Rand Capital's (RAND) CEO Allen Grum on Q4 2017 Results - Earnings Call Transcript

Rand Capital Corporation (NASDAQ:RAND) Q4 2017 Earnings Conference Call March 8, 2017 1:30 PM ET

Executives

Karen Howard - Investor Relations

Allen Grum - President and Chief Executive Officer

Daniel Penberthy - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Sam Rebotsky - SER Asset Management

Operator

Greetings and welcome to the Rand Capital Corporation Fourth Quarter and Full-Year 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I'll now turn the conference over to your host Karen Howard. Thank you. You may begin.

Karen Howard

Thank you, operator, and good afternoon, everyone. We certainly appreciate your time today for Rand's fourth quarter and full-year 2017 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 discuss our Safe Harbor Statement. As you're 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 on our website, or at www.sec.gov.

And with that, let me turn it over to Pete who is going to summarize highlights for the fourth quarter and the year and then Dan who will add more detail regarding the financials. It is now my pleasure to introduce Pete.

Allen Grum

Good afternoon, everyone, and thank you for all joining us. We are happy to have this opportunity to update you on Rand's fourth quarter activities and begin with reflection on the full-year of 2017. For those of you who are following along, I am going to start on Slide 3, which highlights our fourth quarter. At the end of the year, our net asset value as we referred to either NAV grew to $5.05 per share, up from $5.01 per share at the end of September.

Due to the portfolio activities, we grew by $0.09, but that was partially offset by a $0.05 impact of the Tax Cuts and Jobs Act. Dan during his financial presentation will go over that in more detail. During the fourth quarter, we invested $1.5 million in Tilson Technology. Half of that was in the form of preferred shares and half of that was a loan. I will talk more about this exciting growing company in a few momentums.

During the quarter, we had one access. We liquidated our entire position in Athenex. Recall from previous conversation, we mentioned that that company went public in June. After waiting for the expiration of our lockup period, we have sold all of our shares in the open market. We generated approximately 781,000 of proceeds. It realized about 638,000 pretax gains.

I want to update you at this point on the status as far as our ongoing discussions with the Small Business Administration. We continue to work with them and anticipate concluding this work in the next several months. Our goal is to get more leverage and continue our mutually successful relationship with the SBA.

Let's now turn to Slide 4, where I'll summarize some highlights for the year. We had a solid year of investment totaling $5.4 million. To remind you, we listed the nine transactions here. As usual the amounts vary from quarter to quarter. Eight of them was follow-ons and one was an investment in a new portfolio company Centivo in the third quarter.

2016 and 2017 we continued our focus on building investment income. Accordingly 81% of our 2017 investment for debt instruments and 19% were in the form of equity. Our investments drove significant increase in our investment income which is up over 41% when compared to 2016. We ended the year with a portfolio valued at $32.3 million.

If you could all turn to Slide 5, we once again take this opportunity to feature some of the companies within our portfolio to give you more insight into them. As you may recall, we have been doing this each quarter to give you better sense of what's going on inside of our portfolio company.

Let's start with Tilson. Tilson headquartered in Portland, Maine has presence throughout the U.S., including upstate New York. As I mentioned a moment ago, we invested $1.5 million as a follow on during the fourth quarter and that was part of a $5 million Series D round financing. This investment was ranked third one since our initial investment in 2015.

You may recall that Tilson is an award-winning, and veteran owned IT professional services and network deployment firm. They primarily operate in two very fast growing markets; network deployment for cellular carriers, utilities, and governments; and consulting for construction IT, broadband and energy, and government institutional markets. Some of the examples that are in the projects include the following. First, [New Era Field] Stadium, home of the Buffalo Bell, they needed a facility-wide distributed antenna system or DAS upgrade without causing interruptions that's in service during the NFL season.

Tilson provided AT&T and Verizon Wireless with the DAS installation commissioning an optimization. By utilizing a phased approach and coordinated work around team practices and games schedules, Tilson was able to complete the project, and finally during the NFL season with no customer impacting downtime during the game.

The next Friday [indiscernible] tell you about as an example to Tilson software development service. They were asked to assist with a guaranty selection for the New York broadband program, a $500 million investment in universal broadband deployment. Tilson understanding a public policy issues was particularly important being selected. They help the state think through everything from the intricacies of outlining a public program to maximizing the chance that the companies will respond and from the compliance issues to coordinate with State and Federal Communication requirements.

Tilson combined its extra season network deployment with application development to create an essence to reverse auction system that analyzes the financial details projected in each application. So far to date 126,000 armed businesses and institution and under-served communities have been funded through the program to receive new or dramatically improved broadband service. And New York is well on its way to reaching its ultimate goal of broadband for all. In total, we have invested $2.5 million in Tilson, which also has a fair value on our financial statement as of December 31 of the same amount.

I want to make sure that you are aware each time companies reach milestones and their life cycle and inherent value of the business will increase. Typically these incremental financing transactions are done had stepped increases in valuation reflecting the improved nature of our company's development. However, our accounting rules and fair value remained consistent with our original costs. Tilson is an example of this and we have others as well.

Let me tell you about Carolina Skiff which is based in Georgia. They are the leading manufacturer of high quality, versatile outboard boats, including the number one fiberglass outboard brand within their size range. They offer more than 60 models providing the most features and the best functionality available. Carolina Skiff has an established footprint with over 94 dealers in 23 states and also international installation. Since 2014, Carolina Skiff's revenue and EBITDA has grown at compound annual growth rate greater than 9% and 27%, respectively.

We initially invested in 2004. Their recent strong financial performance has driven us to increase our carrying value by $650,000 during the fourth quarter. As you can see here, $1.75 million fair value is significantly greater than our $15,000 cost of the acquisition. Subsequent to year end, two of our portfolio companies had good move.

Based in Buffalo, ACV Auction's mission is to become the trusted source for dealers to purchase wholesale vehicles. The ACV Auction platform starts with a thorough vehicle condition report and then [indiscernible] large buyers at a 20-men auction is begun. They cover wholesale auction operations, including title management, floor plan purchasing, arbitration and facility stadium logistic.

Our initial investment was in 2016. Just last month, a Company announced that it secure a $31 million in Series C venture funding. Rand did not participate on that round, but we believe that a value of our share is continuing to growth. This new capital brings total funding to $53 million and consumption and while enable ACV Auction to continue to expand. The Company have currently selling over 1,000 cars a week and growing rapidly with over 400 new dealers sign ups per month.

ACV Auction is currently operates and sell vehicles and 35 markets located throughout the East Coast and Midwest. By the end of 2018, the Company expected double historical presence to over 70 markets by expanding to the West Coast. ACV Auction also plans to user-funding to further advance our technology and end-to-end customer experience, including enhancement growing warehouse data and analytics around the vehicle. It's an exciting time for ACV.

Finally, let me tough on GiveGab, which is based on the Ithaca, New York. You may recall that GiveGab is modern easy-to-use software that cultivates long-term giving relationships between not-for-profit and their supporter provides robust online fund raising, donor management and supporter engagement. Giving Day's and more, from their first Giving Day's in 2015, GiveGab has launched over 36 also Giving Day's across the country, many of which are multimillion dollar days with several more in the world.

In January, GiveGab announced its acquisition of Kimbia. Kimbia is best known for its nationwide Giving Day event, having supported the fund raising efforts of 1,000s of not-for-profit across the country through their everyday Giving products and Giving Day. This acquisition brings GiveGab closer to fiscal of being the largest chartable software platform through the combined sort the part of our 40,000 not-for-profit since its inception. We initially invested in GiveGab in 2013. This is another exciting event for GiveGab.

Let's go to Slide 5, which you will see the logos of all the companies of our portfolio categories by revenue stage. You've seen this before and we included a most of our presentation, if you look start up's on the left, Initial Revenue, Expansion and then what we call High Traction on the right.

Regarding the four Company's we just featured, you can see the Tilson and Carolina Skiff are on the five far right, which is the High Traction revenue category. Just this quarter, ACV Auctions move from an initial revenue to expansion and two quarters that were in the startups phase. So they are growing rapidly.

GiveGab is in the initial revenue phase as they progress to add just a few quarters ago. I want to point out that few others have moved from startup phase to initial revenues during the fourth quarter. They are Grainful, Clear View Social and PostProcess driven by their business plans and gaining traction in the marketplace.

As I mentioned previously of Company's progress to the right, they may start to develop excess plans from our portfolio. [Indiscernible] transaction will take as they are all depended on the market condition.

We now turn to Slide 7. You likely know how diverse our portfolio is and the breakdown by industry category doesn't change dramatically over time. Consistent with our strategy, we are diversified company. We invest in almost all industries with exempt to real estate, retail and financial services.

Let's now turn to Slide 8, if you don't mind. Here was I expected our portfolio into capital characteristic primarily debt or equity are the two basic choices. Our strategy is always them in focused on capital appreciation to grow 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 and continued depending on the mix of cash flow streams with our portfolio. As we talked about before over the past year, we have focused on building, investment income to generate cash flow to cover our expense.

Let's go to Slide 9, and look at our top five investments in our portfolio and these are based at the end of the year fair value. Our portfolio is valid at $32 million included 30 active company. Compared to last quarter Tilson has moved into the top five, driven by recent investment. The value of our top five investment consistently compromise is about half of our portfolio value and as you can see here they are waiting towards healthcare.

Given this significance in our portfolio, I would like to summarize them for you. Our top investment is a Genicon value to $4 million. Based on Orlando, Florida and they design, produce and distribute patented surgical instrumentation. We invented with them beginning of 2015. Second on the left, there is another one called eHealth, which we value at $3.5 million.

Based on Rochester, New York, they provide a proprietary electronic platform to aggregate patient clinical records and the images to support medical referrals. Our initial investment into eHealth is in 2016.

Rheonix follows with our investment of $2.9 million. This Ithaca, New York Company develops fully automated molecular assays for use in research labs and also for medical as well as food and beverage application. We started investing with this team in 2009. Recently you may have seen their press release, Dan out there developing a rapid diagnostic test for this [indiscernible].

Fourth is Tilson, which we just finished discussing and the fifth is Outmatch with our investment based on $2.1 million. They are in the business of helping companies, be more productive, by providing tools to facilitate hiring people who are the right match for the job.

Based on Dallas, Texas, Outmatch provides workplace analytics, driven from candidate assessments, which have been proven to predict employee's performance. We've started investing in those Company in 2010.

Next 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, I'll start with net asset value per share or NAV. As Pete mentioned, and I am also very pleased to report, we finished the year with net asset value at $5.05 per share. As you can see NAV increased $0.04 per share over the trailing quarter. I'll break this down into two separate pieces.

Our operational results drove over $0.09 per share increase, but that was partially offset by a $0.05 per share for the one-time impact of adopting the new Tax Cuts and Jobs Act.

Basically we had to revalue our deferred tax assets at the new lower federal tax rates. Going forward, Rand's will benefit from this slower rate when we will be taxed at 21% for U.S. federal purposes.

Please turn to Slide 12. Here I've summarized our operating performance for the fourth quarter 2017 and 2016 as well as comparable full-year periods. As we've previously mentioned, we've been investing in more financial instruments over the past year or so, which has increased our interest income. You can see the results here.

Our fourth quarter investment income of $379,000 is up 26% over last year and our full-year 2017 investment income of $1.455 million is up 41%. Our fourth quarter expenses of $448,000 or 8% below last year.

Full-year 2017 total expenses were 41% lower than last year. The 2017 expenses do include approximately $133,000 rather related to our SBIC application process. Last year's our 2016 expenses did include Gemcor exit related transaction expenses, certain taxes and incentive compensation costs.

In the fourth quarter of 2017, we recorded approximately $347,000 of one-time tax expense to implement this Tax Cuts and Jobs Act reform. This resulted from lowering the federal tax rate on our deferred tax assets from 35% to 21%.

As I mentioned earlier, we will benefit from this lowered federal tax rate beginning in 2018. Regarding realized and unrealized changes in our investments, these are in accordance with our valuation policy. In the fourth quarter, we recorded a $638,000 realized gain on the sale of our Athenex stock, which we discussed last quarter.

We also recorded a $650,000 on realized gain on our investment in Carolina Skiff, which Pete also mentioned earlier. But 2017 fourth quarter resulted in an increase in net assets from operations, while the 2016 fourth quarter and both full-year periods reflected a decrease. The respective per share amounts are also shown here.

Please turn to Slide 13. Our balance sheet continues to remain strong. On a per share basis, we have $0.99 of cash and $5.11 of portfolio investments at the end of the year. Our portfolio growth has benefited from and has been personally funded by our past SBA leverage for which we have $1.27 per share remaining this is remaining due to the SBA as of the end of the year. We also have $0.22 per share of other assets net of liabilities, this always up to our net asset value or NAV per share of $5.05.

With that, I'll turn it back to Pete.

Allen Grum

Thanks, Dan. Before we open the lines for questions, I just want to say that I hope you can say there is a lot of excitement going on with Rand and its portfolio companies. We has a management team are working hard to take the Company to the next level by driving our growth strategy. We help to soon have additional SBA capital to put to work has we a wide variety of opportunity in our pipeline.

With that, let me open it up for questions.

Question-and-Answer Session

Operator

Thank you. At this time we will conduct a question-and-answer session. [Operator Instructions] Our first question is from Sam Rebotsky from SER Asset Management. Please go ahead.

Sam Rebotsky

Yes, good afternoon, Pete and Dan. It seems to been a pretty busy year. The SBA you say that it could be two months before you resolve the issue. How much are we seeking and what would we - and how much have we invested so far of what we expected to receive from the SBA?

Allen Grum

That's one of the things we're working on. As you know they have a new leader and he's got some call. We are working to make sure what we end up with workable for both Rand and for the SBA. We have not invested any of it because we're seeking new leverage. We have invested cash of $5.4 million.

Daniel Penberthy

$4.6 million of total investments has been made out of those proceeds.

Allen Grum

Out of those proceeds. So $4.6 million is one answer. We are negotiating with them for additional leverage. I think we're going to be able to wrap that up fairly soon, but we've been working on it for well over a year.

Sam Rebotsky

For example, initially did you get a 2:1 ratio? Are you seeking more than that because you're doing basically more debt, would that be a way to look at it?

Allen Grum

It won't be more than 2:1, but we are negotiating with some of the proper amount for the way that we invest.

Sam Rebotsky

Okay. So another is to the extent you plan to do more debt. I assume there would be less risk going forward.

Allen Grum

Well, I would hope so that tends to be risky, but the SBA really I've never seen them get more than 2:1 and we're certainly not thinking that.

Sam Rebotsky

Okay. Now do we expect to have any significant transactions in the year ending December 31, 2018 based on your knowledge of the companies that you're invested in?

Allen Grum

Well, that's kind of a loaded question Sam.

Sam Rebotsky

Okay.

Allen Grum

We have some companies that are seeking - they all have an exit strategy. When it happens I can't really tell you when, but there are a handful that we now have active discussion. I can't tell you historically once they get solved there is probably more than half comes out an unanticipated results or either a customer or competitors comes to them. And so they want to buy them, but we have a portfolio. Do we expect access? Sure we do. And I'll tell you which one, not at this point.

Sam Rebotsky

Okay. So we have a book value of 505 and we have a depreciation - unrealized depreciation of about $0.70 a share assuming that utilizable against gains or there's a way of wiping out the losses to make them breakeven, and yet we're trading even though it's up at 265, it got below - it's basically 50% below the valuation, and it would appear the market is not responsive to what you're doing. And I have discussed about a dividend or some way of buying some stock. And if we get this loan in place, is there any way is the board has thought more about what you might do so that you get more attention of the investors to invest in stock like Rand because there has been less and less interest in these type of stock of late based on the size you are in?

Allen Grum

You are correct. We had a call with an investment banker and the board that we used this morning and that was one of the issues. The BDC space has certainly been under pressure and certainly when you get to our size and I think there is only four, five left that are equity based and don't pay a dividend and they're not trading well. We have some ideas that we are pursuing. The loan that we are discussing with the SBA is to be used for investments. That to be used to buy shares of company dividend. We are looking at it. If we have free cash flow, whether it can be used for dividend or to buy shares back and we have the right answer, you will be the first to know.

Sam Rebotsky

All right. Looking forward for the market to know and I see you are having an LD Micro Conference today.

Allen Grum

Yes. Friday afternoon.

Sam Rebotsky

Okay. That's good. And I will step back into the queue. If there were nobody else, I will come back. Good luck.

Allen Grum

Sam, you can always call us.

Sam Rebotsky

Okay. Thank you.

Operator

[Operator Instructions] And the next question is from Sam Rebotsky from SER. Please go ahead.

Sam Rebotsky

Okay. All right. Look, do we know - I think, I guess I don't know it's kind of late. I have not seen website that you had this conference with LD Micro. Is it too late to put a press release out or is there ever been press release on that?

Allen Grum

I think there has been one that will spin out and I believe that it's on the website.

Sam Rebotsky

Yes. I saw that on the website. Okay, hopefully some new investors - it appears based on the cheapness of the stock as long as that the potential inventor could expect something as you discussed with your outside banker, they would be willing to hold the stock. And I know one of the company's - the safeguard has been under pressure and they're trying to get them to do something and that's - but they haven't functioned as well as you have.

They've spent a lot of money and you spent less and you've been very profitable relative to increasing the value of your investments. So hopefully, if the story becomes better known and as long as you could do something is the stock should trade in higher valuation. So good luck on the conference with LD Micro, and hopefully the outside bankers could come up with something to work for you. Good luck.

Allen Grum

Thank you, Sam.

Operator

Our next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Hey, good afternoon. How are you?

Allen Grum

Hi, Bill.

Unidentified Analyst

I got a question. Are you - is Rand stock considered a penny stock under current SEC pronouncements?

Allen Grum

I don't know the answer, Bill.

Unidentified Analyst

All right. I have had some experiences lately that frankly are disturbing in that the penny stock, according to what I read at the SEC, and what I've been told. The SEC now says a penny stock can be considered anything to $5 or less and your stock trades under $5 to build the SEC where we only - I guess government believes that $5 only were the penny, I have no idea.

But if it is considered a penny stock, it's problematic in the sense that clearing firms are cracking down on the transfers of penny stocks because it appears that there been a lot of fake stock or people owning stock is not registered in the SEC's with them, they've just thrown everybody into one basket. And because of the Athenex with an ongoing trend, many broker terms won't even allow their customers to buy penny stocks and the custodians for a [indiscernible] so forthwon't even take accounts in that have penny stocks in them.

And in my personal experience, when you get fortunate enough to find the high quality custodian that will take demand. They've then make you go back and produce every trade confirmation for when the position was acquired. So you can see there is a whole group of stocks out there, who were let's say in the dog house, where there are sellers from people being put into the situation by the custodian and no buyers because the broker dealers are making it extremely difficult for customers of any time to even buy penny stocks.

So I'm kind of on a mini crusade here to trying to figure out, I know why that is, but probably not for this call. But anyway there maybe something you might later take a look at, and if you're not considered a penny stock then that's terrific if you are it maybe where it's exploring how they have to fix.

Allen Grum

Okay. I look into that.

Unidentified Analyst

Okay. On that nice work. We just have to trigger out a way to put it unfold display and make somebody care.

Allen Grum

Thank you. Thanks for your support.

Operator

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

Allen Grum

Sure. Thank you. We enjoyed talking to you today. As you know you can call us in between quarters at any time. We're always happy to talk about what's going on with our business. And we look forward to talking to you again in May with our first quarter results.

Operator

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