our legacy investments. As we continue our transformation, we will reduce these assets over time through various exit strategies. On the investment side, during the quarter, we invested $1.9 million in a 12% fixed rate promissory note, with Science and Medicine Group, a new portfolio company. The note is due in 2023. Science and Medicine Group is a leading research and advisory firm serving the life science, analytical instrument, diagnostic, healthcare, radiology, and dental industries. The group uses business intelligence and market research to help build their clients' product, strategy, and marketing plans then leverage their digital audience to help grow their clients' business. We also invested $1.1 million in three more publicly traded BDCs. This brings our total BDC portfolio to eight investments. These investments are in companies that are much larger than RAND, and they provide a dividend and are liquid instruments that we can readily access for other opportunities that we find them. If you turn to slide five, this demonstrates the increasing diversity and growth of our portfolio. With the investments we made this quarter, healthcare is a percentage of total investment increased four percentage points from the trailing sequential quarter, and the BDC investment funds increased three percentage points. We believe the increased diversity of our portfolio reduces our exposure to market risk and benefits us during the challenging economic times we find ourselves. While we may not know the total impact nor the duration of the pandemic and resulting economic downturn that may be in our portfolio companies, we continue to actively engage with them and monitor their liquidity and operational status. The resiliency of our portfolio is encouraging, frankly amazing. Turning now to slide six, You can see now our top five portfolio companies, and this has not changed since last quarter. With the addition of the four companies I mentioned earlier, our portfolio value is $41.7 million, with 42 companies a quarter in. If you turn to slide seven, I would like to give you an update on some of our portfolio companies. We have several companies that are actually performing quite well. and perhaps even benefiting from the COVID-19 environment. Of course, there are a few companies that have been challenged as well. As you might expect, some of the companies that are doing well are directly tied to fighting the pandemic, and I would like to share more about two of them, SIAPS and Rheonix. As I discussed in the call last quarter, SIAPS is a Boston, Massachusetts-based company that is a leading manufacturer of handheld analyzers that provides instant elemental analysis of many individual materials. They have partnered with Allied Bioscience, who have developed an EPA-approved surface coating that can provide protection against viruses and bacterias on the surface, including the virus that causes COVID-19. CIAPS has been chosen to examine the amount of coating present on surfaces and determine whether the coding is still present and active. Reonix, which we've talked about in the past, is an Ithaca-based company, and it's developed in Compass workstations that are fully automatic systems providing molecular testing for use in clinical research and applied testing laboratories. One of their recent developments is a COVID assay that is a fully automated test test to detect the SARS-CoV-2, the virus that causes COVID-19, directly from respiratory samples. The test is designed to operate on the Rheonix and Compass MDX workstation and facilitate same-day test results for small and medium laboratories. I would encourage all of you to access their website as a way to keep up to date with their accomplishments. Others have benefited because of the global work-from-home efforts to contain the environment. For example, the Open Exchange has helped public companies, investment banks, and professional investors keep their vital investor information flowing through with virtual video conferencing and video streaming solutions. Their solutions have been used by some of the largest investment banks and have been the platform for many investor conferences. Demand for Carolina SCIF has been driven by the surging consumer interest in outboard activities. They offer lower price range fiberglass outboard motors. The challenge has been keeping up with the demand with the challenges of manufacturing with reduced and staggered staff, addressing health and safety and managing their supply chain. As a closing thought here on our portfolio, we're advancing the portfolio of competition, including determining actions to take on our equity-only investments as we pursue yield-producing investments and also dividend-paying equity investments. With that, I will turn it over to Dan to review our financials in greater depth.

Dan Bauschner Thanks, Pete, and good morning, everyone. If you could please turn to slide nine, you can see that the total investment income in the third quarter of 2020 was $737,000, a 68% increase from last year's third quarter. This was largely due to the change in our portfolio profile to more debt investment that resulted in 93% or a $307,000 increase in portfolio interest income. As intended with our transformation, the externalization of the administration and management of the RAND portfolio reduced our cost by $74,000 in the quarter. As a result, growing investment income, this is coupled with reduced expenses, drove the net increase in net assets from operations of $263,000, or 10 cents per share. The waterfall graph on slide 10 shows visually shows the impact of several items affecting the $200,000 increase in NAV from the trailing second quarter. This growth was primarily due to the $300,000 increase in net investment income, partially offset by unrealized depreciation on investments, and the 2,097 shares repurchased during the quarter. On a per share basis, NAV benefited by approximately a penny per share from these share repurchases. On slide 11, we depict the waterfall of the change in NAV year to date. The cash portion of the special dividend, which was $4.8 million, was the largest element driving this decline. This was offset by $2.4 million in a net realized gain from a portfolio exit and $1 million in net investment income. Additionally, we have repurchased 3,397 shares of stock during the year to date which did reduce NAV by $40,000 from the repurchases. However, on a per share basis, this contributed positively per share as we are able to purchase the shares at a discount to NAV. If you will turn to slide 12, let me review the strength of our balance sheet. At the end of the third quarter, we had $19.1 million of cash on hand. Of that, $9.7 million was available for corporate purposes, providing significant liquidity for us, and $9.4 million is reserved for investments by the SBIC directly. Our total liquidity also includes $3 million of available leverage, which is a remaining commitment from the SBA. The $11 million currently owed to the SBA matures over a multi-year period, that begins in 2022 when $3 million is due. As Pete noted, we're in an excellent position to grow our portfolio investments and drive investment income, and further, as part of RIC's status, we plan to distribute a large part of that income to our shareholders in the form of cash dividends. We expect to provide details regarding the dividend distribution for 2020 before year-end, I will remind you, however, that these are more complex calculations given our recent conversion from a C-Corp tax status and also being our initial year of RIC testing. We do plan to take a look at our dividend plans for 2021, and those should be released shortly. The distribution in 2020 will include both the element related to our net interest income, but also the capital gain portion related to the exits we had this year. This completes our prepared remarks. Operator, please open the lines for questions.

Thank you. Ladies and gentlemen, at this time we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star key. Once again, to ask a question, press star 1 on your telephone keypad. We will pause for a moment to pull up your questions. Thank you. Thank you. And our first question comes from Brad Davidson. Please state your question.

Good morning. I missed the first couple of slides, but in case this hasn't been addressed, the recent funding round for ACV auctions, I was wondering if you could add any color to that, what you guys know on your end. and how that impacts the valuation of ACV on the company's accounts going forward.

I know and are able to share what is, I think they had a press release about raising $55 million and a new investor. And at this point, that's all I know. But, you know, you can read into what you want. They've added some strength in their board. They've added some investment professionals as employees who have had a history of taking companies public, and that's about all that I can really share with you.

Joe, do you guys have some idea of how that impacts, you know, RAND's investment in there? I mean, do they provide you some sort of information that would, you know, detail that information?

We have not received anything formally from them.

Informally?

There's nothing that I can share with you at this point. We will certainly take a look at it again when we hit the end of the year. But, no, I actually don't have any numbers other than the amounts that went in.

But let me – Fred, if I may, this is Deb. I just also want to point out and put in context, you know, that our position, while very nice in our portfolio, is 13.1% of our portfolio, we hold much less than 1% of ACD.

Well, that's still something in the pretty technical.

Well, I just want to make sure we have it in context, though.

I mean, even prior to the I believe it was the CFO they brought on. I've heard rumblings and I'm not totally sure when, but I think at this point it's almost inevitable unless the IPO market just craters. But, you know, are they required to provide anything to you guys as far as evaluation?

I don't believe so. You know, we have a good relationship with the company. It's a fabulous company. It's going to be great for Buffalo, and they're doing very, very well.

I would encourage you to take a look at the Buffalo Business First. Yeah, I'm well aware. And he's reported that ACV has closed on a $55 million cash injection. at a $1.75 billion valuation.

Oh, that I wasn't aware of.

He also previously reported that the prior rounds were done at a $1.5 billion valuation. Of course, we don't have insight into that, but these are what's being reported by our major business paper in Buffalo.

Yeah, no, I'm a Buffalo guy, too. So, yeah, I was aware of the $1.5. I wasn't aware that they had placed the $1.75 on the current round. So that that certainly adds a little color to that. All right. Thank you very much. I appreciate it.

We always appreciate hearing from you, Brad.

All right. You take care.

Thank you.

Our next question comes from Carlo D'Angelo with, go ahead with your question. Thank you.

Hi, good morning. I'm just curious to know, what is like, I was talking to a friend of mine who also has some shares in rent, and he was telling me that we could expect a dividend payout of $7.50 for every share that we had, something crazy like that. Is that true?

If your son figured that out, it didn't come from us. We are required, when we file for RIC status, which is our intention, and that's a tax filing, to distribute at a minimum 90% of our debt investment income to To date, that doesn't equal anywhere close to $7 a share.

Okay. All right. I have another follow-up question. Would we be able to reinvest those dividends into whatever payouts you give us? Would we be able to reinvest those into RAND?

We do not at this point have a dividend reinvestment plan. That's a formal plan. Of course, you can take anything you want and purchase in the open market.

Okay. Okay. So that sounds good. All right. That's it. Thank you for your time. I appreciate it.

Thank you.

Thank you. And just a reminder to ask a question, press star one on your telephone keypad. Our next question comes from Sam Robotsky with SCR asset management. Please state your question.

Yeah. Good. Good morning, Pete and Dan. Uh, based on this third quarter, what would the dividend be available?

We have not done that computation, but we have started it. And, you know, as far as what it's going to be, and it's a fairly complex and new for us, but there's, as Dan said, there's two parts. There's a capital gains part and there's a net investment income, you know, on a In a simplistic way, if we learned 11 cents every quarter, that would be 44 cents, and we would have to distribute at a minimum 90% of that. So I don't know what that is, 38 cents, somewhere along that.

Okay. Now, as far as future investments, the success we've made with ACV and various other investments, Do we have a dollar amount that we expect to allocate to these type of investments relative to income investments?

We don't have a formal thing. We are transitioning our portfolio to more income investments. We are not really looking at which kind of the early stage equity investments only investments at this point, although we do have some and we'll always have some, but we don't have a formal strategy on that. You will find that in general when we're looking at the ventures, there will be in most cases a portion also allocated to the equity piece.

And as far as the east-west investing in some of the same investments we're investing. Have we created a dollar amount to allocate what they come into and what we come into to future investments?

No, we have not, Sam.

Okay. So they will only come into what we come into jointly, I guess.

I think you're talking about East Asset Management?

Yes.

Okay, I'm not privy to what they invest in, but it's a large, robust organization, and they own sports teams, and they own hotels, and they own oil and gas, and I'm sure they do other investments that we are not aware of, nor do we participate in.

Is there a plan for us? I think before you went to this income approach, you spoke of getting larger and having more investments into RAND. Is there any plans right now to increase the size of investments? Although your stock is selling at a discount from the net asset value, how is that working? Because this was one of the approaches that you wanted to take to increase the size of investments.

Yeah, that is in place, and we are looking, and I think in the next week or so you'll hear us announce at least one larger investment that we've made and are continuing to pursue larger investments.

Hopefully this comes into the stock valuation and people give you more credibility because your stock is now trading at a significant discount from your net asset value. So good luck.

Thanks, Sam.

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.

Thank you for joining us this morning and for your interest in RAND. We look forward to updating all of you on our fourth quarter and full year results in March. Have a great day and stay healthy.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.