Business Context and Reporting Period
Company: Rand Capital Corporation (RAND)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2018
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 utilizes SBA leverage to fund its portfolio of debt and equity instruments.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Assets | $39,433,555 | $40,133,913 |
| Total Investments (Fair Value) | $32,230,223 | $32,284,062 |
| Cash and Cash Equivalents | $5,499,266 | $12,280,140 (Beginning Q1 2017) |
| Total Liabilities | $8,035,283 | $8,215,228 |
| SBA Debentures (Gross) | $8,000,000 | $8,000,000 |
| Net Assets | $31,398,272 | $32,269,882 |
| Net Asset Value (NAV) per Share | $4.97 | $5.10 |
| Total Investment Income | $362,809 | $328,637 |
| Total Expenses | $588,564 | $516,409 |
| Net Investment Loss | ($173,329) | ($115,264) |
| Net Decrease in Net Assets from Operations | ($520,413) | ($359,481) |
| Net Cash Used in Operating Activities | ($762,773) | ($1,590,748) |
Material Changes vs. Prior Period
- Investment Portfolio: Total investments at fair value decreased slightly by 0.2% ($53,839) compared to the prior year-end, while cost basis increased by 1.1% due to new investments and accretion.
- New Investments: $450,000 deployed in SciAps, Inc. ($250,000) and Centivo Corporation ($200,000).
- Repayments: $70,131 received from repayments (Knoa Software and Empire Genomics).
- Unrealized Depreciation: A net decrease in unrealized depreciation of $451,489 was recorded, driven primarily by valuation adjustments:
- First Wave Products Group: $250,000 decrease (anticipating a financing round).
- Empire Genomics, LLC: $201,489 decrease (adjustment for prior capitalized interest).
- Income and Expenses: Total investment income increased 10.4% to $362,809, largely due to a 20.8% increase in interest from portfolio companies. However, total expenses rose 14.0% to $588,564, driven by a 21% increase in professional fees and a new $45,900 bad debt expense charge.
- Liquidity: Cash balances decreased from $6.26 million at year-end 2017 to $5.50 million at March 31, 2018, representing approximately 18% of net assets.
Outlook, Risks, and Management Commentary
- Strategic Outlook: Management expects to continue adding new investments and reinvesting in existing portfolio companies. The company has approximately $5.5 million in cash available and anticipates applying for an additional $6 million in SBA leverage commitments following the consolidation of its SBIC subsidiaries.
- Share Repurchase: The company has authorization to repurchase up to 458,954 shares of common stock at prices no greater than the current NAV. No shares were repurchased in Q1 2018.
- Risks and Contingencies:
- Valuation Risk: 100% of the portfolio is classified as Level 3 assets (unobservable inputs), meaning valuations are determined by management and may differ from actual liquidation values.
- Credit Risk: Several portfolio companies are on non-accrual status, including G-TEC Natural Gas Systems, First Wave Products Group, OnCore Golf Technology, and portions of Empire Genomics and Mercantile Adjustment Bureau.
- Liquidity Risk: SBA debentures begin maturing in 2022. The company must identify funding sources or liquidate investments to meet these obligations.
- Unusual Items: A $45,900 bad debt expense was recorded in Q1 2018, which was not present in the same period in 2017.
Key Facts for Investor Verification
- Non-Accrual Status: Verify the financial health and recovery prospects of portfolio companies currently on non-accrual status (G-TEC, First Wave, OnCore, Empire Genomics, Mercantile).
- Valuation Adjustments: Review the specific rationale and future outlook for the $451,489 in unrealized losses recorded in Q1 2018, particularly regarding First Wave and Empire Genomics.
- SBA Leverage: Confirm the status of the application for the additional $6 million in SBA leverage and the timeline for deployment.
- Expense Growth: Assess the sustainability of the 14% increase in operating expenses, specifically the rise in professional fees related to strategic planning.
- Cash Runway: Monitor the $5.5 million cash balance against the company's investment pipeline and upcoming SBA debt maturities starting in 2022.