Business Context and Reporting Period
Company: Rand Capital Corporation (Rand)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended September 30, 2011
Business Overview: Rand is a publicly traded Business Development Company (BDC) operating a wholly-owned Small Business Investment Company (SBIC) subsidiary, Rand Capital SBIC, Inc. The company invests in a portfolio of private equity and debt instruments, primarily in small and middle-market companies. As of November 4, 2011, there were 6,818,934 shares of common stock outstanding.
Key Financial Metrics
| Metric | Sept 30, 2011 | Dec 31, 2010 |
|---|---|---|
| Total Assets | $30,206,268 | $35,091,260 |
| Investments at Fair Value | $21,696,992 | $19,364,625 |
| Cash and Cash Equivalents | $4,504,418 | $11,698,653 |
| Total Liabilities | $6,371,521 | $12,040,442 |
| SBA Debentures (Debt) | $4,000,000 | $10,000,000 |
| Net Assets | $23,834,747 | $23,050,818 |
| Net Asset Value (NAV) per Share | $3.50 | $3.38 |
Operating Results (Nine Months Ended Sept 30, 2011)
- Total Investment Income: $916,290 (vs. $614,244 in 2010)
- Total Expenses: $1,301,529 (vs. $1,625,482 in 2010)
- Net Investment Loss: $(265,761) (vs. $(623,491) in 2010)
- Net Realized Loss on Investments: $(1,322,563) (vs. Gain of $2,774,630 in 2010)
- Net Increase in Unrealized Appreciation: $2,372,253 (vs. Decrease of $(3,190,771) in 2010)
- Net Increase in Net Assets from Operations: $783,929 (vs. Decrease of $(1,039,632) in 2010)
- Net Increase in Net Assets per Share: $0.11
Material Changes vs. Prior Period
- Debt Reduction: The company repaid $6,000,000 in SBA debentures during the third quarter of 2011, reducing total SBA leverage from $10,000,000 to $4,000,000. This significantly reduced total liabilities and interest expense.
- Portfolio Valuation: Investments at fair value increased by 12.0% to $21.7 million, driven primarily by a $3.7 million increase in unrealized appreciation. Key contributors included reclassifications of realized losses and valuation increases in Synacor, Inc. and Liazon Corporation.
- Cash Position: Cash and cash equivalents decreased by approximately $7.2 million to $4.5 million, primarily due to the repayment of SBA debt and new investment originations of $1.17 million.
- Expense Reduction: Total operating expenses decreased by 19.9% year-over-year, largely due to a $368,900 reduction in salary expense (no profit sharing accrual in 2011 vs. $380,000 in 2010).
Outlook, Risks, and Management Commentary
- Capital Resources: Subsequent to the quarter-end, the company contributed an additional $1,000,000 in regulatory capital to its SBIC subsidiary and received SBA approval for $8,000,000 in new leverage. Management expects current cash and future leverage drawdowns to meet needs for the next 12 months.
- Investment Activity: The company made one new investment totaling $700,000 subsequent to September 30, 2011. Most future investments are anticipated to be originated through the SBIC subsidiary.
- Risks: The company faces valuation risk as 100% of its portfolio consists of Level 3 assets (restricted securities with no active market). Results are subject to fluctuations based on the timing of realized gains/losses and the performance of portfolio companies. The company notes that the recovery of the economy may take longer than expected due to weak labor markets and tight credit.
- Unusual Items: The company recognized a realized loss of $1.78 million on the sale of Niagara Dispensing Technologies, Inc. and a loss of $293,519 on Associates Interactive LLC. Conversely, unrealized appreciation increased significantly due to valuation adjustments on Synacor and Liazon.
Investor Verification Checklist
- SBA Leverage Status: Verify the utilization of the newly approved $8,000,000 SBA leverage commitment and the impact on future interest expenses.
- Portfolio Concentration: Review the concentration risk, as Gemcor II, LLC (28%) and Synacor, Inc. (26%) represent over 50% of the portfolio's fair value.
- Valuation Methodology: Confirm the assumptions used for Level 3 fair value measurements, particularly the $1.53 million increase in Synacor's valuation and the $1.73 million reclassification for Niagara Dispensing.
- Liquidity Coverage: Assess whether the $4.5 million cash balance is sufficient to cover operating expenses and debt service obligations without immediate access to the new SBA leverage.
- Profit Sharing Plan: Monitor future accruals under the profit sharing plan, which significantly impacted expenses in the prior year but were zero in the current period.