Business Context and Reporting Period
Company: Rand Capital Corporation (Rand)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2013
Business Overview: Rand is a publicly traded, closed-end, diversified management company operating as a Business Development Company (BDC) under the Investment Company Act of 1940. It utilizes a wholly-owned subsidiary, Rand Capital SBIC, Inc. (Rand SBIC), licensed by the U.S. Small Business Administration (SBA), to make venture capital investments in small to medium-sized companies. The portfolio consists of a mixture of debt and equity instruments, primarily in the New York region. As of December 31, 2013, the company had four employees.
Key Financial Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total Assets | $39,750,370 | $34,252,413 |
| Total Liabilities | $11,681,038 | $8,470,113 |
| Net Assets | $28,069,332 | $25,782,300 |
| Net Asset Value (NAV) per Share | $4.38 | $3.90 |
| Investment Income | $2,451,036 | $2,604,621 |
| Total Expenses | $2,359,252 | $1,795,600 |
| Net Investment Gain (Loss) | $154,478 | $686,061 |
| Net Realized Gain (Loss) | $4,374,354 | $831,139 |
| Net Unrealized Appreciation (Depreciation) | $(1,655,475) | $422,567 |
| Net Increase in Net Assets from Operations | $2,873,357 | $1,939,767 |
| Cash and Cash Equivalents | $9,764,810 | $4,224,763 |
| SBA Debentures Outstanding | $7,000,000 | $4,900,000 |
Material Changes vs. Prior Period
- Net Asset Value: NAV per share increased 12% to $4.38 from $3.90 in 2012, driven primarily by significant realized gains.
- Realized Gains: Net realized gains surged to $4.37 million in 2013 compared to $0.83 million in 2012. This was largely due to the sale of Liazon Corporation (gain of $6.26 million) and Ultra-Scan Corporation (gain of $0.67 million), partially offset by a $1.06 million loss on the bankruptcy of Mid America Brick.
- Unrealized Appreciation: The portfolio experienced a net decrease in unrealized appreciation of $1.66 million, compared to an increase of $0.42 million in 2012. This decline was influenced by the reclassification of gains/losses to realized status and write-downs on EmergingMed.com and Synacor, Inc.
- Expenses: Total operating expenses increased 31.4% to $2.36 million. The primary driver was a $595,244 increase in bonus and profit sharing expenses, which are tied to realized capital gains.
- Liquidity: Cash and cash equivalents rose significantly to $9.76 million (35% of net assets) from $4.22 million (16% of net assets), reflecting proceeds from investment sales and SBA leverage drawdowns.
- Debt: SBA leverage increased to $7.0 million after repaying $0.9 million and drawing down $3.0 million during the year.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates that most new investments in 2014 will be originated through Rand SBIC. They expect cash and cash equivalents, coupled with available SBA leverage and scheduled interest payments, to be sufficient to meet cash needs throughout 2014.
- Dividends: The company has not paid cash dividends in the last two fiscal years and has no present intention of paying cash dividends in 2014.
- Stock Repurchase: The Board authorized the repurchase of up to 1,000,000 shares through October 24, 2014. During 2013, 198,318 shares were repurchased at an average price of $2.96.
- Key Risks:
- Valuation Risk: 96% of the portfolio consists of private securities with no public market, requiring fair value estimates by management.
- Concentration Risk: The top five portfolio companies represented 45% of total assets at year-end. Gemcor II, LLC alone represented 26% of total assets.
- Liquidity Risk: Most investments are illiquid and subject to resale restrictions.
- Regulatory Risk: Operations are subject to regulations by the SEC and SBA, which could change and impact business operations.
- Unusual Items: The sale of Liazon Corporation resulted in $1.15 million held in escrow, expected to be released in 2014 subject to claims. The bankruptcy of Mid America Brick resulted in a total loss of the investment.
Investor Verification Checklist
- Portfolio Concentration: Verify the financial health of Gemcor II, LLC, which represents 26% of total assets.
- Escrow Receivables: Monitor the release of the $1.15 million escrow from the Liazon sale and the $189,141 escrow from the Ultra-Scan sale.
- Valuation Methodology: Review the "Level 3" fair value inputs for the 96% of the portfolio that is privately held, as these rely on management estimates rather than market prices.
- Profit Sharing Impact: Assess the sustainability of operating expenses, noting that profit sharing (12% of net realized gains) significantly increased expenses in 2013.
- Dividend Policy: Confirm the continued absence of cash dividends, as the company prioritizes capital appreciation over current income.