This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Greetings, and welcome to the Rand Capital Corporation First Quarter 2021 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, Deborah Palowski, Investor Relations for Rand Capital. Thank you. You may begin.
spk00: Thank you and good afternoon, everyone. We appreciate your interest in Rand Capital and for joining us today for our first quarter 2021 financial results conference call. On the line with me 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 that crossed the wire this morning, as well as the slides that will accompany our conversation today. If not, they are available on our website at RandCapital.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 the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe that 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 GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release. With that, please turn to slide three, and I will hand the discussion over to Pete to begin. Pete?
spk01: Thank you, Deb, and good afternoon, everyone. We started the year on a strong note as we continued to transform our portfolio from equity investments to income-producing investments. For the quarter, the number of companies contributing to investment income nearly doubled over the prior year period, resulting in total investment income growing approximately 60 percent to $1 million, or 39 cents per share. That asset value was up 16.9 percent to $20.87 per share, and this was primarily attributable to the increase in fair value of our investment in ACV Auctions, which completed their IPO at the end of March. We did report a gap net investment loss of 84 cents per share. This is because during the quarter we accrued $2.6 million in non-cash expenses related to capital gains incentive fees, which were primarily attributed to ACB's unrealized appreciation. Absent this expense, adjusted net investment income was $0.16 per share, demonstrating the success of our transformation into an income-producing, dividend-paying BDC. As you know, we announced and paid our first regular quarterly dividend of 10 cents per share during the first quarter. This was the culmination of our transformation that began in 2019. At the end of April, we announced our second quarter dividend, also at 10 cents per share. This year, we have paid out $1.53 per share in dividends, including the $1.33 per share that was declared at the end of last year. Please turn to slide four, and we can discuss the progress we have made regarding our evolution of our investment portfolio to support our strategy. The 31% increase in fair value shown here demonstrates the impact of ACV's IPO. We first invested $163,000 in ACV in 2016. It now has a fair value of over $15.8 million. Our shares are now restricted until September 20th of 2021. At quarter end, the portfolio was compromised with approximately 56 percent in equity investments, 34 percent in fixed-rate debt investments, and 10 percent in dividend-paying, publicly traded BDCs. We had a lot of activity in our portfolio for the quarter. We made $6.7 million in new investments, which included 4.6 and new portfolio companies. We also received 4.5 million from exits and loan repayments. Turning to slide five, you can see how we invested the quarterly record of $6.7 million. The largest investment during the quarter was a $2.8 million term loan with warrants from Sievert's Billion Supply. Founded in 1998, Seabirds carries a wide variety of premium billiard equipment and is the largest distributor of predator billiard cues in the U.S. They have developed one of the leading e-commerce platforms for the billiard category and are known for their quality products and service. With the capital infusion, Seabirds is planning to expand its social media presence and grow its e-commerce marketing and customer service platform. Rand also participated with other investment partners to provide acquisition and growth capital in connection with the formation of a full-service fire protection platform under the name of BMP Swanson Holdco. The merged companies have offices in Jacksonville, Florida, and Waldorf, Maryland, and offer a suite of end-to-end fire protection products and services for the commercial and residential facilities. Our $1.8 million investment consisted of subordinated debentures and preferred equity. Lastly, we increased our investments in publicly traded BDCs, which totaled approximately $2.1 million. These investments continue to provide dividends that put our capital to work and are liquid instruments that we can readily access for other opportunities as we find them. The fair value of all our BDCs investments at quarter end was $5.1 million. Slide six illustrates the diversity of our portfolio and the change in industry mix since 2020. With the investments we recently made and the impact of exits, software and healthcare saw sizable increases, while manufacturing declined to 10 percent of the total portfolio. BDCs now make up 10 percent, reflecting recent investments and changes in fair value. We believe that this diversity of our portfolio reduces our exposure to market risk. Slide seven lists our top five portfolio companies a quarter in. Sieverts replaced SMG as they paid off their note and exited the portfolio. There were no changes within the ranking of the top four besides a measurable increase in ACB's fair value given their IPO. Their valuation in our portfolio increased to $15.8 million and represents 29% of our net assets. As I mentioned, Rand was an early investor in ACV, acquiring Series Seed, two preferred stocks, in August of 2016. Following the IPO, Rand now holds 590,580 shares of ACV common stock. Any proceeds for us above our initial investment will be a capital gain and treated as such as it relates to any dividend or distribution. While there are very impossible changes to time, we are now subject to a 180-day lockup agreement. With that, I will turn it over to Dan Penferthy to review our financials in greater depth.
spk03: Thanks, Pete, and good afternoon, everyone. Slide nine provides an overview of our financial summary and operational highlights. Total investment income for the quarter was $1 million, an approximate 60% increase over last year, and reflects a shift in our portfolio profile to more interest-yielding assets, as Pete explained. The quarter's income also benefited from approximately $180,000 of OID income, original issue discount, which resulted from loan payoffs, as well as a large annual dividend received from a portfolio company. Total expenses in the quarter were $3.2 million, up $2.6 million, which reflected the addition of accrued capital gains incentives during the quarter. These were primarily attributable to ACV's unrealized appreciation. A capital gains incentive fee accrual under GAAP is calculated using the cumulative aggregate realized capital gains and losses, and then adjusting for the aggregate net change in unrealized capital appreciation or depreciation at the close of the period. It's important to highlight that while we record the gap expense related to the capital gains fee, no liability or payment is actually due or payable to the external manager until an actual realized exit occurs. Net investment loss was $2.2 million, or 84 cents per share, compared with income of $538,000, or 33 cents per share, in the prior period. Last year's first quarter included a $419,000 income tax benefit due to RAND's conversion to a RIC, or regulated investment company, as well as a tax benefit received under the Federal CARES Act. Excluding the accrued capital gains incentives, adjusted net investment income per share was 16 cents for the first quarter of 2021. Even with the increase in expenses, net assets from operations increased $8 million, or $3.11 per share, again largely impacted by ACV's valuation change. Slide 10 provides a waterfall graph for the change in NAV for the quarter. The increase was due to the change in fair value of RAND's investment in ACV, which was reflected in the 9.9 million net change in unrealized depreciation on investments. Also contributing to the NAV increase was a net realized gain on the sales and disposition of investments of $311,000. We also did pay out approximately $260,000 of cash dividends. Slide 11 highlights the strength of our balance sheet. We have approximately 18 million in liquidity for new investments, which is comprised of 14.9 million of cash, and also our undrawn SBA commitment of $3 million, which is available to invest as we continue to transition our portfolio. The $11 million currently owed to the SBA matures over a multi-year period that begins next year, 2022, when $3 million is due. With the support of our strong liquidity position, we believe we can continue to execute our strategy as we grow our portfolio and further drive investment income. We will continue to distribute a large part of our income to our shareholders in the form of cash dividends as required by our RIC status. This includes the first and second quarterly dividends of 10 cents per share that we announced in February and April. Our annualized dividend rate of 40 cents is based off our conservative estimates of GAAP net investment income for the year. The final determination and calculation of a tax-based distributable income will occur at the close of the year and will also then consider net investment income, our net realized gains or losses we may recognize during the year, in addition to any other needed tax adjustments. Also, we did renew our share repurchase program during the quarter, authorizing the purchase up to $1.5 million in stock. This updated plan expires next year in April of 2022. Lastly, Slide 12 summarizes our overall fund's position. As we look forward, we have a number of focused action items, many of which are a continuation of the strategic initiatives that have been underway as part of our transformation. While we believe we have a strong income-producing portfolio and equity investments that provide potential for additional capital gains, we will continue to prudently adjust our portfolio mix to drive returns and to support a growing dividend. That completes our prepared remarks. Pete, let's open up the line for questions.
spk02: 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 1 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 questions 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. There are no questions in the queue. I'd like to hand the call back to Mr. Grum for closing remarks.
spk01: Thank you for joining us today and for your interest in RAND Capital. We look forward to updating all of you on our second quarter results in August. Have a great day and stay safe.
spk02: 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.
Disclaimer