Business Context and Reporting Period
Company: Rand Capital Corporation (RAND)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2019
Business Overview: Rand Capital is an internally managed Business Development Company (BDC) and Small Business Investment Company (SBIC) focused on venture capital investments in early or expansion-stage companies, primarily in upstate New York. The company invests in a mix of debt and equity instruments.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 |
|---|---|---|
| Total Investment Income | $1,739,771 | $1,438,629 |
| Total Expenses | $2,044,351 | $1,510,034 |
| Net Investment Loss | ($186,082) | ($46,598) |
| Net Realized Loss on Investments | ($392,239) | ($1,125,673) |
| Net Change in Unrealized Depreciation | ($4,197,281) | ($732,128) |
| Net Decrease in Net Assets from Operations | ($3,771,022) | ($1,331,009) |
| Net Assets (End of Period) | $27,753,165 | $30,587,676 |
| Net Asset Value (NAV) per Share | $4.39 | $4.84 |
| Cash and Cash Equivalents | $9,288,502 | $4,404,574 |
| SBA Debentures (Gross) | $11,000,000 | $8,750,000 |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased by 22.7% to $26.8 million, driven primarily by a $4.2 million increase in net unrealized depreciation. Significant write-downs occurred in Genicon ($2.2M), Rheonix ($1.5M), and SocialFlow ($1.1M). Conversely, Tilson Technology Management saw a $1.86M unrealized gain.
- Realized Losses: Net realized losses improved significantly to $392,239 compared to $1.13 million in the prior year. This was due to a $472,632 loss on SOMS Technologies and a $40,500 gain on Advantage 24/7, offsetting the large $1.13M loss on Intrinsiq recorded in 2018.
- Liquidity: Cash and cash equivalents increased by $5.3 million (119%) to $9.3 million, resulting from $4.5 million in loan repayments and $2.25 million in new SBA leverage drawn down.
- Expenses: Total expenses rose 35.4% to $2.04 million. This increase was largely attributable to $289,666 in shareholder expenses and $186,086 in professional fees related to the pending transaction with East Asset Management.
Guidance, Outlook, and Risks
- Pending Transaction: Rand entered into a Stock Purchase Agreement with East Asset Management, LLC to sell approximately 8.3 million shares for $25 million (cash and portfolio assets). Shareholders approved the deal in May 2019, and SBA approval was received in October 2019. Closing is expected in November 2019.
- Strategic Shift: Upon closing, Rand intends to elect Regulated Investment Company (RIC) status, shift strategy toward higher-yielding debt investments, and adopt a new dividend policy to support regular cash dividends.
- Management Change: Rand Capital Management LLC (RCM) will become the external investment advisor post-closing, retaining the current management team.
- Risks: The company faces valuation risk as 100% of its portfolio consists of Level 3 assets (unobservable inputs). Several portfolio companies (BeetNPath, G-TEC, Mercantile) are on non-accrual status. Future funding sources must be identified as SBA debt matures starting in 2022.
Investor Verification Checklist
- Transaction Closing: Verify the closing of the East Asset Management transaction in November 2019 and the subsequent shift to RIC tax status.
- Portfolio Valuations: Review the specific valuation methodologies and assumptions for the significant write-downs in Genicon, Rheonix, and SocialFlow, as these are Level 3 assets.
- Non-Accrual Status: Monitor the status of loans to BeetNPath, G-TEC, and Mercantile Adjustment Bureau, which are currently on non-accrual.
- Dividend Policy: Confirm the implementation of the new dividend policy and the payment of the anticipated special dividend following the transaction.
- Debt Maturity: Assess the company's plan to refinance or repay the $11 million in SBA debentures maturing between 2022 and 2029.