Rand Capital Corp (RAND) 2019 Q4 法說會逐字稿

Greetings, and welcome to the Rand Capital Corporation Fourth Quarter 2019 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Karen Howard, Investor Relations for Rand Capital Corporation. Thank you. You may begin.

Thank you, Melissa, and good afternoon, everyone. We appreciate your time today for Rand's fourth quarter 2019 financial results conference call. On the line with me today 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 wires this morning as well as the slides that will accompany our conversation. If not, they are available on our website at www.randcapital.com.

If you look at the slide deck and turn to Slide 2, let me point out some important information. As you are likely aware, we may make some forward-looking statements during this presentation and also 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. These risks and uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. You can find that information at our website or at www.sec.gov. And with that, let me now turn it over to Pete, who is going to give an update on the status of the transactions with East Asset Management and summarize our 2019 performance, including providing some color on the newest investments in our portfolio that were contributed by East. Then Dan will follow with more details regarding the financials. Pete?

Good afternoon, everyone. Thank you for your time today. We are happy to have this opportunity to summarize 2019, which proved to be a very exciting year.

If you can turn to Slide 3, I want to highlight the transaction with East Asset Management, or East, as we refer to it and the current status of the related activities. As you know, we closed on the transaction in November. We issued about 8.3 million shares of Rand common stock to East in exchange for $25 million of assets. The $25 million consisted of approximately $9.5 million of investment and about $15.5 million in cash. We have also established Rand Capital Management, or RCM, to serve as the external registered investment adviser to Rand. The Rand employees have become employees of our RCM.

We also, during this bid part of the transaction, added 2 new board members, Adam Gusky and Ben Godley, while 2 of our long-standing board members finished their terms, Jayne Rand and Ross Kenzie.

We are continuing the process to transform Rand into a regulated investment company, or RIC. Recall that one of the benefits of being a RIC is that our investment income and capital gains will no longer be subject to U.S. Federal income tax. To accomplish this, we need to distribute our excess earnings and profits to our shareholders. Last week, our Board declared a special dividend of $23.7 million or $1.62 per share, which will be payable in a combination of cash and shares of Rand common stock.

As we've previously communicated, as an indication of confidence and its potential value to members of the Rand Board, Management and East intend to elect to receive an all-stock dividend. Shareholders as of the April 2 record date will receive a mailing with the details included in there an election form on which they can designate their preference for cash or stock and is subject to the limitation. The limitation of the total cash payout is limited to 22 -- 20%, excuse me, of the total dividend. We expect the dividend will be distributed on or about May 11.

Once that process is complete, our Board expects to effect a reverse tax split that was approved by our shareholders at the 2019 Annual Meeting in December. And then going forward, to maintain our RIC status, our Board intends to establish an ongoing regular cash dividend policy.

Let's turn to Slide 4 and I'll provide you with some of the 2019 operational highlights. Total assets grew by $24.3 million or 64% to a total of $64.8 million, benefiting from the $25 million East investment.

We ended the year with $25.8 million of cash, some of which will be used for dividends and future investment. 2019, we invested $2.8 million of follow-up capital in 6 of our portfolio companies, which I will review on the next slide.

At the end of the year, we sold our equity interest in Microcision LLC. And from that, we received $1.5 million of proceeds and realized a $1.5 million pretax gain. Additionally, Microcision repaid $453,000 of principal to it. Then in the first quarter, we updated our $1.5 million subordinated note due from Microcision to reflect an 11% interest rate with a 5-year maturity and received award for 5% of their equity. Our 2019 investment income increased 29% over 2018. Due to our investment focus on income-generating instruments, as well as some variations and nonrecurring investment income in each period.

At the end of the year, our NAV, or net asset value, decreased to $3.66. While we benefited from the gain on the Microcision exit, the decline was impacted by an $0.83 per share dilutive effect of the shares issued to East.

Please turn to Slide 5 and you'll have a summary of the 6 follow-on investments we made during 2019, as well as the assets contributed by East. Follow-on investments we made during the fourth quarter were the $1.5 million to GoNoodle and $250,000 in Lumious, which we previously referred to as Tech 2000. I'll highlight the 4 companies contributed by East in the next few slides.

Slide 6 is a snapshot of the top 5 investments in our portfolio based on our year end portfolio value. Our total portfolio was valued about $37 million, consisting of 32 active companies. The value of our top 5 investments consistently comprises about half of our portfolio. Compared with our top 5 at the end of the third quarter, ACV Auctions is now #1, valued at approximately $6.5 million or 18% of our portfolio, driven by its innovative solution and market penetration. Two of the assets contributed by East are now in our top 5: Andretti in #2 and Filterworks at #4. I will touch on them in more detail in the next few slides.

Now turning to Slide 7. As I do each quarter, I want to take the opportunity to feature some of the companies within our portfolio and give you more insight to them. This quarter, I am featuring the 4 companies contributed by East, all of which include a subordinated note to provide current income.

Let's start with Andretti Indoor Karting & Games, referred to in the slide as AIKG. Headquarters in Orlando, Florida, the company offer go-karting, games, rides and excitement-filled activities all under one roof at each of its locations in Marietta, Georgia, Orlando and Florida, also in San Antonio, Texas. They provide adventure activities such as zip lining, rock climbing and a rope obstacle course. And their venues also offer food, full-service bar, catering to parties, meeting and special events. Our investment consist of a term note with a 12% coupon and a 4% PIK. And as of December 31, we valued it at a $4.4 million.

Turning to Slide 8. Let me tell you a little bit about Filterworks acquisition U.S.A., which is headquartered in Deerfield Beach, Florida. They are a licensed Florida general and mechanical contractor, providing spray booth equipment, frame repair machines and paint booth filter services. Since its founding in 1988, the Filterworks team has installed over 1,500 paint booths. Our investments include a term note, 12% coupon at 2% PIK, as well as some Class A units. Collectively, our investment carries a fair market value of $2.9 million at year end.

Slide 9 introduces us to Hilton Displays Inc., referred to as HDI. This company, headquartered in Greenville, North Carolina, is a nationally recognized manufacturer of signage and branding products. They were formed in 1981 and have emerged as an industry leader with emphasis on primary brand identification, architectural, retail, interior, wayfinding and digital display products. Our investment consists of a term loan with a 12% coupon and 2% PIK, valued at $1.2 million at year end.

The last asset contributed by East is on Slide 10. Headquartered in Dallas, Texas, Mattison Avenue provides a new way of working in the beauty industry in an upscale professional setting. They currently lease high-quality salon suites in the Dallas, Houston and Tampa market. Our investment consists of a promissory note with a 14% coupon and a 2% PIK, carry a fair value of $1 million at December 31.

Please turn to Slide 11. And you see the industry mix of our portfolio at the end of 2019 and '18. Year-over-year comparisons show a more diverse portfolio at the end of 2019 with some significant changes during the year. The decrease in health care was affected by the sale of our equity interest in Microcision and a reduction in the value of Genicon. The growth in software was driven by the increased value in our investment in ACV Auctions. The growth in professional services was driven by an increased valuation of Tilson and the addition of Mattison Avenue from East. Entertainment and automotive -- excuse me, entertainment and automotive are new to the pie due to the East-contributed assets of AIKG and Filterworks.

Slide 12, we describe our new targeted investment structure, as established by the investment committee of RCM. To support our desired risk status, we will need to evolve our portfolio to be more cash-generating than it has historically been. Accordingly, we will place more emphasis on subordinated debt instruments with warrants or preferred equity. We will complement that with expansion capital, and we will continue to co-invest with institutional funds, typically as a minority owner. The current interest, combined with equity interest will become more important to us.

At year end, as shown here, our $37 million portfolio consists of about 41% debt, 59% equity. Going forward, I anticipate that it will evolve into a higher portion of debt instruments.

Slide 13 is our updated investment criteria, and targeted investment terms as established by the investment committee of RCM. Our investment criteria includes companies more advanced in their evolution than our historic and initial investment. We're looking for businesses with at least $2 million of revenue and positive EBITDA, facilitating their ability to generate cash flow. We want private businesses in the early to late stage, and we now have a little bit broader geographic period.

As in the past, we are interested in strong management and differentiated product. We would expect that the product will have already gained market acceptance.

With respect to our new targeted investment terms, we have increased the amount of both our initial investment size and follow-ons to the levels noted here. We have targeted a 5- to 7-year hold period, and as in the past, we'll have some Board involvement for oversight. Thank you. And next, I'd like to turn it over to Dan Penberthy, our EVP and CFO, to cover the financial results.

Thanks, Pete, and good afternoon, everyone. If you could please turn to Slide 15. I'll start with a net asset value per share, or NAV. As Pete mentioned, we started the year with a net asset value of $3.66 per share. As you can see on the chart, NAV decreased $0.73 per share over the last year. The decline is primarily attributable to the $0.83 per share dilutive effect of issuing the 8.3 million shares to East. This is partially offset by the gain on the sale of our equity investment in Microcision.

Slide 16 has a summary of our operating performance for the 2019 and 2018 fourth quarters and the full calendar years. Total investment income in the fourth quarter of 2019 was $985,000, up from $668,000 in the same period last year. The $317,000 increase or 47%, included approximately $76,000 of incremental interest income, $70,000 of incremental dividend income and $170,000 of incremental nonrecurring fee income.

For 2019, investment income was up 29% over 2018. Our fourth quarter expenses were $726,000 in 2019 and $684,000 in 2018. Excluding the costs related to the East transaction, fourth quarter expenses were $645,000 in 2019 and $581,000 in 2018. The 2018 period benefited from a $50,000 bad debt recovery, I should note. I also want to point out that the 2019 fourth quarter includes costs for the base management fee payable to RCM, our newly established external registered investment adviser, of which we are now employees.

Going forward into 2020, this will be a regular fee and certain expenses previously incurred by Rand are now incurred by RCM. These would include such things as compensation and general office expenses. For all of 2019, total expenses were $2.8 million. This compares with $2.2 million in 2018. Excluding costs related to the East transactions, total expenses were $2.2 million and $2.1 million in 2019 and 2018, respectively.

The net realized and unrealized gain on investments was $1.4 million and $1.0 million in the fourth quarters of 2019 and 2018, respectively. The 2019 gain was driven by the Microcision transaction, as Pete previously mentioned, as well as a favorable valuation adjustment for our portfolio holding in ACV Auctions.

For the year, we had a $2.2 million net realized and unrealized loss. This compares with $326,000 loss in 2018. The 2019 results were driven by unrealized losses recorded in the prior quarters, partially offset by the fourth quarter gain, as Pete mentioned.

To summarize, the 2019 fourth quarter resulted in an increase in net assets from operations of $0.13 per share, which compares with the $0.15 per share in the 2018 fourth quarter. The full year of 2019 and 2018 resulted in $0.30 and $0.06 losses per share, respectively.

As you can see on Slide 17, we do continue to hold a strong balance sheet, which is well positioned for growth. This is a direct result from the East transaction, and now we have a historically high level of cash at year end. Cash represents $1.76 -- I'm sorry, $1.76 per share at year end. Our portfolio investments are also at an historic level. These are valuated at $2.53 per share and we had $0.75 per share that remains owed to the SBA for their previous debenture draws. We also have $0.12 per share of other assets net of liabilities. This comprises our NAV per share of $3.66.

So with that, Pete, shall we open the line up for questions?

Yes, we should.

(Operator Instructions) There are no questions at this time. I'll turn the floor back to management for any final comments.

Thank you for your time and attention this afternoon. I know it's a tumultuous day in the market. I want to thank everyone, and I appreciate your support, and we're excited about 2020 and what it will hold for Rand. Thanks, again, and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.