Business Context and Reporting Period
Company: Rand Capital Corporation (RAND), an internally managed Business Development Company (BDC) and Small Business Investment Company (SBIC).
Reporting Period: Quarterly period ended March 31, 2016.
Overview: The company invests in small and medium-sized U.S. companies through debt, equity, and loan instruments. The quarter was defined by a significant liquidity event involving the sale of assets by a major portfolio company, Gemcor II, LLC.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total Investment Income | $194,131 | $641,747 |
| Net Investment (Loss) Income | ($1,081,978) | $129,295 |
| Net Realized Gain on Investments | $8,233,352 | $84,593 |
| Net Decrease in Unrealized Appreciation | ($7,368,894) | ($34,340) |
| Net (Decrease) Increase in Net Assets from Operations | ($217,520) | $179,548 |
| Cash and Cash Equivalents | $17,945,585 | $7,948,799 |
| Total Assets | $45,971,058 | $44,562,060 |
| Total Liabilities | $12,334,918 | $10,708,400 |
| Net Assets (Stockholders' Equity) | $33,636,140 | $33,853,660 |
| Net Asset Value (NAV) per Share | $5.31 | $5.35 |
| SBA Debentures (Gross) | $8,000,000 | $8,000,000 |
Material Changes vs. Prior Period
- Portfolio Composition: Total investments at fair value decreased by 30.3% to $25.7 million from $36.8 million. This reduction is primarily due to the asset sale of Gemcor II, LLC, which reduced the portfolio's fair value but significantly increased cash reserves.
- Liquidity: Cash balances increased by approximately $12.1 million to $17.9 million (53% of net assets), up from $5.8 million (17% of net assets) at year-end 2015. This was driven by $13.8 million in proceeds from the Gemcor asset sale.
- Operating Expenses: Total operating expenses surged 340.3% to $1.94 million from $440,385. The increase is almost entirely attributable to a $1.41 million accrual for profit sharing bonuses paid to executive officers, triggered by the realized gains from the Gemcor sale.
- Investment Income: Total investment income dropped 69.7% to $194,131. Dividend income fell 89.2% due to the cessation of distributions from Gemcor following its asset sale.
- Unrealized Gains/Losses: A net decrease in unrealized appreciation of $11.8 million (pre-tax) occurred, primarily due to the reclassification of Gemcor's unrealized gains to realized gains upon sale and a $422,800 write-down of the investment in Knoa Software, Inc.
Guidance, Outlook, and Risks
- Outlook: Management expects to utilize the $17.9 million cash on hand to pursue new investment opportunities and reinvest in existing portfolio companies. The company has authorization to repurchase up to 465,504 additional shares of common stock.
- Profit Sharing: The company accrued $1,411,659 in profit sharing for the quarter, which is payable to executive officers. This is a non-recurring expense tied to the specific capital event of the Gemcor sale.
- Risks:
- Valuation Risk: 100% of the investment portfolio consists of Level 3 assets (restricted securities), meaning valuations are based on management's good faith determination rather than active market prices.
- Concentration Risk: Five portfolio companies (Rheonix, Outmatch, Social Flow, Genicon, and Microcision) represented 42% of the portfolio's fair value as of March 31, 2016.
- Interest Accruals: The company has ceased accruing interest on loans to First Wave Products Group, Intrinsiq Materials, and a portion of Mercantile Adjustment Bureau due to performance concerns.
Investor Verification Checklist
- Gemcor II, LLC Status: Verify the status of the remaining 31% ownership in Gemcor II, LLC and the timeline for the release of the $1.41 million escrow receivable.
- Profit Sharing Plan: Confirm the terms of the profit sharing plan and the timing of the $1.41 million cash payout to executives.
- Non-Accrual Loans: Review the financial health and recovery prospects of First Wave Products Group, Intrinsiq Materials, and Mercantile Adjustment Bureau, where interest accrual has been suspended.
- Valuation Methodology: Scrutinize the Level 3 valuation inputs, particularly the write-down of Knoa Software, Inc., to ensure consistency with market conditions.
- Share Repurchase Program: Monitor the execution of the share repurchase program authorized for up to 1,000,000 shares.