Rand Capital Corporation

Greetings and welcome to RAND Capital Corporation fourth quarter 2020 financial results. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Debra Pulaski, RAND Investor Relations. Thank you. You may begin.

Thank you, Doug, and good afternoon, everyone. We certainly appreciate your time today and your interest in Rand Capital. As we discuss our fourth quarter and full year 2020 financial results, I will have Pete Grum, our Chief Executive Officer, and Dan Penberthy, our Executive Vice President and Chief Financial Officer, provide you some formal remarks, and then we'll open it for Q&A. You should have a copy of the release that crossed the wires this morning. as well as the slides that will accompany our conversation. If not, they are available on our website at www.rancapital.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 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. With that, please turn to slide three, and I will hand the discussion over to Pete to begin. Pete?

Thank you, Deb. Thank you, and good morning, or actually afternoon, everyone, and thanks for your time today. 2020 marked another important year in our transformation into an income-producing, dividend-paying BDC. Importantly, I believe we ended the year on a strong note. For the quarter, net investment income per share was up nearly four times to 29 cents per share. For the full year, net investment income was 1.8 million, or 77 cents per share. We began this transformation process in 2019 with the sale of shares to East Asset Management that raised $25 million in equity. Concurrent with this sale, we externalized our management to Rand Capital Management. 2020, there were several additional achievements that were part of the path of transformation to increase shareholder value. Let me just outline them. Because we are electing for IRS purposes to become a regulated investment company, or RIC as we refer to it, in May last year, we distributed all of our accumulated earnings and profits since inception with a special dividend. Total dividend was $23.7 million, or $1.62 per share, and was paid out with a combination of cash and stock. Later that month, we executed a one for nine reverse tax split, which was approved by our shareholders in December 2019. In May, our board authorized a new $1.5 million share repurchase program, furthering our ability to provide return of capital to our shareholders. In September, we implemented a 10B51 trading plan to assist our capital deployment in a manner that provides the best returns for our shareholders. This plan helped enable us to repurchase 6,631 shares in 2020. To finish it at the year, we announced our 2020 dividend of $1.33 per share, which was payable to shareholders in January 2021. And we've announced our ongoing dividend plan. We accomplished this all during a year defined by the COVID-19 pandemic that affected almost every aspect of our daily lives. Could you please turn to slide four? This would discuss the progress we have made regarding the evolution of our investment portfolio to support our strategy. A major element of RAND's transformation is our intent to grow net investment income. We are now focusing on more interest-yielding debt securities to provide a steady income. This is a significant departure from our history of investing to increase asset value by investing in equity and high-performing companies. Consistent with our plan, we have exited several equity investments, increased our debt investment portfolio, and purchased dividend-paying securities of other publicly traded BDCs. Given our liquidity, which Dan will discuss, we are also creating a robust pipeline of potential new investments. You can see the evolution of our portfolio in just the last year, where equity investments now represent approximately 47 percent of the total value of our portfolio, compared with 57 percent last year. From this calculation, we excluded the public company BDC shares. The BDC shares provide both dividends that put our capital to work and are liquid instruments that we can readily access for other opportunities as we find them. At year end, the fair value of these investments was $3.3 million. We turn to page five, provides a snapshot of certain portfolio investments from the past year. highlight a couple. In November, we made our largest initial funding for a company in recent history. The combined debt and equity investment in KTEC consisted of $3.5 million of subordinated, secured 14% note, and an additional $300,000 of Class A preferred stock purchase. KTEC, which is based in Hallathorpe, Maryland, is a leading manufacturer and distributor of toys for dogs, various products for pet birds, and other supplies for the pet industry. The company's products are offered globally via a variety of sales channels, including national and local pet retailers, mass and regional retailers, grocery stores, and e-commerce. During the fourth quarter, we increased our investment in Centivo through a $500,000 purchase of Series B preferred stock as part of a $34 million raise. Centivo, located in New York City, has recently launched a new health plan that will allow employers to adopt a self-insured model. This offering can reduce health care costs when compared to traditional health insurance. Please turn to slide six, and you'll notice the increasing diversity of our portfolio. With the investments we recently made in certain exits, we now have consumer products in 10%, healthcare doubled to 12%, and the inclusion of the BDC investments. The largest declines are in software, which now make up 29% of our portfolio, and we have exited entertainment. We believe the increased diversity of our portfolio reduces our exposure to market risk. Slide seven lists our top five portfolio companies a year in. There are few changes since the last quarter. You will notice that Andretti is no longer on the slide, as they paid off their note at the end of 2020 and exited the portfolio. KTEC and SMG rose to the top five. SMG joined the portfolio in July last year, but they did just pass off last week on Friday, so there will be changes to this list for the first quarter. While we are encouraged by the resilience of our portfolio, given the continued uncertainty regarding the duration of the pandemic, and resulting economic downturns impact on our portfolio companies, we remain actively engaged with them and monitor their liquidity and operational status. There are some, however, that have benefited during this period, and others that have used the resulting headwinds and challenges to improve their operations. You may likely have noticed the information in the press regarding HCV. As most of you know, they have filed their S-1 for a public offering of their equity a couple weeks ago. The valuation in our portfolio of $6.5 million was based on their last equity raise as a private company. We will be watching to see, as I'm sure most of you all will, where the offering lands. Any proceeds for us above our $163,000 initial investment will be a capital gain and treat it as such as it relates to any dividend or distribution. With that, let me turn it over to Dan Penberthy to review our financials in greater depth.

Dan Penberthy Thanks, Pete, and good afternoon, everyone. Slides 9 and 10 provide an overview of our financial summary and operational highlights. Total investment income in 2020 was $3.1 million, a 14 percent increase over last year, and does reflect the shift in our portfolio profile to more debt investments. This increased debt portfolio resulted in $941,000 or a 62% increase in portfolio interest income. The externalization of the administration and management of the RAND portfolio through the RAND Capital Management External Manager did reduce our operating costs by $796,000 compared with 2019. As a result of the higher investment income, coupled with the reduced operating expenses, net assets from operations measurably improved $744,000, or 33 cents per share. If you turn to slides 11 and 12, you will see a waterfall graph for the changes in NAV for the quarter as well as for the full 2020 period. The fourth quarter change reflects net realized loss on the sales and disposition of investments of $8.4 million. It is important to recognize that an excess of $8 million of this loss was simply recording a realized loss for portfolio investments that had been previously deemed worthless and had valuations carried at zero. This is why you will also see a large offsetting valuation adjustment to net unrealized depreciation. Effectively, we have moved unrealized depreciation to a realized loss position. The slide also illustrates a $3.4 million of the cash dividends that were declared during the quarter. That dividend equated to $1.33 per share. I should point out that the dividend was comprised of 39 cents per share from operating income and 94 cents per share from capital gains. For the full year period, cash dividends totaled $8.2 million, and we recognized a $6 million net loss, again, on the sales and disposition of investments, many of which were previously deemed worthless. So this component, the large component of the net loss, rather, was previously discussed to realize losses recognized on those zero-value securities. If you turn to slide 13, I will review the strength of our balance sheet. We do have approximately $23 million in liquidity for new investments, including our undrawn SBA commitment of $3 million, which is available for future investments into our portfolio. The $11 million currently owed to the SBA does mature over a relatively long period. However, next year is our first installment when $3 million is due. Utilizing our 10 plan, we did repurchase 3,234 shares of stock at an average price of $11.98 during the fourth quarter. And as Pete previously highlighted, we did repurchase 6,631 shares for the full year period, and this was done at an average price of $11.57. With the support of our strong liquidity position, we believe we can continue to execute our transformational strategy as we grow our portfolio and further drive investment income. We distributed a large part of this year's income to our shareholders in the form of cash dividends in 2020, and we do expect that trend to continue in 2021. In that regard, we have announced our first quarterly dividend of 10 cents per share that was just announced in February. Our annualized dividend rate of 40 cents is based off our conservative estimates of net investment income for the year and does not take into effect any net realized gains or losses which we may have on the portfolio during the course of the year. Lastly, slide 14 highlights a number of action items for 2021. Many of these are a continuation of the strategic initiatives that have already been underway as part of our transformation. Most important, is our effort to put our liquidity to work, which will further drive returns and support an ongoing and growing dividend. This does complete our prepared remarks. Operator, please open the lines for questions for Mr. Grum.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment while we poll for questions. We have a question from the line of Lance Gad, private investor. You may proceed with your question.

Yes, thank you. It looks like ACV auctions, you did, it's carried at what the last raise was, so it's up from $6.2 million. Is that correct?

I think we put in there when we reflected a raise, and I don't believe it was their last raise.

So it's undervalued versus the last raise, correct? Because I believe the last raise was higher than the one before. I had understood our value was 6.2 based on the last raise. So I see the 6.5. I just assumed that that was higher. And my question about it is, do you have any indication where it might come in the S-1?

No, we don't. Your guess is fine.

Okay. Okay, thank you.

Thanks, Lance.

As a reminder, it is Star 1 to ask your question.

There are no other questions in the queue. I'd like to hand the call back to Mr. Grum for closing remarks.

I want to thank all of you for joining us this afternoon and for your interest in Rant Capital. We look forward to updating all of you on our first quarter 2021 results in May, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.