RAND

Rand Capital Corp. 10-Q Summary (Period Ended Sept 30, 2015)

Business Context and Reporting Period

Rand Capital Corporation (RAND) is an internally managed, closed-end, diversified management investment company operating as a Business Development Company (BDC) under the Investment Company Act of 1940. The majority of investments are made through its wholly-owned subsidiary, Rand Capital SBIC, Inc., a Small Business Investment Company (SBIC) licensed by the U.S. Small Business Administration (SBA). This report covers the quarterly period ended September 30, 2015.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Portfolio Growth: Total investments at fair value increased by 20.0% ($6.06 million) compared to December 31, 2014, driven by new investments totaling approximately $6.77 million. New portfolio companies included GoNoodle, Genicon, SciAps, and Tilson Technology Management.
• Cash Position: Cash decreased significantly from $13.2 million to $4.8 million (a 64% drop) as the company deployed capital into new investments.
• Realized Gains: The company reported a net realized gain of $173,183, a reversal from the $701,202 loss in the prior year. This was primarily due to a $262,925 gain on the sale of Synacor, Inc. shares.
• Unrealized Appreciation: Net unrealized appreciation decreased by $158,312, contrasting with a $695,928 increase in the prior year. Notable decreases included a $250,000 write-down of Teleservices Solutions Holdings and a $193,436 reduction in First Wave Products Group. Increases were driven by SocialFlow ($321,300) and Athenex ($92,592).
• Operating Expenses: Total operating expenses increased 12.3% to $1.22 million, largely due to higher interest expense on SBA borrowings and bonus/profit sharing adjustments.

Outlook, Risks, and Management Commentary

• Liquidity and Capital: Management maintains approximately $4.8 million in cash, deemed sufficient for future investments and operating needs for the next 12 months. The company continues to seek new investments alongside other investors to manage risk.
• Valuation Policy: 100% of the portfolio is classified as Level 3 assets (unobservable inputs). Valuations are determined by management and approved by the Board, relying on financial performance, recent financing rounds, and market comparables.
• Portfolio Concentration: As of September 30, 2015, Gemcor II, LLC represented 27% of the portfolio's fair value. Other significant holdings included Rheonix (8%), SciAps (6%), Chequed (6%), and Social Flow (6%).
• Risks: The company faces valuation risk due to the lack of public markets for most holdings. Additionally, the company is subject to SBA regulations and potential automatic events of default regarding its debentures.
• Stock Repurchase: The Board extended a repurchase authorization for up to 1,000,000 shares through October 22, 2016. No shares were repurchased during the nine months ended September 30, 2015.

Key Facts for Investor Verification

• NAV vs. Market Price: Verify the discount between the Net Asset Value ($5.21) and the market price ($3.83 at period end).
• Concentration Risk: Confirm the financial health of Gemcor II, LLC, which comprises over a quarter of the portfolio's fair value.
• Valuation Adjustments: Review the specific rationale for the $250,000 write-down of Teleservices Solutions Holdings and the $193,436 reduction in First Wave Products Group.
• Cash Deployment: Monitor the rate of cash deployment given the significant reduction in cash reserves from $13.2M to $4.8M.
• SBA Compliance: Verify ongoing compliance with SBA regulations regarding the $8 million debenture obligation.