Rand Capital Corporation
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Greetings and welcome to the Rand Capital Corporation First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Rand Capital. Thank you. Please go ahead.

[Deborah Pawlowski:]

Thank you, and good afternoon, everyone. We certainly appreciate your time today for Rand's first quarter 2018 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. Pete and Dan will be reviewing the results that were published in the press release distributed this morning. If you don't have that release, it is available on our website at www.randcapital.com. The slides that will accompany our discussions today are also posted on the website. If you look at the slide deck, and turn to Slide 2, we will review our Safe Harbor Statement. 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. These documents can be found either on our website, or at sec.gov. So with that, let me turn it over to Pete who is going to summarize the highlights for the quarter and with Dan then following with more details regarding the financials. With that, Pete?

[Allen Grum:]

Good afternoon, everyone. We are happy to have an opportunity to update you on Rand’s first quarter. Let me start with slide three, at the end of the quarter, our net asset value or as we describe an NAV was $4.97 per share, down from $5.05 at the end of 2017. This decline of $0.08 was primarily due to two factors; it was down [Indiscernible] of $0.05 per share due to unrealized losses we recorded on certain investments. This was from our normal quarterly review we performed based on their operating performance. And number two; we incurred a $0.03 per share net investment loss since our expenses exceeded our income for the quarter. During the quarter, our expenses included higher legal cost associated with our SBA process and also some bad debt expense. During the first quarter we made two follow on investments in portfolio companies totaling 450,000. The first of 200,000 in Centivo, a new type of self-funded health care plan. This was our second investment in Centivo. The other investment in the quarter was 250,000 SciAps Inc. which completed its Series D $10 million financing round of which we acquired a 147,059 shares of $1.70 per share. As you know if you look at these in the past, past couple of years our focus has been on vehicles to build investment income. That resulted in a 10% increase in investment income over the prior year quarter. Dan will go all over the financial results later in the discussion. I also wanted you to update on the status of our ongoing discussions with the small business administration. During the first quarter, we determined on our optimal organizational structure, would be to revert back to investment in strong businesses through our original SBI subsidiary, brand SBIC. As such, we consolidated our second SBIC fund into our original Rand SBIC. We continue to work with the SBA and anticipate concluding this work in the next several months. Our goal is to gain more leverage and continue our mutually successful relationship with the SBA. To that point, we intend to apply for an additional 6 million in leverage through the original SBIC, Rand SBICA. Give me a minute to turn to slide four. I want to take the opportunity to feature some of the companies within our portfolio, as a way to give you insight into them. As you may recall, we’ve been doing this each quarter to give you better sense of what’s going on with our portfolio of companies. What I like to start with is ACV Auctions. Based in Buffalo, ACV Auction's mission is to become the trusted source for dealers to purchase wholesale vehicles. The ACV Auction mobile platform began with a thorough vehicle report that allows potential buyers at an electric auction on the vehicles about to begin. This mobile application includes auction operation, title management, floor plan purchasing, arbitration and logistics. ACV auction announced this quarter that it has secured 31 million in Series C venture funding. Although we do not participate in this round of funding. We view this as a positive sign providing the company with growth capital, and currently the company announced that they were selling over 1000 cars per week and growing rapidly with over 400 new dealers sign ups per month. By the end of 2018, the company plans to double historical presence to over 70 markets by expanding to the West Coast compared to the 35 markets nationwide it currently serves. The company is poised to offer its world class technology in leadership by disrupting a fabulous industry. In March, the company reached a major milestone by selling more than 5000 units online valued at a total of more than 35 million of vehicle inventory sold. Next something I’d like to talk about is SciAps, a company headquartered in Woburn MA, the design and manufactures portable analytical instruments, which identify virtually any compound mineral or element on earth. The company recently expanded its offering of the world’s most precise handheld micro analysis tool by introducing the Z-200, a virtual first of its kind handheld device, not only to measure carbon and steel or stainless steel but also can measure lithium and rock and brines. Additionally, the company announced the introduction of a new model the X-250, which is an X-ray analyzer designed to be the fastest scrap sorter in existence. Currently its 10 times faster than any other X-ray gun. The quarter’s investment in $250,000 in Series D brings Rand’s March 31 fair value total to $2 million. Next is Outmatch Holdings, which is based in Dallas, Texas. They are a leader in delivering actionable predictive analytics to build world-class workforces, reduce your turnover and accelerate employee time to hire. The Company looks to continue milestones reach since 2017 where we saw a substantial growth fueled by the acquisition of a leading culture analytics firm, the launch of a robust new platform and several industry specific recognition. The company retained a net 98% of the 60 new clients in on-board and in 2017 which helped drive double-digit year-over-year recurring revenue growth. On April 3, 2018 OutMatch announced plans to incorporate machine learning to analyze large data set from assessments into their platform for both candidates and the companies looking for candidates. A more streamlined pre hired assessment should benefit larger, less decentralized organizations with large volume hiring needs such as the hospitality, retail, healthcare and property managed industries. Our investment in OutMatch today since initial 2010 investments are valued at 2.1 million. If you go to slide five, it shows the logos of all of our companies and our portfolio, categorized by revenues stage. You've seen this before with start up's on the left, Initial Revenue, Expansion and then what we call High Traction on the right. Regarding the three Companies’ we just featured, you can see all of them; ACV Auctions, SciAps and OutMatch are all in the expense and revenue category. We didn’t have any company’s mood since we last reported onto this in March. As I mentioned previously of Company's progress to the right, they may start to develop excess plans from our portfolio. It’s virtually impossible to predict how quickly or slowly these transactions will take. They are all dependent on market condition. Slide six of the new slide and that’s a new perspective on our portfolio of companies. One based on our investment period. The average age of companies currently in our portfolios is 4.8 years. Centivo is the most recently added companies to our portfolio, joining in the fourth quarter of 2017. We have three companies that have been in the portfolio of one to three years and eight of them have been between three to five years. As you can see, the majority of the companies that has or have been above the five year time horizon. Today, 18 companies are in there. Our normal investment period is approximately five years. Now let’s turn to slide seven. You will likely know how diverse our portfolio is and that breakdown by industry category doesn’t change drastically overtime. Consistent with our strategy we are and have been a diversified company. We invest in almost all industries with the exception of real estate, retail and financial services. Year-over-year comparison as of March 31 indicates industry classification, has basically been unaffected by the fair value of our investment. I’d ask you now to turn to slide eight. As we dissect our portfolio into capital characteristics, debt or equity being the two main choices. Our strategy has always been our capital appreciation to grow on our net asset value. Accordingly, our portfolio is more heavily weighted towards equity as opposed to debt instrument. However, we have adjusted our investment objectives depending on the mix of cash flow streams within our portfolio. As this slide illustrates the trend of 2015 has seen more diversification overtime. Over the past couple of years, we focus on building investment income to generate cash flow to cover our expenses. Consequently, as we ended this quarter March 31, 2018 60% of our investments were in equity and 40% were in debt. I’d ask you now to turn to slide nine. This is a snapshot of the top five investments in our portfolio based on values at the end of March. As previously noted, our portfolio was valued at over $32 million and includes 30 active companies. The value of our top investors consistently comprises about half of our portfolio, and as you can see they are weighted towards healthcare. To see that five were unchanged from last quarter, I won’t go into a lot of detail in that again, but I will give you a quick summary. Our capital investments were recurrent, this form is based in Orlando, Florida and they design, produce and distribute patented surgical instrumentation. We started investing in them in 2015. Second largest is our portfolio is eHealth. Based in Rochester, New York they provide a proprietary electronic platform to aggregate patient clinical record and images to support medical referral. Financial investment into eHealth was in 2016. Rheonix follows net, this Ithaca, New York Company develops fully automated molecular assays for use in research labs and for both medical as well as food and beverage application. We started investing with this team in 2009. Fourth is Tilson, [Indiscernible] that constructs, deploys management and manages cellular fiber optics or wireless information systems which we have been also investing since 2015. Fifth is Outmatch, which described a minute ago, they are in the business of helping companies being more productive, providing tools to facilitate and hiring people who are right for the job, based on Dallas, Texas, we started investing in them in 2010. Now I'd like to turn it over to Dan Penberthy, our Executive Vice President and Chief Financial Officer to cover the financial results.

[Daniel Penberthy:]

Thanks Pete and good afternoon everyone. If you could please turn to Slide 11, and I'll start with the net asset value per share or NAV. As Pete mentioned, we did finish the quarter with net asset value at $4.97 per share. As you can see on the chart, NAV did decline $0.08 per share over the trailing quarter. This decrease is attributable primarily to two factors; first, our valuation policy has us review the fair value of our investments each quarter. This sometimes results in unrealized appreciation or depreciation in fair value. This is based on the operating performance trends of the particular portfolio of companies and during the quarter, we did recognize unrealized depreciation and fair value. This amounted to about $0.05 per share. The second factor pertains to the fact that our expenses exceeded our investment income this quarter. This I will touch on the slide. This impact was about $0.03 per share. Please turn to slide 12; here I summarized our operating performance for the first quarter of 2018 and also 2017. I’ll take you through the key line items noted here. As we have previously mentioned, we have been investing in more income producing instruments over the past couple of years. This has increased our investment income, you can see the results. Our first quarter investment income of $363,000 is up 10% over last year. However, our first quarter expenses of 589,000 are 14% above last year. The increase in expenses was due to approximately 17,000 of higher professional services cost associated with the ongoing SBA process, as well as $49,000 of bad debt expense directly related to the portfolio. As I mentioned on the last slide, we do record unrealized losses on certain investment in accordance with our valuation policies. The impact was about 103,000 more than the same period of the prior of last year. There were no portfolio like this quarter however, we did have one loan repayment to [Indiscernible] we did repay a small promissory note during the quarter. To summarize, the 2018 first quarter resulted in a net -- in a decrease in net assets from operations of $0.08 per share compared with the $0.06 per decrease per share in the 2017 first quarter. Please turn a slight 13, our balance sheet continues to remain strong. On a per share basis, we had $0.87 of cash at the end of the quarter. This includes $0.49 per share which resides at the corporate parent level, and $0.38 per share at the SBIC, which is available for investing. Our portfolio investments are valued at $5.10 per share at the end of the quarter. Our portfolio growth has benefited from and has been partially funded by our past SBA leverage, for which we have $1.27 per share due to the SBA as of March 31, 2018. We also have $0.27 per share of other assets net of liabilities. This all adds up to our net asset value or NAV per share of $4.97. With that, I’ll turn it back to Pete.

[Allen Grum:]

Thank you, Dan. To complete, turn to slide 15, I want to reemphasize our cash flow on capital priorities. First and foremost, priority is to execute on our business plan, which calls for investments that deliver high return as well as cash or reinvestment. As we considered other various alternatives, we are also focused on our structuring our investments to deliver certain cash flow to cover ongoing operating and financing expenses. Finally, we also consider returning capital to shareholders, on an opportunistic basis when cash flow dictates a good policy. Before we open lines for questions, I want to say, I hope you can see there is a lot of excitement going over with Rand and its portfolio of companies. We as a management team are working hard to take the company at the next level by driving our growth strategy. We hope to soon to have additional SBA Capital put to work as we have a wide variety of opportunities in our pipeline. With that, let me open up the line for any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Sam Rebotsky with SER. Please go ahead with your question.

[Sam Rebotsky:]

Yes, good afternoon Dan and Pete. I’m sorry, I didn’t get up to the annual meeting, but I got a bunch of questions today and I’ll try not to jump out of the queue and come back. Okay, the first question deals to the valuation of your investments. SciAps, you’ve put in 250,000 and you are valued with $1.70, was there any, or there is the previous investments what was the value per share of those investments?

[Allen Grum:]

I don’t have those of the top of my head and Dan is looking through his schedule.

[Daniel Penberthy:]

If you go, you could actually do the math, if you go through the portfolio, because we do identify each of the number of shares that we hold in the specific cost and value for each one of the categorizations.

[Sam Rebotsky:]

So would you say that the value per share is higher or lower than previously?

[Daniel Penberthy:]

The previous round, just doing the math in my head, Sam if I recall, in the dollar 50 range, dollar 55 range, the new financing came through as Pete mentioned in the Series D is $1.70, the Series D does have preference over C, cause we are in there at both an A and A1, a B, a C, a C1 and a D. So our valuation that we had established at December 31, 2017 on an enterprise value, pretty closely approximated what this financing came through in the first quarter so we’re priced right on this valuation for the quarter based on the recent financing.

[Sam Rebotsky:]

So if the previous lease were lower, do you market up to the $1.70 for all the investments?

[Daniel Penberthy:]

No we doubt, Sam. This was not part of our protocol and you and I are attracted by this and I think it’s a good thing. But most times we have substantial and the same investors, counting protocol does not allow us to change that valuation. So you will see in our portfolio where the company has raised new money with the same investors of higher prices, but we don’t go back and mark up our previous investments. But that’s a good point.

[Sam Rebotsky:]

So could you, even if you don’t mark it up, could you sort of indicate what the price has previously done, so therefore assuming a shareholder wanted to take that in consideration because with your stock trading at 250, 255 which is 50% of booked more or less, this is not factored in.

[Daniel Penberthy:]

I think that’s a good point, Sam and let us work on something for the next quarter.

[Sam Rebotsky:]

Okay, and as far as the Carolina Skiff, you’re in the section with 20 million plus, is that mean that each of those investments Carolina Skiff has more than $20 million?

[Daniel Penberthy:]

They have substantially more than $20 million in sales.

[Sam Rebotsky:]

Okay. Is there a reason that the dividend for Carolina Skiff is lower this quarter than the previous quarter?

[Daniel Penberthy:]

That has a dividend that is tied to – it’s not a standard dividend what it is they remit money because it’s -- to perhaps to pay taxes associated with the income that are allocated towards us and as you know with the decrease in the Federal tax rate the dividend in that respect we’re going to go down.

[Sam Rebotsky:]

So my judgment would be based on your 7% and the 170,000 plus this would be valued about $20 million and with Malibu trading at 800 market valuation and well they issued earnings today and their stock is significantly up and their book is about 127 million with an 800 market valuation. How would you value Carolina Skiff relative to this Malibu boat company?

[Allen Grum:]

Well I’d start really relative to ones that are private and ones of public company. We annually take a look at Carolina Skiff and there on a very conservative basis value it as a multiple of the cash flow on this business. So we have a very conservative valuation, but to make the bridge between a private and public company, I would be radicand [ph] to do that.

[Sam Rebotsky:]

Okay. Well I think there somehow there should be I guess if there was a more numbers relative to sales and earnings you could sort of – shareholders could compare a valuation what they might be and considering in public and private, the other thing is the bad debt, what is the bad debt to 46,000 and as far as the additional legal expenses for the working with the SBIC how much did we charge in the current quarter?

[Allen Grum:]

So the bad debt is directly tied to the portfolio valuations and you would notice that we did take some adjustments to Empire Genomics during the quarter. I think that was the largest piece. So it’s in relation to the operating characteristics of the company, their financial performance, how much cash is being paid on a current basis and just like any receivable you know how we feel the likelihood of collectability is on the interest receivable. And so we took a hard look at these and made the appropriate adjustments to the bad debt and the interest receivable. Typically we think that is the initial indicator for future possible valuation changes, right, it’s no different than any other trade receivable.

[Sam Rebotsky:]

And how much did we charge for legal expenses relative to the SBIC

[Allen Grum:]

In total?

[Daniel Penberthy:]

Yes, I think it was $27,000 in the quarter.

[Sam Rebotsky:]

[Indiscernible] so far.

[Daniel Penberthy:]

Yes, it was a 133,000 you had mentioned previously. So okay. And as far as one of the key things that I thought about and I wanted to sort of address this at the annual meeting more so but, we’ve discussed cash and buying stock, or cash dividend and we do have some thoughts relative to paying a dividend between cash and combined with stock to sort of meet the requirements of giving the shareholders something back because with the chart of the net asset value if you put the prices of the stock at each time, you’d see maybe the net asset value stayed the same or went up a bit, previously the stock has come down, and somehow it would appear to me that using cash would be a very good way to work return some to the stockholders and buy some stock in the open market.

[Allen Grum:]

We do look at that on a – and you and I talk I think every month or so about that [Indiscernible]. We look at that and they are running the company and what we would consider excess cash and cash available either for a dividend or a buyback and obviously based on our actions this quarter we do not do anything. We do have the ability and you know in previous years we brought half a million shares back when we have and when we made that test and found we had extra money

[Daniel Penberthy:]

The one thing it doesn’t take cash to give a stock holder dividend and I would say to return the shareholders they might create some kind of interest in the stock for those who wanted and if you created a dividend where with some stock and if you had cash to create some nominal amount of cash to combine this. This is my thought or when you, if a transaction happened and you got some additional cash, do something as you on the slide that you indicate with return capital shareholders opportunistically this would be one way that would make shareholders more comfortable with the lower price of the stock.

[Allen Grum:]

I think that -- we’ll look at it Sam

[Sam Rebotsky:]

Okay, good luck. And if I have some other questions, I’ll jump back in. Thank you.

[Allen Grum:]

Okay Sam, thank you for your interest.

[Operator:]

Our next question is coming from the line of [Indiscernible]. Please go ahead with your questions.

[Unidentified Analyst.:]

Hi, how are you guys doing?

[Allen Grum:]

Good.

[Unidentified Analyst.:]

Good. I probably should know this, but I don’t. Are all of your investments assets pledged against the SBIC loan or are some of them segregated to that purpose and some not?

[Allen Grum:]

Anything that is – that we have identified as an SBIC is pledged in a general sense to the SBA as a senior lender. We have a small number of investments that are apparent and I believe it’s two or three. The only one of significant value as we have a guest pipeline that runs across Ohio, but for conversational purposes, everything that is in the SBIC is positive to the SBI.

[Unidentified Analyst.:]

All right. Should you taken out of that investment in some way, IPO take over you know whatever, all of that money has to be, all of that cash receipt have to be retained as collateral as well.

[Allen Grum:]

There is a set of protocols that we have to follow where they look at our in essence that they called realized retained earnings available for distribution and based on whether that's positive or negative we can take some money out. We have done that historically over time and put it back into the SBIC as a way to get more leverage and to do bigger deals, but there are ways to take the money out.

[Daniel Penberthy:]

All right. So as a shareholder, I know, Sam is much more up that than I am, but it would seem to me that if there were some dividend to be paid and it wasn't from a situation where we have more income producing investments and therefore less equity exposure. That all the money that could be paid out would have to be retained -- have to be paid out after provisions for that FBIC, let's call it relief formula?

[Unidentified Analyst.:]

Okay.

[Daniel Penberthy:]

Is that correct? So let me put it this way. Let's say we had a dollar worth of assets as collateral for the FBIC loan under the terms that you have with them and then let's say that some portion of the dollar was represented by the investment that was turned into cash. You then have to make the calculation to see how many pennies would be left over after making the calculation and then that's the money that would be available to shareholders if in fact there was any into the formula?

[Allen Grum:]

That's a good way to look at it and I remember where I was looking at least three years out. Our exits are hard to put out some force because we're in minority investor and to predict. But we have a fairly bigger model, but you're concept is correct.

[Unidentified Analyst.:]

All right. And I guess that would also apply then, let's one of the company you have investment in were public or was taken over for stock by a public company, it would be just as difficult under the formula to distribute those shares as it would be to distribute cash if in fact it was the case taker?

[Daniel Penberthy:]

Correct and then we get into some periods where we're not allowed to distribute or even sell the share in the lock up period. And that so uncommon, I think we have [Indiscernible] if you are aware of.

[Unidentified Analyst.:]

Right.

[Daniel Penberthy:]

You're correct it’s hard to get the money moved around on add well base.

[Allen Grum:]

You're right. It's been a restricted bucket and it’s hard to get us to an unrestricted status.

[Unidentified Analyst.:]

Right. So the whole idea of return capital is shareholders opportunistically, anything that you feel to do?

[Daniel Penberthy:]

You're correct, yes.

[Unidentified Analyst.:]

Okay. I think I understand it. Thank you.

[Daniel Penberthy:]

Okay. Thank you, Bill.

[Operator:]

And our next question comes from the line of Brett Reiss of Janney Montgomery. Please go ahead with your question.

[Brett Reiss:]

Yes. Good afternoon. And I'll stipulate, Pete, Dan you know you're honest and hard-working guys, but the reality for me, I started to buy this stock personally for clients, its three in a quarter to three-fifty in the fall of 2013. Its 4.5 years later and the fact that $2.57, putting yourself in my shoes how much longer do you think, I'll have to be patient before I see the discount to NAV and the market price narrow and I can make a decent return on my client's investment?

[Daniel Penberthy:]

I don't have an answer for you as most of my network tied up. We're followed it down and BDC space is particularly again hit, and so we've followed the market, but that's not a good answer for anyone that's involved with it.

[Brett Reiss:]

I just raise it because Mr. Rebotsky exploring different ways to return capital to shareholders, I just hope that on your – if an opportunity does present itself that it's on our radar screen because I and my shareholders when I'm instant gratification jockey we've been very patient and loyal, but it's been a long time? Hope you take that into account.

[Pete Grum:]

Let me address couple of things and I think we last published two years ago. We as a board went through and looked at everything from shutting the place down and letting the money come in. you know I have someone come check the mail once accordance see if there is check than I'm come back to the shareholders to delisting the growth through the SBIC to putting ourselves up for sales. And that was a expensive process to think that we can control as growing through the SBIC, but we engage and we'll continue engage anyone that interesting in buying Rand, anyone that's interested in merging with Rand. We are interested and do pursue those conversation. And that frustrate us as much as that frustrates you. The only think we can control and which we're going to do is to continue to grow the business through our investing activities and making good investment. Any other opportunity comes up we will pursue it with another larger, smaller and we've always trying to pursue, taken a private and not found what assist with that. We did not think shutting the company down or going dark what's best and the shareholders at risk, so we did not pursue them, but anything else the door is open and we're ready for conversations.

[Brett Reiss:]

All right. Thank you for taking my question and giving me your frank appraisal.

[Daniel Penberthy:]

Thanks, Brett.

[Operator:]

The next question comes from the line of [Indiscernible] Private Investor. Please go ahead with your question.

[Unidentified Analyst:]

Hi. Good morning, Dan and Pete. I'm wondering these follow-up in investment in Centivo. Was that an income producing item?

[Allen Grum:]

To follow-on is not and the reason there is not more information as the company is kind of make a larger and they has just hold off giving details. But it is a theory they hit back. This is where the management team that we had invested with before and we're very well with and are looking forward to working with them again.

[Unidentified Analyst:]

Okay. Can you give us a little more follow-up on the new SBA loan? I think you mentioned that it would take several months before it comes to fruition. What's going to happen after we use the $6 million dollars? Are we still able and are we still looking to get the additional $9 million that we're talking about in the last year and a half?

[Allen Grum:]

The way we believe that will work, is that as we get access we will be able to work with them to see it that will qualify us for more debentures going forward. This is frankly the transaction we're trying to do a couple years ago and based on that we'd rather go and have you get realized and then we kind of went around this circle, But we believe from conversations that we've had that as we have access those can be used to pay down debt, but the other thing is they may be only use as a capital, regulatory capital to get more debentures.

[Unidentified Analyst:]

And also you have mentioned there were possibly two or three companies that were I'll say, owed money into the Rand Capital part of your initial capital. Is GTECH natural gas systems for company you were talking in Ohio and can you tell me what the other two companies are?

[Allen Grum:]

GTECH is one, but that's not the one in Ohio. The one in Ohio is Somerset Gas which is I think we have work around 500,000. GTECH is another company that we continue work with which is pre-SBIC and I don't think that there are any other ones that are active companies that we're working with. We may have some shares in some companies but…

[Daniel Penberthy:]

Anything else is though [ph] is zero.

[Unidentified Analyst:]

Okay. My final question is, do we have any kind of an emergency plan that we've either thought about, worked on or is in the process, i.e. should the market have a ban six to a year and stock price and performance. And we see a discount to NAV go to some unknown levels. Do we have any kind of emergency plan or funds putting the share repurchase program into operation?

[Daniel Penberthy:]

We don't have that, but we'll talk about with the board. We do have the ability and we talk with the board on a monthly basis, but we don't – have not gone through that scenario, I could do just hope, I mean with our NAV, but it’s a good thing to think about, but we would certainly have the ability to repurchase shares.

[Unidentified Analyst:]

And lastly I apologize, but I also missed the Annual Meeting, although, I was trying to make it there. Once again my thoughts to his family of Reg Newman for being a wonderful steward for Rand Capital himself and his kind words, thoughts and deeds will always be remembered. Many thanks.

[Allen Grum:]

Norm [ph], I think that's well said and we appreciate those thoughts.

[Operator:]

Our next question comes from the line of Sam Rebotsky with SER. Please go ahead with your question.

[Sam Rebotsky:]

Yes. Just a little follow-up and also reiterate my thoughts with Reg Newman's family. He was very significant. Now as far as SBIC, initially you expect to get more money, so I believe you're paying 3% so that you would lend it out cautiously and that would cover all your expenses. But based on Southwest – the Capital Southwest announcement on April 30 they indicated that the SBIC is basically giving less leverage going into effect April 25 of this year. And if this is the case and if this makes it too difficult and to cover expenses and to get enough money and it makes it more difficult to return something to the shareholder, the possibility might be if you paid a higher interest rate and had more flexibility maybe that maybe more beneficial to the stockholders. What do you think of that thought?

[Allen Grum:]

I maybe – and I got your message the other day. I look at the Capital Southwest and I couldn't find what you're referring.

[Sam Rebotsky:]

Okay. This was a press release that was put out April 30 under CSWC. They indicated March 20 -- as a result the board approves the required minimum asset coverage was applicable [ph] to company will be decreased from 200% to 150% leverage effective April 25, and that's why the probably it's taken you longer and less flexibility with the SBIC and this is evidently changed recently. So they are willing to give less leverage than previously and then what you expected. So the question comes up if you don't have flexibility -- to me if you have the flexibility and the cash if you paid off your SBIC and you could buy stock in the open market that's a 50% -- it’s a 50% return, it’s a 50% discount and if it came the net asset value the shareholders would benefit significantly. And that's why my thought of giving those shareholders that are dedicated and want to stay with it even though their shares would stay the same to pay a stock dividend and a little cash dividend if you could or combine it that way. So this is the press release Capital Southwest put out April 30. I could get you facts to you or you could just see if you can look up CSWC and you should be able to find that press release.

[Allen Grum:]

I not believe because I did read this one, but I don't believe that that's part of their SBIC program. But I will go read it again.

[Sam Rebotsky:]

Okay. Okay. It’s a small business credit availability act was signed March 23, 2018. The required [Indiscernible] coverage applicable to the company will be decreased from 200% to 150%?

[Allen Grum:]

Yes, Sam. The SBA's FX is excluded from that calculation according to regulation if I understand them. And I actually read that I thought the amount increase in another release I saw, so what they getting then. Take a look.

[Sam Rebotsky:]

Okay. Good luck and hopefully we could do something to sort of give relief for the stock in other words -- and hopefully if you could get some kind of valuation on comparable companies on a valuation even though you're not increasing the value. This would be somehow that people would understand that there would an increase in the near future and or later. But there, I mean, we need to have some kind of understanding of valuation similar companies and possibilities going forward. Okay. Good luck. Thank you.

[Allen Grum:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question has come from the line of [Indiscernible]. Please go ahead with your question.

[Unidentified Analyst:]

Hi. I'm back but my questions been answered. Thank you.

[Allen Grum:]

Thanks, Bill.

[Operator:]

Just one moment please. Our next question is from the line of Brett Davis from Private Investor. Please go ahead.

[Brett Davis:]

Can you hear me now?

[Operator:]

Go ahead Brett. Yes, we can hear you now.

[Brett Davis:]

Good afternoon. I have kind of couple of questions. I certainly understand and I am in same boat with the other shareholders, but I draw little bit part of line to understand between operating business and machinations of the stock market. And so, you're not going to get [Indiscernible] account. If you run the business you're doing – you're upholding you're at with high-frequency trading and all the other assuming and again check the line in stock market. It's a pretty big stretch to hold you accountable for the discount in share price. What I would like to ask about is and that is the failures? So to me it appears that the value of that SciAps, is drop since the initial purchase. There's a couple others that had some significant drops intrinsic materials, GTECH natural gas, am I heading these right?

[Allen Grum:]

Yes.

[Brett Davis:]

So I was wondering you know is part of the process we're looking at new investments and reviewing what you're existing investments are. What kind of and maybe its little too early to use this term but for the lack of another one is the top of my head. What kind of postmortem you do looking at the failures and what the reasoning or what best appears to be the reasoning why that happened?

[Allen Grum:]

We probably spend more of our time on our failures than our winners, but I can kind of talk directly. I personally don't believe a quarter-by-quarter valuation is appropriate for the kind of investment do we make. However that's what the economy protocol tells. SciAps is management team that we invest within the past. That was very successful and do believe they're going to be successful going forward. And that I believe the trend in their sales and everything is good. It has taking longer like many of our companies to get to where they are. But we have to follow our valuation policy and look at this quarter. And it’s a strange thing, because we come over the value that frankly most of the companies wouldn't fell at. But that's what we do. So I believe and I like to believe that these companies are going to turnaround, but on a quarter-by-quarter basis we have to reflect the near term and short term how they been doing and they're not gone according to plan that we have to look strongly a decrease in the value. But these are unrealized. We have in general if we want to go back and so we track and I think their low – would be happy to sit down with you. And of the companies that we have exited, there's about a third that we've lost the money and third that we've made a lot of money and the third that we've done very very well and we just spend a fair amount of time going on the third that we lost money. There is very few that we lost everything, but there's certainly happens however.

[Daniel Penberthy:]

The lesson learned was SciAps was there. And this as Pete mentioned our management team, same management that I think we made $7 million worth, right. So after their non-compete was up they came back to us and said, you know, I think I can do it better and do it again. So they had the pedigree coming in. They had the same team, not the same instrument, but not too far off, right to avoid any non-compete problem. And so they came through with a lofty valuation. And we gave him a little more -- than we probably would otherwise to an entrepreneur they came in up to street. And as you can see in the portfolio summary, we had a 1.5 million invested into that Series A investment. And so probably lesson learned from this one is we stepped in too quick, too fast with little too much money, we should have stepped in a little slower, but there was reasons why it made sense for this investment and like all our portfolio companies believe or not it took longer and was a little bit harder and took more money, right. That's the common theme. And so now I think we are being more cautious whether it’s an experience management team or not is evidence by Centivo where we stepped in with 100 and $200,000 investments to the same management team coming back with the similarly business piece and we're taking a slower approach at this, watching them hit the milestone both technical and business and then we'll continue to invest as evidence by SciAps we continue to invest if the B, C, C1 and D each time they hit another critical milestone.

[Brett Davis:]

Got it. So, maybe it so might hang-up then is with the valuation event, is that GAAP dictated or is that some proprietary formula does it vary by company. Is it standardized across everybody?

[Daniel Penberthy:]

It's GAAP. There are different methodologies that we can use. And I think we actually disclosed what the different methodologies are.

[Allen Grum:]

In the footnotes to the financial there's a chart lays out some of you can multiple, you can use an EBITDA multiple which references Sam direct comment earlier regarding Carolina skip. And I believe the footnote calls, I'm just looking at that, but it think its call for an average EBITDA multiple. I think we have 5.5 is the number, and those revenue multiples. So here market approach EBITDA multiple, we have a range of values of 4x to 9x of EBITDA with the weighted average of 5.7. Some of our debt instruments we use the liquidation sonority which is a generally 1x, so those would be our debt instrument where we believe they are fully collectible and then in other companies we use a revenue multiple and our weighted average revenue multiple is 2x with a range of 0.5 to 6.2 and those are all disclosed in the foot notes to the financials and so we take a hard look at each portfolio company and determine the metrics that's appropriate, and then we run through the waterfall scenario based on those multiple and ultimately that drives us back to the situation in SciAps where we look and say, maybe we got some exposure if the company were to sell today based on the revenues they have today at these multiples. We believe all these things will recover and they will have significantly higher revenues when they ultimately sell and so we will have some pickup back into NAV once the company began to get market saturation and drive sales and bottom-line profitability.

[Brett Davis:]

So this is all crystal balls based on what's the recent 90 days looks like?

[Daniel Penberthy:]

Actually it’s a longer term trend. But yes, it’s more near term and then all this underlies, that's our GAAP fair value accounting, FAS 157 its not ASCA 20 which maybe something else now. But all the underlying team is as Pete mentioned is the SBA valuation policy that says, if you think there's a problem in the company you got to take a write down. If you thinking to risen money at a higher valuation, we can't do anything until it's done. And if you're just writing checks with all your friends the same people on the deal, you can't recognize the result, you got to wait. You got to wait to true arms length third party transaction and I think that comes back to. We got some good solid conservative values on these companies and I think there's more goods and bads, but we won't know until somebody write just check and buys one of done thing.

[Brett Davis:]

So is there's something then in the annual that details and it may not pass the lawyers get use. But is it something that details like your current thought and these businesses as whether they're tracking straight through with your long term picture when you first get in to this or whether they've geared up and things look even better than you initially had expected when your maybe initial investment or things like net P&L quite the way you have initially thought?

[Daniel Penberthy:]

We don't have that in hand, but if you're really live [Indiscernible].

[Brett Davis:]

That's well. Maybe we could swap some ideas the couple of times and play that out.

[Allen Grum:]

I think the chart that’s in our investor deck that lays out both the timeline of the companies and the revenue stage of the company, that tells you a lot, because we know that once company start reaching above 5 million in revenues they've turned into a real company. It still got some work to do. They are expanding and they will require more capital. But that means somebody out there in the market is buying the stuff and if we can move in to that next bucket, that $15 million to $20 million category that's when you would believe that they're start getting some attention in the marketplace and somebody is going warn them. They don’t always warn them. But you would think that's the point at which we can begin to sell these things. Now tech companies can sell for throughput [ph] values unless revenues we've sold some of those in the past, but really the companies are in the 5 million and above for those that are really starting to get market attention and market traction and that's really kind of what we look at and push the companies how to drive that topline.

[Daniel Penberthy:]

The another talent [ph] at least to my mind is when they're able to raise money, that means someone who look at them and you know, and said, yes, I want to make an investment.

[Brett Davis:]

Right. Well, that was great. That tells me two things in a little better.

[Daniel Penberthy:]

Okay. We'll be happy to sit down with you.

[Deborah Pawlowski:]

Thanks Brett.

[Operator:]

Okay. Thank you. This concludes our question and answer session. I'd like to turn the floor back to management for closing comments.

[Allen Grum:]

Thank you very much for your interest in Rand. We're always available by phone and we look forward to sharing the results in another 90 days.

[Operator:]

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.