Business Context and Reporting Period
Company: Rand Capital Corporation (Rand), a publicly traded Business Development Company (BDC) and its wholly-owned subsidiary, Rand Capital SBIC, Inc. (Rand SBIC), a Small Business Investment Company (SBIC) licensed by the SBA.
Reporting Period: Quarter ended March 31, 2013.
Overview: Rand invests in small to medium-sized companies through a mix of debt and equity instruments. The company operates under the Investment Company Act of 1940. As of March 31, 2013, the company held 6,610,236 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total Investment Income | $768,371 | $298,254 |
| Net Investment Income | $307,940 | ($48,310) |
| Net Realized Gain on Investments | $441,972 | $23,065 |
| Net Unrealized Appreciation (Decrease) | ($946,977) | $230,295 |
| Net (Decrease) Increase in Net Assets from Operations | ($197,065) | $205,050 |
| Net Assets (End of Period) | $25,585,235 | $24,604,171 |
| Net Asset Value (NAV) per Share | $3.87 | $3.58 (Year End 2012) |
| Cash and Cash Equivalents | $4,814,203 | $1,716,267 |
| SBA Debentures Outstanding | $4,000,000 | $4,900,000 (Dec 31, 2012) |
| Portfolio Investments at Fair Value | $27,175,477 | $29,779,786 (Dec 31, 2012) |
Material Changes vs. Prior Period
- Investment Income Surge: Total investment income increased 157.6% to $768,371, driven primarily by a $367,831 increase in dividend and other investment income (largely a $535,290 distribution from Gemcor II, LLC) and a 79.7% increase in interest from portfolio companies.
- Expense Reduction: Total expenses decreased 23.1% to $286,462. This was primarily due to a $64,654 bad debt recovery and a 34% reduction in SBA interest expense resulting from lower debt balances.
- Realized Gains and Losses: The company recognized a net realized gain of $441,972. This included significant gains from the sale of Synacor, Inc. ($1.08M) and Ultra-Scan Corporation ($670k), partially offset by a realized loss of $1.06M on Mid America Brick following its bankruptcy filing.
- Unrealized Depreciation: Net unrealized appreciation decreased by $946,977, largely due to mark-to-market adjustments on Synacor, Inc. and the reclassification of Mid America Brick to a realized loss.
- Liquidity Improvement: Cash and cash equivalents increased to $4.81M (19% of net assets) from $4.22M at year-end 2012, aided by proceeds from investment sales ($2.87M) and loan repayments.
Outlook, Risks, and Management Commentary
- Capital Deployment: Management expects most new investments in the coming year to be originated through the SBIC subsidiary. The company has $4.0 million in available SBA leverage remaining.
- Liquidity Position: Management believes current cash balances, available SBA leverage, and scheduled portfolio payments are sufficient to meet cash needs for the next 12 months. The company is evaluating potential exits to increase liquidity for new investments.
- Valuation Risks: 95% of the portfolio consists of restricted securities (Level 3 assets) valued using unobservable inputs. Valuations are subject to management judgment and may differ significantly from realizable values if a market existed.
- Concentration Risk: Five portfolio companies (Gemcor II, Liazon, Microcision, BinOptics, and Carolina Skiff) represented 65% of the fair value of the investment portfolio as of March 31, 2013.
- Forward-Looking Statements: Results may fluctuate due to economic conditions, timing of realized/unrealized gains, and market values of publicly traded securities. No specific financial guidance was provided for future periods.
Investor Verification Checklist
- Mid America Bankruptcy Impact: Verify the final recovery rate, if any, on the $1.06M realized loss from Mid America Brick.
- Synacor Holdings: Confirm the current market value of the remaining 453,643 shares of Synacor, Inc., which are subject to market volatility and trading restrictions.
- SBA Leverage Utilization: Monitor the utilization of the remaining $4.0 million SBA commitment and the maturity schedule of existing debentures (2022-2023).
- Portfolio Concentration: Assess the financial health of the top five portfolio holdings, which comprise the majority of the portfolio's fair value.
- Dividend Sustainability: Evaluate the sustainability of the $535k dividend from Gemcor II, LLC, which drove the majority of the quarter's dividend income.