RAND

Business Context and Reporting Period

Rand Capital Corporation (RAND) is an externally managed, closed-end, non-diversified business development company (BDC) regulated under the Investment Company Act of 1940. The company targets current income and capital appreciation by investing in lower middle-market companies, primarily through debt and equity instruments. This filing covers the quarterly period ended June 30, 2024.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Valuation: Total investments at fair value increased by 12.9% to $87.1 million, driven by a $4.9 million increase in net unrealized appreciation. This was primarily due to valuation increases in SciAps, Inc. ($5.6M), Tilson Technology Management, Inc. ($1.8M), and Knoa Software, Inc. ($1.1M).
• Income vs. Expenses: While total investment income rose 14.6% to $4.2 million (driven by a 37.5% increase in interest income from new debt originations), total expenses surged 64.8% to $3.9 million. This expense increase was largely due to a $971,300 rise in capital gains incentive fee accruals and a $365,880 increase in interest expense.
• Net Investment Income: Net investment income declined significantly to $322,390 from $1.2 million in the prior year period, resulting in a net investment loss for the quarter ended June 30, 2024, before realized and unrealized gains.
• Realized Gains: Net realized gains were relatively flat year-over-year ($3.9M vs $3.5M), though the composition changed. The company sold public BDC holdings (ACV, Carlyle, PennantPark, Ares) and recognized a $1.2M realized loss on the liquidation of Knoa Software.

Guidance, Outlook, and Risks

• SciAps Acquisition: Subsequent to the quarter end, SciAps, Inc. (the company's largest holding at 15.7% of net assets) entered a definitive agreement to be acquired for up to $260 million. Closing is expected later in 2024, subject to regulatory approvals.
• Dividends: The Board declared a quarterly cash dividend of $0.29 per share on July 31, 2024, payable in September 2024. Dividends for the first two quarters of 2024 were $0.25 and $0.29 per share, respectively.
• Liquidity: The company maintains a $25 million senior secured revolving credit facility with $7.8 million of unused availability as of June 30, 2024. The facility bears interest at SOFR + 3.50% (8.83% at period end).
• Valuation Risk: 98% of the portfolio is classified as Level 3 assets (unobservable inputs), meaning valuations are determined in good faith by the investment adviser and approved by the Board. These valuations may differ from amounts realized upon liquidation.
• Capital Gains Fee: The company accrued $4.03 million in capital gains incentive fees as of June 30, 2024, based on GAAP requirements for unrealized gains. No fee is currently payable under the Investment Management Agreement until year-end calculations are finalized.

Investor Verification Checklist

• SciAps Closing: Verify the status of the SciAps acquisition closing and the certainty of the $260 million consideration, as this represents a significant portion of the portfolio's unrealized gains.
• Capital Gains Fee Payability: Confirm the final calculation of the capital gains incentive fee payable to the adviser at year-end, as the current $4.03M accrual includes unrealized gains that may not be realized.
• Debt Covenants: Monitor compliance with the Credit Facility covenants, specifically the Asset Coverage Ratio (3:1) and Tangible Net Worth ($50M), given the high leverage ratio (25.09% debt/equity).
• Portfolio Concentration: Review the top five holdings (Tilson, SciAps, Seybert's, BMP Food Service, Mattison), which collectively represent a significant concentration of risk.
• Dividend Sustainability: Assess the ability to maintain the current dividend rate given the decline in net investment income and the reliance on realized/unrealized gains to fund distributions.