Rand Capital Corp. 10-Q Summary: Q1 2017
Business Context and Reporting Period
Rand Capital Corporation (RAND) is an internally managed Business Development Company (BDC) and Small Business Investment Company (SBIC) focused on investing in privately-held, early-stage, and emerging growth businesses. This report covers the quarterly period ended March 31, 2017. The company operates through its primary subsidiary, Rand Capital SBIC, Inc., and is in the process of establishing a second SBIC subsidiary, Rand Capital SBIC II, L.P., having received "pre-licensing" approval from the SBA.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total Assets | $40,804,200 | $42,418,530 |
| Total Investments (Fair Value) | $27,582,775 | $25,660,149 |
| Cash and Cash Equivalents | $10,689,392 | $17,945,585 |
| Total Liabilities | $8,534,318 | $9,789,167 |
| SBA Debentures (Net) | $7,834,623 | $7,827,773 |
| Net Assets | $32,269,882 | $33,636,140 |
| Net Asset Value (NAV) per Share | $5.10 | $5.32 |
| Net Investment Loss | ($115,264) | ($1,081,978) |
| Net Realized Gain | $0 | $8,233,352 |
| Net Change in Unrealized Depreciation | ($244,217) | ($7,368,894) |
| Net Decrease in Net Assets from Operations | ($359,481) | ($217,520) |
| Net Cash Used in Operating Activities | ($1,590,748) | $12,100,790 |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 69.3% to $328,637 from $194,131 in Q1 2016. Interest from portfolio companies rose 78.5% to $246,091, driven by new debt instruments originated in 2016 and 2017 (e.g., Genicon, eHealth, Empire Genomics).
- Expense Reduction: Total operating expenses decreased 73.4% to $516,409 from $1.94 million. This significant drop is primarily due to the absence of a $1.41 million profit-sharing bonus expense recorded in Q1 2016 related to the sale of Gemcor II, LLC.
- Realized Gains: Unlike Q1 2016, which included a $13.2 million realized gain from the Gemcor II asset sale, Q1 2017 reported no realized gains or losses.
- Unrealized Depreciation: Net unrealized depreciation decreased to $244,217 (after tax) compared to $7.37 million in Q1 2016. The Q1 2017 decrease was driven by valuation adjustments on City Dining Cards (Loupe) and Mercantile Adjustment Bureau, partially offset by an appreciation in ACV Auctions.
- Cash Position: Cash balances declined from $12.28 million at year-end 2016 to $10.69 million at March 31, 2017, reflecting new investments of $450,000 and the payment of accrued profit-sharing liabilities.
Outlook, Risks, and Management Commentary
- New SBIC Fund: Management expects to capitalize a new SBIC subsidiary with $7.5 million of cash on hand and $15 million in SBA leverage, creating a $22.5 million fund. The application was filed in April 2017.
- Investment Strategy: The company continues to prioritize growing its portfolio over share repurchases, though it maintains authorization to repurchase up to 458,954 shares. Management cites low cost of capital and strong business spending as favorable trends.
- Valuation Risks: 100% of the investment portfolio is classified as Level 3 assets (unobservable inputs). Valuations are determined in good faith by management and approved by the Board. Significant changes in unobservable inputs (e.g., EBITDA multiples, revenue multiples) could materially impact fair value.
- Liquidity: The company holds approximately $10.7 million in cash, representing 33% of net assets. Management believes this, combined with investment income, is sufficient to meet 2017 cash needs. SBA debt maturities begin in 2022.
- Non-Accrual Status: Investments in G-TEC Natural Gas Systems, First Wave Products Group, and a portion of Mercantile Adjustment Bureau remain on non-accrual status.
Key Facts for Investor Verification
- Profit Sharing Liability: Verify the payment of the $1.14 million profit-sharing liability accrued in 2016, which significantly impacted Q1 2017 cash flow but reduced Q1 2017 expenses compared to the prior year.
- Valuation Adjustments: Review the specific financial metrics used to justify the $250,000 write-downs for City Dining Cards and Mercantile Adjustment Bureau, as well as the $119,356 write-up for ACV Auctions.
- New SBIC Licensing: Confirm the status of the SBA licensing for the second SBIC subsidiary and the timeline for the anticipated $22.5 million fund deployment.
- Non-Accrual Assets: Monitor the status of the non-accrual loans (G-TEC, First Wave, Mercantile) to assess potential future credit losses or restructuring needs.
- Share Repurchase Program: Note that while authorized, no shares were repurchased in Q1 2017; verify if capital allocation priorities shift toward buybacks if new investment opportunities dry up.