RAND

Business Context and Reporting Period

Company: Rand Capital Corporation (Rand)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Rand is a publicly traded Business Development Company (BDC) and Small Business Investment Company (SBIC) focused on venture capital investments in small to medium-sized private companies, primarily in the Northeastern United States. The company invests in a mix of debt and equity instruments, often providing managerial assistance to portfolio companies. As of December 31, 2009, the company had four employees and maintained its principal offices in Buffalo, New York.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Asset Value: NAV per share decreased 4% to $3.40 from $3.54 in 2008, driven by a net decrease in net assets from operations of $739,420.
• Portfolio Valuation: Total investment portfolio fair value decreased 13.6% to $24.3 million. This was primarily due to a $4.2 million decrease in unrealized appreciation, offset by a $3.2 million realized gain.
• Liquidity: Cash and cash equivalents increased significantly by $6.66 million (241%) to $9.4 million, representing 41% of net assets (up from 14% in 2008). This increase was driven by a private stock offering, SBA leverage drawdown, and portfolio exits.
• Realized Gains: The company recognized a net realized gain of $2.0 million in 2009, compared to zero in 2008. Key contributors included a $3.74 million gain on the sale of Kionix, Inc. and a $155,000 gain on Ramsco warrants, partially offset by a $705,000 loss on Rocket Broadband.
• Expenses: Total expenses increased 7.5% to $1.85 million. This was largely due to a $177,000 accrual for profit sharing and bonuses and an $86,272 increase in bad debt expense.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates that most new investments in 2010 will be originated through the SBIC subsidiary. The company expects cash balances and scheduled portfolio payments to be sufficient to meet 2010 needs.
• Capital Raising: In September 2009, the company completed a private offering of 1.1 million shares at $3.42 per share, raising approximately $3.72 million in net proceeds.
• SBA Leverage: The company drew down $1.0 million in SBA leverage in Q4 2009, bringing total outstanding debentures to $9.1 million. The remaining $900,000 commitment was drawn in January 2010.
• Valuation Risks: A significant portion of the portfolio (Level 3 assets) is valued based on management's good faith determination due to the lack of a public market. In 2009, significant write-downs occurred for Innov-X Systems ($2.7 million), Golden Goal (written to zero), and Associates Interactive (written to zero) due to deteriorating financial conditions or market changes.
• Dividend Policy: The company has not paid cash dividends in the last two fiscal years and has no intention of paying them in the coming fiscal year.

Key Facts for Investor Verification

• Concentration Risk: The top five portfolio companies represented 54% of total assets at year-end 2009, with Innov-X Systems and Gemcor II each comprising approximately 17-18% of total assets.
• Valuation Methodology: Verify the assumptions used for the $24.3 million portfolio valuation, particularly for Level 3 assets where fair value is determined by management rather than market quotes.
• Bad Debt Exposure: Review the $209,089 allowance for doubtful accounts and the specific portfolio companies (APF, Associates Interactive, Golden Goal) that contributed to the $87,089 bad debt expense in 2009.
• Stock Premium/Discount: The stock closed 2009 at $3.98, trading at a premium to the NAV of $3.40. Investors should monitor the sustainability of this premium given the decline in NAV.
• Regulatory Compliance: Confirm continued compliance with BDC and SBIC regulations, specifically the requirement to maintain 70% of assets in "qualifying assets" and the 20% investment in "Smaller Enterprises" for the SBIC subsidiary.