Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to                     

Commission File Number: 814-00235

 

 

Rand Capital Corporation

(Exact Name of Registrant as specified in its Charter)

 

 

 

New York   16-0961359

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

2200 Rand Building, Buffalo, NY   14203
(Address of Principal executive offices)   (Zip Code)

(716) 853-0802

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

As of November 6, 2017, there were 6,321,988 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-Q

 

PART I. – FINANCIAL INFORMATION

Item 1.

 

Financial Statements and Supplementary Data

  3
 

Consolidated Statements of Financial Position as of September  30, 2017 (Unaudited) and December 31, 2016

  3
 

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

  4
 

Consolidated Statements of Changes in Net Assets for the Three Months and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

  5
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)

  6
 

Consolidated Schedule of Portfolio Investments as of September  30, 2017 (Unaudited)

  7
 

Consolidated Schedule of Portfolio Investments as of December  31, 2016

  15
 

Notes to the Consolidated Financial Statements (Unaudited)

  23

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  35

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  44

Item 4.

 

Controls and Procedures

  45
PART II. – OTHER INFORMATION

Item 1.

 

Legal Proceedings

  46

Item 1A.

 

Risk Factors

  46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  46

Item 3.

 

Defaults upon Senior Securities

  46

Item 4.

 

Mine Safety Disclosures

  46

Item 5.

 

Other Information

  46

Item 6.

 

Exhibits

  47

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Supplementary Data

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

     September 30,
2017
(Unaudited)
    December 31,
2016
 

ASSETS

    

Investments at fair value:

    

Control investments (cost of $99,500)

   $ 99,500     $ 99,500  

Affiliate investments (cost of $19,356,165 and $17,589,623, respectively)

     14,706,841       13,605,974  

Non-Control/Non-Affiliate investments (cost of $16,358,555 and $13,941,907, respectively)

     15,889,347       13,795,007  
  

 

 

   

 

 

 

Total investments, at fair value (cost of $35,814,220 and $31,631,030, respectively)

     30,695,688       27,500,481  

Cash

     6,373,128       12,280,140  

Interest receivable (net of allowance: $161,000)

     202,562       324,237  

Deferred tax asset

     1,708,081       1,165,164  

Prepaid income taxes

     266,935       —    

Other assets

     584,010       1,148,508  
  

 

 

   

 

 

 

Total assets

   $ 39,830,404     $ 42,418,530  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

 

Liabilities:

 

 

Debentures guaranteed by the SBA, net

   $ 7,848,323     $ 7,827,773  

Profit sharing and bonus payable

     132,000       1,270,052  

Accounts payable and accrued expenses

     114,365       324,537  

Deferred revenue

     43,240       46,797  

Income tax payable

     —         320,008  
  

 

 

   

 

 

 

Total liabilities

     8,137,928       9,789,167  
  

 

 

   

 

 

 

Commitments and contingencies (See Note 5)

 

 

Stockholders’ equity (net assets):

 

 

Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,321,988 at 9/30/17 and 12/31/16

     686,304       686,304  

Capital in excess of par value

     10,581,789       10,581,789  

Accumulated net investment loss

     (1,876,712     (1,577,848

Undistributed net realized gain on investments

     27,127,054       27,127,054  

Net unrealized depreciation on investments

     (3,356,854     (2,718,831

Treasury stock, at cost: 541,046 shares

     (1,469,105     (1,469,105
  

 

 

   

 

 

 

Total stockholders’ equity (net assets) (per share $5.01 at 9/30/17; $5.16 at 12/31/16)

     31,692,476       32,629,363  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (net assets)

   $ 39,830,404     $ 42,418,530  
  

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three months
ended
September 30,
2017
    Three months
ended
September 30,
2016
    Nine months
ended
September 30,
2017
    Nine months
ended
September 30,
2016
 

Investment income:

        

Interest from portfolio companies:

        

Control investments

   $ —       $ —       $ —       $ 11,828  

Affiliate investments

     142,247       113,643       416,247       273,218  

Non-Control/Non-Affiliate investments

     167,675       110,395       417,406       240,027  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from portfolio companies

     309,922       224,038       833,653       525,073  

Interest from other investments:

        

Non-Control/Non-Affiliate investments

     6,348       11,974       24,182       33,683  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from other investments

     6,348       11,974       24,182       33,683  

Dividend and other investment income:

        

Affiliate investments

     74,408       69,010       189,805       149,807  

Non-Control/Non-Affiliate investments

     2,405       3,011       7,598       3,011  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other investment income

     76,813       72,021       197,403       152,818  

Fee income:

        

Control investments

     —         —         —         2,000  

Affiliate investments

     2,166       2,083       6,250       3,945  

Non-Control/Non-Affiliate investments

     1,770       5,770       13,307       13,004  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     3,936       7,853       19,557       18,949  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     397,019       315,886       1,074,795       730,523  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Salaries

     165,413       155,437       496,239       466,312  

Bonus and profit sharing

     —         —         —         1,411,659  

Employee benefits

     38,454       38,730       138,523       164,952  

Directors’ fees

     36,374       47,380       107,623       142,135  

Professional fees

     48,433       86,938       310,628       237,986  

Stockholders and office operating

     45,355       50,846       193,290       174,882  

Insurance

     8,058       8,358       25,618       25,876  

Corporate development

     16,621       17,794       49,938       49,319  

Other operating

     2,772       3,495       8,055       9,470  
  

 

 

   

 

 

   

 

 

   

 

 

 
     361,480       408,978       1,329,914       2,682,591  

Interest on SBA obligations

     77,568       77,570       232,706       232,709  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     439,048       486,548       1,562,620       2,915,300  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss before income taxes

     (42,029     (170,662     (487,825     (2,184,777

Income tax benefit

     (17,050     (55,934     (188,961     (833,525
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (24,979     (114,728     (298,864     (1,351,252
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain on sales and dispositions of investments:

        

Control investments

     —         1,412,500       —         14,588,813  

Non-Control/Non-Affiliate investments

     —         —         —         168,140  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain before income tax expense

     —         1,412,500       —         14,756,953  

Income tax expense

     —         526,862       —         5,504,343  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain on investments

     —         885,638       —         9,252,610  

Net change in unrealized (depreciation) or appreciation on investments:

        

Control investments

     —         (1,412,500     —         (12,775,000

Affiliate investments

     —         (666,011     (665,675     (1,413,811

Non-Control/Non-Affiliate investments

     111,000       —         (322,308     69,444  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized depreciation or appreciation before income tax expense (benefit)

     111,000       (2,078,511     (987,983     (14,119,367

Deferred income tax expense (benefit)

     28,090       (736,301     (349,960     (5,231,097
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized depreciation or appreciation on investments

     82,910       (1,342,210     (638,023     (8,888,270
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) on investments

     82,910       (456,572     (638,023     364,340  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets from operations

   $ 57,931     ($ 571,300   ($ 936,887   ($ 986,912
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     6,321,988       6,325,299       6,321,988       6,327,074  

Basic and diluted net increase (decrease) in net assets from operations per share

   $ 0.01     ($ 0.09   ($ 0.15   ($ 0.16

See accompanying notes

 

4


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Three months
ended
September 30,
2017
    Three months
ended
September 30,
2016
    Nine months
ended
September 30,
2017
    Nine months
ended
September 30,
2016
 

Net assets at beginning of period

   $ 31,634,545     $ 33,438,048     $ 32,629,363     $ 33,853,660  

Net investment loss

     (24,979     (114,728     (298,864     (1,351,252

Net realized gain on investments

     —         885,638       —         9,252,610  

Net change in unrealized depreciation or appreciation on investments

     82,910       (1,342,210     (638,023     (8,888,270
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets from operations

     57,931       (571,300     (936,887     (986,912

Purchase of treasury shares

     —         (21,614     —         (21,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net assets

     57,931       (592,914     (936,887     (1,008,526
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 31,692,476     $ 32,845,134     $ 31,692,476     $ 32,845,134  
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated net investment loss

   ($ 1,876,712   ($ 1,375,832   ($ 1,876,712   ($ 1,375,832
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine months
ended
September 30,
2017
    Nine months
ended
September 30,
2016
 

Cash flows from operating activities:

    

Net decrease in net assets from operations

   ($ 936,887   ($ 986,912

Adjustments to reconcile net decrease in net assets to net cash (used in) provided by operating activities:

    

Investments in portfolio companies

     (3,900,000     (5,883,012

Proceeds from sale of investments

     —         14,313,203  

Proceeds from loan repayments

     —         416,972  

Change in unrealized depreciation or appreciation on investments

     987,983       14,119,367  

Change in deferred tax benefit

     (542,917     (3,448,438

Realized gain on portfolio investments

     —         (14,756,953

Depreciation and amortization

     23,550       25,034  

Original issue discount accretion

     (21,085     (7,497

Non-cash conversion of debenture interest

     (262,105     (16,711

Changes in operating assets and liabilities:

    

Decrease (increase) in interest receivable

     121,675       (97,299

Decrease in other assets

     561,499       61,484  

(Increase) decrease in prepaid income taxes

     (266,935     65,228  

(Decrease) increase in income tax payable

     (320,008     826,983  

Decrease in accounts payable and accrued expenses

     (210,173     (85,678

(Decrease) increase in profit sharing and bonus payable

     (1,138,052     1,311,659  

(Decrease) increase in deferred revenue

     (3,557     27,553  
  

 

 

   

 

 

 

Total adjustments

     (4,970,125     6,871,895  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (5,907,012     5,884,983  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchase of treasury shares

     —         (21,614
  

 

 

   

 

 

 

Net cash used in financing activities

     —         (21,614
  

 

 

   

 

 

 

Net (decrease) increase in cash

     (5,907,012     5,863,369  

Cash:

    

Beginning of period

     12,280,140       5,844,795  
  

 

 

   

 

 

 

End of period

   $ 6,373,128     $ 11,708,164  
  

 

 

   

 

 

 

See accompanying notes

 

6


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017

(Unaudited)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

  

(b)

Date

Acquired

    

(c)

 

Equity

    

Cost

    

(d)(f)

Fair

Value

    

Percent
of Net
Assets

Non-Control/Non-Affiliate Investments – 50.1% of net assets: (j)                  

ACV Auctions, Inc. (e)(g)

Buffalo, NY. Live mobile auctions for new and used car dealers. (Software)

www.acvauctions.com

   1,181,160 Series A preferred shares.      8/12/16        1%     

 

 

 

$163,000

 

 

  

 

 

 

$282,356

 

 

   0.9%

Athenex, Inc. NASDAQ: ATNX (e)(g)(o)(p)

(Formerly Kinex Pharmaceuticals, Inc.)

Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care)

www.athenex.com

   46,296 restricted common shares valued at $15.66 per share.      9/8/14        <1%     

 

 

 

143,285

 

 

  

 

 

 

725,000

 

 

   2.3%

Centivo Corporation (e)(n)

New York, NY. Tech-enabled health solutions company that helps self-insured employers and their employees save money and have a better experience.

(Health Care)

   $100,000 convertible unsecured note at 2% due February 1, 2019.      7/5/17        0%     

 

 

 

100,000

 

 

  

 

 

 

100,000

 

 

   0.3%

City Dining Cards, Inc. (Loupe) (e)(g)

Buffalo, NY. Customer loyalty technology company for restaurants. (Software)

   9,525.25 Series B preferred shares.      9/1/15        4%        500,000        0      0.0%

eHealth Global Technologies, Inc.

Henrietta, NY. eHealth Connect® improves health care delivery through intelligently aggregated clinical record and images for patient referrals.

(Health Care)

www.ehealthtechnologies.com

  

(g) $1,500,000 term note at 10% due September 2, 2019.

(n) $2,000,000 term note at 10% due September 28, 2019.

Total eHealth

     6/28/16        0%     

 

 

 

 

1,500,000

 

2,000,000

3,500,000

 

 

 

 

 

  

 

 

 

 

1,500,000

 

2,000,000

3,500,000

 

 

 

 

 

   11.0%

Empire Genomics, LLC (g)

Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care)

www.empiregenomics.com

  

$1,101,489 senior secured convertible term notes at 10% due April 30, 2018.

$250,000 promissory note at 12% due December 31, 2019.

(i) Interest receivable $51,359.

Total Empire

     6/13/14        0%     

 

 

 

 

 

1,101,489

 

  250,000

 

1,351,489

 

 

 

 

 

 

  

 

 

 

 

 

1,101,489

 

  250,000

 

1,351,489

 

 

 

 

 

 

   4.3%

GoNoodle, Inc. (g)(m)

(Formerly HealthTeacher, Inc.)

Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software)

www.gonoodle.com

  

$1,000,000 secured note at 12% due January 31, 2020, (1% Payment in Kind (PIK)).

Warrant for 47,324 Series C Preferred shares.

Total GoNoodle

     2/6/15        <1%     

 

 

 

 

 

 

1,026,763

 

            25

1,026,788

 

 

 

 

 

 

  

 

 

 

 

 

 

1,026,763

 

            25

1,026,788

 

 

 

 

 

 

   3.2%

Mercantile Adjustment Bureau, LLC (g)

Williamsville, NY. Full service accounts receivable management and collections company.

(Contact Center)

www.mercantilesolutions.com

  

$1,199,039 subordinated secured note at 13% (3% for the calendar year 2017) due January 31, 2018.

(e) $150,000 subordinated debenture at 8% due June 30, 2018.

Warrant for 3.29% membership interests. Option for 1.5% membership interests.

(i) Interest receivable $57,490.

Total Mercantile

     10/22/12        4%     

 

 

 

 

 

 

 

 

1,198,187

 

 

150,000

 

 

     97,625

 

1,445,812

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

948,187

 

 

            -

 

 

           -

 

948,187

 

 

 

 

 

 

 

 

 

 

   3.0%

Outmatch Holdings, LLC (e)(g)

(Chequed Holdings, LLC)

Dallas, TX. Web based predictive employee selection and reference checking. (Software)

www.outmatch.com

  

2,542,167 Class P1 Units.

109,788 Class C1 Units.

Total Outmatch

     11/18/10        4%       

2,140,007

       5,489

2,145,496

 

 

 

    

2,140,007

       5,489

2,145,496

 

 

 

   6.8%

 

7


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

  

(b)

Date

Acquired

  

(c)

 

Equity

  

Cost

    

(d)(f)

Fair

Value

    

Percent
of Net
Assets

PostProcess Technologies LLC (e)(g)

Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing)

www.postprocess.com

   $300,000 convertible promissory note at 5% due July 28, 2018.    7/25/16    0%   

 

 

 

300,000

 

 

  

 

 

 

300,000

 

 

   0.9%

Rheonix, Inc. (e)

Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care)

www.rheonix.com

  

9,676 common shares.

(g) 1,839,422 Series A preferred shares.

(g) 50,593 common shares.

(g) 589,420 Series B preferred shares.

Total Rheonix

   10/29/09    4%     

-

2,099,999

-

     702,732

  2,802,731

 

 

 

 

 

    

11,000

2,165,999

59,000

   702,732

2,938,731

 

 

 

 

 

   9.3%

SocialFlow, Inc. (e)(g)

New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software)

www.socialflow.com

  

1,049,538 Series B preferred shares.

1,204,819 Series B-1 preferred shares.

717,772 Series C preferred shares.

Total Social Flow

   4/5/13    4%     

500,000

750,000

     500,000

 1,750,000

 

 

 

 

    

731,431

839,648

    500,221

2,071,300

 

 

 

 

   6.5%

Somerset Gas Transmission Company, LLC (e)

Columbus, OH. Natural gas transportation.

(Oil and Gas)

www.somersetgas.com

   26.5337 units.    7/10/02    3%      719,097        500,000      1.6%
Other Non-Control/Non-Affiliate Investments:                  
DataView, LLC (Software) (e)    Membership Interest.    -    -      310,357        -      0.0%
UStec/Wi3 (Manufacturing) (e)    Common Stock.    -    -      100,500        -      0.0%
Subtotal Non-Control/Non-Affiliate Investments                  
           

 

 

    
                  $16,358,555            $15,889,347       
           

 

 

    
Affiliate Investments – 46.5% of net assets (k)                  

BeetNPath, LLC (Grainful) (e)(g)

Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product)

www.grainful.com

  

1,119,024 Series A-2 Preferred Membership Units.

1,032,918 Series B Preferred Membership Units.

Total BeetNPath

   10/20/14    9%   

 

 

 

 

$359,000

 

261,277

620,277

 

 

 

 

 

  

 

 

 

 

$359,000

 

291,000

650,000

 

 

 

 

 

   2.1%

Carolina Skiff LLC (g)

Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats.

(Manufacturing)

www.carolinaskiff.com

   6.0825% Class A common membership interest.    1/30/04    7%   

 

 

 

15,000

 

 

  

 

 

 

1,100,000

 

 

   3.5%

ClearView Social, Inc. (e)(g)

Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software)

www.clearviewsocial.com

   312,500 Series seed plus preferred shares.    1/4/16    6%   

 

 

 

200,000

 

 

  

 

 

 

200,000

 

 

   0.6%

First Wave Products Group, LLC (e)(g)

Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Health Care)

www.firstwaveproducts.com

  

$500,000 senior term notes at 10% due July 31, 2017.

$280,000 junior term notes at 10% due July 31, 2017.

Warrant for 41,619 capital securities.

Total First Wave

   4/19/12    7%   

 

 

 

 

661,563

 

316,469

    22,000

1,000,032

 

 

 

 

 

 

  

 

 

 

 

250,000

 

-

           -

250,000

 

 

 

 

 

 

   0.8%

 

8


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

  

(b)

Date

Acquired

  

(c)

 

Equity

  

Cost

    

(d)(f)

Fair

Value

    

Percent
of Net
Assets

Genicon, Inc.

Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care)

www.geniconendo.com

  

(g) 1,586,902 Series B preferred shares.

(g) $2,000,000 promissory note at 8% due May 1, 2020.

(g) Warrant for 250,000 common

shares.

(n) $1,000,000 promissory note at 8% due May 1, 2020.

(n) Warrant for 125,000 common

shares.

Total Genicon

   4/10/15    6%     

 

 

 

 

1,000,000

 

1,929,144

 

80,000

 

964,444

 

     40,000

4,013,588

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

1,000,000

 

1,929,144

 

80,000

 

964,444

 

     40,000

4,013,588

 

 

 

 

 

 

 

 

 

 

   12.7%

GiveGab, Inc. (e)(g)

Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software)

www.givegab.com

   5,084,329 Series Seed preferred shares.    3/13/13    7%      616,221        424,314      1.3%

G-TEC Natural Gas Systems (e)

Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing)

www.gas-tec.com

   16.930% Class A membership interest. 8% cumulative dividend.    8/31/99    17%   

 

 

 

400,000

 

 

  

 

 

 

100,000

 

 

   0.3%

Intrinsiq Materials, Inc. (e)(g)

Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing)

www.intrinsiqmaterials.com

   4,161,747 Series A preferred shares.    9/19/13    12%      1,125,673        780,000      2.5%

Knoa Software, Inc. (g)

New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software)

www.knoa.com

  

973,533 Series A-1 convertible preferred shares.

1,876,922 Series B preferred shares.

$48,466 convertible promissory note at 8% due May 9, 2018.

Total Knoa

   11/20/12    7%   

 

 

 

 

750,000

479,155

 

     48,466

1,277,621

 

 

 

 

 

 

  

 

 

 

 

-

449,455

 

  48,466

497,921

 

 

 

 

 

 

   1.6%

KnowledgeVision Systems, Inc. (e)(g)

Lincoln, MA. Online presentation and training software. (Software)

www.knowledgevision.com

  

200,000 Series A-1 preferred shares.

214,285 Series A-2 preferred shares.

129,033 Series A-3 preferred shares.

Warrant for 46,743 Series A-3 shares.

$50,000 subordinated promissory note at 8% payable on demand of majority of noteholders after August 31, 2017.

Total KnowledgeVision

   11/13/13    7%     

 

 

250,000

300,000

165,001

35,000

 

  50,000

 

800,001

 

 

 

 

 

 

 

 

    

 

 

-

300,000

165,001

35,000

 

  50,000

 

550,001

 

 

 

 

 

 

 

 

   1.7%

Mezmeriz, Inc. (e)(g)

Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer)

www.mezmeriz.com

   1,554,565 Series Seed preferred shares.    1/9/08    14%      742,850        351,477      1.1%

Microcision LLC (g)(m)

Pennsauken Township, NJ. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing)

www.microcision.com

  

$1,500,000 subordinated promissory note at 12% (1% PIK) due December 31, 2024.

15% Class A common membership

interest.

Total Microcision

   9/24/09    15%   

 

 

 

 

1,909,367

 

              -

1,909,367

 

 

 

 

 

  

 

 

 

 

1,909,367

 

              -

1,909,367

 

 

 

 

 

   6.0%

New Monarch Machine Tool, Inc. (g)

Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing)

www.monarchmt.com

   22.84 common shares.    9/24/03    15%      22,841        22,841      0.1%

 

9


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

 

(b)

Date

Acquired

  

      (c)      

 

Equity

 

Cost

 

(d)(f)

Fair

Value

 

Percent

of Net

Assets

OnCore Golf Technology, Inc. (e)(g)

Buffalo, NY. Maker of patented golf balls.

(Consumer Product)

www.oncoregolf.com

  

150,000 Series AA preferred shares.

$300,000 subordinated convertible promissory notes at 6% due January 24, 2018.

Total OnCore

  12/31/14    7%    

 

375,000

 

300,000

675,000

 

 

 

 

   

 

-

 

300,000

300,000

 

 

 

 

  0.9%

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing)

www.sciaps.com

  

187,500 Series A convertible preferred shares.

274,299 Series A-1 convertible preferred shares.

117,371 Series B convertible preferred shares.

113,636 Series C preferred shares.

369,698 Series C-1 preferred shares.

Total SciAps

  7/12/13    9%    

 

 

1,500,000

 

504,710

 

250,000

175,000

   399,274

2,828,984

 

 

 

 

 

 

 

 

   

 

 

700,000

 

504,710

 

250,000

175,000

   399,274

2,028,984

 

 

 

 

 

 

 

 

  6.4%

SOMS Technologies, LLC (g)

Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products)

www.microgreenfilter.com

   5,959,490 Series B membership interests.   12/2/08    9%  

 

 

 

472,632

 

 

 

 

 

 

528,348

 

 

  1.7%

Teleservices Solutions Holdings, LLC (e) (g)(m)

Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center)

www.ipacesetters.com

  

250,000 Class B preferred units.

1,000,000 Class C preferred units.

80,000 Class D preferred units.

104,198 Class E preferred units.

PIK dividend for Series C and D at 12% and 14%, respectively.

Total Teleservices

  5/30/14    6%    

 

250,000

1,190,680

91,200

   104,198

 

1,636,078

 

 

 

 

 

 

   

 

-

-

-

-

 

-

 

 

 

 

 

 

  0.0%

Tilson Technology Management, Inc.(g)

Portland, ME. Cellular, fiber optic and wireless information systems, construction, and management. (Professional Services)

www.tilsontech.com

  

120,000 Series B preferred shares.

21,391 Series C convertible preferred shares.

$200,000 subordinated promissory note at 8% due September 28, 2021.

Total Tilson

  1/20/15    8%    

 

 

600,000

 

200,000

 

   200,000

1,000,000

 

 

 

 

 

 

   

 

 

600,000

 

200,000

 

   200,000

1,000,000

 

 

 

 

 

 

  3.2%
         

 

 

 

 
Subtotal Affiliate Investments             $19,356,165       $14,706,841    
         

 

 

 

 
Control Investments – 0.3% of net assets (l)              

Advantage 24/7 LLC (e)(g)

Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company)

www.advantage24-7.com

   53% Membership interest.   12/30/10    53%     $99,500       $99,500     0.3%
         

 

 

 

 
Subtotal Control Investments                       $99,500       $99,500    
         

 

 

 

 
TOTAL INVESTMENTS – 96.9%             $35,814,220       $30,695,688    
OTHER ASSETS IN EXCESS OF LIABILITIES – 3.1%               996,788    
           

 

 

 

 
NET ASSETS – 100%            $31,692,476      
        

 

 

 

 

 

10


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

Notes to the Consolidated Schedule of Portfolio Investments

(a) At September 30, 2017, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable.

(b) The Date Acquired column indicates the year in which the Corporation first acquired an investment in the company or a predecessor company.

(c) Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.

(d) The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At September 30, 2017, ASC 820 designates 98% of the Corporation’s investments as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the reporting period. Restricted securities are subject to restrictions on resale, and, other than with respect to the shares of common stock of Athenex, Inc. owned by the Corporation, are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. The Corporation valued the shares of common stock of Athenex using the average closing bid price for the last three trading days of the reporting period, and applied a discount to that value to address the sale restriction. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).

(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.

(f) As of September 30, 2017 the total cost of investment securities was approximately $35.8 million. Net unrealized depreciation was approximately ($5.1) million, which was comprised of $2.3 million of unrealized appreciation of investment securities and ($7.4) million of unrealized depreciation of investment securities. At September 30, 2017, the aggregate gross unrealized gain for federal income tax purposes was $2.6 million and the aggregate gross unrealized loss for federal income tax purposes was ($6.9) million. The net unrealized loss for federal income tax purposes was ($4.3) million based on a tax cost of $35.0 million.

(g) Rand Capital SBIC, Inc. investment.

(h) Reduction in cost and value from previously reported balances reflects current principal repayment. There were no principal repayments during the nine months ended September 30, 2017.

(i) Represents interest due (amounts over $50,000) from investments included as interest receivable on the Corporation’s Statement of Financial Position.

(j) Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments.

(k) Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as those Non-Control investments in companies in which between 5% and 25% of the voting securities are owned by the Corporation.

(l) Control Investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned by the Corporation or where greater than 50% of the board representation is maintained.

(m) Payment in kind (PIK) represents earned interest that is added to the cost basis of the investment.

(n) Rand Capital SBIC II, L.P. investment.

(o) Publicly-traded company.

(p) At September 30, 2017, shares of common stock of Athenex owned by the Corporation were categorized as a Level 2 investment because these shares were subject to restriction on sale as of the end of the period. The Corporation valued the shares of common stock of Athenex that it owns using the average closing bid price for the last three trading days of the reporting period, and applied a discount to that value to address the sale restriction. See Athenex’s publicly disclosed financial reports at sec.gov for additional information on Athenex’s industry, financial results and business operations.

 

11


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

                    Investments in and Advances to Affiliates

Company

 

 

Type of Investment

 

 

December 31,

2016

Fair Value

 

Gross
Additions (1)

 

 

Gross

Reductions

(2)

 

September 30,

2017

Fair Value

 

Net

Realized

Gains

(Losses)

 

Amount of

Interest/

Dividend/

Fee Income

(3)

Control Investments:              
Advantage 24/7 LLC   53% Membership interest.     $99,500       $-       $-       $99,500     $-   $-
   

 

 

  Total Control Investments     $99,500       $0       $0       $99,500     -   $0
   

 

 

Affiliate Investments:              
BeetNPath, LLC  

1,119,024 Series A-2 Preferred Membership Units.

1,032,918 Series B Preferred Membership Units

$150,000 convertible promissory note at 8%.

Total BeetNPath

   

$359,000

-

 150,000

509,000

 

 

 

 

  $

 

-

291,000

           -

291,000

 

 

 

 

   

$-

-

(150,000)

(150,000)

 

 

 

 

   

$359,000

291,000

            0

650,000

 

 

 

 

 

-

-

-

-

 

 

$        -

-

4,800

4,800

Carolina Skiff LLC   6.0825% Class A common membership interest.     1,100,000       -       -       1,100,000     -   141,372
ClearView Social, Inc.   312,500 Series seed plus preferred shares.     200,000       -       -       200,000     -   -
First Wave Products Group, LLC  

$500,000 senior term notes at 10%.

$280,000 junior term notes at 10%.

Warrant for 41,619 capital securities.

Total First Wave

   

250,000

-

           -

250,000

 

 

 

 

   

-

-

-

-

 

 

 

 

   

-

-

-

-

 

 

 

 

   

250,000

-

           -

250,000

 

 

 

 

 

-

-

-

-

 

-

-

-

-

Genicon, Inc.  

1,586,902 Series B preferred shares.

$1,100,000 senior term loans at 12%.

$600,000 term loan at 14%.

$2,000,000 promissory note at 8%

$1,000,000 promissory note at 8%

Warrant for 250,000 common shares

Warrant for 125,000 common shares

Total Genicon

   

1,000,000

1,100,000

600,000

-

-

-

               -

2,700,000

 

 

 

 

 

 

 

 

   

-

-

-

2,009,144

1,004,444

80,000

     40,000

3,133,588

 

 

 

 

 

 

 

 

   

-

(1,100,000)

(600,000)

(80,000)

(40,000)

-

                 -

(1,820,000)

 

 

 

 

 

 

 

 

   

1,000,000

-

-

1,929,144

964.444

80,000

     40,000

4,013,588

 

 

 

 

 

 

 

 

 

-

-

-

-

-

-

-

-

 

-

50,234

32,200

81,088

35,833

 

           -

199,355

GiveGab, Inc.   5,084,329 Series Seed preferred shares.     424,314       -       -       424,314     -   -
G-TEC Natural Gas Systems   16.930% Class A membership interest. 8% cumulative dividend.     100,000       -       -       100,000     -   -
Intrinsiq Materials, Inc.   4,161,747 Series A preferred shares.     780,000       -       -       780,000     -   -
Knoa Software, Inc.  

973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares.

$48,466 convertible promissory note at 8%.

Total Knoa

   

-

449,455

  48,466

497,921

 

 

 

 

   

-

-

-

-

 

 

 

 

   

-

-

-

-

 

 

 

 

   

-

449,455

  48,466

497,921

 

 

 

 

 

-

-

-

-

 

-

-

2,908

2,908

KnowledgeVision Systems, Inc.  

200,000 Series A-1 preferred shares.

214,285 Series A-2 preferred shares.

129,033 Series A-3 preferred shares.

$50,000 subordinated promissory note at 8%

Warrant for 46,743 Series A-3 shares.

Total Knowledge Vision

   

-

300,000

165,001

-

  35,000

500,001

 

 

 

 

 

 

   

-

-

-

50,000

         -

50,000

 

 

 

 

 

 

   

-

-

-

-

-

-

 

 

 

 

 

 

   

-

300,000

165,001

50,000

  35,000

550,001

 

 

 

 

 

 

 

-

-

-

-

-

-

 

-

-

-

2,751

       -

2,751

Mezmeriz, Inc.   1,554,565 Series seed preferred shares.     351,477       -       -       351,477     -   -
Microcision LLC   $1,500,000 subordinated promissory note at 11%.     1,891,964       17,403       -       1,909,367     -   170,959
New Monarch Machine Tool, Inc.   22.84 common shares.     22,841       -       -       22,841     -   28,409
OnCore Golf Technology, Inc.  

150,000 Series AA preferred shares.

$300,000 subordinated convertible promissory notes at 6%.

Total OnCore

   

-

    

300,000

300,000

 

 

 

 

   

-

    

-

-

 

 

 

 

   

-

    

-

-

 

 

 

 

   

-

    

300,000

300,000

 

 

 

 

 

-

    

-

-

 

-

    

21,650

21,650

 

12


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

                    Investments in and Advances to Affiliates  
Company   Type of Investment  

December 31,

2016

Fair Value

 

Gross

Additions

(1)

 

Gross

Reductions

(2)

 

September 30,
2017

Fair Value

 

Net

Realized

Gains

(Losses

 

 

Amount of

Interest/

Dividend/

Fee Income (3)

SciAps, Inc.  

187,500 Series A convertible preferred shares.

274,299 Series A-1 convertible preferred shares.

117,371 Series B convertible preferred shares.

113,636 Series C preferred shares.

369,698 Series C-1 preferred shares.

$200,000 subordinated promissory note at 10%.

$100,000 secured subordinated convertible note at 10%.

Total SciAps

   

 

1,000,000

504,710

250,000

-

-

200,000

 

   100,000

2,054,710

 

 

 

 

 

 

 

 

 

   

 

-

-

-

175,000

399,274

-

 

           -

574,274

 

 

 

 

 

 

 

 

 

   

 

(300,000

-

-

-

-

(200,000

 

(100,000

(600,000


 

 

 

 

 

   

 

700,000

504,710

250,000

175,000

399,274

-

 

              -

2,028,984

 

 

 

 

 

 

 

 

 

   

 

-

-

-

-

-

-

 

-

-

 

 

 

 

 

 

 

 

 

   

 

-

-

-

-

-

4,731

 

2,376

7,107

 

 

 

 

 

 

 

 

 

SOMS Technologies, LLC   5,959,490 Series B membership interests.     528,348       -       -       528,348       -       6,024  
Teleservices Solutions Holdings, LLC  

250,000 Class B shares.

1,000,000 Class C shares.

80,000 Class D preferred units.

104,198 Class E preferred units.

Total Teleservices

   

-

200,000

91,200

104,198

395,398

 

 

 

 

 

   

-

-

-

-

-

 

 

 

 

 

   

-

(200,000

( 91,200

(104,198

(395,398

 

   

-

-

-

-

-

 

 

 

 

 

   

-

-

-

-

-

 

 

 

 

 

   

-

-

-

-

-

 

 

 

 

 

Tilson Technology Management, Inc.  

120,000 Series B preferred shares.

21,391 Series C convertible preferred shares.

$200,000 subordinated promissory note at 8%.

Total Tilson

   

600,000

200,000

200,000

1,000,000

 

 

 

 

   

-

-

-

-

 

 

 

 

   

-

-

-

-

 

 

 

 

   

600,000

200,000

   200,000

1,000,000

 

 

 

 

   

-

-

-

-

 

 

 

 

   

15,000

-

11,967

26,967

 

 

 

 

   

 

 

 

  Total Affiliate Investments     $13,605,974       $4,066,265       ($2,965,398     $14,706,841       -       $612,302  
   

 

 

 

  Total Control and Affiliate Investments     $13,705,474       $4,066,265       ($2,965,398     $14,806,341       -       $612,302  
   

 

 

 

This schedule should be read in conjunction with the Corporation’s Consolidated Financial Statements, including the Consolidated Schedule of Portfolio Investments and Notes to the Consolidated Financial Statements.

(1) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow on investments, capitalized interest and the accretion of discounts. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation, and the movement of an existing portfolio company into this category and out of another category.

(2) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement of an existing portfolio company out of this category and into another category.

(3) Represents the total amount of interest, fees or dividends credited to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.

 

13


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2017 (Continued)

(Unaudited)

 

Industry Classification    Percentage of Total
Investments (at fair value)
as of September 30, 2017

Healthcare

   42.0%

Software

   23.5%

Manufacturing

   20.3%

Consumer Product

   4.8%

Professional Services

   3.3%

Contact Center

   3.1%

Oil and Gas

   1.6%

Electronics

   1.1%

Marketing

   0.3%
  

 

Total Investments

   100%
  

 

 

14


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

   Type of Investment  

(b)

Date

Acquired

 

    (c)

 

    Equity

   Cost   

(d)(f)

Fair

Value

   Percent
of Net
Assets
Non-Control/Non-Affiliate Investments – 42.3% of net assets: (j)                    

ACV Auctions, Inc. (e)(g)

Buffalo, NY. Live mobile auctions for new and used car dealers. (Software)

www.acvauctions.com

   118,116 Series A preferred shares.   8/12/16   1%        $163,000          $163,000      0.5%

Athenex, Inc. (e)(g)

(Formerly Kinex Pharmaceuticals, Inc.)

Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care)

www.athenex.com

   46,296 common shares.   9/8/14   <1%        143,285          416,664      1.3%

City Dining Cards, Inc. (Loupe) (e)(g)

Buffalo, NY. Customer loyalty technology company that helps businesses attract and retain customers. (Software)

www.loupeapp.io

   9,525.25 Series B preferred shares.   9/1/15   4%        500,000          500,000      1.5%

eHealth Global Technologies, Inc. (g)

Henrietta, NY. eHealth Connect® improves health care delivery through intelligently aggregated clinical record and images for patient referrals.

(Health Care)

www.ehealthtechnologies.com

   $1,500,000 term note at 9% due September 2, 2019.   6/28/16   0%        1,500,000          1,500,000      4.6%

Empire Genomics, LLC (e)(g)

Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care)

www.empiregenomics.com

   $900,000 senior secured convertible term notes at 10% due April 1, 2017.   6/13/14   0%     

 

 

 

900,000

 

 

    

 

 

 

900,000

 

 

   3.5%
   $250,000 promissory note at 12% due December 31, 2019.            250,000          250,000     
   (i) Interest receivable $200,339.                 
   Total Empire            1,150,000          1,150,000     

GoNoodle, Inc. (g)

(Formerly HealthTeacher, Inc.)

Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software)

www.gonoodle.com

   $1,000,000 secured note at 12% due January 31,   2/6/15   <1%              3.1%
   2020, (1% Payment in Kind (PIK)).            1,019,101          1,019,101     
   Warrant for 47,324 Series C Preferred shares.                       25                      25     
   Total GoNoodle            1,019,126          1,019,126     
                   
                   

Mercantile Adjustment Bureau, LLC (g)

Williamsville, NY. Full service accounts receivable management and collections company.

(Contact Center)

www.mercantilesolutions.com

   $1,099,039 subordinated secured note at 13% (3% for the calendar year 2016) due October 30, 2017.   10/22/12   4%        1,090,690          1,090,690      3.3%
   (e) $150,000 subordinated debenture at 8% due June 30, 2018.            150,000                        -     
   Warrant for 3.29% membership interests. Option for 1.5% membership interests.                97,625                       -     
   Total Mercantile            1,338,315          1,090,690     
Outmatch Holdings, LLC (e)(g)    2,446,199 Class P1 Units.   11/18/10   4%        2,140,007          2,140,007      6.6%
(Chequed Holdings, LLC)    109,788 Class C1 Units.                   5,489                  5,489     

Dallas, TX. Web based predictive employee selection and reference checking. (Software)

www.outmatch.com

   Total Outmatch            2,145,496           2,145,496     
                   
                   

PostProcess Technologies LLC (e)(g)

Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing)

www.postprocess.com

   $300,000 convertible promissory note at 5% due July 28, 2018.   7/25/16   0%        300,000          300,000      0.9%

 

15


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

   Type of Investment  

(b)

Date

Acquired

 

    (c)

 

    Equity

   Cost     

(d)(f)

Fair

Value

     Percent
of Net
Assets

Rheonix, Inc. (e)

Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care)

www.rheonix.com

   9,676 common shares.   10/29/09   4%      -        11,000      9.0%
   (g) 1,839,422 Series A preferred shares.          2,099,999        2,165,999     
   (g) 50,593 common shares.          -        59,000     
   (g) 589,420 Series B preferred shares.              702,732           702,732     
   Total Rheonix           2,802,731        2,938,731     

SocialFlow, Inc. (e)(g)

New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing.

(Software)

www.socialflow.com

   1,049,538 Series B preferred shares.   4/5/13   4%      500,000        731,431      6.3%
   1,204,819 Series B-1 preferred shares.          750,000        839,648     
   717,772 Series C preferred shares.               500,000            500,221     
                       Total Social Flow            1,750,000         2,071,300     
               
               

Somerset Gas Transmission Company, LLC (e)

Columbus, OH. Natural gas transportation.

(Oil and Gas)

www.somersetgas.com

   26.5337 units.   7/10/02   3%      719,097        500,000      1.5%
Other Non-Control/Non-Affiliate Investments:                
DataView, LLC (Software) (e)    Membership Interest.   -         -          310,357        -        0.0%
UStec/Wi3 (Manufacturing) (e)    Common Stock.   -         -          100,500        -        0.0%
         

 

 

    
Subtotal Non-Control/Non-Affiliate Investments               $13,941,907        $13,795,007         
         

 

 

    
Affiliate Investments – 41.7% of net assets (k)                

BeetNPath, LLC (Grainful) (e)(g)

Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product)

www.grainful.com

   1,119,024 Series A-2 Preferred
Membership Units.
  10/20/14   9%          1.6%
            $359,000        $359,000     
   $150,000 convertible promissory note
at 8% due September 1, 2017.
            
            150,000        150,000     
                           Total BeetNPath          509,000        509,000     

Carolina Skiff LLC (g)

Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Manufacturing)

www.carolinaskiff.com

   6.0825% Class A common membership interest.   1/30/04   7%      15,000        1,100,000      3.4%
               
               
               
               

ClearView Social, Inc. (e)(g)

Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software)

www.clearviewsocial.com

  

312,500 Series seed plus preferred shares.

 

 

  1/4/16   6%          0.6%
            200,000        200,000     
               
               

First Wave Products Group, LLC (e)(g)

Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Health Care)

www.firstwaveproducts.com

   $500,000 senior term notes at 10% due January 31, 2017.   4/19/12   7%          0.8%
            661,563        250,000     
   $280,000 junior term notes at 10% due January 31, 2017.             
            316,469        -     
   Warrant for 41,619 capital securities.               22,000                    -     
                           Total First Wave          1,000,032        250,000     

Genicon, Inc. (g)

Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care)

www.geniconendo.com

   1,586,902 Series B preferred shares.   4/10/15   6%      1,000,000        1,000,000      8.3%
  

$1,100,000 promissory note at 12%

due April 1, 2019.

            
            1,100,000        1,100,000     
   $600,000 promissory note at 14% due March 31, 2018.             
               600,000           600,000     
                       Total Genicon          2,700,000        2,700,000     

GiveGab, Inc. (e)(g)

Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software)

www.givegab.com

   5,084,329 Series Seed preferred shares.   3/13/13   7%      616,221        424,314      1.3%
               

 

16


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

   Type of Investment  

(b)

Date

Acquired

 

    (c)

 

    Equity

   Cost   

(d)(f)

Fair

Value

   Percent
of Net
Assets

G-TEC Natural Gas Systems (e)

Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing)

www.gas-tec.com

   16.930% Class A membership interest.   8/31/99   18%        400,000          100,000      0.3%
   8% cumulative dividend.                 
                   
                   
                   

Intrinsiq Materials, Inc. (e)(g)

Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing)

www.intrinsiqmaterials.com

   4,161,747 Series A preferred shares.   9/19/13   12%        1,125,673          780,000      2.4%
                   
                   
                   
                   

Knoa Software, Inc. (e)(g)

New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software)

www.knoa.com

   973,533 Series A-1 convertible preferred shares.   11/20/12   7%              1.5%
              750,000          -     
   1,876,922 Series B preferred shares.            479,155          449,455     
   $48,466 convertible promissory note at 8% due May 9, 2018.                 48,466            48,466     
                       Total Knoa            1,277,621          497,921     

KnowledgeVision Systems, Inc. (e)(g)

Lincoln, MA. Online presentation and training software. (Software)

www.knowledgevision.com

   200,000 Series A-1 preferred shares.   11/13/13   7%        250,000          -      1.5%
   214,285 Series A-2 preferred shares.            300,000          300,000     
   129,033 Series A-3 preferred shares.            165,001          165,001     
   Warrant for 46,743 Series A-3 shares.              35,000            35,000     
                       Total KnowledgeVision            750,001          500,001     

Mezmeriz, Inc. (e)(g)

Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer)

www.mezmeriz.com

   1,554,565 Series Seed preferred shares.   1/9/08   14%        742,850          351,477      1.1%
                   
                   
                   
                   

Microcision LLC (g)

Pennsauken Township, NJ. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing)

www.microcision.com

   $1,500,000 subordinated promissory note at 12% (1% PIK) due December 31, 2024.   9/24/09   15%              5.8%
              1,891,964          1,891,964     
   15% Class A common membership interest.                          -                        -     
                       Total Microcision            1,891,964          1,891,964     

New Monarch Machine Tool, Inc. (g)

Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing)

www.monarchmt.com

   22.84 common shares.   9/24/03   15%        22,841          22,841      0.1%
                   
                   
                   
                   

OnCore Golf Technology, Inc. (e)(g)

Buffalo, NY. Maker of patented hollow-metal core golf balls. (Consumer Product)

www.oncoregolf.com

   150,000 Series AA preferred shares.   12/31/14   7%        375,000          -      0.9%
   $300,000 subordinated convertible promissory notes at 6% due January 24, 2017.                 
              300,000          300,000     
                       Total OnCore            675,000          300,000     

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing)

www.sciaps.com

   187,500 Series A convertible preferred shares.   7/12/13   9%              6.3%
              1,500,000          1,000,000     
   274,299 Series A-1 convertible preferred shares.            504,710          504,710     
   117,371 Series B convertible preferred shares.            250,000          250,000     
   $200,000 subordinated convertible note at 10% due April 8, 2017.            200,000          200,000     
   $100,000 secured subordinated convertible note at 10% due December 31, 2017.               100,000             100,000     
              2,554,710          2,054,710     
   Total SciAps                 

 

17


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

   Type of Investment  

(b)

Date

Acquired

 

    (c)

 

    Equity

   Cost   

(d)(f)

Fair

Value

   Percent
of Net
Assets

SOMS Technologies, LLC (g)

Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products)

www.microgreenfilter.com

   5,959,490 Series B membership interests.   12/2/08   9%        472,632          528,348        1.6%

Teleservices Solutions Holdings, LLC (e) (g)(m)

Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center)

www.ipacesetters.com

   250,000 Class B preferred units.   5/30/14   6%        250,000          -        1.2%
   1,000,000 Class C preferred units.            1,190,680          200,000       
   80,000 Class D preferred units.            91,200          91,200       
   104,198 Class E preferred units.               104,198             104,198       
   PIK dividend for Series C and D at 12% and 14%, respectively.                 
                   
   Total Teleservices            1,636,078             395,398       

Tilson Technology Management, Inc.(g)

Portland, ME. Cellular, fiber optic and wireless information systems, construction, and management. (Professional Services)

www.tilsontech.com

   120,000 Series B preferred shares.   1/20/15   8%        600,000          600,000        3.1%
   21,391 Series C convertible preferred shares.            200,000          200,000       
   $200,000 subordinated promissory note at 8% due September 28, 2021.               200,000             200,000       
   Total Tilson            1,000,000          1,000,000       
                   
           

 

 

    

Subtotal Affiliate Investments

                $17,589,623          $13,605,974       
           

 

 

    

Control Investments – 0.3% of net assets (l)

                   

Advantage 24/7 LLC (e)(g)

Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company)

www.advantage24-7.com

   53% Membership interest.   12/30/10   53%        $99,500          $99,500        0.3%
                   
                   
                   
                   
           

 

 

    

Subtotal Control Investments

              $99,500          $99,500       
           

 

 

    

TOTAL INVESTMENTS – 84.3%

              $31,631,030          $27,500,481       

OTHER ASSETS IN EXCESS OF

                   

LIABILITIES – 15.7%

                   5,128,882       
                

 

 

    

NET ASSETS – 100%

                       $32,629,363       
                

 

 

    

 

18


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

Notes to the Consolidated Schedule of Portfolio Investments

(a)  At December 31, 2016, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable.

(b)  The Date Acquired column indicates the year in which the Corporation first acquired an investment in the company or a predecessor company.

(c)  Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.

(d)  The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At December 31, 2016, ASC 820 designates 100% of the Corporation’s investments as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the month. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).

(e)  These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.

(f)  As of December 31, 2016 the total cost of investment securities was approximately $31.6 million. Net unrealized depreciation was approximately ($4.1) million, which was comprised of $1.9 million of unrealized appreciation of investment securities and ($6.0) million of unrealized depreciation of investment securities. At December 31, 2016, the aggregate gross unrealized gain for federal income tax purposes was $2.2 million and the aggregate gross unrealized loss for federal income tax purposes was ($5.4) million. The net unrealized loss for federal income tax purposes was ($3.3) million based on a tax cost of $30.8 million.

(g)  Rand Capital SBIC, Inc. investment.

(h)  Reduction in cost and value from previously reported balances reflects current principal repayment. There were no principal repayments during the three months ended December 31, 2016.

(i)  Represents interest due (amounts over $50,000 net of reserves) from investment included as interest receivable on the Corporation’s Statement of Financial Position.

(j)  Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments.

(k)  Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as those Non-Control investments in companies in which between 5% and 25% of the voting securities are owned by the Corporation.

(l)  Control Investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned by the Corporation or where greater than 50% of the board representation is maintained.

(m)  Payment in kind (PIK) represents earned interest that is added to the cost basis of the investment.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

Investments in and Advances to Affiliates                                    

 

 
Company    Type of Investment    December
31, 2015
Fair Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
    December
31, 2016
Fair
Value
     Net
Realized
Gains
(Losses)
     Amount of    
Interest/    
Dividend/    
Fee Income    
(3)    
 

 

 

Control

Investments:

                   

Advantage 24/7

   53% Membership interest.      $99,500      $ -        $            -       $99,500        $      -            $            -      

LLC

                   

Gemcor II, LLC

   $1,000,000 subordinated promissory note at 15%.      416,972        -        (416,972     -        14,620,063        11,828      
   31.25 membership units.      13,400,000        -        (13,400,000     -        -        2,000      
   Escrow receivable due from sale of business.                       -        -                         -       -        -                        -      
   Total Gemcor      13,816,972        -        (13,816,972     -        -        13,828      
     

 

 

 
   Total Control Investments      $13,916,472        $0        ($13,816,972)       $99,500        14,620,063      $ 13,828      
     

 

 

 

Affiliate

Investments:

                   

BeetNPath, LLC

   1,119,024 Series A-2 Preferred Membership       $ -        $            -       $359,000      $ -        $      -      
   Units.      $359,000             150,000        -       150,000          -        6,477      
   $150,000 convertible promissory note at 8%.                       -        150,000        -       509,000          -        6,477      
   Total BeetNPath           359,000                

Carolina Skiff LLC

   6.0825% Class A common membership interest.      600,000        500,000        -       1,100,000        -        131,785      

ClearView Social,

   312,500 Series seed plus preferred shares.      -        200,000        -       200,000        -        -      

Inc.

                   

First Wave

   $500,000 senior term notes at 10%.      250,000        -        -       250,000        -        834      

Products Group,

   $280,000 junior term notes at 10%.      -        -        -       -        -        -      

LLC

   Warrant for 41,619 capital securities.                  -        -        -                   -        -             -      
   Total First Wave      250,000        -        -       250,000        -        834      

Genicon, Inc.

   1,586,902 Series B preferred shares.      1,000,000        -        -       1,000,000        -        3,028      
   $1,100,000 senior term loans at 12%.      -        1,100,000        -       1,100,000        -        109,700      
   $600,000 term loan at 14%.                     -           600,000        -          600,000        -         28,700      
   Total Genicon      1,000,000        1,700,000        -       2,700,000        -        141,428      

GiveGab, Inc.

   5,084,329 Series Seed preferred shares.      424,314        -        -       424,314        -        -      

G-TEC Natural Gas

   17.845% Class A membership interest. 8%                 

Systems

   cumulative dividend.      100,000        -        -       100,000        -        -      

Intrinsiq Materials,

   4,161,747 Series A preferred shares.      -        780,000        -       780,000        -        -      

Inc.

   $95,000 convertible promissory note at 8%.      95,000                    -        (95,000                 -        -        6,689      
   Total Intrinsiq      95,000        780,000        (95,000     780,000        -        6,689      

Knoa Software, Inc.

   973,533 Series A-1 convertible preferred shares.      381,503        -        (381,503     -        -        -      
   1,876,922 Series B preferred shares.      490,752        -        ( 41,297     449,455        -        -      
   $48,466 convertible promissory note at 8%.                  -        48,466                    -         48,466        -        2,499      
   Total Knoa      872,255        48,466        (422,800 )      497,921        -        2,499      

KnowledgeVision

   200,000 Series A-1 preferred shares.      -        -        -       -           -      

Systems, Inc.

   214,285 Series A-2 preferred shares.      300,000        -        -       300,000        -        -      
   129,033 Series A-3 preferred shares.      165,001        -        -       165,001        -        -      
   Warrant for 46,743 Series A-3 shares.        35,000        -        -         35,000        -        -      
   Total Knowledge Vision      500,001        -        -       500,001        -        -      

Mezmeriz, Inc.

   1,554,565 Series seed preferred shares.      351,477        -        -       351,477        -        -      

Microcision LLC

   $1,500,000 subordinated promissory note at                 
   11%.      1,891,964        -        -       1,891,964        -        211,269      
   15% Class A common membership interest.                     -        -        -                      -        -                    -      
   Total Microcision      1,891,964        -        -       1,891,964        -        211,269      

New Monarch

   22.84 common shares.      22,841        -        -       22,841        -        29,409      

Machine Tool, Inc.

                   

OnCore Golf

   150,000 Series AA preferred shares.      187,500        -        (187,500     -        -        -      

Technology, Inc.

   $300,000 subordinated convertible promissory                 
   notes at 6%.      150,000        150,000                     -       300,000        -        17,186      
   Total OnCore      337,500        150,000        (187,500     300,000        -        17,186      

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

Investments in and Advances to Affiliates

 

           

 

 
      Company    Type of Investment    December 31,
2015 Fair
Value
    

Gross
Additions

(1)

     Gross
Reductions (2)
     December 31,
2016 Fair
Value
    

Net

Realized
Gains

(Losses)

    

Amount of    
Interest/    

Dividend/    

Fee Income (3)    

 

 

 

Rheonix, Inc.

   9,676 common shares.      11,000        -        (11,000)        -        -        -      
   1,839,422 Series A preferred shares.      2,165,999        -        (2,165,999)        -        -        -      
   50,593 common shares.      59,000        -        (59,000)        -        -        -      
   589,420 Series B preferred shares.        702,732        -          (702,732)        -        -        -      
   Total Rheonix      2,938,731        -        (2,938,731)        -        -        -      

SciAps, Inc.

   187,500 Series A convertible preferred shares.      1,000,000        -        -        1,000,000        -        -      
   274,299 Series A-1 convertible preferred shares.      504,710        -        -        504,710        -        -      
   117,371 Series B preferred shares.      250,000        -        -        250,000        -        -      
   $200,000 subordinated promissory note at 10%.      -        200,000        -        200,000        -        14,611      
   $100,000 secured subordinated convertible note at 10%.                    -        100,000        -          100,000        -          2,555      
   Total SciAps      1,754,710        300,000        -        2,054,710        -        17,166      

SOMS

Technologies,

LLC

   5,959,490 Series B membership interests.      528,348        -        -        528,348        -        13,464      
                    

Statisfy, Inc.

   65,000 Series seed preferred shares.      20,968        -        (20,968)        -        (20,968)        -      
   Warrant for 1,950,000 Series seed preferred shares.      629,032        -        (629,032)        -        (629,032)        -      
   Total Statisfy      650,000        -        (650,000)        -        (650,000)        -      

Teleservices

Solutions

Holdings, LLC

   250,000 Class B shares.      -        -        -        -        -        -      
   1,000,000 Class C shares.      1,190,680        -        (990,680)        200,000        -        -      
   80,000 Class D preferred units.      91,200        -        -        91,200        -        -      
   104,198 Class E preferred units.        104,198        -        -            104,198        -        -      
   Total Teleservices      1,386,078        -        (990,680)        395,398        -        -      

Tilson

Technology

Management,

Inc.

   12 Series B preferred shares.      600,000        -        -        600,000        -        16,250      
   21,390 Series C convertible preferred shares.      -        200,000        -        200,000        -        -      
   $200,000 subordinated promissory note at 8%.                  -        200,000        -        200,000        -        4,164      
   Total Tilson      600,000        400,000        -        1,000,000        -        20,414      
     

 

 

 
   Total Affiliate Investments    $ 14,662,219      $ 4,228,466      ($ 5,284,711)      $ 13,605,974        (650,000)      $ 598,620      
     

 

 

 
   Total Control and Affiliate Investments    $ 28,578,691      $ 4,228,466      ($ 19,101,683)      $ 13,705,474      $ 13,970,063      $ 612,448      
     

 

 

 

This schedule should be read in conjunction with the Corporation’s Consolidated Financial Statements, including the Consolidated Schedule of Portfolio Investments and Notes to the Consolidated Financial Statements.

(1) Gross additions include increases in the cost basis of investments resulting from new portfolio investment, follow on investments, capitalized interest and the accretion of discounts. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation, and the movement of an existing portfolio company into this category and out of another category.

(2) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement of an existing portfolio company out of this category and into another category.

(3) Represents the total amount of interest, fees or dividends credited to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

 

Industry Classification

   Percentage of Total
Investments (at fair value)
as of December 31, 2016

Healthcare

   32.6%

Software

   27.3%

Manufacturing

   22.7%

Contact Center

   5.4%

Consumer Product

   4.9%

Professional Services

   3.6%

Oil and Gas

   1.8%

Electronics

   1.3%

Marketing

   0.4%
  

 

Total Investments

               100%            
  

 

 

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Table of Contents

Rand Capital Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

For the Nine Months Ended September 30, 2017 and 2016

(Unaudited)

Note 1. ORGANIZATION

Rand Capital Corporation (“Rand”) was incorporated under the laws of New York in February 1969. We completed our initial public offering in 1971 as an internally managed, closed-end, diversified, management investment company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets” and provide managerial assistance to the portfolio companies in which we invest. See Item 1. Business – Regulation, Regulation as a Business Development Company in our Annual Report on Form 10-K for the year ended December 31, 2016.

We have made the majority of our venture capital investments through our wholly-owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which operates as a small business investment company (“SBIC”) and has been licensed by the U.S. Small Business Administration (“SBA”) since its formation in 2002. Rand SBIC’s predecessor was organized as a Delaware limited partnership and was converted into a New York corporation on December 31, 2008, at which time our operations as a licensed SBIC were continued. Although Rand SBIC was operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC, and then Rand SBIC filed an election to be regulated as a BDC under the 1940 Act. Rand SBIC’s board of directors is comprised of the directors of Rand, a majority of whom are not “interested persons” of Rand or Rand SBIC.

Responding to our request submitted during 2016, the SBA issued a “green light” or “go forth” letter authorizing Rand to continue its application process to obtain a license to form and operate a second SBIC subsidiary. The application for the new SBIC fund was filed with the SBA in April 2017 and is currently under review by the SBA. We expect our new SBIC subsidiary, Rand Capital SBIC II, L.P. (Rand SBIC II) will continue our investment strategy of focusing on privately-held, early stage and emerging growth businesses with proven management teams. Our initial wholly-owned subsidiary, Rand SBIC, has historically been our primary investment vehicle since its formation and, once approved by the SBA, we expect to continue this investment strategy through our new SBIC subsidiary. Under the SBA’s pre-licensing approval protocols, we have begun investing using Rand SBIC II.

We operate as an internally managed investment company whereby our officers and employees conduct the business of the Corporation under the general supervision of our Board of Directors. We have not elected to qualify to be taxed as a regulated investment company as defined under Subchapter M of the Internal Revenue Code.

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, “we”, the “Corporation”, “us”, and “our” refer to Rand Capital Corporation, Rand SBIC, and Rand SBIC II.

Our corporate office is located in Buffalo, NY and our website address is www.randcapital.com. We make available free of charge on our website our annual and periodic reports, proxy statements and other information as soon as reasonably practicable after such material is filed with the Securities and Exchange Commission (“SEC”). Our shares are traded on the NASDAQ Capital Market under the ticker symbol “RAND”.

 

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Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – It is our opinion that the accompanying consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation in accordance with United States generally accepted accounting principles (“GAAP”) of the consolidated financial position, results of operations, cash flows and statement of changes in net assets for the interim periods presented. Certain information and note disclosures normally included in audited annual consolidated financial statements prepared in accordance with GAAP have been omitted; however, we believe that the disclosures made are adequate to make the information presented herein not misleading. Our interim results for the nine months ended September 30, 2017 are not necessarily indicative of the results for the full year.

These statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. Information contained in this filing should also be reviewed in conjunction with our related filings with the SEC prior to the date of this report. Those filings include, but are not limited to, the following:

 

N-54A    Election to Adopt Business Development Company status
DEF-14A    2017 Definitive Proxy Statement submitted to shareholders
Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2016
Form 10-Q    Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2017 and March 31, 2017

Principles of Consolidation - The consolidated financial statements include the accounts of Rand and its two wholly-owned SBIC subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments – The carrying amounts reported in the consolidated statement of financial position of cash, interest receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term nature of these financial instruments.

Fair Value of SBA Debentures - In September 2017, the SBIC Funding Corporation completed a pooling of SBA debentures that have a coupon rate of 2.518%, excluding a mandatory SBA annual charge estimated to be 0.804%, resulting in a total estimated fixed rate for ten years of 3.322%. The carrying value of Rand’s SBA debentures is a reasonable estimate of fair value because their stated interest rates approximate current interest rates that are available for debt with similar terms.

Investment Classification – In accordance with the provisions of the 1940 Act, the Corporation classifies its investments by level of control. Under the 1940 Act, “Control Investments” are investments in companies that the Corporation is deemed to “Control” because it owns more than 25% of the voting securities of the company or has greater than 50% representation on the company’s board. “Affiliate Investments” are companies in which the Corporation owns between 5% and 25% of the voting securities. “Non-Control/Non-Affiliate Investments” are those companies that are neither Control Investments nor Affiliate Investments.

Investments - Investments are valued at fair value as determined in good faith by the management of the Corporation and approved by the Board of Directors. The Corporation invests in loan instruments, debt instruments, and equity instruments. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistent valuation process. The Corporation analyzes and values each investment quarterly, and records unrealized depreciation for an investment that it believes has become impaired, including where collection of a loan or debt security or realization of the recorded value of an equity security is doubtful. Conversely, the Corporation will record unrealized appreciation if it believes that an underlying portfolio company has appreciated in value and, therefore, its equity securities have also appreciated in value. These estimated fair values may differ from the values that would have been used had a ready market for the investments existed and these differences could be material if the Corporation’s assumptions and judgments differ from results of actual liquidation events.

 

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Qualifying Assets - All of the Corporation’s investments were made in privately held small business enterprises, that were not investment companies, were principally based in the United States, and represent qualifying assets as defined by Section 55(a) of the 1940 Act.

Revenue Recognition - Interest Income - Interest income is recognized on the accrual basis except where the investment is in default or otherwise presumed to be in doubt. In such cases, interest is recognized at the time of receipt. A reserve for possible losses on interest receivable is maintained when appropriate.

Accrual of interest by an SBIC is regulated by the SBA’s “Accounting Standards and Financial Reporting Requirements for Small Business Investment Companies.” Under these rules, interest income cannot be recognized if collection is doubtful, and a 100% reserve must be established. The collection of interest is presumed to be in doubt when there is substantial doubt about a portfolio company’s ability to continue as a going concern or a loan is in default for more than 120 days. Management also uses other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

The following investments remain on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

The Corporation holds debt securities in its investment portfolio that contain payment-in-kind (“PIK”) interest provisions. PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment.

Revenue Recognition - Dividend Income – The Corporation may receive cash distributions from portfolio companies that are limited liability companies or corporations and these distributions are classified as dividend income on the consolidated statement of operations. Dividend income is recognized on an accrual basis when it can be reasonably estimated.

The Corporation may hold preferred equity securities that contain cumulative dividend provisions. Cumulative dividends are recorded as dividend income, if declared and deemed collectible, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed.

Revenue Recognition - Fee Income - Consists of amortization of financing fees charged to the portfolio companies upon successful closing of our SBIC funds financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $18,557 and $15,948 for the nine months ended September 30, 2017 and 2016, respectively. The board fees were $1,000 and $3,000 for the nine months ended September 30, 2017 and 2016, respectively.

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Investments - Amounts reported as realized gains and losses are measured by the difference between the proceeds from the sale or exchange and the cost basis of the investment without regard to unrealized gains or losses recorded in prior periods. The cost of securities that have, in management’s judgment, become worthless are written off and reported as realized losses when appropriate. Unrealized appreciation or depreciation reflects the difference between the fair value of the investments and the cost basis of the investments.

Original Issue Discount – Investments may include “original issue discount” or OID income. This occurs when the Corporation purchases a warrant and a note from a portfolio company simultaneously, which requires an allocation of a portion of the purchase price to the warrant and reduces the note or debt instrument by an equal amount in the form of a note discount or OID. The note is reported net of the OID and the OID is accreted into interest income over the life of the loan. The Corporation recognized $21,085 and $7,497 in OID income for the nine months ended September 30, 2017 and 2016, respectively. OID income is estimated to be approximately $13,000 for the remainder of 2017.

 

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Deferred Debenture Costs - SBA debenture origination and commitment costs, which are netted against the debenture obligation (See Note 6 “SBA Debentures”), will be amortized ratably over the terms of the SBA debentures. Amortization expense was $20,550 for each of the nine months ended September 30, 2017 and 2016. Amortization expense on currently outstanding debentures for the next five years is estimated to average approximately $27,000 per year.

SBA Debenture - The Corporation had $8,000,000 in outstanding SBA debentures at September 30, 2017 and December 31, 2016 with a weighted average interest rate of 3.54%. The debentures are presented net of deferred debenture costs (see Note 6). The $8,000,000 in outstanding SBA leverage matures from 2022 through 2025.

In the event of a future default of such SBA obligations, the Corporation has consented to the exercise, by the SBA, of all rights of the SBA under 13 C.F.R. 107.1810(i) “SBA remedies for automatic events of default” and has agreed to take all actions that the SBA may so require. These actions may include the Corporation’s automatic consent to the appointment of the SBA, or its designee, as receiver under Section 311(c) of the Small Business Investment Act of 1958.

Net Assets per Share - Net assets per share are based on the number of shares of common stock outstanding. The Corporation does not have any common stock equivalents outstanding.

Supplemental Cash Flow Information - Income taxes paid during the nine months ended September 30, 2017 and 2016, net of refunds, was $590,940 and $1,995,948, respectively. Interest paid during the nine months ended September 30, 2017 and 2016 was $282,875 and $283,650, respectively. The Corporation converted $262,105 and $16,711 of interest receivable into investments during the nine months ended September 30, 2017 and 2016, respectively.

Accounting Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stockholders’ Equity (Net Assets) - At September 30, 2017 and December 31, 2016, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

On October 26, 2017, the Board of Directors extended the repurchase authorization for up to 1,000,000 shares of the Corporation’s outstanding common stock on the open market through October 26, 2018 at prices that are no greater than the then current net asset value. No shares were repurchased during the nine months ended September 30, 2017. There were 6,550 shares repurchased during the nine months ended September 30, 2016. At September 30, 2017, the total treasury shares held was 541,046 shares with a total cost of $1,469,105.

Profit Sharing and Stock Option Plan - In 2001, the stockholders of the Corporation authorized the establishment of an Employee Stock Option Plan (the “Option Plan”), that provides for the award of stock options to purchase up to 200,000 common shares to eligible employees. In 2002, the Corporation placed the Option Plan on inactive status as it developed a new profit sharing plan for the Corporation’s employees in connection with the formation of its SBIC subsidiary. As of September 30, 2017, no stock options had been awarded under the Option Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any option, warrant or right is outstanding under an executive compensation plan, no stock options will be granted under the Option Plan while any profit sharing plan is in effect with respect to the Corporation.

 

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In 2002, the Corporation established a Profit Sharing Plan (the “Plan”) for its executive officers in accordance with Section 57(n) of the 1940 Act. Under the Plan, the Corporation will pay its executive officers aggregate profit sharing payments equal to 12% of the net realized capital gains of its SBIC subsidiary, net of all realized capital losses and unrealized depreciation of the SBIC subsidiary, for the fiscal year, computed in accordance with the Plan and the Corporation’s interpretation of the Plan. Any profit sharing paid or accrued cannot exceed 20% of the Corporation’s net income, as defined in the Plan. For purposes of the 20% profit sharing test, the Corporation interprets net income to be the total of the Corporation’s net investment gain (loss) and its net realized gain (loss) on investments, prior to inclusion of the estimated profit sharing obligation. The profit sharing payments are split equally between the Corporation’s two executive officers, each of whom is fully vested in the Plan.

There were no amounts earned pursuant to the Plan for the nine months ended September 30, 2017. The Corporation had accrued $1,411,659 under the Plan for the nine months ended September 30, 2016. Estimated payroll taxes and benefits on the profit sharing under the Plan were also accrued at September 30, 2016. The amounts accrued were within the defined limits under the Plan. At December 31, 2016, the Corporation’s final approved and accrued amount was $1,270,052 under the Plan, of which $1,138,052 was paid during the nine months ended September 30, 2017.

Income Taxes - The Corporation reviews the tax positions it has taken to determine if they meet a “more likely than not threshold” for the benefit of the tax position to be recognized in the consolidated financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in either a reduction of a current or deferred tax asset or receivable, or the recording of a current or deferred tax liability. There were no uncertain tax positions recorded at September 30, 2017.

It is the Corporation’s policy to include interest and penalties related to income tax liabilities in income tax expense. There were no amounts recognized for interest or penalties for the nine months ended September 30, 2017 or 2016.

Concentration of Credit and Market Risk – The Corporation’s financial instruments potentially subject it to concentrations of credit risk. Cash is invested with banks in amounts which, at times, exceed insurable limits. Management does not anticipate non-performance by such banks.

At September 30, 2017, Genicon, Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Rheonix, Inc. (Rheonix), Outmatch (formerly Chequed Holdings, LLC) (Outmatch) and Social Flow, Inc. (Social Flow) represented 13%, 11%, 10%, 7% and 7%, respectively, of the fair value of the Corporation’s investment portfolio.

Note 3. INVESTMENTS

The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements.

Loan investments are defined as traditional loan financings with no equity features. Debt investments are defined as debt financings that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. A financing may also be categorized as a debt financing if it is accompanied by the direct purchase of an equity interest in the company.

 

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The Corporation uses several approaches to determine the fair value of an investment. The main approaches are:

 

    Loan and debt securities are valued at cost when it is representative of the fair value of the investment or sufficient assets or liquidation proceeds are expected to exist from a sale of a portfolio company at its estimated fair value. However, they may be valued at an amount other than the price the security would command given the rate and related inherent portfolio risk of the investment. A loan or debt instrument may be reduced in value if it is judged to be of poor quality, collection is in doubt or insufficient liquidation proceeds exist.

 

    Equity securities may be valued using the “asset approach”, “market approach” or “income approach.” The asset approach involves estimating the liquidation value of the portfolio company’s assets. To the extent the value exceeds the remaining principal amount of the debt or loan securities of the portfolio company, the fair value of such securities is generally estimated to be their cost. However, where value is less than the remaining principal amount of the loan and debt securities, the Corporation may discount the value of an equity security. The market approach uses observable prices and other relevant information generated by similar market transactions. It may include the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, the Corporation adjusts valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor. The income approach employs a cash flow and discounting methodology to value an investment.

ASC 820 classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, used in the Corporation’s valuation at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable and significant inputs to determining the fair value.

Financial assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

Any changes in estimated fair value are recorded in the statement of operations as “Net change in unrealized depreciation or appreciation on investments.”

Under the valuation policy, the Corporation values unrestricted publicly traded companies, categorized as Level 1 investments, at the average closing bid price for the last three trading days of the reporting period. There were no such Level 1 investments as of September 30, 2017. The Corporation did have one portfolio company, Athenex, that completed an initial public offering during the second quarter of 2017 and the shares of the common stock of Athenex were categorized as a Level 2 investment because these shares were subject to restriction on sale as of the end of the period. The Corporation valued the common stock of Athenex stock that it owns using the average closing bid price for the last three trading days of the reporting period, and applied a discount to that value to address the sale restriction.

In the valuation process, the Corporation values restricted securities, categorized as Level 3 investments, using information from these portfolio companies, which may include:

 

    Audited and unaudited statements of operations, balance sheets and operating budgets;

 

    Current and projected financial, operational and technological developments of the portfolio company;

 

    Current and projected ability of the portfolio company to service its debt obligations;

 

    The current capital structure of the business and the seniority of the various classes of equity if a deemed liquidation event were to occur;

 

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    Pending debt or capital restructuring of the portfolio company;

 

    Current information regarding any offers to purchase the investment, or recent fundraising transactions;

 

    Current ability of the portfolio company to raise additional financing if needed;

 

    Changes in the economic environment which may have a material impact on the operating results of the portfolio company;

 

    Internal circumstances and events that may have an impact (both positive and negative) on the operating performance of the portfolio company;

 

    Qualitative assessment of key management;

 

    Contractual rights, obligations or restrictions associated with the investment; and

 

    Other factors deemed relevant by the Corporation’s management to assess valuation.

The valuation may be reduced if a portfolio company’s performance and potential have deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.

Equity Securities

Equity Securities may include preferred stock, common stock, warrants and limited liability company membership interests.

The significant unobservable inputs used in the fair value measurement of the Corporation’s equity investments are earnings before interest, tax and depreciation and amortization (EBITDA) and revenue multiples, where applicable, the financial and operational performance of the business, and the debt and senior equity preferences that may exist in a deemed liquidation event. Standard industry multiples may be used when available; however, the Corporation’s portfolio companies are typically small and in early stages of development and these industry standards may be adjusted to more closely match the specific financial and operational performance of the portfolio company. Due to the nature of certain investments, fair value measurements may be based on other criteria, which may include third party appraisals. Significant changes in any of these unobservable inputs may result in a significantly higher or lower fair value estimate.

Another key factor used in valuing equity investments is a significant recent arms-length equity transaction entered into by the portfolio company with a sophisticated non-strategic unrelated new investor. The terms of these equity transactions may not be identical to the equity transactions between the portfolio company and the Corporation, and the impact of the difference in transaction terms on the market value of the portfolio company may be difficult or impossible to quantify.

When appropriate the Black-Scholes pricing model is used to estimate the fair value of warrants for accounting purposes. This model requires the use of highly subjective inputs including expected volatility and expected life, in addition to variables for the valuation of minority equity positions in small private and early stage companies. Significant changes in any of these unobservable inputs may result in a significantly higher or lower fair value estimate.

For recent investments, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing the Corporation to depart from this basis.

Loan and Debt Securities

The significant unobservable inputs used in the fair value measurement of the Corporation’s loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, as well as the market acceptance for the portfolio company’s products or services. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. The Corporation’s loan and debt investments are often junior secured or unsecured debt securities. Fair value may also be determined based on other criteria where appropriate.

 

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Significant changes to the unobservable inputs may result in a change in fair value. For recent investments, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing the Corporation to depart from this basis.

The following table provides a summary of the significant unobservable inputs used to determine the fair value of the Corporation’s Level 3 portfolio investments as of September 30, 2017:

 

Investment

Type

  Market
Approach
EBITDA
Multiple
    Market
Approach

Liquidation
Seniority
    Market
Approach

Revenue
Multiple
    Market
Approach
Transaction

Pricing
    Black
Scholes
Pricing
Model
    Asset
Approach
Liquidation
Method
    Totals  

Non-Control/Non-Affiliate Equity

  $ —       $ —       $ 2,071,325     $ 5,866,583     $ —       $ —       $ 7,937,908  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Control/Non-Affiliate Debt

  $ 948,187       —         5,878,252       —         —         400,000       7,226,439  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Control/Non-Affiliate

    948,187       —         7,949,577       5,866,583       —         400,000       15,164,347  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Equity

    1,628,348       22,841       3,078,440       3,405,791       120,000       800,000       9,055,420  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Debt

    1,909,367       —         648,466       2,893,588       —         200,000       5,651,421  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate

    3,537,715       22,841       3,726,906       6,299,379       120,000       1,000,000       14,706,841  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Control Equity

    —         —         99,500       —         —         —         99,500  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Control Debt

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control

    —         —         99,500       —         —         —         99,500  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Investments

  $ 4,485,902     $ 22,841     $ 11,775,983     $ 12,165,962     $ 120,000     $ 1,400,000     $ 29,970,688  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Range

    4.8X-6.7X       1X       0.5X-10.3X       Not Applicable       Not Applicable       Not Applicable    

Unobservable Input

    EBITDA Multiple       Asset Value      
Revenue
Multiple
 
 
    Transaction Price       Exercise Price       Asset Value    

Weighted Average

    5.9X       1X       3.1X       Not Applicable       Not Applicable       Not Applicable    

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at September 30, 2017:

 

       Fair Value Measurements at Reported Date Using  

Description

   September 30,
2017
     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant
Observable Inputs
(Level 2)
     Other Significant
Unobservable
Inputs
(Level 3)
 

Loan investments

   $ 3,550,000      $ —        $ —        $ 3,550,000  

Debt investments

     9,327,860        —          —          9,327,860  

Equity investments

     17,817,828        —          725,000        17,092,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,695,688      $ —        $ 725,000      $ 29,970,688  
  

 

 

       

 

 

    

 

 

 

 

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The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at December 31, 2016:

 

       Fair Value Measurements at Reported Date Using  

Description

   December 31,
2016
     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant
Observable Inputs
(Level 2)
     Other Significant
Unobservable
Inputs
(Level 3)
 

Loan investments

   $ 3,200,000      $ —        $ —        $ 3,200,000  

Debt investments

     6,700,221        —          —          6,700,221  

Equity investments

     17,600,260        —          —          17,600,260  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,500,481      $ —        $ —        $ 27,500,481  
  

 

 

          

 

 

 

The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the quarter ended September 30, 2017:

 

     Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Venture Capital Investments
 

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
     Total  

Ending Balance, December 31, 2016, of Level 3 Assets

   $ 3,200,000      $ 6,700,221      $ 17,600,260      $ 27,500,481  

Unrealized Gains and Losses included in net change in net assets from operations:

           

ACV Auctions, Inc. (ACV Auctions)

     —          —          119,356        119,356  

Athenex, Inc. (Athenex)

     —          —          308,336        308,336  

BeetNPath, LLC (Beetnpath)

     —          —          29,723        29,723  

City Dining Cards, Inc. (Loupe)

     —          —          (500,000      (500,000

Mercantile Adjustment Bureau, LLC (Mercantile)

     —          (250,000      —          (250,000

SciAps, Inc. (Sciaps)

     —             (300,000      (300,000

Teleservices Solutions Holdings, LLC (Teleservices)

     —             (395,398      (395,398
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Unrealized Gains and Losses

     —          (250,000      (737,983      (987,983

Purchases of Securities/Changes to Securities/Non-cash conversions:

           

Beetnpath

     —          100,000        11,277        111,277  

Centivo Corporation (Centivo)

     —          100,000        —          100,000  

eHealth Global Technologies, Inc. (eHealth)

     2,000,000        —          —          2,000,000  

Empire Genomics, LLC (Empire Genomics)

     —          201,489        —          201,489  

Genicon, Inc. (Genicon)

     300,000        893,588        120,000        1,313,588  

GoNoodle, Inc. (GoNoodle)

     —          7,662        —          7,662  

KnowledgeVision Systems, Inc. (Knowledge Vision)

     50,000        —          —          50,000  

Mercantile

     —          107,497        —          107,497  

Microcision LLC (Microcision)

     —          17,403        —          17,403  

Sciaps

     —          —          274,274        274,274  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Purchases of Securities/Changes to Securities/Non-cash conversions

     2,350,000        1,427,639        405,551        4,183,190  
  

 

 

    

 

 

    

 

 

    

 

 

 

Transfers within Level 3

     (2,000,000      1,450,000        550,000        —    

Transfers out of Level 3

     —          —          (725,000      (725,000
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, September 30, 2017, of Level 3 Assets

   $ 3,550,000      $ 9,327,860      $ 17,092,828      $ 29,970,688  
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in unrealized depreciation on investments for the period included in changes in net assets

 

   ($ 987,983

Net realized gain on investments for the period included in changes in net assets

 

   $  

 

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The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2016:

 

     Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Venture Capital Investments
 

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
     Total  

Ending Balance, December 31, 2015, of Level 3 Assets

   $ 416,972      $ 5,076,632      $ 31,338,796      $ 36,832,400  

Realized Gains included in net change in net assets from operations:

           

Gemcor II, LLC (Gemcor)

     —          —          14,588,813        14,588,813  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Realized Gains

     —          —          14,588,813        14,588,813  

Unrealized Gains and Losses included in net change in net assets from operations:

           

Athenex, Inc. (Athenex)

     —          —          69,444        69,444  

Gemcor II, LLC (Gemcor)

     —          —          (12,775,000      (12,775,000

Intrinsiq Material, Inc. (Intrinsiq)

     —          —          254,329        254,329  

Knoa Software, Inc. (Knoa)

     —          —          (422,800      (422,800

Statisfy, Inc. (Statisfy)

     —          —          (650,000      (650,000

Teleservices Solutions Holdings, LLC (Teleservices)

     —          —          (595,340      (595,340
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Unrealized Gains and Losses

     —          —          (14,119,367      (14,119,367

Purchases of Securities/Changes to Securities/Non-cash conversions:

           

ACV Auctions, Inc. (ACV Auctions)

     —          —          163,000        163,000  

BeetNPath, LLC (Beetnpath)

     —          150,000        —          150,000  

ClearView Social, Inc. (Clearview Social)

     —          —          200,000        200,000  

eHealth Global Technologies, Inc. (eHealth)

     1,500,000        —          —          1,500,000  

Empire Genomics, LLC (Empire Genomics)

     —          550,000        —          550,000  

Genicon, Inc. (Genicon)

     1,700,000        —          —          1,700,000  

GoNoodle, Inc. (GoNoodle)

     —          7,586        —          7,586  

Intrinsiq

     —          —          430,671        430,671  

Knoa Software, Inc. (Knoa)

     —          48,466        —          48,466  

Mercantile Adjustment Bureau, LLC (Mercantile)

     —          7,497        —          7,497  

OnCore Golf Technology, Inc. (Oncore Golf)

     —          150,000        —          150,000  

PostProcess Technologies, Inc. (Post Process)

     —          300,000        —          300,000  

SciAps, Inc. (Sciaps)

     —          300,000        —          300,000  

Tilson Technology Management, Inc. (Tilson)

     —          200,000        200,000        400,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Purchases of Securities/Changes to Securities/Non-cash conversions

     3,200,000        1,713,549        993,671        5,907,220  

Repayments and Sale of Securities:

           

Gemcor

     (416,972      —          (15,213,813      (15,630,785
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Repayments and Sale of Securities

     (416,972      —          (15,213,813      (15,630,785
  

 

 

    

 

 

    

 

 

    

 

 

 

Transfers within Level 3

     —          (95,000      95,000        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, September 30, 2016, of Level 3 Assets

   $ 3,200,000      $ 6,695,181      $ 17,683,100      $ 27,578,281  
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in unrealized appreciation on investments for the period included in changes in net assets

 

   ($ 14,119,367

Net realized gain on investments for the period included in changes in net assets

 

   $ 14,756,953  

 

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NOTE 4. OTHER ASSETS

At September 30, 2017 and December 31, 2016, other assets was comprised of the following:

 

     September 30,
2017
(Unaudited)
     December 31,
2016
 

Escrow receivable from Gemcor II LLC (Gemcor)

   $ 550,000      $ 1,100,000  

Prepaid expenses

     26,208        6,758  

Dividend receivable

     —          34,101  

Operating receivables

     4,279        1,126  

Equipment (net)

     3,523        6,523  
  

 

 

    

 

 

 

Total other assets

   $ 584,010      $ 1,148,508  
  

 

 

    

 

 

 

During the first quarter of 2016, Gemcor II, LLC sold its assets, and $1,100,000 of the proceeds were held in escrow, subject to potential claims. During the first quarter of 2017, $550,000 of the Gemcor escrow receivable was released and the remainder was released in October 2017.

Note 5. COMMITMENTS AND CONTINGENCIES

The Corporation did not have any commitments to fund any investments as of September 30, 2017.

Note 6. SBA DEBENTURES

Pursuant to Accounting Standard Update (ASU) 2015-03, the debt origination costs associated with the SBA debt obligations are presented as a direct deduction of the related debt obligation.

 

     September 30,
2017
(Unaudited)
     December 31,
2016
 

Debentures guaranteed by the SBA

   $ 8,000,000      $ 8,000,000  

Less unamortized issue costs

     (151,677      (172,227
  

 

 

    

 

 

 

Debentures guaranteed by the SBA, net

   $ 7,848,323      $ 7,827,773  
  

 

 

    

 

 

 

 

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The following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the nine months ended September 30, 2017 and the year ended December 31, 2016:

 

     Nine months ended
September 30,
2017 (Unaudited)
    Year ended
December 31,
2016
 

Income from investment operations (1):

    

Investment income

   $ 0.17     $ 0.16  

Operating expenses

     0.25       0.54  
  

 

 

   

 

 

 

Investment loss before income taxes

     (0.08     (0.38

Income tax benefit

     (0.03     (0.13
  

 

 

   

 

 

 

Net investment loss

     (0.05     (0.25

Net realized and unrealized (loss) gain on investments

     (0.10     0.06  
  

 

 

   

 

 

 

Decrease in net asset value

     (0.15     (0.19

Net asset value, beginning of period

     5.16       5.35  
  

 

 

   

 

 

 

Net asset value, end of period

   $ 5.01     $ 5.16  
  

 

 

   

 

 

 

Per share market price, end of period

   $ 2.96     $ 3.16  
  

 

 

   

 

 

 

Total return based on market value

     (6.3 %)      (16.1 %) 

Total return based on net asset value

     (2.87 %)      (3.62 %) 

Supplemental data:

    

Ratio of operating expenses before income taxes to average net assets

     4.86     10.23

Ratio of operating expenses including income taxes to average net assets

     3.18     8.48

Ratio of net investment loss to average net assets

     (0.93 %)      (3.62 %) 

Portfolio turnover

     13.4     18.4

Net assets, end of period

   $ 31,692,476     $ 32,629,363  

Weighted shares outstanding, end of period

     6,321,988       6,325,792  

 

(1) Per share data are based on weighted average shares outstanding and the results are rounded to the nearest cent.

The Corporation’s interim period results could fluctuate as a result of a number of factors; therefore results for any interim period should not be relied upon as being indicative of performance for the full year or in future periods.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.

FORWARD LOOKING STATEMENTS

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by us from time to time, and forward-looking statements may be included in documents that are filed with the Securities and Exchange Commission. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part II, Item 1A of this report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

There may be other factors not identified that affect the accuracy of our forward-looking statements. Further, any forward-looking statement speaks only as of the date when it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and we cannot predict all of them.

Overview

We are an internally managed investment company that lends to and invests in small companies. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements as provided for in the 1940 Act and the rules and regulations promulgated thereunder. We have historically made the majority of our investments through our wholly-owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which is our initial small business investment company (“SBIC”) subsidiary and has been licensed by the U.S. Small Business Administration (“SBA”) since 2002.

Responding to our request submitted during 2016, the U.S. Small Business Administration (SBA) issued a “green light” or “go forth” letter authorizing us to continue our application process to obtain a license to form and operate a second SBIC subsidiary and create a new SBIC fund, Rand Capital SBIC II, L.P. (Rand SBIC II). We filed an application for Rand SBIC II in April 2017 and it is currently under review by the SBA. We funded Rand SBIC II with $7.5 million of cash from Rand Capital Corporation which, when combined with $15 million of expected SBA leverage, will create a new $22.5 million SBIC fund. We also expect Rand SBIC II to continue our investment strategy of focusing on privately-held, early stage and emerging growth businesses with proven management teams.

 

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Our initial wholly-owned subsidiary, Rand SBIC, has historically been our primary investment vehicle since its formation and, once approved by the SBA, we expect to continue this investment strategy through Rand SBIC II. Under the SBA’s pre-licensing approval protocols, we have begun investing using Rand SBIC II.

Outlook

We believe the combination of cash on hand, proceeds from portfolio exits, potential future SBA leverage, and prospective investment income provide sufficient capital for us to continue to add new investments to our portfolio while reinvesting in existing portfolio companies that demonstrate continued growth potential. The following short and long-term trends provide us confidence in our ability to grow Rand:

 

    We expect that well run businesses will require capital to grow and should be able to compete effectively given the low cost of capital, strong business and consumer spending, and eager reception of new technologies and service concepts.

 

    We are able to invest larger amounts in companies, which will provide an opportunity to accelerate our rate of growth.

 

    We continue to manage risk by investing with other investors, when possible.

 

    We are actively involved with the governance and management of our portfolio companies, which enables us to support their operating and marketing efforts and facilitate their growth.

 

    As our portfolio continues to expand, we are able to better leverage our infrastructure.

 

    We have sufficient cash to invest in new opportunities and to repurchase shares for the treasury. At quarter end, we had authorization to repurchase an additional 458,954 shares of our common stock. However, our preferred use of cash continues to be growing our portfolio.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. A summary of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2016 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Financial Condition

 

     September 30, 2017      December 31, 2016      Decrease      % Decrease  

Overview:

           

Total assets

   $ 39,830,404      $ 42,418,530      ($ 2,588,126      (6.1 %) 

Total liabilities

     8,137,928        9,789,167        (1,651,239      (16.9 %) 
  

 

 

    

 

 

    

 

 

    

Net assets

   $ 31,692,476      $ 32,629,363      ($ 936,887      (2.9 %) 
  

 

 

    

 

 

    

 

 

    

Net asset value per share (NAV) was $5.01 at September 30, 2017 and $5.16 at December 31, 2016.

Our gross outstanding SBA debentures at September 30, 2017 were $8,000,000 and will mature from 2022 through 2025. Cash approximated 20% of net assets at September 30, 2017 as compared to 38% at December 31, 2016.

Composition of Our Investment Portfolio

Our financial condition is dependent on the success of our portfolio holdings. We have invested substantially all of our assets in small to medium-sized companies. The following summarizes our investment portfolio at the dates indicated.

 

     September 30, 2017      December 31, 2016      Increase
(Decrease)
     % Increase
(Decrease)
 

Investments, at cost

   $ 35,814,220      $ 31,631,030      $ 4,183,190        13.2

Unrealized depreciation, net

     (5,118,532      (4,130,549      (987,983      (23.9 %) 
  

 

 

    

 

 

    

 

 

    

Investments at fair value

   $ 30,695,688      $ 27,500,481      $ 3,195,207        11.6
  

 

 

    

 

 

    

 

 

    

Our total investments at fair value, as estimated by management and approved by our Board of Directors, approximated 97% of net assets at September 30, 2017 versus 84% of net assets at December 31, 2016.

The change in investments during the nine months ended September 30, 2017, at cost, is comprised of the following:

 

     Cost
Increase
(Decrease)
 

New investments:

  

eHealth Global Technologies, Inc. (eHealth)

   $ 2,000,000  

Genicon, Inc. (Genicon)

     1,300,000  

SciAps, Inc. (Sciaps)

     250,000  

Mercantile Adjustment Bureau, LLC (Mercantile)

     100,000  

BeetNPath, LLC (Beetnpath)

     100,000  

Centivo Corporation (Centivo)

     100,000  

KnowledgeVision Systems, Inc. (Knowledge Vision)

     50,000  
  

 

 

 

Total of new investments

     3,900,000  

Other changes to investments:

  

Empire Genomics, LLC (Empire Genomics) interest conversion

     201,489  

Sciaps interest conversion

     24,274  

Microcision LLC (Microcision) interest conversion

     17,403  

Genicon OID amortization

     13,588  

Beetnpath interest conversion

     11,277  

GoNoodle, Inc. (GoNoodle) interest conversion

     7,662  

Mercantile OID amortization

     7,497  
  

 

 

 

Total of other changes to investments

     283,190  
  

 

 

 

Net change in investments, at cost

   $ 4,183,190  
  

 

 

 

 

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Table of Contents

Results of Operations

Our principal investment objective is to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments to fund expenses. Therefore, we invest in a variety of financial instruments to provide a current return on a portion of the investment portfolio.

Comparison of the three months ended September 30, 2017 to the three months ended September 30, 2016

Investment Income

 

     Three months
Ended
September 30,
2017
     Three months
ended
September 30,
2016
     Increase
(Decrease)
     % Increase
(Decrease)
 

Interest from portfolio companies

   $ 309,922      $ 224,038      $ 85,884        38.3

Interest from other investments

     6,348        11,974        (5,626      (47.0 %) 

Dividend and other investment income

     76,813        72,021        4,792        6.7

Fee income

     3,936        7,853        (3,917      (49.9 %) 
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 397,019      $ 315,886      $ 81,133        25.7
  

 

 

    

 

 

    

 

 

    

Interest from portfolio companies – Interest from portfolio companies was 38% higher during the three months ended September 30, 2017 versus the same period in 2016 due to the fact that we have originated more income-producing debt investments in the last year. These new debt instruments were originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Empire Genomics, LLC (Empire Genomics) and several other portfolio companies.

The following investments remain on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

Interest from other investments - The decrease in interest from other investments is primarily due to lower average cash balances during the three months ended September 30, 2017 versus the same period in 2016.

Dividend and other investment income - Dividend income is comprised of cash distributions from limited liability companies (LLCs) and corporations in which we have invested. Our investment agreements with certain LLCs require those LLCs to distribute funds to us for payment of income taxes on our allocable share of the LLC’s profits. These portfolio companies may also elect to make additional discretionary distributions. Dividend income will fluctuate based upon the profitability of these LLCs and corporations and the timing of the distributions or the impact of new investments or divestitures. The dividend distributions for the respective periods were:

 

    Three months
ended September 30,
2017
    Three months
ended September 30,
2016
 

Carolina Skiff LLC (Carolina Skiff)

  $ 41,999     $ 34,101  

New Monarch Machine Tool LLC (Monarch)

    27,409       27,409  

Tilson Technology Management, Inc. (Tilson)

    5,000       7,500  

Empire Genomics LLC (Empire Genomics)

    2,405       3,011  
 

 

 

   

 

 

 

Total dividend and other investment income

  $ 76,813     $ 72,021  
 

 

 

   

 

 

 

 

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Fee income - Fee income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of SBIC financings and income from portfolio company board attendance fees. The financing fees are amortized ratably over the life of the instrument associated with the fees. The unamortized fees are carried on the balance sheet under the line item “Deferred revenue.”

The income associated with the amortization of financing fees was $3,936 and $6,851 for the three months ended September 30, 2017 and 2016, respectively. The income from board fees was $0 and $1,000 for the three months ended September 30, 2017 and 2016, respectively.

Expenses

 

     Three months ended
September 30, 2017
     Three months ended
September 30, 2016
     Decrease      % Decrease  

Total expenses

   $ 439,048      $ 486,548      ($ 47,500      (9.8 %) 

Expenses predominately consist of interest expense on outstanding SBA borrowings, compensation expense, and general and administrative expenses, including stockholder and office operating expenses and professional fees.

The decrease in expenses during the three months ended September 30, 2017 versus the same period in 2016 was primarily caused by a 44% decrease in professional fees. Professional fees were higher during the three months ended September 30, 2016 versus the same period in 2017 because we incurred additional expenses in connection with implementing our long-term growth strategy. These expenses included external legal, tax consulting and other advisory expenses to support refinement of our strategy, which involved assessing options relative to the complex regulatory environment in which we operate.

Realized Gains and Losses on Investments

 

     Three months ended
September 30, 2017
     Three months ended
September 30, 2016
     Decrease  

Realized gain on investments before income taxes

   $ —        $ 1,412,500      ($ 1,412,500

There were no realized gains or losses during the three months ended September 30, 2017.

During the three months ended September 30, 2016, we recognized a gain on the escrow receivable related to the sale of Gemcor.

Change in Unrealized Depreciation or Appreciation of Investments

 

     Three months ended
September 30, 2017
     Three months ended
September 30, 2016
     Increase  

Change in unrealized depreciation or appreciation before income taxes

   $ 111,000      ($ 2,078,511    $ 2,189,511  

The change in unrealized depreciation, before income taxes, for the three months ended September 30, 2017 was comprised of the following:

 

     Three months
ended September 30,
2017
 

Athenex, Inc. (Athenex)

     111,000  
  

 

 

 

Total change in net unrealized depreciation of investments before income taxes during the three months ended September 30, 2017

   $ 111,000  
  

 

 

 

 

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Athenex completed an initial public offering (IPO) during the second quarter of 2017 and its shares of common stock are now publicly traded on the NASDAQ Global Select Market under the symbol “ATNX”. We hold 46,296 shares of the common stock of Athenex and valued these shares using the average bid price for the last three trading days of the reporting period, which was then discounted 10% due to restrictions on the sale of the shares. Subsequent to quarter end, the sale restrictions on our shares in Athenex common stock were removed and its shares were freely tradable.

The decrease in unrealized depreciation or appreciation before income taxes for the three months ended September 30, 2016 was comprised of the following:

 

     Three months
ended September 30,
2016
 

Reclassify Gemcor II, LLC (Gemcor) to a realized gain

   ($ 1,412,500

Statisfy, Inc. (Statisfy)

     (325,000

Teleservices Solutions Holdings, LLC (Teleservices)

     (595,340

Intrinsiq Materials, Inc. (Intrinsiq)

     254,329  
  

 

 

 

Total change in net unrealized depreciation of investments before income taxes during the three months ended September 30, 2016

   ($ 2,078,511
  

 

 

 

During the first quarter of 2016, Gemcor sold its assets and we received gross cash proceeds of approximately $14.1 million. The realized gain from the sale, before income taxes, was $14,588,813 and included $1,068,750 that was held in escrow at September 30, 2016. The escrow holdback is recorded in “Other Assets” on the accompanying consolidated statement of financial position.

The valuation of our investment in Statisfy was decreased after we reviewed the portfolio company and its financial condition and determined that a valuation adjustment was necessary.

Our investment in Teleservices was revalued after we reviewed their operations and their current and past financial performance. This review indicated that a further deterioration of their business had occurred. If the factors that led to this reduction in valuation are overcome, the value may be restored. The portfolio company remains in operation and is developing new business strategies.

Intrinsiq’s value was increased based on a financial analysis of the portfolio company, completed by management, indicating continued improved performance and the completion of an equity refinancing in the third quarter of 2016.

All of these value adjustments resulted from a review by our management using the guidance set forth by ASC 820 and our established valuation policy.

Net Increase (Decrease) in Net Assets from Operations

We account for our operations under GAAP for investment companies. The principal measure of our financial performance is “net increase (decrease) in net assets from operations” on our consolidated statements of operations. For the three months ended September 30, 2017 and 2016, the net increase (decrease) in net assets from operations was $57,931 and ($571,300), respectively.

 

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Comparison of the nine months ended September 30, 2017 to the nine months ended September 30, 2016

Investment Income

 

     Nine months
ended
September 30,
2017
     Nine months
ended
September 30,
2016
     Increase
(Decrease)
     %
Increase
(Decrease)
 

Interest from portfolio companies

   $ 833,653      $ 525,073      $ 308,580        58.8

Interest from other investments

     24,182        33,683        (9,501      (28.2 %) 

Dividend and other investment income

     197,403        152,818        44,585        29.2

Fee income

     19,557        18,949        608        3.2
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 1,074,795      $ 730,523      $ 344,272        47.1
  

 

 

    

 

 

    

 

 

    

Interest from portfolio companies – Interest from portfolio companies was 59% higher during the nine months ended September 30, 2017 versus the same period in 2016 due to the fact that we have originated more income-producing debt investments in the last year. These new debt instruments were originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Empire Genomics, LLC (Empire Genomics) and several other portfolio companies.

The following investments remain on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

Interest from other investments - The decrease in interest from other investments is primarily due to lower average cash balances during the nine months ended September 30, 2017 versus the same period in 2016.

Dividend and other investment income – The dividend distributions for the respective periods were:

 

    Nine months
ended September 30,

2017
    Nine months
ended September 30,

2016
 

Carolina Skiff LLC (Carolina Skiff)

  $ 141,372     $ 97,684  

New Monarch Machine Tool LLC (Monarch)

    27,409       27,409  

Tilson Technology Management, Inc. (Tilson)

    15,000       11,250  

Empire Genomics LLC (Empire Genomics)

    7,598       3,011  

SOMS Technologies, LLC (SOMS)

    6,024       13,464  
 

 

 

   

 

 

 

Total dividend and other investment income

  $ 197,403     $ 152,818  
 

 

 

   

 

 

 

Fee income - The income associated with the amortization of financing fees was $18,557 and $15,949 for the nine months ended September 30, 2017 and 2016, respectively. The income from board fees was $1,000 and $3,000 for the nine months ended September 30, 2017 and 2016, respectively.

Expenses

 

     Nine months ended
September 30, 2017
     Nine months ended
September 30, 2016
     Decrease      % Decrease  

Total expenses

   $ 1,562,620      $ 2,915,300      ($ 1,352,680      (46.4 %) 

The decrease in expenses during the nine months ended September 30, 2017 versus the same period in 2016 was primarily caused by a decrease of $1,411,659 in bonus and profit sharing expense related to the Gemcor II, LLC (Gemcor) exit in early 2016. However, we incurred higher professional fees during the nine months ended September 30, 2017 that were associated with the formation of our new SBIC fund.

Gemcor sold its assets in March 2016 and based on our ownership percentage, we received gross cash proceeds of approximately $13.8 million, excluding an escrow receivable, and realized a gain, before income taxes, of approximately $13.2 million from the sale. Related to this sale, we expensed $1,411,659 under our Profit Sharing Plan during the nine months ended September 30, 2016. There were no amounts earned pursuant to the Profit Sharing Plan for the nine months ended September 30, 2017.

 

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Realized Gains and Losses on Investments

 

     Nine months ended
September 30, 2017
     Nine months ended