Business Context and Reporting Period
Company: Rand Capital Corporation (RAND)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2015
Business Overview: Rand is an internally managed Business Development Company (BDC) and Small Business Investment Company (SBIC) focused on making venture capital investments in early or expansion-stage companies, primarily in New York and surrounding states. The company invests in a mix of debt and equity instruments, aiming for long-term capital appreciation while maintaining current cash flow to offset expenses. As of December 31, 2015, the company had four employees and held 31 portfolio companies.
Key Financial Metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total Assets | $44,761,687 | $45,525,987 |
| Total Liabilities | $10,908,027 | $13,172,546 |
| Net Assets | $33,853,660 | $32,353,441 |
| Net Asset Value (NAV) per Share | $5.35 | $5.11 |
| Investment Income | $2,824,337 | $2,584,475 |
| Total Expenses | $1,817,279 | $2,499,297 |
| Net Investment Gain | $842,902 | $21,835 |
| Net Realized Gain (Loss) | ($27,973) | $4,767,484 |
| Net Unrealized Appreciation | $685,290 | ($247,838) |
| Net Increase in Net Assets from Operations | $1,500,219 | $4,541,481 |
| Cash and Cash Equivalents | $5,844,795 | $13,230,717 |
| Outstanding SBA Debentures | $8,000,000 | $8,000,000 |
Material Changes vs. Prior Period
- Net Asset Value: NAV per share increased 5% to $5.35 from $5.11 in 2014, driven by a net increase in net assets of $1.5 million.
- Investment Income: Increased 9% to $2.8 million, primarily due to higher dividend income ($2.1 million vs. $1.8 million in 2014). Interest income from portfolio companies decreased 13% due to principal repayments and ceased accruals on certain distressed loans.
- Expenses: Total expenses decreased 27% to $1.8 million. This reduction was largely due to a significant decrease in bonus and profit sharing expenses ($122,500 in 2015 vs. $991,000 in 2014).
- Realized Gains: Net realized gains turned negative at ($28,000) compared to $4.8 million in 2014. The 2014 figure was heavily influenced by the sale of BinOptics Corporation. In 2015, the company recognized a $300,000 realized loss on CrowdBouncer, Inc., which ceased operations.
- Unrealized Appreciation: The portfolio recorded a net unrealized appreciation of $685,000, a reversal from the $248,000 depreciation in 2014. This was driven by a $4.1 million valuation increase in Gemcor II, LLC, partially offset by write-downs in several other portfolio companies.
- Liquidity: Cash balances decreased from $13.2 million to $5.8 million as the company deployed capital into $7.0 million of new investments across 16 businesses.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management expects to continue adding new investments and reinvesting in existing portfolio companies. The company anticipates receiving approximately $14 million in gross cash proceeds from the pending sale of its largest portfolio company, Gemcor II, LLC, expected to close in Q1 2016. Management believes current cash balances, anticipated proceeds, and investment income are sufficient to meet cash needs and fund future SBA debenture obligations.
Key Risks and Contingencies:
- Valuation Risk: 100% of the investment portfolio consists of private securities with no public market. Valuations are determined in good faith by management and may differ significantly from actual liquidation values.
- Concentration Risk: The top five portfolio companies represented 50% of total assets at year-end. Gemcor II, LLC alone represented 31% of total assets.
- Liquidity Risk: Investments are illiquid and subject to resale restrictions. The company may not be able to dispose of securities at advantageous times.
- Regulatory Risk: As a BDC and SBIC, the company is subject to regulations by the SEC and SBA, including leverage limits and asset qualification requirements.
- Key Personnel: The company is dependent on two senior officers for investment selection and monitoring; no key man life insurance is maintained.
Investor Verification Checklist
- Gemcor Sale Closure: Verify the closing of the Gemcor II, LLC sale in Q1 2016 and the actual proceeds received versus the estimated $14 million.
- Portfolio Valuations: Review the specific valuation methodologies and inputs used for the $4.1 million increase in Gemcor and the write-downs in companies like First Wave, Intrinsiq, and SciAps.
- Profit Sharing Liability: Monitor the accrual and payment of profit sharing expenses related to the Gemcor sale, which are expected to be incurred in Q1 2016.
- Interest Accruals: Track the performance of portfolio companies where interest accrual was ceased in 2015 (First Wave, Intrinsiq, Mercantile) to assess potential future write-offs.
- SBA Debt Maturity: Note that $8 million in SBA debentures mature between 2022 and 2025; verify the company's strategy for refinancing or repayment.