Rand Capital Corporation
Q3 2018 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Greetings, and welcome to Rand Capital Corporation Third Quarter 2018 Financial Results. 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. It is now my pleasure to introduce your host Deborah Pawlowski, Investor Relations for Rand. Thank you Ms. Pawlowski. You may begin.

[Deborah Pawlowski:]

Thanks, Doug, and good afternoon, everyone. We certainly appreciate your time today and your interest in Rand. On the line with 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 of the quarter that were released this morning. If you don’t have a copy of that release, it is available on our website at randcapital.com. The slides that will accompany our discussion today are also posted on the website. If you turn to that deck, on Slide 2, I’ll 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 materially from what we state here 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 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 as well as feature some of our portfolio of companies, and then Dan is going to follow up with more details regarding the financial. Pete?

[Pete Grum:]

Thanks, Dan. Good afternoon everyone. We’re happy to have this opportunity to update you on Rand’s third quarter. I’m going to start with Slide three. At the end of the quarter, our net asset value or as we call it NAV was $4.84 per share, down slightly from $4.87 at the end of Q2. Most of this decline was due to a realized loss, which we recorded on the sale of a portfolio of company that was slightly offset by an improved tax rate. The net result was the modest $0.03 decline on a per share basis. During the quarter, our investments have been modest. We’ve been working as you know to figure additional capital from the United States small business administration. That process continues. Accordingly, we only have one investment during the quarter. We invested $140,000 in the form of convertible secured note to one of our existing portfolio of companies, BeetNPath, the company that goes to market using the Grainful brand name. As you may recall, earlier this year, we announced that they unveiled product reformulization an updated brand look and feel and new packaging for their frozen entrée product line. This additional capital supports their ongoing market penetration and growth. Our initial investment in BeetNPath was in 2014. As you may know, our focus over the last couple of years is to invest in vehicles to build investment income, which has been evident in our investment income results over the past several quarters. In addition to that, we realized this quarter a non-recurring long restructuring interest income of a combine – those factors resulted into 66% increase in investment income over the prior quarter, a 34% percent increase for the nine month period. Dan will go over the financial results later in the discussion. If you turn to Page – Slide 4, we’ve received feedback over time that people would be more interested in learning about our portfolio of companies. So as I do each quarter, I want to take the opportunity to feature some of the companies within our portfolio as a way to give you more insight into them. I’d like to start with Genicon, which is our largest investment of $4.2 million. Based on Winter Park, Florida, in Orlando, Genicon is an industry leader in the design, production and distribution of patented surgical instrumentation focused exclusively on laparoscopic surgery market. We currently categorize them in the expansion revenue stage, which includes companies with revenues between $5 million and $20 million. The company has experienced significant growth specifically revenue is up 38% over the prior year and they are gaining market penetration. There’s several factors that are driving this success. They expanded our extended contracts with several customers, including the HealthTrust Purchaseing Group, Vizient which is the largest member driven healthcare performance improvement company in the US, and a German based integrated delivery network organization called Helio. Additionally to develops and recently filed six new inventions with the U.S. patent and trademark office. And they registered and obtain market approval for their products by the Saudi Arabian Food and Drug Administration. These actions are expected to be catalysts for further growth, further global market acceptance of their growing product offering. Currently, Genicon is producing a record [indiscernible] so they are progressing very well. If I could ask you now to turn to Slide 5, the next company I would like to talk about is Tilson Technology Management, headquartered in Portland, Maine with offices around various cities around the U.S., this company provides network deployment in information system, professional services to telecom, construction, utility in government clients, and successfully execute complex and challenging projects worldwide. We’re very proud of this consistent success realized by this company and its team. They were included in 2018 Inc. 5,000 list for the eighth year in a row, only a fraction of the company is making this more than once. Tilson is one within an elite group of less than 2%, who have made the list eight times or more. This year, they are again realized an exceptional revenue growth, expecting to be up over 50% in 2018 and about the same trajectory in 2019. This performance has been driven by Tilson differentiated capability to be a leader in technology advancement. To support, this growth, they have more than doubled their employment level in 2018. They have the skill-set and culture to creatively figure out solutions in support of expanding 5G infrastructure deployment. There are a one stop shop enhancing their ability to win in this marketplace. As of September 30, 2018, our investment in Tilson was valued at $2.5 million and as the fourth largest investment in our portfolio. They have progressed to the high traction in revenue stage, which we define as companies with revenues in excess of $20 million. Please now turn to Slide 6. This company, which I’d like to discuss is GiveGab,based in Ithaca, New York. Included in expansion revenue stage category GiveGab, is the Nonprofit Giving Platform, providing a quick and easy way for fundraising professionals to raise money online. You may recall they acquired Kimbia earlier this year and they now report that the integration is going extremely well. Synergies include adopting the best practices of platforms of each company to drive the growth of the combined organization. The company’s 2018 giving transaction volume is on pace to grow at a rate of approximately ten times over 2017 which it grew about five times over 2016. Over the past three years, GiveGab has expanded to partner with more than 150 giving days annually, while helping tens of thousands of nonprofits raise approximately $500 million on GiveGab’s platforms in 2018 alone. At September 30, 2018, Rand’s investment in GiveGab was valued at approximately $616,000. Please turn to Slide 7, and we’ll look at the final company we’ve featured this quarter, which is SciAps based near Boston, New York. Our initial investment was $1 million in 2013 and in five years it has quickly ground from the start-up phase, which we characterize as less than a million in revenue, to they expansion phase. SciAps is an instrumentation company producing portable analytic devices using X-ray fluorescent or XRF, laser induced breakdown spectrometer, or LIBS and Raman spectroscopy to identify compounds, minerals and elements. As you would imagine, these are important technical requirements in this industry. We’re pleased to note that recently their LIBS analyzer was approved globally for measuring carbon and carbon equivalent for both pipeline inspections and refining. The company anticipates significant rather than opportunity, since it’s the only device of its type that has been approved for pipeline inspection application. And they recently won a new distribution channel partner in China who switched to SciAps due to their superior breadth and more responsive consumer report. At the end of September Rand’s investment in SciAps was valued at $2 million. If we go to Slide 8, we’ve had this before. It shows the logos of all the companies in our portfolio characterized by revenue stage. You’ve seen this before with start-ups on the left initial revenue, expansion and then what we call high tracks on the right. The newest investment in our portfolio Centivo listed there as a startup. You may recall the new high value healthcare solution. I’m pleased to report that they reached a significant milestone in their early development as they have their first customer and enrollment seems to be going very well. We just started investing in Centivo little a year ago. Regarding the four companies we just featured, you can see Genicon, GiveGab, SciAps, are all within the expansion stage. And Tilson that’s to the far right, one of our companies in the high traction revenue stage. Compared with last quarter, we’ve removed intrinsic material because that was a company we previously talked about was sold during the quarter. As I mentioned before as companies progress to the right, they may start to develop exit plans from our portfolio virtually and possible to predict how quickly or slowly such transactions may progress as they are all dependent on market conditions. Slide 9 is another way to look at our portfolio. These same company logos, but they are now categorized based on how long the company has been in our portfolio. We haven’t added any new companies to our portfolio this year and the average age of our company in our portfolio is just under five years and our normal investment period is approximately five years. As you can see the majority of the companies that are above the five-year time period, today 17 companies are in there. If we turn to Slide 10, you can see how diverse our portfolio and the breakdown by industry category doesn’t change drastically over time. 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 comparisons as of September 30 show slight increases in the professional services, and software industries and a decrease in healthcare. I’d ask you now turn to Slide 11. As we dissect our portfolio into capital characteristics with debt and equity being the two main choices, our strategy has always been on capital appreciation to grow our net asset value. Accordingly, our portfolio is more heavily weighted towards equity as opposed to debt instrument. However, because as adjust our investment objective depending on the mix of cash flow stream within our portfolio, as this slide illustrates, since 2015, we had trended some more debt, or focused on building investment income to generate cash flow to cover our expenses. Consequently, at the end of this quarter at September 30, nearly 60% of our investments were in equity and about 40% in debt, which is virtually unchanged from the end of 2017. I’d asked you to turn now to Slide 12 for the snapshot of the top five investments in our portfolio at the end of September. Our portfolio was valued at over $32.2 million and includes 29 active companies. These five are unchanged from the past couple of quarters. I won’t go into a lot of detail, but it does give you a quick summary. The value of our top five investments consistently compromises about half of our portfolio. And as you can see it’s weighted towards healthcare. But each one of these companies sits in a different sector within the healthcare ground. Our cash investment continues to be Genicon which we discussed recently. The second largest investment in our portfolio is eHealth. Based in Rochester, New York they provided a proprietary, electronic platform with an aggregate patient clinical record and images to support medical referral. Our initial investment into eHealth was in 2016. Rheonix follows next, which is based in Ithaca, New York. They are a developer of fully automated, sample-to-answer, molecular testing solution for use in a variety of innovative applications, different industries. Our initial investment in Rheonix was back in 2009. Fourth is Tilson, which we recently discussed. And number five, is Outmatch, they’re in the business of helping companies to be more productive and providing tools to facilitate hiring people who are right for the job. Based in 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.

[Dan Penberthy:]

Thanks Pete and good afternoon everyone. If you could please turn to Slide 14, I’ll start with the net asset value per share or NAV as Pete mentioned. We finished the quarter with a net asset value of $4.84. As you see on the chart NAV declined $0.03 per share over the trailing quarter. This decrease is attributable primarily to a realized loss upon the sale of a portfolio company, Intrinsiq Materials. That business had been underperforming and we did not realize any proceeds from the sale. We also benefited then from a favorable tax treatment rate for this quarter. Please turn to Slide 15. Here I summarize our operating performance for the third quarters of 2018 and 2017. Then also the first nine months of both years. I’ll take you through the key line items noted here. The first thing I want to point out is that our investment income line includes a nonrecurring item this quarter. The loans we had invested in Empire Genomics were modified this quarter and resulted in a recording of interest that had not been accrued, as well as a debt modification fee. Those items amounting to approximately $233,000 of investment income this quarter were then capitalized into the loan balance is part of this debt modification. That was a significant portion of a [indiscernible] that was in the investment income that was noted in the table. The remaining balance represents a healthy 8% increase over the prior year investment income. As we previously mentioned, we have been investing in more income producing instruments over the past couple of years and that has driven increased investment income. On a year-to-date basis, investment income is up $364,000 or 34%. Excluding the nonrecurring items in the quarter, which I had previously described, year-to-date investment income is up 12%. Our third quarter expenses of $448,000 or 2% above the same quarter of last year. The increase in expenses was due to a higher professional services cost, partially offset by a bad debt recovery related to [Audio Dip] down $53,000 or 3%. As I mentioned on the last slide, during the third quarter, we recorded a realized loss on a portfolio company. This was intrinsic materials, for which we did not receive any proceeds upon the sale. Net of previously recorded unrealized losses, the third quarter was unfavorably impacted by $400,000 before taxes for this exit. Also related to the debt restructuring that I’ve mentioned previously, we recorded the right time in our investment at Empire Genomics over about $250,000 prior to taxes. However, recall that I previously described the $233,000 nonrecurring investment income items a few minutes ago. Thinking about these two income statement lines together, the net unfavorable impact was only about $17,000 before taxes. Clearly these two offset each other. To summarize, the 2018 third quarter resulted in a decrease in net assets from operations of $0.03 per share, which was primarily driven by our loss upon the sale of intrinsic material, partially offset by favorable tax rates due to the new U.S. tax legislation. Please turn to Slide 16, our balance sheet continues to remain strong. On a per share year basis, we have $0.70 of cash at the end of the quarter. This includes $0.39 per share which resides at the corporate or parent level and $0.31 per share in our SBIC, which is available for investing. Our portfolio investments are valued at $5.09 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 the end of the quarter. We also have $0.32 per share of other assets, net of liabilities. This all adds up to our net asset value or NAV per share of $4.84. With that, I’ll turn it back to Pete.

[Pete Grum:]

Thank you, Dan. Before I open the line for questions, I want to say I hope you can see there’s lot of things going on excitement, a lot of underlying value on our portfolio company. We, as a management team are working hard to take the company to the next level by securing additional capital and driving our growth strategy. And now I’d like to open up for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.

[Brett Reiss:]

Hi, Pete, hi Dan, how are you doing?

[Pete Grum:]

Hi, Brett.

[Brett Reiss:]

Your last comment that you’re looking at securing additional capital to go to the next level, can you give us some more specificity of the variety of things that you’re looking at in that area?

[Pete Grum:]

Hi, it’s the current thing as we’ve talked about our partnership with the SBA to obtain $6 million in additional leverage, it’s been very frustrating we’ve been working on this for some time. And as our last conversation with them, we’ve been told our application is in process and that’s what I was trying to refer to.

[Brett Reiss:]

Okay. Are there any other things you’re looking at?

[Pete Grum:]

We’ve had discussions about issuing convertible, a variety of other capital market transactions. We have not found an underwriter that can accommodate that but do have some ongoing conversation.

[Brett Reiss:]

If ultimately you go the BC route and get the $6 million additional capital, how will that help us when we look at the company a year or two down the road?

[Pete Grum:]

Well, the $6 million would be invested in no investment. And generally the rate between what we’re borrowing that because that’s agency data, that’s agency data compared to where we reinvestment is generally a positive. It’s really tenure – long-term capital for us to deploy.

[Brett Reiss:]

Okay. So we capture the arbitrage spread. Okay. If you go to convertible route, how will that benefit us?

[Pete Grum:]

Well, it’s been a concept that has come from some shareholders, the way they talk to and it’s a way to just raise additional capital. It’s operational leverage and that as we grow our fixed expenses for running the company, say, fairly flat.

[Brett Reiss:]

Can you do both or it’s got to be either or?

[Pete Grum:]

I believe we can do. I know we can do the SBA. So they may want to work with. The convertible note, I’m not sure these are discussions that we’ve had there’s a variety of ways to do that. And I’m not sure whether they would require shareholder vote or what really goes into it. But I believe out of consensual basis, we could do both.

[Brett Reiss:]

Okay. Is there anything else other than these two avenue that can be on the table to try to get some more sponsorship of the stock and just a better stock price?

[Pete Grum:]

We are open to any and all ideas that may or may not know, but we have an investment banker that we work with from time to time. We get inquiries about various things and we have a fiduciary responsibility as a management and as a board to evaluate those, and we do evaluate.

[Brett Reiss:]

Right. Right. All right, I’ll drop back in queue. Thank you for answering my question.

[Pete Grum:]

Thank you, Brett.

[Operator:]

Our next question comes from the line of Brett Davidson, a private investor. Please proceed with your question.

[Brett Davidson:]

Good afternoon. I got a quick question regarding the changes in the new tax law, regarding the qualified opportunity zones. Have you guys become familiar with that? And does that play any role in what brand maybe you’re looking to do?

[Pete Grum:]

We are aware of them and are trying to figure out how we can utilize these and whether they can be utilized and passed through the shareholders or how they work or whether it would really just pick up at a corporate level without taking proceeds and reinvesting them. As you know, the language on that legislation is being written kind of as we speak.

[Brett Davidson:]

Yes, I believe they just came up with regs in the past – proposed regs in the past week or so. So guidance has come through on that and I haven’t got – had a chance to look at it, but I imagine it probably introduced is more confusion than it clears up, but…

[Pete Grum:]

But, yes, I think it’s sort of on the tax side.

[Brett Davidson:]

Have you heard any rumblings from any of the SBA investment companies may be looking to open a new facility and explore and usually something like that?

[Pete Grum:]

I have not – I’ve had discussion with high net worth individuals and specifically around Buffalo as far as where the loans are going to be and how they may roll some of their investments into it.

[Brett Davidson:]

Very good. Thank you.

[Pete Grum:]

Thanks, Brett.

[Operator:]

[Operator Instructions] There are no further questions in the queue. I’d like to hand the call back to management for closing comments.

[Pete Grum:]

We appreciate you taking the time and learning more about RAND. In between these calls, if you want to pick up the phone and call us, we’re always available, and thank you very much for your time.

[Operator:]

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.