Business Context and Reporting Period
Company: Rand Capital Corporation (RAND)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2018
Business Overview: Rand Capital is an internally managed Business Development Company (BDC) and Small Business Investment Company (SBIC) that invests in early and expansion-stage small businesses, primarily in upstate New York. The company utilizes SBA-guaranteed debentures to leverage its capital. As of June 30, 2018, the company held 6,321,988 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $776,327 | $677,776 |
| Total Expenses | $1,062,234 | $1,123,572 |
| Net Investment Loss | ($211,097) | ($273,885) |
| Net Unrealized Loss on Investments | ($940,610) | ($720,933) |
| Net Decrease in Net Assets from Operations | ($1,151,707) | ($994,818) |
| Net Assets (End of Period) | $30,766,978 | $31,634,545 |
| Net Asset Value (NAV) per Share | $4.87 | $5.00 |
| Cash and Cash Equivalents | $4,720,381 | $6,590,994 |
| SBA Debentures (Gross) | $8,000,000 | $8,000,000 |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by 14.5% ($98,551) compared to the prior year period, driven primarily by a 17.1% increase in interest from portfolio companies due to new debt originations (e.g., Genicon, eHealth).
- Expense Reduction: Total expenses decreased by 5.5% ($61,338), largely due to a 47% reduction in professional fees associated with strategic planning in 2017. This was partially offset by a $76,641 bad debt expense charge in the current period.
- Unrealized Depreciation: Net unrealized depreciation increased by $219,677 compared to the prior year. Significant valuation decreases were recorded for Empire Genomics ($651,489), SOMS Technologies ($498,348), and First Wave Products ($250,000), partially offset by an increase in GiveGab ($191,907).
- Liquidity: Cash balances decreased by approximately $1.5 million, reflecting new investments totaling $1.225 million and operating cash outflows.
Outlook, Risks, and Management Commentary
- Capital Deployment: Management expects to continue adding new investments and reinvesting in existing portfolio companies. The company has approximately $4.7 million in cash available and is pursuing an additional $6 million in SBA leverage commitments.
- Share Repurchase: The company maintains an authorization to repurchase up to 1,000,000 shares. No shares were repurchased in the first half of 2018; 458,954 shares remain available for repurchase under the plan.
- Valuation Risks: 100% of the investment portfolio is classified as Level 3 assets (unobservable inputs). Valuations are determined by management and approved by the Board, creating potential volatility if assumptions differ from actual liquidation values.
- Credit Risk: Several portfolio investments are on non-accrual status, including G-TEC Natural Gas Systems, First Wave Products Group, OnCore Golf Technology, and portions of Empire Genomics and Mercantile Adjustment Bureau.
- Debt Maturity: SBA debentures totaling $8 million mature between 2022 and 2025. The company anticipates using cash on hand, investment income, and proceeds from portfolio exits to meet obligations.
Investor Verification Checklist
- Valuation Methodology: Verify the specific unobservable inputs (e.g., EBITDA multiples, revenue multiples) used to justify the significant write-downs in Empire Genomics and SOMS Technologies.
- Non-Accrual Status: Review the financial health and recovery prospects of portfolio companies currently on non-accrual status (G-TEC, First Wave, OnCore).
- SBA Leverage Approval: Confirm the status of the application for the additional $6 million in SBA leverage commitments.
- Bad Debt Provision: Assess the adequacy of the allowance for interest receivable ($237,641) given the number of non-accrual loans.
- Cash Burn Rate: Monitor the rate of cash deployment versus investment income generation to ensure liquidity remains sufficient for operations and debt service.