Rand Capital Corporation

Greetings. Welcome to Rand Capital Corporation's second quarter 2023 financial results. At this time, all participants are in listen-only mode. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Craig Mahalik. Craig, you may now begin. Craig Mahalik.

Thank you and good morning, everyone. We appreciate your interest in RAND Capital and for joining us today for our second quarter 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 two, where I'd like to point out some important information. 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 at sec.gov. During today's call, we'll also discuss some non-GAAP financial measures, 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 three, and I'll hand the discussion over to Dan. Dan?

Thank you, Craig, and good morning, everyone. Our second quarter results reflected the strength and execution of our strategy with continued earnings momentum driven by the addition of debt investments originated during the quarter and a recognized sizable gain from the exit of our debt and equity investments in DSD or dealer solutions and designs. We delivered total investment growth of 34% for the quarter, which reflects increased interest from portfolio companies and higher fee incomes. For the quarter, net investment income per share was 19 cents, and on an adjusted basis, a non-GAAP financial measure which excludes the capital gains incentive fee accrual expense was 38 cents per share. Margaret will review these changes in more detail later. We paid a regular quarterly cash dividend of 25 cents per share during the second quarter, and just over a week ago announced our regular quarterly cash dividend for the third quarter, which will also be $0.25 per share. 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 nearly $4.7 million in new and follow-on investments, while receiving $8.8 million from portfolio investment sales and debt repayments. If you turn to slide four, you can see our portfolio mix between debt and equity and the changes during the past quarter. At quarter end, our portfolio consisted of investments in 29 companies, down one, which reflects the sale of DSD and also Somerset Gas, offset by one new investment, which I'll talk to on the next slide. The portfolio comprises approximately 60% in fixed rate debt investments, and this reflects an improvement over the past quarter and since the year ended 2022. The remaining mix at the end of the quarter comprised 29% in equity investments in private companies and 11% in publicly traded equities consisting of other BDCs and their ACV auctions holdings. The fair value of our investments totaled 66.8 million. This was down sequentially, largely due to the partial sale of our ACV shares and the valuation adjustment on open exchange, as well as the DSD sale. Helping to offset this was our new investments. On a year-to-date basis, however, our portfolio value expanded 9%, or $5.3 million, from December 31, 2022. We made an investment in one new portfolio company, and one follow-on investment that totaled $4.7 million during the quarter. Those transactions are highlighted on slide five. The largest investment was $4.3 million to INEA, which consisted of $3.3 million of subordinated debt at a 12% interest rate with an additional 2% payment in kind, alongside $1 million of preferred equity. INEA is a stocking distributor of controlled expansion alloys, electronic-grade nickels, refractory-grade metals and alloys, and also soft magnetic alloys. We've also made a follow-on debt investment of $390,000 in portfolio company ITA. This is to support the working capital needs and new manufacturing equipment for the company. RAND's total debt and equity investment in ITA has a fair value of $4.0 million at quarter end. We had two exits during the quarter. ZFD was sold during June 2023, which resulted in full repayment of our subordinated debt and the sale of our preferred equity investments. In total, RAND received $6.8 million in proceeds, which included a net gain of $2.5 million. The other exit was a small one as we sold Rand's legacy equity position, and that was in Somerset Gas. Lastly, we have also added to our liquidity position by trimming some of our holdings in ACD auctions, for which we sold 125,000 shares during the quarter at an average price of $14.03. This has netted us a realized gain of $1.7 million. At quarter end, We still hold 194,934 shares of ACV, which represented approximately 5% of the portfolio's fair value. Recently, ACV has been trading at the $16 to $18 share range, and we have our shares valued at $17.32 at quarter ends. As always, we'll continue to evaluate our holdings in ACV as we consider our future liquidity needs. The charts on slide six illustrate the diversity in our portfolio and the change in industry mix during the second quarter. Given the impact of the new investment in INEA, the sale of DSD, along with fair value changes, we saw notable changes in our industry mix. Distribution, a rather new industry within our mix, was due to the investment in INEA, which now makes up 7% of our total. Additionally, our automotive mix decreased 7 percentage points, also due to the sale of DSD. There were also some smaller adjustments, as manufacturing went up 2 percentage points, software went down 2 percentage points, and overall we continue to value the diversity of this portfolio. Slide 7 lists our top five portfolio companies at quarter end, representing almost half of our total portfolios. There was one change in the ranking since the last quarter, with INEA moving up to the top five ranking at the number five spot, while DSD dropped out giving its sale. Kilson continues to remain the largest fair value investment at $10.6 million, or 16% of our total portfolio. With that, I'll turn it over to Margaret to review our financials in greater depth.