Business Context and Reporting Period
Company: Rand Capital Corporation (RAND)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2018
Business Overview: Rand Capital is an internally managed Business Development Company (BDC) and Small Business Investment Company (SBIC). It invests in early and expansion-stage small businesses, primarily in upstate New York, utilizing a mix of debt and equity instruments. The company operates through its SBIC subsidiary, Rand Capital SBIC, Inc., which leverages capital from the Small Business Administration (SBA).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 |
Nine Months Ended Sep 30, 2018 |
Dec 31, 2017 (Balance Sheet) |
|---|---|---|---|
| Total Investment Income | $662,302 | $1,438,629 | - |
| Total Expenses | $447,800 | $1,510,034 | - |
| Net Investment Gain (Loss) | $164,499 | ($46,598) | - |
| Net Realized Loss | ($718,934) | ($718,934) | - |
| Net Change in Unrealized Depreciation | $375,133 | ($565,477) | - |
| Net (Decrease) Increase in Net Assets | ($179,302) | ($1,331,009) | - |
| Cash and Cash Equivalents | - | - | $4,404,574 |
| Total Assets | - | - | $38,658,226 |
| Total Liabilities | - | - | $8,070,550 |
| Net Assets (Stockholders' Equity) | - | - | $30,587,676 |
| Net Asset Value (NAV) per Share | - | - | $4.84 |
| SBA Debentures (Gross) | - | - | $8,000,000 |
Material Changes vs. Prior Period
- Investment Income Surge: Total investment income increased 66.8% for the three months ended September 30, 2018, compared to the same period in 2017. This was driven by a 45.3% increase in interest from portfolio companies and a significant spike in fee income (up 3,845%) due to a one-time debt modification fee of approximately $142,000 recorded for Empire Genomics.
- Realized Losses: The company recognized a net realized loss of $1,125,673 (pre-tax) in the third quarter of 2018, primarily due to the sale of its investment in Intrinsiq Materials, Inc., where no proceeds were received. There were no realized gains or losses in the comparable 2017 period.
- Unrealized Depreciation: For the nine months ended September 30, 2018, the company recorded a net unrealized depreciation of $732,128. Significant valuation decreases were noted for Empire Genomics ($901,360), SOMS Technologies ($498,348), and First Wave Products ($250,000), partially offset by an increase in GiveGab ($191,907).
- Net Asset Value Decline: NAV per share decreased from $5.05 at December 31, 2017, to $4.84 at September 30, 2018, reflecting the net decrease in net assets from operations.
Outlook, Risks, and Management Commentary
- Liquidity and Capital: As of September 30, 2018, the company held approximately $4.4 million in cash and cash equivalents. Management believes this, combined with anticipated SBA leverage and portfolio exits, is sufficient to fund operations and new investments for the next 12 months.
- SBA Leverage: Rand SBIC has applied for an additional $6 million in SBA leverage commitments, which is currently under review. Existing SBA debentures of $8 million mature between 2022 and 2025.
- Portfolio Strategy: Management continues to prioritize growing the portfolio over share repurchases, though they maintain authorization to repurchase up to 1,000,000 shares. They are actively involved in the governance of portfolio companies to support growth.
- Risks: The portfolio consists entirely of Level 3 assets (restricted securities), meaning valuations are based on management's good faith determination rather than active market prices. Several portfolio companies (G-TEC, First Wave, OnCore, and Mercantile) are on non-accrual status, indicating collection risk.
Investor Verification Checklist
- Valuation Methodology: Verify the assumptions used for Level 3 fair value measurements, particularly for 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, Mercantile).
- Intrinsiq Exit: Confirm the details of the Intrinsiq Materials sale and the rationale for the total loss of the investment.
- SBA Commitment: Monitor the status of the pending $6 million SBA leverage application, as this is critical for future deployment of capital.
- Debt Maturity: Assess the company's plan to refinance or repay the $8 million SBA debentures maturing starting in 2022.