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DATE
Monday, Aug. 4, 2025 at 5:30 p.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Daniel Penberthy
Executive Vice President and Chief Financial Officer — Margaret Brechtel
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RISKS
Tilson Technologies filed for bankruptcy under Chapter 11, resulting in a $9.5 million reduction in the fair value of that investment and ongoing litigation impacting recovery expectations.
Portfolio fair value declined to $52.4 million at quarter-end, reflecting both repayments and negative valuation adjustments across several portfolio companies.
Net asset value (GAAP) decreased from $65.3 million at Mar. 31, 2025 to $56.7 million at June 30, 2025, mainly due to the Tilson unrealized loss and portfolio value pressures.
Total investment income declined by 25% year over year, primarily due to a reduction in interest income and fewer contributing portfolio companies.
Takeaways
Net investment income: $2.5 million, or $0.83 per share, primarily due to a non-cash capital gains incentive fee reversal tied to unrealized depreciation.
Total investment income: $1.6 million, driven by fewer contributing companies and debt instrument repayments.
PIK interest: $1.2 million, or one-third of total investment income for the first six months of 2025, highlighting increased payment-in-kind reliance among borrowers.
Liquidity and leverage: $25 million in total liquidity at quarter-end with no outstanding bank debt, and $4.4 million in cash as of June 30, 2025 versus $835,000 at year-end 2024.
Dividend actions: Three quarterly dividends of $0.29 per share declared in 2025, with increased total dividend outflow due to a higher share count resulting from a stock component in the Q4 2024 dividend.
Portfolio composition: Fair value of $52.4 million at quarter-end; debt investments accounted for 86% and equity for 14% of portfolio value.
Weighted average yield on debt: 12.2% annualized at quarter-end, including PIK interest.
Tilson impact: $9.5 million fair value reduction on Tilson Edge, while Tilson SQS retained a $2 million valuation, as it is not subject to bankruptcy as of June 30, 2025.
Top five holdings: $28.7 million, or 55% of total portfolio value, led by Cybert (RAC group) at $8.1 million (16%).
Net asset value per share: $19.10, reduced by dividend distributions totaling $861,000.
Follow-on investment: $35,000 equity infusion into Carolina Skiff, with the investment valued at $800,000 at quarter-end.
Credit facility: $20 million remaining availability as of June 30, 2025, with potential expansion to $25 million, maturing in 2027.
Summary
The sector composition ofRand Capital Corporation(RAND 0.60%) shifted, with professional services exposure declining to 37% and consumer products rising to 25% as of the end of the quarter, reflecting valuation and repayment dynamics. Management emphasized ongoing discipline in capital deployment, maintaining the regular quarterly dividend, and a cautious approach to new originations amid continued economic volatility. No new portfolio exits occurred, and deal activity remained limited, but leadership stated readiness to deploy capital when market conditions improve.
Chief Executive Officer Penberthy said, "Our ability to support consistent quarterly dividends, even through periods of lower investment activity, demonstrates the strength of our portfolio."
Executive Vice President Brechtel stated, "We had no debt outstanding on our senior secured revolving credit facility," highlighting a strengthened liquidity profile.
Leadership stressed that Tilson SQS, valued at $2 million as of June 30, 2025, "is a separate legal entity from Tilson and not part of the bankruptcy filing," with ongoing telecommunication tower operations independent of the bankruptcy.
The company noted early signs of stabilizing market activity and indicated readiness to pursue new investments as the environment improves.
Industry glossary
PIK interest: Payment-in-kind interest, where borrowers pay interest with additional securities instead of cash, often seen in periods of cash flow constraints.
Chapter 11: U.S. Bankruptcy Code provision allowing for reorganization of financially distressed companies under court supervision.
Full Conference Call Transcript
Daniel Penberthy, our President and Chief Executive Officer, and Margaret Brechtel, our Executive Vice President and Chief Financial Officer. A copy of the release and slides that accompany our conversation is available at randcapital.com. If you are following along with the slide deck, please turn to slide two. I would like to point out some important information. As you are likely aware, we may make forward-looking statements during this presentation. 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.
You can find a summary of these risks and uncertainties and other factors in the earnings release and other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting principles. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany the earnings release. With that, please turn to Slide three.
And I will hand the discussion over to Daniel Penberthy. Dan?
Daniel Penberthy: Thank you, Craig, and good afternoon, everyone. The overall investment environment remained muted during this quarter, with limited new deal flow, stalled M&A transactions, and borrowers continuing to face higher financing costs, as well as more selective underwriting by their commercial senior lenders. This dynamic has led to delays in refinancing activity and prompted a more conservative posture across much of our portfolio. That said, Rand Capital Corporation did deliver positive second quarter results, underscoring the depth of our portfolios. We have maintained our underwriting standards and continue to prioritize measured, risk-adjusted capital deployment.
Net investment income was $2.5 million or $0.83 per share, driven primarily by a non-cash reversal of a capital gains incentive fee tied to unrealized depreciation, most notably related to our investment in Tilson, which we will discuss later. Total investment income was $1.6 million, reflecting a continued slowdown in originations and elevated repayment trends that have been echoed across the BDC sector for the first six months of 2025. Many portfolio companies remain cautious and have experienced tightened senior credit facilities amidst a volatile economic environment in which they are selling their goods and services. This has contributed to their increased reliance on PIK interest or payment-in-kind interest.
Looking at the first six months of the year, approximately $1.2 million of interest income was PIK, representing about one-third of total investment income. We are actively monitoring this trend as we assess overall portfolio health and forward return expectations. Despite these headwinds, we exited the quarter with approximately $25 million in total liquidity and no outstanding bank debt, positioning us well to take advantage of new opportunities as market activity rebounds. Please now turn to Slide four. Even as market conditions remain fluid, we remain focused on protecting and sustaining our dividend. Our ability to support consistent quarterly dividends, even through periods of lower investment activity, demonstrates the strength of our portfolio.
So far this year, we have declared three quarterly dividends of $0.29 per share. Notably, the total dollar amount paid to shareholders has increased in 2025, reflecting the higher number of shares outstanding following our fourth quarter 2024 dividend, which was paid in part using common stock. That stock component increased our total shares outstanding to nearly 3 million and thus increased our total distributable shares accordingly. Turning to slide five, you will see the current breakdown of our portfolio between debt and equity, along with some of the recent shifts that have taken place. At 06/30/2025, our portfolio was valued at $52.4 million, down sequentially and from year-end.
This reduction was driven by both repayments and valuation adjustments across multiple portfolio companies, most significantly Tilson Technologies. As previously noted, Tilson did file for bankruptcy under Chapter 11 during the quarter. This resulted following a contract dispute with its major customer. We now understand that the two parties are also now actively litigating this matter in the courts. As a result, we recorded a $9.5 million reduction in the fair value of that investment at quarter-end. Overall, the portfolio mix remains tilted towards income-generating debt investments, which did account for 86% of the portfolio by fair value, while equity investments rounded out representing 14%. The annualized weighted average yield on debt investments, inclusive of PIK, was 12.2% at quarter-end.
As noted on slide six, during the quarter, we made one follow-on equity investment of $35,000 into Carolina Skiff, as part of a capital infusion to support their boat building and business operations. We have placed a fair value of $800,000 on this investment at quarter-end. We did not have any realized exits during the period following the first quarter activity, which had seen three meaningful portfolio repayments. As mentioned, the decline in total fair value this quarter reflects both the Tilson adjustment and broader portfolio valuation pressure. I want to clarify on the Tilson valuation that, as we identified also in our October, we do carry two separate Tilson investments.
The larger Tilson Edge entity is the operating company which specializes in installing fiber optics in major cities for major Internet providers. This is the one that filed for bankruptcy protection and the one in which we reduced the value. The other remaining investment is an investment in Tilson SQS, for which we are reflecting a fair value of $2 million. SQF is a separate legal entity from Tilson and not part of the bankruptcy filing. SQF is an entity that owns telecommunication tower assets, and they continue to operate. We believe they retain value. More importantly, they have positive customer cash flows independent of Tilson's operations and that bankruptcy. Please turn to Slide seven.
As of 06/30/2025, our portfolio remained invested across a number of sectors, with modest shifts from the prior quarter. Professional services continues to represent the largest industry exposure at 37%, down from 45% at the '1, largely reflecting the valuation adjustment to our investment in Tilson. We saw growth in consumer products, which increased to 25%, and modest gains in distribution, manufacturing, and health and wellness. These changes were primarily driven by fair value movements and the relative impact of repayments. Our sector mix continues to reflect our strategy of building a portfolio of income-generating assets while maintaining exposure to resilient, scalable businesses.
We believe this balanced portfolio structure strengthens our ability to navigate shifting market dynamics and support long-term portfolio stability. While we face the recurring challenge of successful companies accessing cheaper senior bank debt and repaying our subordinated investments, this does reflect the natural life cycle of our strategy and is a positive validation of our model. Slide eight highlights our top five portfolio companies. As of June 30, these holdings represent $28.7 million or 55% of the total portfolio fair value and include a mix of consumer products, distribution, and services businesses.
Following our Tilson valuation change, Cybert or the RAC group has now moved into our largest position, and it was valued at $8.1 million, representing 16% of the portfolio. That business continues to perform well, generating strong income and value for us through a combination of both current interest income and equity value. Foodservice supply at $7 million remains a key contributor in commercial kitchen build-outs and renovation. Others such as INEA, Chi Tech, and FCM Industries round out this list across different industry sectors and also have attractive yield components. Notably, all five investments are structured with debt instruments yielding between 12-14%, many also contain these PIK features.
We believe these investments will continue to perform and will contribute to long-term shareholder value. With that, I will now turn it over to Margaret Brechtel to walk you through our financials in more detail.
Margaret Brechtel: Thanks, Dan, and good afternoon, everyone. I will start on slide 10, which provides an overview of our financial summary and operational highlights for 2025. Total investment income was $1.6 million, a 25% decrease compared with the prior year period. This decline was primarily driven by a reduction in interest income due to the repayment of five debt instruments over the past year along with lower dividend income. During the quarter, 14 portfolio companies contributed to investment income compared to 22 companies the same period last year. Total benefits were $864,000 compared with an expense of $2.7 million in last year's second quarter.
This improvement was primarily due to a $1.5 million capital gain incentive fee reversal, which offset other expense categories. Additionally, we saw lower interest expense and a decline in our base management fees, reflecting the impact of portfolio repayments and valuation adjustments. Excluding the incentive fee benefit, adjusted expenses, which is a non-GAAP financial measure, were $620,000, a 38% decrease year over year. Net investment income totaled $2.5 million or $0.83 per share in 2025, compared with a loss of $517,000 or $0.20 per share in 2024.
Excluding the capital gains incentive fee benefit, which is a non-GAAP financial measure, adjusted net investment income per share was $0.33 compared with $0.44 per share last year, primarily due to lower investment income. On slide 11, you will see a waterfall chart that illustrates the change in net asset value for the second quarter. At quarter-end, our net asset value was $56.7 million, down from $65.3 million at 03/31/2025. This decline reflects the $9.5 million unrealized loss on Tilson that Dan spoke about, as well as other valuation adjustments across the portfolio. We believe these changes reflect an appropriate valuation of our portfolio fair market value at 06/30/2025.
It is important to note that our dividend declaration and distribution reduced our net asset value by approximately $861,000 during the quarter. As a result, net asset value per share at 06/30/2025 was $19.10. As highlighted in slide 12, we ended the quarter with $4.4 million in cash, up significantly from $835,000 at year-end 2024. We had no debt outstanding on our senior secured revolving credit facility. While the borrowing base formula provided approximately $20 million of unused availability as of June 30, 2025, we have the capacity to increase this to a total of $25 million subject to certain borrowing criteria and portfolio eligibility requirements through its 2027 maturity.
With no leverage outstanding and a strong liquidity position, we are well equipped to support new investments and respond to evolving market conditions. Last week, on July 28, the Board declared our regular quarterly cash dividend of $0.29 per share payable on or about September 12, 2025, to shareholders of record as of 08/29/2025. With that, I will turn the discussion back over to Daniel Penberthy.
Daniel Penberthy: Thanks, Margaret. And moving on to slide 13. We continue to execute our long-term strategy with a focus on income generation and capital preservation. As market conditions begin to stabilize, we are already encouraged by early signs that may lead to stronger deal activity in the second half of the year. In the meantime, we are prioritizing yield-focused debt investments and maintaining disciplined underwriting standards. As always, we are managing through volatility with a long-term lens, and we remain committed to creating value for shareholders through proactive oversight and prudent capital allocation. While Q2 did not include meaningful new investment activity, we have the balance sheet strength, access to capital, and organizational flexibility to move quickly as quality transactions emerge.
The ability to maintain this patience for the right investment opportunities and maintain our dividend is key to our strategy in this environment. To close, I want to reiterate our confidence in Rand Capital Corporation's long-term strategy. While the investment environment does remain cautious, as do we, our portfolio companies are generally holding up well, and our liquidity position provides meaningful flexibility for the future. We are seeing signs of stabilization and deal flow across the BDC sector. And as that momentum builds, we are prepared to deploy capital in ways that will continue to support earnings, NAV growth, and dividend stability. Thank you again for your continued interest and support.
We look forward to updating you on the progress during our third quarter call in November. Have a wonderful day. This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.