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Rand Capital Announces Third Quarter 2019 Results
[November 07, 2019]

Rand Capital Announces Third Quarter 2019 Results


Rand Capital Corporation (Nasdaq: RAND) ("Rand" or "Rand Capital"), a business development company, announced its results for the quarter and nine months ended September 30, 2019.

Allen F. ("Pete") Grum, President and Chief Executive Officer of Rand Capital, commented, "We are pleased to have received approval from the SBA, which was the final regulatory approval required to close on our transaction with East Asset Management ("East"). Having received that approval, we anticipate closing the transaction in November. The closing of this transformational transaction culminates approximately two years of work and we look forward to continuing our path forward with East. In the coming months, our Board and management will make best efforts to continue the steps to transform Rand into a regulated investment company ("RIC") and complete the anticipated special dividend outlined in our proxy statement for the special shareholders meeting which was held in May."

He noted, "We were disappointed with our third quarter financial results, as reflected in the decrease in our NAV. Investing in small and growing businesses and valuing them on a quarterly basis is complex. The valuation changes we recorded for several of our portfolio companies this quarter were unrealized and we believe that, over time, the companies can fulfill their potential and we may see reversals of some of those unfavorable valuation adjustments that were taken this quarter."

Mr. Grum added, "We curtailed our investment activity over the past 18 months as we completed the requirements of the East transaction, including pursuit of the SBA approval. We now expect to increase our investment activity, utilizing the additional capital from the East transaction and our historically high cash balances in our SBIC subsidiary. We currently have $1.47 per share in cash and will substantially increase that balance after closing on the East transaction. Additionally, the Board renewed and increased our longstanding share repurchase program. With the increased cash from the East transaction, buying back shares is a viable option."

Third Quarter 2019 Financial Highlights

  • Reported $4.39 net asset value (NAV) per share at September 30, 2019, compared with $4.85 at June 30, 2019. The sequential decrease was primarily due to net depreciation in five portfolio investments in accordance with the Company's valuation policy.
  • At September 30, 2019, portfolio fair value was $26.8 million and consolidated cash was $9.3 million, or $1.47 per share, with $1.2 million available for corporate purposes and $8.1 million in the SBIC.

Total investment income in the third quarter of 2019 was $437,000, compared with $662,000 in the same period last year. Last year's quarter included approximately $233,000 of nonrecurring interest and debt modification fee income generated from a portfolio company loan restructuring. Total expenses in the 2019 and 2018 third quarters were $531,000 and $448,000, respectively. Higher expenses were due primarily to the East transaction as well as more interest expense on higher outstanding debt.

The Company recorded pre-tax net unrealized depreciation of $3.6 million in the third quarter of 2019 compared with $476,000 positive change in pre-tax unrealized depreciation in the same quarter of 2018. Rand also recorded a $1.1 million realized pre-tax loss during the prior-year third quarter.

Total investment income increased 21% to $1.7 million for the nine months ended September 30, 2019, compared with $1.4 million in the same 2018 period. The growth resulted from the Company's investment focus on income-generating instruments as well as variations in nonrecurring investment income in each period. Total expenses for the first nine months of 2019 and 2018 were $2.0 million and $1.5 million, respectively, with the increase primarily related to the East transaction process.

Pre-tax realized losses were $392,000 in the first nine months of 2019 and $1.1 million in the same 2018 period. The 2019 loss primarily resulted from Rand's investment in a company that ceased doing business during the second quarter of 2019, reflecting a reclassification of an unrealized loss previously recorded. Pre-tax net unrealized depreciation on investments was $4.2 million and $732,000 in the first nine months of 2019 and 2018, respectively.

Selected Portfolio Highlights

  • ACV Auctions, Inc., is the leading dealer-to-dealer, online automotive marketplace that strives to be the trusted way that dealers source their wholesale vehicles. The company recently launched new tools and features that it believes will further increase efficiency for dealers buying and selling on the online ACV platform: 1) Their new Run List provides access to certain auctions before they go live, enabling dealers to bid in a way that fits their schedule. The dealer's bid will automatically go into effect once the auction becomes live. 2) Enhancements to filters are optimizing the time dealers spend on the platform so they can find the exact dealer they want quickly and easily. 3) Proxy bids have been enhanced, allowing for both standard and persistent proxy bids. These features also optimize the time spent in the app, generating more views and bids. 4) ACV recently launched Virtual Lift™, the industry's first mobile vehicle undercarriage imaging tool. The portable, lightweight, low profile device utilizes ACV's proprietary mobile hardware and software technology to provide a full bumper-to-bumper view and image of the vehicle's undercarriage in less than one minute. Virtual Lift™ elevates the level of trust and transparency in the ACV Auctions online marketplace. Since its establishment in 2015, ACV has experienced rapid growth and now operates in 138 territories from coast-to-coast. Rand's initial $163,000 investment in 2016 has a fair market value of $2.8 million at September 30, 2019.
  • Carolina Skiff, LLC is a leading manufacturer of high quality, versatile outboard boats, including the #1 fiberglass outboard brand within their size range. The company recently undertook a comprehensive refresh of its product line, developing a more linear series of boats with advanced features and functionality in response to evolving consumer preferences. In mid-2019, Carolina Skiff launched an industry-leading 18 new models for the 2020 model year, featured at a dealer showcase at one of its facilities in Georgia. In alignment with their slogan - Family. Fishing. Fun. - the new models provide boat enthusiasts with turnkey options to simplify the buying process while delivering reduced lead times. Offering more than 60 models through its established footprint of 94 dealers across 23 states, Carolina Skiff boats provide the most features and the best functionality available on the market. Rand initially invested in Carolina Skiff in 2004 and its investment currently carries a cost of $15,000. The company's strong financial performance has resulted in the investment carrying a fair market value of $1.8 million in Rand's portfolio as of September 30, 2019.

As of September 30, 2019, Rand's portfolio consisted of 28 active companies. At that date, the portfolio was comprised of approximately 67% in equity investments and 33% in debt investments, compared with 57% in equity investments and 43% in debt investments at September 30, 2018. The change was attributable to the repayment of a large loan by a portfolio company in 2019.

Renewed and Increased Share Buyback Authorization

Rand's priority for allocating capital continues to be investment in its portfolio. Also, the Board of Directors has renewed and increased the Company's share repurchase program by authorizing up to an additional 1,000,000 shares of Rand common stock through October 25, 2020.

Webcast and Conference Call

Rand will host a conference call and live webcast today, November 7, 2019, at 2:30 p.m. Eastern Time to review its financial condition and results for the 2019 third quarter, as well as its strategy and outlook. The review will be accompanied by a slide presentation, which will be available on Rand's website at www.randcapital.com under the "Investor Relations" heading. A question-and-answer session will follow the formal presentation.

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 the "Investor Relations" heading.

A telephonic replay will be available from 5:30 p.m. ET on the day of the call through Thursday, November 14, 2019. To listen to the archived call, dial (412) 317-6671 and enter replay pin number 13694913. The webcast replay will be available in the Investors section at www.randcapital.com, where a transcript will also be posted once available.

ABOUT RAND CAPITAL

Rand Capital (Nasdaq: RAND) is a Business Development Company (BDC) with a wholly-owned subsidiary licensed by the U.S. Small Business Administration (SBA) as a Small Business Investment Company (SBIC). Rand currently focuses its equity investments in early or expansion stage companies and generally lends to more mature companies. The Company seeks investment opportunities in businesses with strong leaders who are bringing to market new or unique products, technologies or services that have a high potential for growth. 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 expected timing of the closing of the proposed transactions; the ability of the parties to complete the proposed transactions considering the various closing conditions, including approval from the U.S. Small Business Administration ("SBA"); the intention of Rand Capital and Rand Capital SBIC, Inc. ("Rand SBIC") to elect to be taxed as a regulated investment company for U.S. federal tax purposes; the intention to declare and pay a special cash and stock dividend after the closing of the proposed transactions; the intention to pay a regular cash dividend after the completion of the proposed transactions; the expected benefits of the proposed transactions such as a lower expense-to-asset ratio for Rand Capital, increased net investment income, availability of additional resources, expanded access to and sourcing platform for new investments and streamlining of operations under the external management structure; the business strategy of originating additional income-producing investments; the competitive ability and position of Rand Capital following completion of the proposed transactions; 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) that one or more closing conditions to the stock purchase may not be satisfied or waived, on a timely basis or otherwise, including that the SBA may not approve the proposed transactions; (2) the risk that the proposed transactions may not be completed in the time frame expected by parties, or at all; (3) the risk that Rand Capital and/or Rand SBIC may be unable to fulfill the conditions required in order to elect to be treated as a regulated investment company for U.S. tax purposes; (4) uncertainty of the expected financial performance of Rand Capital following completion of the proposed transactions; (5) failure to realize the anticipated benefits of the proposed transactions, including as a result of delay in completing the proposed transactions; (6) the risk that the board of directors of Rand Capital is unable or unwilling to declare and pay the special cash and stock dividend or pay quarterly dividends on a going forward basis; (7) the occurrence of any event that could give rise to termination of the stock purchase agreement; (8) the risk that shareholder litigation in connection with the proposed transactions may affect the timing or occurrence of the contemplated transactions or result in significant costs of defense, indemnification and liability; (9) evolving legal, regulatory and tax regimes; (10) changes in general economic and/or industry specific conditions; and (11) other risk factors as detailed from time to time in Rand Capital's reports filed with the Securities and Exchange Commission ("SEC"), including Rand Capital's annual report on Form 10-K for the year ended December 31, 2018, later filed quarterly reports on Form 10-Q, the definitive proxy statement for the proposed transactions and other documents filed with the SEC. Consequently, such forward-looking statements should be regarded as Rand Capital's current plans, estimates and beliefs. Except as required by applicable law, Rand Capital assumes no obligation to update the forward-looking information contained in this release.

FINANCIAL TABLES FOLLOW.





Rand Capital Corporation and Subsidiary

Consolidated Statements of Financial Position

 
       

September 30,

 

       

2019

December 31,

       

(Unaudited)

2018

ASSETS      
  Investments at fair value:      
   

Control investments (cost of $0 and $99,500, respectively)...............................................................

 $                       -

 $              99,500

   

Affiliate investments (cost of $20,427,536 and $20,708,659, respectively)........................................

          15,568,648

          17,026,091

    

Non-Control/Non-Affiliate investments (cost of $14,182,282 and $17,483,984, respectively)............

          11,218,550

          17,541,213

  Total investments, at fair value (cost of $34,609,818 and $38,292,143, respectively)...............................

          26,787,198

          34,666,804

  Cash and cash equivalents ........................................................................................................................

            9,288,502

            4,033,792

  Interest receivable (net of allowance of $166,413 and $161,000, respectively).........................................

               125,808

               145,532

 

Deferred tax asset.......................................................................................................................................

            1,653,395

               525,198

 

Prepaid income taxes..................................................................................................................................

               488,768

            1,138,708

 

Other assets................................................................................................................................................

               317,668

                 11,690

  Total assets..................................................................................................................................

 $       38,661,339

 $       40,521,724

       
LIABILITIES AND STOCKHOLDERS' EQUITY (NET ASSETS)
  Liabilities:    
  Debentures guaranteed by the SBA (net of debt issuance costs) ............................................................

 $       10,777,493

 $         8,554,443

  Profit sharing and bonus payable................................................................................................................

                          -

               125,000

  Accounts payable and accrued expenses..................................................................................................

               102,733

               245,758

  Deferred revenue.........................................................................................................................................

                 27,948

                 72,336

  Total liabilities.................................................................................................................................

          10,908,174

            8,997,537

         
  Stockholders' equity (net assets):    
  Common stock, $0.10 par; shares authorized 10,000,000;  shares issued 6,863,034;      
  shares outstanding of 6,321,988 at 9/30/19 and 12/31/18.....................................................................

               686,304

               686,304

  Capital in excess of par value.....................................................................................................................

          10,581,789

          10,581,789

  Accumulated net investment loss...............................................................................................................

          (1,851,634)

          (1,665,552)

  Undistributed net realized gain on investments..........................................................................................

          25,920,065

          26,221,443

  Net unrealized depreciation on investments...............................................................................................

          (6,114,254)

          (2,830,692)

  Treasury stock, at cost: 541,046 shares....................................................................................................

          (1,469,105)

          (1,469,105)

  Total stockholders' equity (net assets) (per share - 9/30/19: $4.39; 12/31/18: $4.99)..................

          27,753,165

          31,524,187

  Total liabilities and stockholders' equity (net assets)............................................................

 $       38,661,339

 $       40,521,724


Rand Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 
  For the Quarter Ended
September 30, 
  For the Nine Months
Ended September 30, 
 

2019

2018

 

2019

2018

Investment income:           
  Interest from portfolio companies:          
    Affiliate investments............................................................................................................

 $       217,953

 $    192,758

 

 $     632,705

 $     515,784

    Non-Control/Non-Affiliate investments...................................................................................

          110,150

      257,531

 

       416,852

        547,553

    Total interest from portfolio companies............................................................................

          328,103

      450,289

 

     1,049,557

     1,063,337

                 
  Interest from other investments:        
    Non-Control/Non-Affiliate investments...................................................................................

           36,797

          7,872

 

       108,146

          20,717

    Total interest from other investments..............................................................................

           36,797

          7,872

 

       108,146

          20,717

                 
   Dividend and other investment income:        
    Affiliate investments............................................................................................................

           65,996

        48,856

 

       307,681

        175,905

    Non-Control/Non-Affiliate investments...................................................................................

                    -

                 -

 

                  -

           6,058

    Total dividend and other investment income.....................................................................

           65,996

        48,856

 

       307,681

        181,963

                 
  Fee income:        
    Affiliate investments............................................................................................................

             3,607

          4,042

 

         11,460

          11,625

    Non-Control/Non-Affiliate investments...................................................................................

             2,852

      151,243

 

       262,927

        160,987

    Total fee income...........................................................................................................

             6,459

      155,285

 

       274,387

        172,612

Total investment income................................................................................................................

          437,355

      662,302

 

     1,739,771

     1,438,629

                 
Expenses:        
  Salaries..................................................................................................................................

          181,500

      169,875

 

       544,500

        509,624

  Employee benefits...................................................................................................................

           40,606

        39,845

 

       143,705

        148,841

  Directors' fees.........................................................................................................................

           30,124

        28,624

 

         87,372

          92,123

  Professional fees.....................................................................................................................

           68,931

        81,745

 

       406,859

        220,773

  Stockholders and office operating..............................................................................................

           85,782

        47,839

 

       466,543

        176,877

  Insurance................................................................................................................................

           10,500

          8,700

 

         31,070

          27,588

  Corporate development.............................................................................................................

           18,301

        15,028

 

         51,627

          41,470

  Other operating .......................................................................................................................

                604

          4,875

 

           3,413

           9,990

   

          436,348

      396,531

 

     1,735,089

     1,227,286

  Interest on SBA obligations......................................................................................................

           94,191

        77,568

 

       303,849

        232,406

  Bad debt (recovery) expense.....................................................................................................

                    -

       (26,299)

 

           5,413

          50,342

  Total expenses........................................................................................................................

          530,539

      447,800

 

     2,044,351

     1,510,034

Net investment (loss) gain before income taxes.............................................................................

          (93,184)

      214,502

 

      (304,580)

         (71,405)

  Income tax (benefit) expense....................................................................................................

          (27,635)

        50,003

 

      (118,498)

         (24,807)

Net investment (loss) gain..............................................................................................................

          (65,549)

      164,499

 

      (186,082)

         (46,598)

                 
Net realized (loss) gain on sales and dispositions of investments:        
  Control investments.................................................................................................................

                    -

                 -

 

         80,393

                  -

  Affiliate investments.................................................................................................................

                    -

   (1,125,673)

 

      (472,632)

    (1,125,673)

  Net realized loss on sales and dispositions before income taxes..................................................

                    -

   (1,125,673)

 

      (392,239)

    (1,125,673)

  Income tax (benefit).................................................................................................................

                    -

     (406,739)

 

        (90,861)

       (406,739)

  Net realized loss on sales and dispositions of investments..........................................................

                    -

     (718,934)

 

      (301,378)

       (718,934)

                 
Net change in unrealized depreciation or appreciation on investments:         
  Affiliate investments.................................................................................................................

      (1,847,468)

      725,673

 

    (1,176,320)

        169,232

  Non-Control/Non-Affiliate investments........................................................................................

      (1,749,661)

     (249,871)

 

    (3,020,961)

       (901,360)

  Change in unrealized depreciation or appreciation before income taxes.........................................

      (3,597,129)

      475,802

 

    (4,197,281)

       (732,128)

  Deferred income tax (benefit) expense.......................................................................................

         (783,790)

      100,669

 

      (913,719)

       (166,651)

  Net change in unrealized depreciation or appreciation on investments...........................................

      (2,813,339)

      375,133

 

    (3,283,562)

       (565,477)

                 
Net realized and unrealized loss on investments...........................................................................

      (2,813,339)

     (343,801)

 

    (3,584,940)

    (1,284,411)

Net decrease in net assets from operations...................................................................................

 $   (2,878,888)

 $   (179,302)

 

 $ (3,771,022)

 $ (1,331,009)

Weighted average shares outstanding...........................................................................................

       6,321,988

    6,321,988

 

     6,321,988

     6,321,988

Basic and diluted net decrease in net assets from operations per share.......................................

 $           (0.46)

 $        (0.03)

 

 $         (0.60)

 $         (0.21)

 


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