Rand Capital Reports 40% Increase in Total Investment Income for Fourth Quarter 2022
Rand Capital Corporation (Nasdaq: RAND) (“Rand” or the “Company”), a business development company providing alternative financing for lower middle market companies, announced its results for the fourth quarter ended December 31, 2022.
“2022 was a strong year and continued to demonstrate the execution of our strategy. We advanced our investment portfolio composition towards more debt instruments with the addition of four interest yielding investments over the past year. In total, our debt portfolio now makes up more than half of our total portfolio mix at 56% compared with 46% at the end of 2021,” commented Daniel P. Penberthy, President and Chief Executive Officer of Rand. “Equally important has been our focus on expense management, which translated into strong net investment income growth for the year and enabled us to increase our return to shareholders. During 2022, we paid total dividends of $0.83 per share, which represented an increase of nearly 90% over our 2021 distributions. This included raising our regular quarterly cash dividend by 33%, or $0.05 per share, to $0.20 per share in the fourth quarter.
“With the support of our strong liquidity position, we believe we can continue to execute our strategy to grow our portfolio, drive investment income and support a growing dividend.”
Fourth Quarter Highlights
Total investment income grew $496,000, or 40%, to $1.7 million primarily due to increased interest income from portfolio companies and higher portfolio dividend income. Total expenses were $371,000 compared with $923,000 in the prior-year period. The decrease reflects lower interest expense and a credit of accrued capital gain incentive fees of $168,000 for the fourth quarter of 2022 compared with $86,000 of expense for the fourth quarter of 2021. Excluding capital gains incentive fees, adjusted expenses, which is a non-GAAP financial measure, were $539,000, down $298,000, or 36%, from the prior-year period. See the attached description of this non-GAAP financial measure and reconciliation table for adjusted expenses. Net investment income was $1.2 million, or $0.48 per share, compared with $320,000, or$0.12 per share, in the prior-year period. Adjusted net investment income per share, a non-GAAP financial measure, which excludes the capital gains incentive fee accrual, was $0.41 per share, up from $0.16 per share in the fourth quarter of 2021. See the attached description of this non-GAAP financial measure and reconciliation table for adjusted net investment income per share.
2022 Highlights
Total investment income of $5.8 million increased $1.7 million or 41%. Total expenses were $1.1 million compared with $6.7 million in the prior year. The decrease was largely due to the accrual of $4.2 million of capital gains incentive fees during 2021 compared with a reversal of $1.0 million in accrual of fees during the current year. Also reflected was lower interest expense of $547,000 given the Company’s SBA indebtedness was paid off in full in November 2021. Excluding the capital gains incentive fee accrual, adjusted expenses, which is a non-GAAP financial measure, decreased $302,000, or 12%, to $2.2 million. See the attached description of this non-GAAP financial measure and reconciliation table for adjusted expenses. Net investment income per share was $1.72 for the year compared with net investment loss of $1.01 per share in the prior year. Excluding the capital gains incentive fee accrual, adjusted net investment income per share was $1.31 for 2022 compared with $0.62 for 2021. See the attached description of this non-GAAP financial measure and reconciliation table for adjusted net investment income per share. Net assets at December 31, 2022 were $57.7 million, down 5% from year-end 2021, which reflected new and follow on investments offset by fair market value changes across a number of portfolio companies during the year.Portfolio and Investment Activity
As of December 31, 2022, Rand’s portfolio included investments with a fair value of $61.5 million across 29 portfolio businesses. This was up $1.8 million, or 3%, from September 30, 2022, which reflected new and follow on investments partially offset by valuation adjustments to several portfolio companies. At December 31, 2022, the portfolio was comprised of approximately 56% in debt investments, 34% in equity investments in private companies, and 10% in publicly traded equities consisting of other BDCs and ACV Auctions. The annualized weighted average yield of debt investments was 12.6%.
Fourth quarter 2022:
Funded $3.1 million to Food Service Supply (FSS), consisting of $2.5 million of senior subordinated debt and $600,000 of preferred equity. FSS provides design, distribution and installation services for commercial kitchens, renovations and new builds. Follow on debt investment of $590,000 in SciAps, Inc., an instrumentation company specializing in portable analytical instruments to identify compounds, minerals and elements. Rand’s total debt and equity investment in SciAps had a fair value of $5.2 million at year-end. Follow on equity investment of $194,000 in Seybert’s Billiards Corporation, a billiard supply company. Rand’s total debt and equity investment in Seybert’s had a fair value of $5.9 million at year-end.Full year 2022:
Invested a total of $7.0 million across seven transactions, which largely consisted of interest yielding assets Sold BDC and ACV Auctions public securities for $2.0 million in gains Received $1.6 million from repaid loansLiquidity and Capital Resources
Cash at year-end was $1.4 million compared with $834,000 at the end of 2021. The Company held approximately $3.9 million in publicly traded equities of other BDCs and $2.5 million of ACV Auctions shares, all of which are available for future liquidity requirements including dividends and portfolio investments.
At December 31, 2022, Rand had outstanding borrowings of $2.6 million on its existing $25.0 million senior secured revolving credit facility.
The Company did not repurchase any outstanding common stock during 2022.
Dividends
On December 6, 2022, the Board declared an aggregate of $0.38 per share cash dividend distribution, which was paid during the fourth quarter, to shareholders of record as of December 19, 2022. The dividends consisted of a regular quarterly dividend of $0.20 per share, which was an increase of $0.05, or 33%, and a supplemental dividend of $0.18 per share.
During 2022, Rand paid a total of $2.1 million in dividends, which included the four regular quarterly dividends, and the year-end 2022 supplemental dividend.
On February 28, 2023, Rand declared its regular quarterly cash dividend distribution of $0.20 per share. The cash dividend will be distributed on or about March 27, 2023, to shareholders of record as of March 13, 2023.
Webcast and Conference Call
Rand will host a conference call and webcast on Friday, March 10, 2023, at 11:00 a.m. Eastern Time, to review its financial results. The review will be accompanied by a slide presentation, which will be available on Rand’s website at www.randcapital.com in the “Investor Relations” section. Rand’s conference call can be accessed by calling (201) 689-8263. Alternatively, the webcast can be monitored on Rand’s website at www.randcapital.com under “Investor Relations” where the replay will also be available.
A telephonic replay will be available from 2:00 p.m. ET on the day of the call through Friday, March 17, 2023. To listen to the archived call, dial (412) 317-6671 and enter replay pin number 13735032. A transcript of the call will also be posted once available.
ABOUT RAND CAPITAL
Rand Capital (Nasdaq: RAND) is an externally managed business development company (BDC). The Company’s investment objective is to maximize total return to its shareholders with current income and capital appreciation by focusing its debt and related equity investments in privately-held, lower middle market companies with committed and experienced managements in a broad variety of industries. Rand invests in early to later stage businesses that have sustainable, differentiated and market-proven products, revenue of more than $2 million and a path to free cash flow or up to $5 million in EBITDA. The Company’s investment activities are managed by its external investment adviser, Rand Capital Management, LLC. Additional information can be found at the Company’s website where it regularly posts information: https://www.randcapital.com/.
Safe Harbor Statement
This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than historical facts, including but not limited to statements regarding the strategy of the Company and its outlook; and any assumptions underlying any of the foregoing, are forward-looking statements. Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue,” “target” or other similar words or expressions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove to be incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, (1) evolving legal, regulatory and tax regimes; (2) changes in general economic and/or industry specific conditions; and (3) other risk factors as detailed from time to time in Rand ’s reports filed with the Securities and Exchange Commission (“SEC”), including Rand’s annual report on Form 10-K for the year ended December 31, 2022, quarterly reports on Form 10-Q, and other documents filed with the SEC. Consequently, such forward-looking statements should be regarded as Rand’s current plans, estimates and beliefs. Except as required by applicable law, Rand assumes no obligation to update the forward-looking information contained in this release.
FINANCIAL TABLES FOLLOW.
Rand Capital Corporation and Subsidiaries
Consolidated Statements of Financial Position
(Audited)
December 31,
2022
2021
ASSETS
Investments at fair value:
Control investments (cost of $4,660,017 and $0, respectively)
$
3,536,207
$
-
Affiliate investments (cost of $30,204,160 and $27,357,797, respectively)
38,241,589
30,279,873
Non-Control/Non-Affiliate investments (cost of $20,852,060 and $25,012,871, respectively)
19,726,463
33,788,589
Total investments, at fair value (cost of $55,716,237 and $52,370,668, respectively)
61,504,259
64,068,462
Cash
1,368,996
833,875
Interest receivable
208,338
128,047
Prepaid income taxes
76,396
252,010
Deferred tax asset
28,160
181,003
Other assets
295,043
181,457
Total assets
$
63,481,192
$
65,644,854
LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)
Liabilities:
Due to investment adviser
$
562,221
$
891,102
Accounts payable and accrued expenses
66,680
51,689
Line of credit
2,550,000
-
Capital gains incentive fees
2,167,000
3,547,760
Deferred revenue
413,971
408,887
Total liabilities
5,759,872
4,899,438
Stockholders’ equity (net assets):
Common stock, $0.10 par; shares authorized 100,000,000; shares issued: 2,648,916; shares outstanding: 2,581,021
264,892
264,892
Capital in excess of par value
51,464,267
51,679,809
Treasury stock, at cost: 67,895 shares
(1,566,605
)
(1,566,605
)
Total distributable earnings
7,558,766
10,367,320
Total stockholders’ equity (net assets) (per share - 2022: $22.36, 2021: $23.54)
57,721,320
60,745,416
Total liabilities and stockholders’ equity (net assets)
$
63,481,192
$
65,644,854
Rand Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited) (Audited)For the Quarter Ended
December 31, For the Year Ended
December 31,
2022
2021
2022
2021
Investment income:
Interest from portfolio companies:
Control investments
$
154,647
$
11,303
$
279,055
$
23,068
Affiliate investments
599,931
517,539
2,366,955
1,541,507
Non-Control/Non-Affiliate investments
381,248
378,043
1,506,792
1,453,059
Total interest from portfolio companies
1,135,826
906,885
4,152,802
3,017,634
Interest from other investments:
Non-Control/Non-Affiliate investments
82
533
131
13,876
Total interest from other investments
82
533
131
13,876
Dividend and other investment income:
Affiliate investments
422,200
145,589
974,669
354,536
Non-Control/Non-Affiliate investments
122,965
128,965
481,665
533,643
Total dividend and other investment income
545,165
274,554
1,456,334
888,179
Fee income:
Control investments
3,900
-
7,800
-
Affiliate investments
20,371
36,912
92,531
114,697
Non-Control/Non-Affiliate investments
27,642
17,647
55,583
41,917
Total fee income
51,913
54,559
155,914
156,614
Total investment income
1,732,986
1,236,531
5,765,181
4,076,303
Expenses:
Base management fee
230,454
238,904
927,226
858,144
Capital gains incentive fees
(168,000
)
86,000
(1,048,760
)
4,200,000
Professional fees
160,657
200,195
729,967
578,577
Shareholders and office operating
41,756
38,878
205,083
223,381
Directors' fees
50,050
39,050
187,833
153,500
Interest expense
43,918
304,700
69,960
617,270
Insurance
11,238
9,698
43,026
38,635
Corporate development
-
4,372
3,753
14,702
Other operating
1,017
998
1,141
1,106
Bad debt recovery
-
-
-
(15,000
)
Total expenses
371,090
922,795
1,119,229
6,670,315
Net investment income (loss) before income taxes
1,361,896
313,736
4,645,952
(2,594,012
)
Income tax expense (benefit)
131,792
(6,119
)
215,542
10,896
Net investment income (loss)
1,230,104
319,855
4,430,410
(2,604,908
)
Net realized gain (loss) on sales and dispositions of investments:
Control investments
-
(308,676
)
-
(308,676
)
Affiliate investments
-
57,215
167,159
192,645
Non-Control/Non-Affiliate investments
14,902
1,342,349
538,334
5,936,385
Net realized gain (loss) on sales and dispositions of investments
14,902
1,090,888
705,493
5,820,354
Net change in unrealized appreciation/depreciation on investments:
Control investments
(748,810
)
1,151,021
(748,810
)
1,151,021
Affiliate investments
4,692,512
(233,249
)
4,740,353
3,414,050
Non-Control/Non-Affiliate investments
(4,760,553
)
(1,597,207
)
(9,901,315
)
7,804,535
Change in unrealized appreciation/depreciation before income taxes
(816,851
)
(679,435
)
(5,909,772
)
12,369,606
Deferred income tax expense (benefit)
107,980
(213,327
)
107,980
(212,376
)
Net change in unrealized appreciation/depreciation on investments
(924,831
)
(466,108
)
(6,017,752
)
12,581,982
Net realized and unrealized (losses) gains on investments
(909,929
)
624,780
(5,312,259
)
18,402,336
Net increase (decrease) in net assets from operations
$
320,175
$
944,635
$
(881,849
)
$
15,797,428
Weighted average shares outstanding
2,581,021
2,581,021
2,581,021
2,581,707
Basic and diluted net increase (decrease) in net assets from operations per share
$
0.12
$
0.37
$
(0.34
)
$
6.12
Rand Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
For The Years Ended December 31, 2022 and 2021
(Audited)
2022
2021
Net assets at beginning of year
$
60,745,416
$
46,104,830
Net investment income (loss)
4,430,410
(2,604,908
)
Net realized gain on sales and dispositions of investments
705,493
5,820,354
Net change in unrealized appreciation/depreciation on investments
(6,017,752
)
12,581,982
Net (decrease) increase in net assets from operations
(881,849
)
15,797,428
Declaration of dividends
(2,142,247
)
(1,136,071
)
Purchase of treasury shares
-
(20,771
)
Net assets at end of year
$
57,721,320
$
60,745,416
Rand Capital Corporation and Subsidiaries
Reconciliation of GAAP Total Expenses to Non-GAAP Adjusted Expenses
(Unaudited)
In addition to reporting total expenses, which is a U.S. generally accepted accounting principle (“GAAP”) financial measure, Rand presents adjusted expenses, which is a non-GAAP financial measure. Adjusted expenses is defined as GAAP total expenses removing the effect of any (credits)/expenses for capital gains incentive fees. GAAP total expenses is the most directly comparable GAAP financial measure. Rand believes that adjusted expenses provides useful information to investors regarding financial performance because it is a method the Company uses to measure its financial and business trends related to its results of operations. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
Three months
ended
December 31,
2022
Three months
ended
December 31,
2021
Year
ended
December 31,
2022
Year
ended
December 31,
2021
Total expenses
$
371,090
$
922,795
$
1,119,229
$
6,670,315
Exclude (credits)/expenses for capital gains incentive fees
(168,000
)
86,000
(1,048,760
)
4,200,000
Adjusted expenses
$
539,090
$
836,795
$
2,167,989
$
2,470,315
Reconciliation of GAAP Net Investment Income (Loss) per Share to
Adjusted Net Investment Income per Share
(Unaudited)
In addition to reporting Net Investment Income per Share, which is a U.S. generally accepted accounting principle (“GAAP”) financial measure, the Company presents Adjusted Net Investment Income per Share, which is a non-GAAP financial measure. Adjusted Net Investment Income per Share is defined as GAAP Net Investment Income (Loss) per Share removing the effect of any (credits)/expenses for capital gains incentive fees. GAAP Net Investment Income (Loss) per Share is the most directly comparable GAAP financial measure. Rand believes that Adjusted Net Investment Income per Share provides useful information to investors regarding financial performance because it is a method the Company uses to measure its financial and business trends related to its results of operations. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
Three months
ended
December 31,
2022
Three months
ended
December 31,
2021
Year
ended
December 31,
2022
Year
ended
December 31,
2021
Net Investment Income (Loss) per Share
$
0.48
$
0.12
$
1.72
$
(1.01
)
Exclude (credits)/expenses for capital gains incentive fees per share
(0.07
)
0.04
(0.41
)
1.63
Adjusted Net Investment Income per Share
$
0.41
$
0.16
$
1.31
$
0.62
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