Q1 2025 Rand Capital Corp Earnings Call

Speaker Change: Greetings and welcome to the Rand Capital Corporation's first quarter fiscal year 'twenty five financial results Conference call. This time, all participants will be in listen only mode.

Speaker Change: If anyone should require operator assistance during todays conference. Please press star zero from your telephone keypad.

Speaker Change: Please note this conference is being recorded.

Speaker Change: At this time I'll now turn the conference over to Craig Mihalik Investor Relations, Greg you May now begin.

Speaker Change: Thank you and good afternoon, everyone. We appreciate your interest in Rand capital and for joining US today for our first quarter 2025 financial results Conference call on the line with me are Dan Penberthy, Our President and Chief Executive Officer, and Margaret Brookdale Executive Vice President and Chief Financial Officer, a copy of the release and slides that accompany our converse.

Speaker Change: Patient is available at Rand capital Dotcom, if you're following along with the slide deck. Please turn to slide two I'd like to point out some important information.

Speaker Change: 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 long 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 Committee.

Speaker Change: Sure.

Speaker Change: And then it can be found on our website or at SEC Gov.

During today's call. We'll also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance 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.

Speaker Change: GAAP measures in the tables that accompany today's earnings release.

Speaker Change: That please turn to slide three and I'll hand, the discussion over to Dan Dan.

Dan: Thank you Craig and good afternoon, everyone.

Dan: Our first quarter results underscore the resilience of our business model and the strength of our balance sheet, putting us in a solid position to execute on our continued long term strategy.

Dan: I am pleased to report that despite a modest decline in total investment income we have delivered a 45% year over year increase in net investment income, reaching $1 2 million or <unk> 42 per share.

Dan: It's important to highlight that this performance was supported by certain nonrecurring fee income and a 36% reduction in total expenses driven by lower interest costs, following our debt repayments and capital gains incentive fee adjustments.

Dan: Our net asset value per share was $21 99, which compared with $25.31 at year end 2024.

Dan: It is important to note that this change reflects the dilutive impact from the issuance of additional shares related to the fourth quarter dividend, which were distributed in January 2025.

During the quarter, we also realized a gain of $925000 from portfolio redemptions.

Dan: And we redeployed a portion of those proceeds into a follow on investment that we will highlight shortly.

Dan: Staying aligned with our strategy to maintain a strong financial position, we have repaid 600000 of our revolver debt, finishing the quarter with nearly $5 million in cash and over $22 million in available credit capacity.

As I mentioned last quarter, we continue to operate in a cautious and evolving environment well.

Dan: Well, we are seeing a slowdown in new investment opportunities due to ongoing macroeconomic and political uncertainty, we remain well positioned to capitalize as conditions improve.

Dan: Looking ahead, our focus remains on a disciplined execution proactive portfolio oversight and building sustainable shareholder value.

Dan: As highlighted on slide four the success, we've had executing on our long term strategic objectives over the past few years has translated into tangible benefits for our shareholders.

Dan: Clear example of that is our recent dividend activity.

Dan: Our fourth quarter 2024 dividend paid in January 2025 included a stock component that resulted in the issuance of approximately 389000 new shares.

Dan: Following that distribution ranch total shares outstanding increased to nearly $3 1 million.

Dan: In the first quarter of 2025, and again with our recently declared a Q2 dividend of <unk> 29 per share.

Dan: The regular per share amounts remained consistent however.

Dan: However, due to the increased share count, which I previously mentioned the total dollar amount of the dividend dividend distributed to shareholders increase.

Dan: This reflects not just our continued commitment to delivering stable and attractive returns.

Dan: But also the strength of our balance sheet the discipline in our capital deployment and the resilience of our income generating portfolio.

Dan: Together these factors position us to continuously create value for shareholders over the long term.

Dan: Turning to slide five you will see the current breakdown of our portfolio between debt and equity along with some other recent shifts that have taken place.

Dan: As of March 31, 2025, our portfolio stood at a fair value of approximately $62 million spread across 19 businesses.

Dan: This represents a decline from year end 2024, primarily driven by the repayment of the loans from three portfolio companies.

Dan: While we have seen encouraging signs of strength from several businesses. We continue to factor in the broader economic and political headwinds that are still affecting some of these portfolio company operations.

Dan: These challenges are reflected in our valuations and we remain optimistic about future recovery and performance.

Dan: A key pillar of our investment strategy has been the deliberate shift towards more income generating portfolio.

Dan: As we stand today debt investments represented 72% of our portfolio up from prior years and this mix supports greater earnings stability and consistency.

Dan: As of quarter end, the annualized weighted average yield on our debt investments, including <unk> interest payment in kind interest was $12 two interest I'm, sorry 12, 2%.

Dan: The average yield was down from prior quarters, because one of our debt investments, which represents 3% of the value of the total portfolio was on non accrual status during the first quarter of 2025.

Dan: The remaining 28% of our portfolio consists of equity positions either through direct investments warrants or equity components alongside our debt structures.

Dan: Our strategy continues to prioritize structures were subordinated debt component provides a yield phase III turn while still capturing potential upside through equity participation. This can be in the form of a warrant or a direct equity investment.

Dan: This thoughtful portfolio construction supports both current income generation and long term value creation, which aligns ourselves with our commitment to a disciplined capital deployment and sustainable returns and future dividends.

Dan: Slide six highlights our investment activity during the first quarter on.

Dan: On the investment side, we made a $375000 follow on investment in Iga, a Florida based manufacturer of blinds and shades. This.

This incremental capital supports <unk> manufacturing operations and as of quarter end, our total holdings in the company, including both debt and equity had a fair value of 2.1 million.

Dan: There were three notable exits this past quarter, each resulting in full repayment of principal and certain nonrecurring loan fees further strengthening our liquidity position.

Dan: We received full repayment of a $5 $6 million debt instrument for Madison Avenue Holdings.

Dan: We also exited our investment in pressure pro receiving repayments of $1 7 million in principal.

Dan: As part of that transaction, we also sold our warrant position, resulting in a realized gain of $870000.

Dan: Lastly, we exited our investment in HDI acquisition with full repayment of a $1 $1 million debt instrument.

Dan: These exits not only reflect the strength and quality of our underwriting, but also reinforce our ability to recycle capital efficiently.

Dan: Being up resources for future income generating opportunities as market conditions improve.

Dan: Turning to slide seven Youll see shifts in our industry allocation since the end of 2024.

Dan: Notably our exposure to professional services decreased from 48% to 45%.

Dan: And manufacturing declined from 13% to 8%.

Dan: Both driven by the exits, which we discussed just prior to this.

Dan: Meanwhile, consumer products grew as a share of the portfolio, reflecting continued strength in some of our existing holdings in that space.

Dan: Maintaining a thoughtful mix across sectors remains a core part of our investment approach.

Dan: This not only reduces exposure to any single industry risk, but also positions us to benefit from growth across a broader set of market dynamics.

Dan: Ultimately, we believe a balanced portfolio structure allows us to adapt to a changing macro conditions, while continuing to pursue strong risk adjusted return.

Dan: Slide eight highlights our top five portfolio companies, which together represent 58% of our total portfolio at fair value.

Dan: Tilson continues to lead as our largest individual are holding and is valued at $11 5 million and accounting for 19% of the total portfolio.

Dan: We have been invested until <unk> for over a decade and it does remain a cornerstone of our portfolio.

Dan: With an original cost basis of approximately $3 million the position now reflects $8 4 million in unrealized depreciation.

An excellent example of the kind of long term value creation, we aim to deliver through our investment strategy.

Dan: Cyber or the Rec group and foodservice supply continue to be consistent performers among our top five while I N T E advanced and ranking this quarter and Kai Tech held steady.

Dan: Overall, we remain confident in our ability to drive long term growth and income.

Dan: With that I'll now turn it over to Margaret to walk you through our financials in greater detail.

Margaret Brookdale: Thanks, Dan and good afternoon, everyone I'll start on slide 10, which provides an overview of our financial summary, and operational highlights for the 2025 first quarter.

Margaret Brookdale: Total investment income for the quarter was 2 million, representing a slight decline of 59000 or 3% from the prior year period.

Margaret Brookdale: This decrease was primarily driven by lower dividend income and an 8% reduction in interest income, reflecting the repayment of the three debt instruments during the quarter.

Margaret Brookdale: Offsetting this was an increase in non reoccurring fee income, which comprise 15% of total investment income in the first quarter of 2025.

Margaret Brookdale: From 5% in the first quarter of 2024.

Margaret Brookdale: During the quarter 18 portfolio companies contributed to investment income compared to 24 companies in the same period last year.

Margaret Brookdale: On the expense side total expenses declined 36% to 791000 from $1 2 million in the prior year period.

Margaret Brookdale: This reduction was largely due to a $354000 decrease in interest expense, thanks to lower outstanding debt.

Margaret Brookdale: We also saw favorable changes in management fees, including a 75000 <unk>.

Margaret Brookdale: Capital gains incentive fee benefit this quarter compared with 112000 expense in Q1 of 2024.

Margaret Brookdale: In addition base management fees declined by 50000 as a result of the principal repayments.

Margaret Brookdale: These benefits were partially offset by the accrual of 120000 income based incentive fee, which reflects our improved operating performance and fund profitability.

Margaret Brookdale: No such fee was accrued in the first quarter of last year.

Margaret Brookdale: To clarify incentive fees include two components and income base fee and a capital gains fee.

Margaret Brookdale: The income base fee is calculated quarterly and are subject to a $1 seven 5% hurdle rate per quarter or 7% on an annualized basis.

Margaret Brookdale: The capital gains incentive fee on the other hand is accrued based on both realized and unrealized gains and losses in accordance with generally accepted accounting principles.

Margaret Brookdale: Excluding the capital gains incentive fee accrual adjusted expenses, which is a non-GAAP financial measure were 866000 in the first quarter, representing a 22% decrease year over year.

Margaret Brookdale: Net investment income increased 45% to $1 2 million or <unk> 42 per share compared with 840000 or <unk> 33 per share in the first quarter of 2024.

Margaret Brookdale: On an adjusted basis, excluding the capital gains incentive fee benefit or expense net investment income was <unk> 40 per share up 8% or <unk> 37 per share in the prior year period.

Margaret Brookdale: On slide 11, you'll see a waterfall chart that illustrates the change in net asset value for the first quarter.

Margaret Brookdale: As of March 31, 2025, net assets totaled $65 3 million, representing a slight decrease from year end 2024.

Margaret Brookdale: We saw strong net investment income for the quarter, along with a $925000 net realized gain from sales and dispositions of portfolio investments.

Margaret Brookdale: However, these were offset by a $1 3 million net decrease in unrealized depreciation reflecting valuation adjustments.

Margaret Brookdale: <unk> holding.

Margaret Brookdale: In addition, we declared 863000 in cash dividends to shareholders during the quarter.

Margaret Brookdale: As a result net asset value per share at quarter end was $21 99 per share compared with $25 31 per share at year end 2020 for.

Margaret Brookdale: It is important to reiterate that change in the per share net asset value reflects the issuance of approximately 389000, new shares that were declared in the fourth quarter of 2024 and distributed in January of 2025.

Margaret Brookdale: As highlighted on slide 12, we continue to maintain a strong balance sheet and ample liquidity, which positions us well to pursue.

Margaret Brookdale: Future investment opportunities.

Margaret Brookdale: Net assets at quarter end were $67 8 million down 6% from year end 2024.

Margaret Brookdale: We ended the quarter with $4 9 million in cash a significant increase from 835000 at year end.

Margaret Brookdale: In addition, we fully repaid the remaining 600000 outstanding on our senior secured revolving credit facility, leaving us with no debt outstanding under the facility as of March 31 2025.

Margaret Brookdale: On April 30, we declared a regular quarterly cash dividend of <unk> 29 per share payable on or about June 13th 2025 to shareholders of record as of May 32025.

Margaret Brookdale: Lastly, <unk> board of directors renewed the company's share repurchase program authorizing the repurchase of up to $1 5 million in additional Rand capital common stock.

Margaret Brookdale: Program is now in effect through April of 2020.

Dan: With that I will turn the discussion back to Dan.

Dan: Thanks, Margaret and moving to slide 13. Please.

Dan: As we look ahead to the rest of the year and beyond our focus remains clear on executing with discipline and building on our long term shareholder value.

Dan: There are many challenges in our current environment.

Dan: And this does present and should present, new investment opportunities. However, we remained challenged with macroeconomic and political uncertainty. This could include tariffs consumer spending changes in government regulation weaknesses in the M&A markets.

Dan: However, I do believe we are well positioned to navigate this cycle.

Dan: Our investment model combined with our disciplined approach.

Dan: Allows us to maintain a long term view with the expectation that conditions will improve over time.

Dan: We are actively looking to scale, our income generating assets with high quality debt investments, while remaining prudent in our capital deployment and risk management.

Dan: With ample revolving credit availability, we have the flexibility to support future growth as the market evolves.

Importantly, our commitment to shareholders remain we're focused on driving growth and total returns.

Dan: Through active portfolio oversight.

Dan: Sound financial management, and a sustainable dividend strategy backed by what we believe to be is a strong portfolio.

Dan: Thank you for your continued trust and partnership we look forward to updating you on our progress with our second quarter 2025 results in August have a great day.

Dan: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.