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).
Reporting Period: Quarter and nine months ended September 30, 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 and utilizes SBA leverage to fund its portfolio.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Total Investment Income | $2,012,826 | $2,185,292 |
| Total Expenses | $968,634 | $1,202,052 |
| Net Investment Gain | $686,752 | $767,920 |
| Net Realized Gain on Investments | $487,467 | $258,590 |
| Net Unrealized (Decrease) Increase | ($1,340,504) | $660,279 |
| Net (Decrease) Increase in Net Assets from Operations | ($166,285) | $1,686,789 |
| Cash and Cash Equivalents (Sep 30, 2013) | $3,946,504 | $4,224,763 (Dec 31, 2012) |
| Net Assets (Sep 30, 2013) | $25,069,474 | $25,782,300 (Dec 31, 2012) |
| Net Asset Value (NAV) per Share | $3.90 | $3.90 (Dec 31, 2012) |
| SBA Debentures Outstanding | $5,500,000 | $4,900,000 (Dec 31, 2012) |
Material Changes vs. Prior Period
- Operating Results: The company reported a net decrease in net assets from operations of $166,285 for the nine months ended September 30, 2013, compared to a net increase of $1,686,789 in the prior year period. This decline was primarily driven by a $2.16 million decrease in unrealized appreciation on investments.
- Investment Income: Total investment income decreased by 7.9% ($172,466) year-over-year. While interest income from portfolio companies increased by 40.3% due to new debt originations, dividend income dropped significantly by 20.4% ($356,659), largely due to lower distributions from key portfolio companies like Gemcor II, LLC.
- Expenses: Total expenses decreased by 19.4% ($233,418). This reduction was primarily due to the absence of a $144,000 bonus accrual in the current period (which was present in 2012) and a $64,654 bad debt recovery.
- Realized Gains/Losses: Net realized gains increased to $487,467 from $258,590. This included a $1.16 million gain on the sale of Synacor, Inc. shares and a $670,808 gain on the sale of Ultra-Scan Corporation shares, partially offset by a $1.06 million realized loss on the Mid-America Brick investment following its bankruptcy filing.
- Portfolio Valuation: Total investments at fair value decreased by 5.4% to $28.17 million. Unrealized appreciation declined by $2.16 million, driven by mark-to-market adjustments on Synacor, Inc. and write-downs on EmergingMed.com, Inc.
Guidance, Outlook, and Risks
- Liquidity: As of September 30, 2013, the company held $3.95 million in cash and cash equivalents. Management expects this, combined with $2.5 million in available SBA leverage and scheduled portfolio payments, to be sufficient for the next 12 months.
- Capital Resources: The company repurchased 185,318 shares of common stock during the nine-month period for $546,541. Subsequent to the quarter end, the stock buyback program was extended through October 24, 2014, to accumulate up to 1,000,000 shares.
- Subsequent Events: The company received an additional $1.5 million in proceeds from SBA debentures after September 30, 2013.
- Risks: The filing highlights risks related to the valuation of private securities (Level 3 assets), which represent 96% of the portfolio. Valuations are subject to management judgment and may differ from actual realized values. Additionally, quarterly results may fluctuate due to the timing of realized/unrealized gains and general economic conditions.
Investor Verification Checklist
- Portfolio Concentration: Verify the financial health of top holdings, specifically Gemcor II, LLC (36% of portfolio fair value), Liazon Corporation (7%), and Microcision LLC (7%).
- Valuation Methodology: Review the assumptions used for Level 3 asset valuations, particularly the write-downs on EmergingMed.com, Inc. and the mark-to-market adjustments for Synacor, Inc.
- Dividend Sustainability: Assess the trend in dividend distributions from LLC portfolio companies, which dropped significantly year-over-year.
- Debt Obligations: Confirm the maturity schedule and interest rates of the $5.5 million in SBA debentures (maturing 2022-2023) and the utilization of the remaining $2.5 million commitment.
- Stock Repurchase Impact: Monitor the execution of the extended stock buyback program and its effect on share count and NAV per share.