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 June 30, 2018

 

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 August 2, 2018, 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 June 30, 2018 (Unaudited) and December 31, 2017

     3  
 

Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2018 and 2017 (Unaudited)

     4  
 

Consolidated Statements of Changes in Net Assets for the Three Months and Six Months Ended June 30, 2018 and 2017 (Unaudited)

     5  
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

     6  
 

Consolidated Schedule of Portfolio Investments as of June 30, 2018 (Unaudited)

     7  
 

Consolidated Schedule of Portfolio Investments as of December 31, 2017

     15  
 

Notes to the Consolidated Financial Statements (Unaudited)

     23  

Item 2.

 

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

     34  

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     42  

Item 4.

 

Controls and Procedures

     43  
  PART II. – OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     44  

Item 1A.

 

Risk Factors

     44  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     44  

Item 3.

 

Defaults upon Senior Securities

     44  

Item 4.

 

Mine Safety Disclosures

     44  

Item 5.

 

Other Information

     44  

Item 6.

 

Exhibits

     45  

 

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

 

     June 30, 2018     December 31,  
     (Unaudited)     2017  

ASSETS

    

Investments at fair value:

    

Control investments (cost of $99,500)

   $ 99,500     $ 99,500  

Affiliate investments (cost of $21,937,593 and $20,871,129, respectively)

     17,526,818       17,016,795  

Non-affiliate investments (cost of $15,903,520 and $15,718,690, respectively)

     14,701,108       15,167,767  
  

 

 

   

 

 

 

Total investments, at fair value (cost of $37,940,613 and $36,689,319, respectively)

     32,327,426       32,284,062  

Cash

     4,720,381       6,262,039  

Interest receivable (net of allowance: $237,641 at 6/30/18; $161,000 at 12/31/17)

     127,897       231,048  

Deferred tax asset

     898,903       551,863  

Prepaid income taxes

     740,086       762,047  

Other assets

     55,956       42,854  
  

 

 

   

 

 

 

Total assets

   $ 38,870,649     $ 40,133,913  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

    

Liabilities:

    

Debentures guaranteed by the SBA (net of debt issuance costs)

   $ 7,868,873     $ 7,855,173  

Profit sharing and bonus payable

     —         144,000  

Accounts payable and accrued expenses

     168,918       178,348  

Deferred revenue

     65,880       37,707  
  

 

 

   

 

 

 

Total liabilities

     8,103,671       8,215,228  

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

     686,304       686,304  

Capital in excess of par value

     10,581,789       10,581,789  

Accumulated net investment loss

     (1,808,243     (1,597,146

Undistributed net realized gain on investments

     27,215,738       27,215,738  

Net unrealized depreciation on investments

     (4,439,505     (3,498,895

Treasury stock, at cost: 541,046 shares

     (1,469,105     (1,469,105
  

 

 

   

 

 

 

Total stockholders’ equity (net assets) (per share $4.87 at 6/30/18; $5.05 at 12/31/17)

     30,766,978       31,918,685  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (net assets)

   $ 38,870,649     $ 40,133,913  
  

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three months     Three months     Six months     Six months  
     ended     ended     ended     ended  
     June 30, 2018     June 30, 2017     June 30, 2018     June 30, 2017  

Investment income:

        

Interest from portfolio companies:

        

Affiliate investments

   $ 175,990     $ 137,243     $ 323,026     $ 274,000  

Non-Control/Non-Affiliate investments

     139,710       140,397       290,022       249,731  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from portfolio companies

     315,700       277,640       613,048       523,731  

Interest from other investments:

        

Non-Control/Non-Affiliate investments

     7,735       6,859       12,845       17,834  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from other investments

     7,735       6,859       12,845       17,834  

Dividend and other investment income:

        

Affiliate investments

     76,266       53,024       127,049       115,397  

Non-Control/Non-Affiliate investments

     2,676       2,681       6,058       5,193  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other investment income

     78,942       55,705       133,107       120,590  

Fee income:

        

Affiliate investments

     4,416       3,167       7,583       4,084  

Non-Control/Non-Affiliate investments

     6,725       5,768       9,744       11,537  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     11,141       8,935       17,327       15,621  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     413,518       349,139       776,327       677,776  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Salaries

     169,875       165,413       339,749       330,826  

Employee benefits

     45,251       47,699       108,996       100,069  

Directors’ fees

     28,624       36,374       63,499       71,249  

Professional fees

     37,341       178,193       139,028       262,195  

Stockholders and office operating

     64,599       80,725       129,038       147,935  

Insurance

     6,900       6,258       18,888       17,560  

Corporate development

     10,646       11,609       26,442       33,317  

Other operating

     2,424       3,323       5,115       5,283  
  

 

 

   

 

 

   

 

 

   

 

 

 
     365,660       529,594       830,755       968,434  

Interest on SBA obligations

     77,269       77,569       154,838       155,138  

Bad debt expense

     30,741       —         76,641       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     473,670       607,163       1,062,234       1,123,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss before income taxes

     (60,152     (258,024     (285,907     (445,796
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit

     (22,384     (99,403     (74,810     (171,911
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (37,768     (158,621     (211,097     (273,885
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in unrealized depreciation on investments:

        

Affiliate investments

     (306,441     (665,675     (556,441     (665,675

Non-Control/Non-Affiliate investments

     (450,000     (52,664     (651,489     (433,308
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase in unrealized depreciation before income tax benefit

     (756,441     (718,339     (1,207,930     (1,098,983

Deferred income tax benefit

     (162,915     (241,623     (267,320     (378,050
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in unrealized depreciation on investments

     (593,526     (476,716     (940,610     (720,933
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized loss on investments

     (593,526     (476,716     (940,610     (720,933
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in net assets from operations

   ($ 631,294   ($ 635,337   ($ 1,151,707   ($ 994,818
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     6,321,988       6,321,988       6,321,988       6,321,988  

Basic and diluted net decrease in net assets from operations per share

   ($ 0.10   ($ 0.10   ($ 0.18   ($ 0.16

See accompanying notes

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

              
     Three months     Three months     Six months     Six months  
     ended     ended     ended     ended  
     June 30, 2018     June 30, 2017     June 30, 2018     June 30, 2017  

Net assets at beginning of period

   $ 31,398,272     $ 32,269,882     $ 31,918,685     $ 32,629,363  

Net investment loss

     (37,768     (158,621     (211,097     (273,885

Net increase in unrealized depreciation on investments

     (593,526     (476,716     (940,610     (720,933
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in net assets from operations

     (631,294     (635,337     (1,151,707     (994,818
  

 

 

   

 

 

   

 

 

   

 

 

 

Total decrease in net assets

     (631,294     (635,337     (1,151,707     (994,818
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 30,766,978     $ 31,634,545     $ 30,766,978     $ 31,634,545  
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated net investment loss

   ($ 1,808,243   ($ 1,851,733   ($ 1,808,243   ($ 1,851,733
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six months        
     ended     Six months  
     June 30,     ended  
     2018     June 30, 2017  

Cash flows from operating activities:

    

Net decrease in net assets from operations

   ($ 1,151,707   ($ 994,818

Adjustments to reconcile net decrease in net assets to net cash used in operating activities:

    

Investments in portfolio companies

     (1,225,000     (3,800,000

Proceeds from loan repayments

     70,131       —    

Increase in unrealized depreciation on investments

     1,207,930       1,098,983  

Deferred tax benefit

     (347,040     (519,163

Depreciation and amortization

     14,800       15,700  

Original issue discount amortization

     (19,271     (8,395

Non-cash conversion of debenture interest

     (77,154     (53,294

Change in interest receivable allowance

     76,641       —    

Changes in operating assets and liabilities:

    

Decrease (increase) in interest receivable

     26,510       (49,598

(Increase) decrease in other assets

     (14,202     537,995  

Decrease (increase) in prepaid income taxes

     21,961       (298,630

Decrease in income tax payable

     —         (320,008

Decrease in accounts payable and accrued expenses

     (21,430     (160,244

Decrease in profit sharing and bonus payable

     (132,000     (1,138,052

Increase in deferred revenue

     28,173       378  
  

 

 

   

 

 

 

Total adjustments

     (389,951     (4,694,328
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,541,658     (5,689,146
  

 

 

   

 

 

 

Net decrease in cash

     (1,541,658     (5,689,146

Cash:

    

Beginning of period

     6,262,039       12,280,140  
  

 

 

   

 

 

 

End of period

   $ 4,720,381     $ 6,590,994  
  

 

 

   

 

 

 

 

See accompanying notes

 

6


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018

(Unaudited)

 

Company, Geographic Location, Business

Description, (Industry) and Website

  

(a)

 

Type of Investment

  

(b)

      Date      

Acquired

  

(c)

 

Equity

         Cost           

    (d)(f)    

Fair

Value

    

  Percent  

of Net

Assets

Non-Control/Non-Affiliate Investments – 47.8% of

net assets: (j)

                 
ACV Auctions, Inc. (e)(g)    1,181,160 Series A Preferred    8/12/16    <1%          0.9%
Buffalo, NY. Live mobile wholesale auctions for new    shares.            $163,000        $282,356     

and used car dealers. (Software)

www.acvauctions.com

                 
Centivo Corporation (e)(g)    190,967 Series A-1 Preferred    7/5/17    <1%          1.0%
New York, NY. Tech-enabled health solutions    shares.            200,000        200,000     
company that helps self-insured employers and their    337,808 Series A-2 Preferred               
employees save money and have a better experience.    shares.            101,342        101,342     
(Health Care)    Total Centivo                    301,342        301,342     
www.centivo.com                  
eHealth Global Technologies, Inc. (g)    $3,500,000 Term Notes at 10%    6/28/16    0%          11.4%
Henrietta, NY. eHealth Connect® improves health    due September 2, 2019.            3,500,000        3,500,000     

care delivery through intelligently aggregated

clinical record and images for patient referrals.

                 

(Health Care)

www.ehealthtechnologies.com

                 
Empire Genomics, LLC (h)(g)    $1,101,489 Senior Secured    6/13/14    0%          2.2%
Buffalo, NY. Molecular diagnostics company that    Convertible Term Notes at 10%               
offers a comprehensive menu of assay services for    due April 30, 2018.            1,101,489        450,000     
diagnosing and guiding patient therapeutic treatments.    $250,000 Promissory Note at 12%               
(Health Care)    due December 31, 2019.                228,334          228,334     
www.empiregenomics.com    Total Empire                    1,329,823        678,334     
GoNoodle, Inc. (g)(m)    $1,000,000 Secured Note at 12%    2/6/15    <1%          3.3%
(Formerly Health Teacher, Inc.)    due January 31, 2020, (1%               
Nashville, TN. Student engagement education    Payment in Kind (PIK)).            1,034,484        1,034,484     
software providing core aligned physical activity    Warrant for 47,324 Series C               
breaks. (Software)    Preferred shares.                        25                    25     
www.gonoodle.com    Total GoNoodle                    1,034,509        1,034,509     
Mercantile Adjustment Bureau, LLC (g)    $1,199,039 Subordinated Secured    10/22/12    4%          3.1%
Williamsville, NY. Full service accounts receivable    Note at 13% (3% for the calendar               
management and collections company.    year 2018) due January 31, 2019.            1,199,040        949,040     
(Contact Center)    (e) $150,000 Subordinated               
www.mercantilesolutions.com    Debenture at 8% due June 30,               
   2018.            150,000        -     
   Warrant for 3.29% Membership               
   Interests. Option for 1.5%               
   Membership Interests.                97,625                     -     
   (i) Interest receivable $53,069.               
   Total Mercantile                    1,446,665        949,040     
Outmatch Holdings, LLC (e)(g)    2,693,224 Class P1 Units.    11/18/10    4%      2,140,007        2,140,007      7.0%
(Chequed Holdings, LLC)    109,788 Class C1 Units.                   5,489               5,489     
Dallas, TX. Web based predictive employee selection    Total Outmatch                    2,145,496        2,145,496     

and reference checking. (Software)

www.outmatch.com

                 
PostProcess Technologies LLC (e)(g)    $300,000 Convertible Promissory    7/25/16    0%          1.0%
Buffalo, NY. Provides innovative solutions for the    Note at 5% due July 28, 2018.            300,000        300,000     
post-processing of additive manufactured 3D parts.                  

(Manufacturing)

www.postprocess.com

                 

 

7


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

     (a)    (b)    (c)               (d)(f)            Percent  
Company, Geographic Location, Business               Date                                         Fair      of Net

Description, (Industry) and Website

  

Type of Investment

  

Acquired

  

Equity

   Cost     

Value

    

Assets

Rheonix, Inc. (e)    9,676 Common shares.    10/29/09    4%      -        11,000      9.6%
Ithaca, NY. Developer of fully automated    (g) 1,839,422 Series A preferred               
microfluidic based molecular assay and diagnostic    shares.            2,099,999        2,165,999     
testing devices. (Health Care)    (g) 50,593 Common shares.            -        59,000     
www.rheonix.com    (g) 589,420 Series B Preferred shares.                  702,732             702,732     
   Total Rheonix              2,802,731          2,938,731     
SocialFlow, Inc. (e)(g)    1,049,538 Series B Preferred shares.    4/5/13    4%      500,000        731,431      6.7%
New York, NY. Provides instant analysis of social    1,204,819 Series B-1 Preferred shares.            750,000        839,648     
networks using a proprietary, predictive analytic    717,772 Series C Preferred shares.                 500,000             500,221     
algorithm to optimize advertising and publishing.    Total Social Flow              1,750,000          2,071,300     

(Software)

www.socialflow.com

                 
Somerset Gas Transmission Company, LLC (e)    26.5337 Units.    7/10/02    3%      719,097        500,000      1.6%
Columbus, OH. Natural gas transportation.                  

(Oil and Gas)

www.somersetgas.com

                 
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                  
              $15,903,520        $14,701,108     
Affiliate Investments – 57.0% of net assets (k)                  
BeetNPath, LLC (Grainful) (e)(g)    1,119,024 Series A-2 Preferred    10/20/14    9%          2.1%
Ithaca, NY. Frozen entrées and packaged dry side    Membership Units.            $359,000        $359,000     
dishes made from 100% whole grain steel cut oats    1,032,918 Series B Preferred               
under Grainful brand name. (Consumer Product)    Membership Units.            261,277        291,000     
www.grainful.com    Total BeetNPath            620,277        650,000     
Carolina Skiff LLC (g)    6.0825% Class A Common    1/30/04    7%          5.7%
Waycross, GA. Manufacturer of fresh water,    Membership Interest.            15,000        1,750,000     
ocean fishing and pleasure boats.                  

(Manufacturing)

www.carolinaskiff.com

                 
ClearView Social, Inc. (e)(g)    312,500 Series Seed Plus Preferred    1/4/16    6%          0.7%
Buffalo, NY. Social media publishing tool for law,    shares.            200,000        200,000     

CPA and professional firms. (Software)

www.clearviewsocial.com

                 
First Wave Products Group, LLC (e)(g)    $500,000 Senior Term Notes at 10%    4/19/12    7%          0.0%
Batavia, NY. Sells First Crush automated pill    due July 31, 2017.            661,563        -     
crusher that crushes and grinds medical pills for    $280,000 Junior Term Notes at 10%               
nursing homes and medical institutions. (Health    due July 31, 2017.            316,469        -     
Care)    Warrant for 41,619 Capital Securities.                22,000        -     
www.firstwaveproducts.com    Total First Wave            1,000,032        -     
Genicon, Inc. (g) (m)    1,586,902 Series B Preferred shares.    4/10/15    6%      1,000,000        1,000,000      13.3%
Winter Park, FL. Designs, produces and    $3,000,000 Promissory Notes at 10%               
distributes patented surgical instrumentation.    due May 1, 2020, (8% Payment in               
(Health Care)    Kind (PIK)).            2,984,127        2,984,127     
www.geniconendo.com    Warrant for 250,000 Common shares.            80,000        80,000     
   Warrant for 125,000 Common shares.                 40,000             40,000     
   Total Genicon            4,104,127        4,104,127     

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

    (a)    (b)    (c)                 (d)(f)            Percent  
Company, Geographic Location, Business              Date                                           Fair      of Net
Description, (Industry) and Website   Type of Investment    Acquired     Equity    Cost        Value      Assets
GiveGab, Inc. (e)(g)   5,084,329 Series Seed Preferred shares.    3/13/13    6%      616,221          616,221      2.0%

Ithaca, NY. Online fundraising, day of giving

supporter engagement software for non-profit

organizations. (Software)

www.givegab.com

                  
G-TEC Natural Gas Systems (e)   16.639% Class A Membership Interest.    8/31/99    17%            0.3%
Buffalo, NY. Manufactures and distributes   8% cumulative dividend.            400,000          100,000     

systems that allow natural gas to be used as an

alternative fuel to gases. (Manufacturing)

www.gas-tec.com

                  
Intrinsiq Materials, Inc. (e)(g)   4,161,747 Series A Preferred shares.    9/19/13    12%      1,125,673          400,000      1.3%

Rochester, NY. Produces printable electronics

utilizing a unique process of nanomaterial based

ink in a room-temperature environment.

                  

(Manufacturing)

www.intrinsiqmaterials.com

                  
Knoa Software, Inc. (h)(g)   973,533 Series A-1 Convertible    11/20/12    7%            4.0%
New York, NY. End user experience   Preferred shares.            750,000          750,000     
management and performance (EMP) solutions   1,876,922 Series B Preferred shares.                479,155              479,155     
utilizing enterprise applications. (Software)   Total Knoa            1,229,155          1,229,155     
www.knoa.com                   
KnowledgeVision Systems, Inc. (g)   200,000 Series A-1 Preferred shares.    11/13/13    7%      250,000          -      4.3%
Lincoln, MA. Online presentation and training   214,285 Series A-2 Preferred shares.            300,000          300,000     
software. (Software)   129,033 Series A-3 Preferred shares.            165,001          165,001     
www.knowledgevision.com   Warrant for 46,743 Series A-3 shares.            35,000          35,000     
  $75,000 Subordinated Promissory Notes                 
  at 8% payable on demand of majority of                 
  holders after August 31, 2019.(e)            75,000          75,000     
  $750,000 Replacement Term Note at                 
  11% due April 30, 2021.                750,000              750,000     
  Total KnowledgeVision            1,575,001          1,325,001     
Mezmeriz, Inc. (e)(g)   1,554,565 Series Seed Preferred shares.    1/9/08    14%      742,850          351,477      1.1%
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

                  
Microcision LLC (g)(m)   $1,500,000 Subordinated Promissory    9/24/09    15%            6.3%
Pennsauken Township, NJ. Manufacturer of   Note at 12% (1% PIK) due December                 
precision machined medical implants,   31, 2024.            1,923,722          1,923,722     
components and assemblies. (Manufacturing)   15% Class A Common Membership                 
www.microcision.com   Interest.                          -                        -     
  Total Microcision            1,923,722          1,923,722     
New Monarch Machine Tool, Inc. (g)   22.84 Common shares.    9/24/03    15%      22,841          22,841      0.1%

Cortland, NY. Manufactures and services

vertical/horizontal machining centers.

                  
(Manufacturing)                   
www.monarchmt.com                   

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

    (a)    (b)    (c)             (d)(f)          Percent  
Company, Geographic Location, Business              Date                                       Fair    of Net
Description, (Industry) and Website   Type of Investment    Acquired    Equity    Cost    Value    Assets
OnCore Golf Technology, Inc. (e)(g)   150,000 Series AA Preferred shares.    12/31/14    9%    375,000      -      1.0%
Buffalo, NY. Maker of patented golf balls.   $300,000 Subordinated Convertible               
(Consumer Product)   Promissory Notes at 6% due January 24,               
www.oncoregolf.com   2018.               
  (i) Interest receivable $50,342.          300,000      300,000     
  Total OnCore          675,000      300,000     
SciAps, Inc. (e)(g)   187,500 Series A Preferred shares.    7/12/13    6%    1,500,000      700,000      6.6%
Woburn, MA. Instrumentation company   274,299 Series A-1 Convertible               
producing portable analytical devices using XRF,   Preferred shares.          504,710      250,000     
LIBS and RAMAN spectroscopy to identify   117,371 Series B Convertible Preferred               
compounds, minerals, and elements.   shares.          250,000      250,000     
(Manufacturing)   113,636 Series C Convertible Preferred               
www.sciaps.com   shares.          175,000      175,000     
  369,698 Series C-1 Convertible               
  Preferred shares.          399,274      399,274     
  147,059 Series D Convertible Preferred               
  shares.             250,000         250,000     
  Total SciAps          3,078,984      2,024,274     
SOMS Technologies, LLC (e)(g)   5,959,490 Series B Membership    12/2/08    9%          0.1%
Valhalla, NY. Produces and markets the   Interests.          472,632      30,000     
microGreen Extended Performance Oil Filter.                 

(Consumer Products)

www.microgreenfilter.com

                
Teleservices Solutions Holdings, LLC (e)   250,000 Class B Preferred Units.    5/30/14    6%    250,000      -      0.0%
(g)(m)   1,000,000 Class C Preferred Units.          1,190,680      -     
Montvale, NJ. Customer contact center   80,000 Class D Preferred Units.          91,200      -     
specializing in customer acquisition and retention   104,198 Class E Preferred Units.              104,198      -     
for selected industries. (Contact Center)   PIK dividend for Series C and D at 12%               
www.ipacesetters.com   and 14%, respectively.               
  Total Teleservices          1,636,078      -     
Tilson Technology Management, Inc. (g)   120,000 Series B Preferred shares.    1/20/15    11%    600,000      600,000      8.1%
Portland, ME. Cellular, fiber optic and wireless   21,391 Series C Convertible Preferred               
information systems, construction, and   shares.          200,000      200,000     
management. (Professional Services)   $200,000 Subordinated Promissory               
www.tilsontech.com   Note at 8% due September 28, 2021.          200,000      200,000     
  65,790 Series D Preferred shares.          750,000      750,000     
  $750,000 Subordinated Promissory               
  Note at 8% due December 1, 2022.             750,000         750,000     
  Total Tilson          2,500,000      2,500,000     
                
Subtotal Affiliate Investments            $21,937,593      $17,526,818     
Control Investments – 0.3% of net assets (l)                 
Advantage 24/7 LLC (e)(g)   45% Membership Interest.    12/30/10    45%    $99,500      $99,500      0.3%
Williamsville, NY. Marketing program for wine                 
and spirits dealers. (Marketing Company)                 
www.advantage24-7.com                 
                              

 

Subtotal Control Investments

          

 

$99,500

     $99,500     
TOTAL INVESTMENTS – 105.1%            $37,940,613      $32,327,426     
OTHER ASSETS IN EXCESS OF LIABILITIES – (5.1%)                       (1,560,448)     
                      
NET ASSETS – 100%                       $30,766,978     
                      

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

Notes to the Consolidated Schedule of Portfolio Investments

 

(a)

At June 30, 2018, 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 date 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 June 30, 2018, 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 reporting period. 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 June 30, 2018 the total cost of investment securities was approximately $37.9 million. Net unrealized depreciation was approximately ($5.6) million, which was comprised of $1.9 million of unrealized appreciation of investment securities and ($7.5) million of unrealized depreciation of investment securities. At June 30, 2018, the aggregate gross unrealized gain for federal income tax purposes was $2.5 million and the aggregate gross unrealized loss for federal income tax purposes was ($7.0) million. The net unrealized loss for federal income tax purposes was ($4.5) million based on a tax cost of $36.8 million.

(g)

Rand Capital SBIC, Inc. investment.

(h)

Reduction in cost and value from previously reported balances reflects current principal repayment.

(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.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

  Investments in and Advances to Affiliates

 

 

                                              Amount of    
                                     Net      Interest/  
          December             Gross     June 30,        Realized        Dividend/  
          31, 2017      Gross        Reductions         2018 Fair        Gains      Fee Income  
Company    Type of Investment      Fair Value          Additions (1)        (2)     Value      (Losses)      (3)  
Control Investments:                    
Advantage 24/7 LLC    45% Membership interest.      $99,500        $-        $-       $99,500        $-        $-  
   Total Control Investments        $99,500        $-        $-       $99,500        -        $-  
Affiliate Investments:                    
BeetNPath, LLC    1,119,024 Series A-2 Preferred Membership                 
   Units.      $359,000        $-        $-       $359,000        -        $-  
   1,032,918 Series B Preferred Membership                 -     
   Units.      291,000        -        -       291,000        -        -  
   Total BeetNPath        650,000        -        -       650,000        -        -  
Carolina Skiff LLC    6.0825% Class A common membership                 
   interest.      1,750,000        -        -       1,750,000        -        80,264  
ClearView Social, Inc.    312,500 Series seed plus preferred shares.      200,000        -        -       200,000        -        -  
First Wave Products    $500,000 senior term notes at 10%.      250,000        -        (250,000     -        -        -  
Group, LLC    $280,000 junior term notes at 10%.      -        -        -       -        -        -  
   Warrant for 41,619 capital securities.                  -        -        -       -        -        -  
   Total First Wave        250,000        -        (250,000     -        -        -  
Genicon, Inc.    1,586,902 Series B preferred shares.      1,000,000        -        -       1,000,000        -        -  
   $3,000,000 promissory notes at 8%.      2,903,779        80,348        -       2,984,127        -        159,950  
   Warrant for 250,000 common shares      80,000        -        -       80,000        -        -  
   Warrant for 125,000 common shares           40,000                  -        -            40,000        -                   -  
   Total Genicon        4,023,779        80,348        -       4,104,127        -        159,950  
GiveGab, Inc.    5,084,329 Series Seed preferred shares.      424,314        191,907        -       616,221        -        -  
G-TEC Natural Gas    16.639% Class A membership interest. 8%                 
Systems    cumulative dividend.      100,000        -        -       100,000        -        -  
Intrinsiq Materials,    4,161,747 Series A preferred shares.      400,000        -        -       400,000        -        -  
Inc.                    
Knoa Software, Inc.    973,533 Series A-1 convertible preferred                 
   shares.      750,000        -        -       750,000        -        -  
   1,876,922 Series B preferred shares.      479,155        -        -       479,155        -        -  
   $48,466 convertible promissory note at 8%.           48,466        -        (48,466                    -        -        773  
   Total Knoa        1,277,621        -        (48,466     1,229,155        -        773  
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        -        -  
   $75,000 subordinated promissory notes at 8%      50,000        25,000        -       75,000        -        2,383  
   $750,000 replacement term note at 11%      -        750,000        -       750,000        -        12,823  
   Warrant for 46,743 Series A-3 shares.        35,000                   -        -          35,000        -                  -  
   Total Knowledge        550,001        775,000        -       1,325,001        -        15,206  
   Vision                   
Mezmeriz, Inc.    1,554,565 Series seed preferred shares.      351,477        -        -       351,477        -        -  
Microcision LLC    $1,500,000 subordinated promissory note at                 
   12% (1% PIK).      1,914,140        9,582        -       1,923,722        -        114,992  
New Monarch    22.84 common shares.      22,841        -        -       22,841        -        29,409  
Machine Tool, Inc.                    

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

  Investments in and Advances to Affiliates

 

                                     Net      Amount of
            December 31,        Gross      Gross       June 30, 2018        Realized      Interest/
     Type of Investment    2017 Fair        Additions          Reductions       Fair Value      Gains      Dividend/
Company          Value      (1)      (2)               (Losses)          Fee Income (3)  

  OnCore Golf

   150,000 Series AA preferred shares.      -        -        -       -        -        -  

  Technology, Inc.

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

  SciAps, Inc.

   187,500 Series A convertible preferred                 
   shares.      700,000        -        -       700,000        -        -  
   274,299 Series A-1 convertible preferred                 
   shares.      250,000        -        -       250,000        -        -  
   117,371 Series B convertible preferred                 
   shares.      250,000        -        -       250,000        -        -  
   113,636 Series C preferred shares.      175,000        -        -       175,000        -        -  
   369,698 Series C-1 preferred shares.      399,274        -        -       399,274        -        -  
   147,059 Series D shares                    -        250,000        -          250,000        -        -  
   Total SciAps          1,774,274        250,000        -       2,024,274        -        -  

  SOMS

   5,959,490 Series B membership interests.      528,348        -        (498,348     30,000        -        -  

  Technologies, LLC

                   

  Teleservices

   250,000 Class B preferred units.      -        -        -       -        -        -  

  Solutions

   1,000,000 Class C preferred units.      -        -        -       -        -        -  

  Holdings, LLC

   80,000 Class D preferred units.      -        -        -       -        -        -  
   104,198 Class E preferred units.      -        -        -       -        -        -  
   Total Teleservices          -        -        -       -        -        -  

  Tilson Technology

   120,000 Series B preferred shares.      600,000        -        -       600,000        -        10,000  

  Management, Inc.

   21,391 Series C convertible preferred                 
   shares.      200,000        -        -       200,000        -        -  
   $200,000 subordinated promissory note at 8%.      200,000        -        -       200,000        -        7,934  
   65,790 Series D preferred shares.      750,000        -        -       750,000        -        9,376  
   $750,000 subordinated promissory note at 8%.         750,000        -        -          750,000        -        29,754  
   Total Tilson          2,500,000        -        -       2,500,000        -        57,064  
   Total Affiliate Investments          $17,016,795        $1,306,837        ($796,814)           $17,526,818        $-        $457,658  
   Total Control and Affiliate Investments          $17,116,295        $1,306,837        ($796,814)           $17,626,318        $-        $457,658    
                                                       

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.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2018 (Continued)

(Unaudited)

 

 

 

 

Industry Classification

  

Percentage of Total

Investments (at fair value)

as of June 30, 2018

Healthcare

   35.7%

Software

   27.5

Manufacturing

   20.2

Professional Services

   7.7

Consumer Product

   3.0

Contact Center

   2.9

Oil and Gas

   1.6

Electronics

   1.1

Marketing

   0.3
  

 

Total Investments

   100%
  

 

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017

 

Company, Geographic Location, Business

Description, (Industry) and Website

  

(a)

 

Type of Investment

  

(b)

      Date      

Acquired

    

(c)

 

Equity

        Cost           

    (d)(f)    

Fair

Value

    

  Percent  

of Net

Assets

Non-Control/Non-Affiliate Investments – 47.5% of

net assets: (j)

                
ACV Auctions, Inc. (e)(g)    1,181,160 Series A preferred      8/12/16      <1%         0.9%
Buffalo, NY. Live mobile wholesale auctions for new    shares.           $163,000        $282,356     

and used car dealers. (Software)

www.acvauctions.com

                
Centivo Corporation (e)(n)    $100,000 convertible unsecured      7/5/17      0%         0.3%
New York, NY. Tech-enabled health solutions    note at 2% due February 1, 2019.           100,000        100,000     

company that helps self-insured employers and

their employees save money and have a better experience.

(Health Care)

                
eHealth Global Technologies, Inc.    (g) $1,500,000 term note at 10%      6/28/16      0%         11.0%
Henrietta, NY. eHealth Connect® improves health    due September 2, 2019.           1,500,000        1,500,000     
care delivery through intelligently aggregated clinical    (n) $2,000,000 term note at 10%              
record and images for patient referrals.    due September 2, 2019.           2,000,000        2,000,000     
(Health Care)    Total eHealth           3,500,000        3,500,000     
www.ehealthtechnologies.com                 
Empire Genomics, LLC (g)    $1,101,489 senior secured      6/13/14      0%         4.2%
Buffalo, NY. Molecular diagnostics company that    convertible term notes at 10% due              
offers a comprehensive menu of assay services for    April 30, 2018.           1,101,489        1,101,489     
diagnosing and guiding patient therapeutic treatments.    $250,000 promissory note at 12%              
(Health Care)    due December 31, 2019.              250,000           250,000     
www.empiregenomics.com    (i) Interest receivable $65,906.              
   Total Empire           1,351,489        1,351,489     
GoNoodle, Inc. (g)(m)    $1,000,000 secured note at 12%      2/6/15      <1%         3.2%
(Formerly HealthTeacher, Inc.)    due January 31, 2020, (1%              
Nashville, TN. Student engagement education    Payment in Kind (PIK)).           1,029,330        1,029,330     
software providing core aligned physical activity    Warrant for 47,324 Series C              
breaks. (Software)    Preferred shares.                       25                    25     
www.gonoodle.com    Total GoNoodle           1,029,355        1,029,355     
Mercantile Adjustment Bureau, LLC (g)    $1,199,039 subordinated secured      10/22/12      4%         3.0%
Williamsville, NY. Full service accounts receivable    note at 13% (3% for the calendar              
management and collections company.    year 2017) due January 31, 2018.           1,199,040        949,040     
(Contact Center)    (e) $150,000 subordinated              
www.mercantilesolutions.com    debenture at 8% due June 30,              
   2018.           150,000        -     
   Warrant for 3.29% membership              
   interests. Option for 1.5%              
   membership interests.                97,625                    -     
   (i) Interest receivable $55,983.              
   Total Mercantile           1,446,665        949,040     

Outmatch Holdings, LLC (e)(g)

   2,641,899 Class P1 Units.      11/18/10      4%     2,140,007        2,140,007      6.7%

(Chequed Holdings, LLC)

   109,788 Class C1 Units.                   5,489                5,489     

Dallas, TX. Web based predictive employee selection

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

and reference checking. (Software)

www.outmatch.com

                

PostProcess Technologies LLC (e)(g)

   $300,000 convertible promissory      7/25/16      0%         0.9%

Buffalo, NY. Provides innovative solutions for the

   note at 5% due July 28, 2018.           300,000        300,000     

post-processing of additive manufactured 3D parts.

                

(Manufacturing)

www.postprocess.com

                

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

 

Company, Geographic Location, Business

Description, (Industry) and Website

  

(a)

 

Type of Investment

  

(b)

      Date      

Acquired

    

(c)

 

Equity

        Cost           

    (d)(f)    

Fair

Value

    

  Percent  

of Net

Assets

Rheonix, Inc. (e)

   9,676 common shares.      10/29/09      4%     -        11,000      9.2%

Ithaca, NY. Developer of fully automated

   (g) 1,839,422 Series A preferred              

microfluidic based molecular assay and diagnostic

   shares.           2,099,999        2,165,999     

testing devices. (Health Care)

   (g) 50,593 common shares.           -        59,000     

www.rheonix.com

   (g) 589,420 Series B preferred shares.               702,732            702,732     
   Total Rheonix              2,802,731         2,938,731     

SocialFlow, Inc. (e)(g)

   1,049,538 Series B preferred shares.      4/5/13      4%     500,000        731,431      6.5%

New York, NY. Provides instant analysis of social

   1,204,819 Series B-1 preferred shares.           750,000        839,648     

networks using a proprietary, predictive analytic

   717,772 Series C preferred shares.               500,000            500,221     

algorithm to optimize advertising and publishing.

   Total Social Flow              1,750,000         2,071,300     

(Software)

www.socialflow.com

                

Somerset Gas Transmission Company, LLC (e)

   26.5337 units.      7/10/02      3%     719,097        500,000      1.6%

Columbus, OH. Natural gas transportation.

                

(Oil and Gas)

www.somersetgas.com

                

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

                
                   
             $15,718,690        $15,167,767     
                   

Affiliate Investments – 53.3% of net assets (k)

                

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

   1,119,024 Series A-2 Preferred      10/20/14      9%         2.0%

Ithaca, NY. Frozen entrées and packaged dry side

   Membership Units.           $359,000        $359,000     

dishes made from 100% whole grain steel cut oats

   1,032,918 Series B Preferred              

under Grainful brand name. (Consumer Product)

   Membership Units.           261,277        291,000     

www.grainful.com

   Total BeetNPath             620,277        650,000     

Carolina Skiff LLC (g)

   6.0825% Class A common      1/30/04      7%         5.5%

Waycross, GA. Manufacturer of fresh water,

   membership interest.           15,000        1,750,000     

ocean fishing and pleasure boats.

                

(Manufacturing)

www.carolinaskiff.com

                

ClearView Social, Inc. (e)(g)

   312,500 Series seed plus preferred      1/4/16      6%         0.6%

Buffalo, NY. Social media publishing tool for law,

   shares.           200,000        200,000     

CPA and professional firms. (Software)

www.clearviewsocial.com

                

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

   $500,000 senior term notes at 10% due      4/19/12      7%         0.8%

Batavia, NY. Sells First Crush automated pill

   July 31, 2017.           661,563        250,000     

crusher that crushes and grinds medical pills for

   $280,000 junior term notes at 10% due              

nursing homes and medical institutions. (Health

   July 31, 2017.           316,469        -     

Care)

   Warrant for 41,619 capital securities.                22,000                    -     

www.firstwaveproducts.com

   Total First Wave             1,000,032        250,000     

Genicon, Inc.

   (g) 1,586,902 Series B preferred shares.      4/10/15      6%     1,000,000        1,000,000      12.6%

Winter Park, FL. Designs, produces and

   (g) $2,000,000 promissory note at 8%              

distributes patented surgical instrumentation.

   due May 1, 2020.           1,936,002        1,936,002     

(Health Care)

   (g) Warrant for 250,000 common              

www.geniconendo.com

   shares.           80,000        80,000     
   (n) $1,000,000 promissory note at 8%              
   due May 1, 2020.           967,777        967,777     
   (n) Warrant for 125,000 common              
   shares.                40,000             40,000     
   Total Genicon             4,023,779        4,023,779     

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

 

     (a)    (b)    (c)              (d)(f)            Percent  
Company, Geographic Location, Business               Date                                        Fair      of Net

Description, (Industry) and Website

  

Type of Investment

  

Acquired

  

Equity

 

Cost

    

Value

    

Assets

GiveGab, Inc. (e)(g)    5,084,329 Series Seed preferred shares.    3/13/13    6%     616,221        424,314      1.3%

Ithaca, NY. Online fundraising, day of giving

supporter engagement software for non-profit

organizations. (Software)

www.givegab.com

                
G-TEC Natural Gas Systems (e)    16.639% Class A membership interest.    8/31/99    17%         0.3%
Buffalo, NY. Manufactures and distributes    8% cumulative dividend.           400,000        100,000     

systems that allow natural gas to be used as

an alternative fuel to gases. (Manufacturing)

www.gas-tec.com

                
Intrinsiq Materials, Inc. (e)(g)    4,161,747 Series A preferred shares.    9/19/13    12%     1,125,673        400,000      1.3%

Rochester, NY. Produces printable electronics

utilizing a unique process of nanomaterial based

ink in a room-temperature environment.

(Manufacturing)

www.intrinsiqmaterials.com

                
Knoa Software, Inc. (g)    973,533 Series A-1 convertible    11/20/12    7%         4.0%
New York, NY. End user experience    preferred shares.           750,000        750,000     
management and performance (EMP) solutions    1,876,922 Series B preferred shares.           479,155        479,155     
utilizing enterprise applications. (Software)    $48,466 convertible promissory note at              
www.knoa.com    8% due May 9, 2018.           48,466        48,466     
   Total Knoa           1,277,621        1,277,621     
KnowledgeVision Systems, Inc. (e)(g)    200,000 Series A-1 preferred shares.    11/13/13    7%     250,000        -      1.7%
Lincoln, MA. Online presentation and training    214,285 Series A-2 preferred shares.           300,000        300,000     
software. (Software)    129,033 Series A-3 preferred shares.           165,001        165,001     
www.knowledgevision.com    Warrant for 46,743 Series A-3 shares.           35,000        35,000     
   $50,000 subordinated promissory note              
   at 8% payable on demand of majority of              
   noteholders after August 31, 2017.             50,000          50,000     
   Total KnowledgeVision           800,001        550,001     
Mezmeriz, Inc. (e)(g)    1,554,565 Series Seed preferred shares.    1/9/08    14%     742,850        351,477      1.1%

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

                
Microcision LLC (g)(m)    $1,500,000 subordinated promissory    9/24/09    15%         6.0%
Pennsauken Township, NJ. Manufacturer of    note at 12% (1% PIK) due December              
precision machined medical implants,    31, 2024.           1,914,140        1,914,140     
components and assemblies. (Manufacturing)    15% Class A common membership              
www.microcision.com    interest.           -        -     
   Total Microcision           1,914,140        1,914,140     
New Monarch Machine Tool, Inc. (g)    22.84 common shares.    9/24/03    15%     22,841        22,841      0.1%

Cortland, NY. Manufactures and services

vertical/horizontal machining centers.

(Manufacturing)

www.monarchmt.com

                

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

    

 

     (a)    (b)      (c)                (d)(f)           Percent    
Company, Geographic Location, Business               Date                                            Fair     of Net  

Description, (Industry) and Website

  

Type of Investment

  

Acquired

    

Equity

   

Cost

    

Value

   

Assets

 

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

   150,000 Series AA preferred shares.      12/31/14        9%       375,000        -       0.9%  

Buffalo, NY. Maker of patented golf balls.

   $300,000 subordinated convertible             

(Consumer Product)

   promissory notes at 6% (10% for             

www.oncoregolf.com

   calendar year 2017) due January 24, 2018.             
   (i) Interest receivable $50,342.           300,000        300,000    
   Total OnCore           675,000        300,000    

SciAps, Inc. (e)(g)

   187,500 Series A convertible preferred      7/12/13        8%            5.6%  

Woburn, MA. Instrumentation company

   shares.           1,500,000        700,000    

producing portable analytical devices using XRF,

   274,299 Series A-1 convertible             

LIBS and RAMAN spectroscopy to identify

   preferred shares.           504,710        250,000    

compounds, minerals, and elements.

   117,371 Series B convertible preferred             

(Manufacturing)

   shares.           250,000        250,000    

www.sciaps.com

   113,636 Series C preferred shares.           175,000        175,000    
   369,698 Series C-1 preferred shares.              399,274           399,274    
   Total SciAps           2,828,984        1,774,274    

SOMS Technologies, LLC (e)(g)

   5,959,490 Series B membership      12/2/08        9%            1.7%  

Valhalla, NY. Produces and markets the

   interests.           472,632        528,348    

microGreen Extended Performance Oil Filter.

               

(Consumer Products)

www.microgreenfilter.com

               

Teleservices Solutions Holdings, LLC (e)

   250,000 Class B preferred units.      5/30/14        6%       250,000        -       0.0%  

(g)(m)

   1,000,000 Class C preferred units.           1,190,680        -    

Montvale, NJ. Customer contact center

   80,000 Class D preferred units.           91,200        -    

specializing in customer acquisition and retention

   104,198 Class E preferred units.             104,198        -    

for selected industries. (Contact Center)

   PIK dividend for Series C and D at 12%             

www.ipacesetters.com

   and 14%, respectively.             
   Total Teleservices           1,636,078        -    

Tilson Technology Management, Inc.

   (g) 120,000 Series B preferred shares.      1/20/15        11%       600,000        600,000       7.8%  

Portland, ME. Cellular, fiber optic and wireless

   21,391 Series C convertible preferred             

information systems, construction, and

   shares.           200,000        200,000    

management. (Professional Services)

   (g) $200,000 subordinated promissory             

www.tilsontech.com

   note at 8% due September 28, 2021.           200,000        200,000    
   (n) 65,790 Series D preferred shares.           750,000        750,000    
   (n) $750,000 subordinated promissory             
   note at 8% due December 1, 2022.              750,000           750,000    
   Total Tilson           2,500,000        2,500,000    
               
   

Subtotal Affiliate Investments

             $20,871,129        $17,016,795    

Control Investments – 0.3% of net assets (l)

               

Advantage 24/7 LLC (e)(g)

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

Williamsville, NY. Marketing program for wine

               

and spirits dealers. (Marketing Company)

               

www.advantage24-7.com

               
   

Subtotal Control Investments

             $99,500        $99,500    

TOTAL INVESTMENTS – 101.1%

             $36,689,319        $32,284,062    

OTHER ASSETS IN EXCESS OF

               

LIABILITIES – (1.1%)

                (365,377  

NET ASSETS – 100%

                $31,918,685    
                     

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

 

Notes to the Consolidated Schedule of Portfolio Investments

 

(a)

At December 31, 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 date 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, 2017, 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 reporting period. 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, 2017, the total cost of investment securities was approximately $36.7 million. Net unrealized depreciation was approximately ($4.4) million, which was comprised of $2.4 million of unrealized appreciation of investment securities and ($6.8) million of unrealized depreciation of investment securities. At December 31, 2017, the aggregate gross unrealized gain for federal income tax purposes was $2.8 million and the aggregate gross unrealized loss for federal income tax purposes was ($4.4) million. The net unrealized loss for federal income tax purposes was ($1.6) million based on a tax cost of $33.9 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 year ended December 31, 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.

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

 

  Investments in and Advances to Affiliates  
                                     Net      Amount of
          December      Gross      Gross     December      Realized      Interest/
     Type of Investment    31, 2016      Additions      Reductions     31, 2017 Fair      Gains      Dividend/
Company          Fair Value      (1)      (2)     Value      (Losses)           Fee Income (3)     
  Control Investments:                    
  Advantage 24/7 LLC    53% Membership interest.      $99,500        $-        $-       $99,500        $-        $-  
  

 

Total Control Investments    

     $99,500        $-        $-       $99,500        -        $-  

 

  Affiliate Investments:

                   
  BeetNPath, LLC    1,119,024 Series A-2 Preferred Membership                 
   Units.      $359,000           $-       $359,000        -        $
   1,032,918 Series B Preferred Membership                 -     
   Units      -        $291,000        -       291,000        -        -  
   $150,000 convertible promissory note at 8%.      150,000                   -        (150,000                 -        -        4,800  
   Total BeetNPath          509,000        291,000        (150,000     650,000        -        4,800  

 

  Carolina Skiff LLC

  

 

6.0825% Class A common membership

     1,100,000        650,000        -       1,750,000        -        178,532  
   interest.                 

 

  ClearView Social, Inc.

  

 

312,500 Series seed plus preferred shares.

     200,000        -        -       200,000        -        -  

 

  First Wave Products

  

 

$500,000 senior term notes at 10%.

     250,000        -        -       250,000        -        -  
  Group, LLC    $280,000 junior term notes at 10%.      -        -        -       -        -        -  
   Warrant for 41,619 capital securities.                 -        -        -                   -        -        -  
   Total First Wave          250,000        -        -       250,000        -        -  

 

  Genicon, Inc.

  

 

1,586,902 Series B preferred shares.

     1,000,000        -        -       1,000,000        -        -  
   $1,100,000 senior term loans at 12%.      1,100,000        -        (1,100,000     -        -        50,234  
   $600,000 term loan at 14%.      600,000        -        (600,000     -        -        32,200  
   $2,000,000 promissory note at 8%      -        2,016,002        (80,000     1,936,002        -        129,752  
   $1,000,000 promissory note at 8%      -        1,007,777        (40,000     967,777        -        60,860  
   Warrant for 250,000 common shares      -        80,000        -       80,000        -     
   Warrant for 125,000 common shares                    -             40,000                        -            40,000        -                    -  
   Total Genicon          2,700,000        3,143,779        (1,820,000     4,023,779        -        273,046  

 

  GiveGab, Inc.

  

 

5,084,329 Series Seed preferred shares.

     424,314        -        -       424,314        -        -  

 

  G-TEC Natural Gas

  

 

16.639% Class A membership interest. 8%

                
  Systems    cumulative dividend      100,000        -        -       100,000        -        -  

 

  Intrinsiq Materials, Inc.

  

 

4,161,747 Series A preferred shares.

     780,000        -        (380,000     400,000        -        -  

 

  Knoa Software, Inc.

  

 

973,533 Series A-1 convertible preferred

     -        750,000        -       750,000        -        -  
   shares. 1,876,922 Series B preferred shares.      449,455        29,700        -       479,155        -        -  
   $48,466 convertible promissory note at 8%.        48,466                    -        -            48,466        -        3,877  
   Total Knoa          497,921        779,700        -       1,277,621        -        3,877  

 

  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        -               -  
   $50,000 subordinated promissory note at 8%      -        50,000        -       50,000        -        3,748  
   Warrant for 46,743 Series A-3 shares.        35,000                  -        -         35,000        -                -  
   Total Knowledge Vision          500,001        50,000        -       550,001        -        3,748  

 

  Mezmeriz, Inc.

  

 

1,554,565 Series seed preferred shares.

     351,477        -        -       351,477        -        -  

 

  Microcision LLC

  

 

$1,500,000 subordinated promissory note at

                
   12% (1% PIK).      1,891,964        22,176        -       1,914,140        -        228,239  

 

  New Monarch

  

 

22.84 common shares.

     22,841        -        -       22,841        -        28,409  
  Machine Tool, Inc.                    

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

 

  Investments in and Advances to Affiliates                
                                     Net      Amount of
          December 31,      Gross      Gross     December 31,      Realized      Interest/
     Type of Investment    2016 Fair      Additions      Reductions     2017 Fair      Gains      Dividend/

Company

 

        

Value

 

    

(1)

 

    

(2)

 

 

   

Value

 

    

(Losses)

 

    

Fee Income (3)

 

  OnCore Golf    150,000 Series AA preferred shares.      -        -        -       -        -        -  
  Technology, Inc.    $300,000 subordinated convertible                 
   promissory notes at 6%.      300,000        -        -       300,000        -        29,211  
   Total OnCore        300,000        -        -       300,000        -        29,211  
  SciAps, Inc.    187,500 Series A convertible preferred                 
   shares.      1,000,000        -        (300,000)       700,000        -        -  
   274,299 Series A-1 convertible preferred                 
   shares.      504,710        -        (254,710)       250,000        -        -  
   117,371 Series B convertible preferred                 
   shares.      250,000        -        -       250,000        -        -    
   113,636 Series C preferred shares.      -        175,000        -       175,000        -        -  
   369,698 Series C-1 preferred shares.      -        399,274        -       399,274        -        -  
   $200,000 subordinated promissory note at                 
   10%.      200,000        -        (200,000)       -        -        4,731  
   $100,000 secured subordinated convertible                 
   note at 10%.         100,000                    -        (100,000)                     -        -        2,376  
   Total SciAps        2,054,710        574,274        (854,710)       1,774,274        -        7,107  
  SOMS    5,959,490 Series B membership interests.      528,348        -        -       528,348        -        6,024  
  Technologies, LLC                        
  Teleservices    250,000 Class B preferred units.      -        -        -       -        -        -  
  Solutions    1,000,000 Class C preferred units.      200,000        -        (200,000)       -        -        -  
  Holdings, LLC    80,000 Class D preferred units.      91,200        -        (91,200)       -        -        -  
   104,198 Class E preferred units.      104,198        -        (104,198)       -        -        -  
   Total Teleservices        395,398        -        (395,398)       -        -        -  
  Tilson Technology    120,000 Series B preferred shares.      600,000        -     

 

-

 

    600,000        -        20,000  
  Management, Inc.    21,391 Series C convertible preferred      200,000        -          200,000        -        -  
   shares.            -          
   $200,000 subordinated promissory note at      200,000        -          200,000        -        16,000  
   8%.      -        750,000          750,000           1,579  
   65,790 Series D preferred shares.                 
   $750,000 subordinated promissory note at                    -           750,000        -          750,000        -          5,096  
   8%.      1,000,000        1,500,000        -       2,500,000        -        42,675  
   Total Tilson                                                       
   Total Affiliate Investments        $13,605,974        $7,010,929        ($3,600,108     $17,016,795        $-        $805,668  
   Total Control and Affiliate Investments        $13,705,474        $7,010,929        ($3,600,108     $17,116,295        $-        $805,668  
                                                   

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.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

 

        
      

Industry Classification

   Percentage of Total
Investments (at fair value)
as of December 31, 2017

Healthcare

     37.7 %   

Software

     24.7  

Manufacturing

     19.4  

Professional Services

     7.7  

Consumer Product

     4.6  

Contact Center

     2.9  

Oil and Gas

     1.6  

Electronics

     1.1  

Marketing

     0.3  
  

 

 

 

Total Investments

     100
  

 

 

 

 

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Rand Capital Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1. ORGANIZATION

Rand Capital Corporation (“Rand”, “we”, “us” and “our”) 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, 2017.

Throughout our history, our principal business has been to make venture capital investments in early or expansion stage companies, often in upstate New York and regions in close proximity. In accordance with our strategic growth plan, we look for companies with strong leadership that are bringing to market new or unique products, technologies or services and have a high potential for growth. We invest in a mixture of debt and equity instruments. The debt securities typically have an equity component in the form of warrants or options to acquire stock or the right to convert the debt securities into equity securities.

We established our first small business investment company (“SBIC”) in 2002, Rand Capital SBIC, Inc. (“Rand SBIC”), whereby we utilized funds borrowed from the Small Business Administration (“SBA”) combined with our capital to invest in our portfolio companies. We historically made the majority of our venture capital investments through Rand SBIC. 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.

During 2017 we established a second SBIC subsidiary, Rand Capital SBIC II, L.P. (“Rand SBIC II”), and began making investments through this SBIC subsidiary. During the first quarter of 2018, together with the SBA, we determined that the optimal structure was to revert back to investing in small businesses through our original SBIC, Rand SBIC, and the assets of Rand SBIC II were transferred to Rand SBIC. Rand SBIC has applied for $6 million in new SBA leverage commitment and is currently undergoing the review and approval process.

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 and Rand SBIC.

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 six months ended June 30, 2018 are not necessarily indicative of the results to be expected 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, 2017. 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

2018 Definitive Proxy Statement submitted to shareholders

Principles of Consolidation - The consolidated financial statements include the accounts of Rand and its two wholly-owned 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 March 2018, the SBIC Funding Corporation completed a pooling of SBA debentures that have a coupon rate of 3.187%, excluding a mandatory SBA annual charge estimated to be 0.804%, resulting in a total estimated fixed rate for ten years of 3.991%. 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.

Rand SBIC’s interest accrual is also 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 are on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and portions of the Empire Genomics, LLC (Empire Genomics) and Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balances.

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 recognized into income and 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 the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of SBIC financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $15,327 and $14,621 for the six months ended June 30, 2018 and 2017, respectively. The board fees were $2,000 and $1,000 for the six months ended June 30, 2018 and 2017, 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.

 

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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 $19,271 and $8,395 in OID income for six months ended June 30, 2018 and 2017, respectively. OID income is estimated to be approximately $20,000 for the remainder of 2018.

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 $13,700 for each of the six months ended June 30, 2018 and 2017. Amortization expense on currently outstanding debentures for the next five years is estimated to average approximately $23,000 per year.

SBA Debentures - The Corporation had $8,000,000 in outstanding SBA debentures at June 30, 2018 and December 31, 2017 with a weighted average interest rate of 3.54%. The debentures are presented net of deferred debenture costs (See Note 6 “SBA Debentures”). 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 (refunded) paid during the six months ended June 30, 2018 and 2017 were ($17,051) and $587,840, respectively. Interest paid during each of the six months ended June 30, 2018 and 2017 was $140,275. The Corporation converted $77,154 and $53,294 of interest receivable into investments during the six months ended June 30, 2018 and 2017, 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 June 30, 2018 and December 31, 2017, 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 no greater than the then current net asset value. No shares were repurchased during the six months ended June 30, 2018. At June 30, 2018, 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 June 30, 2018, 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.

The Corporation did not record any expense pursuant to the Plan for the six months ended June 30, 2018 and 2017, respectively. Included in the profit sharing and bonus payable line on the Consolidated Statement of Financial Position at December 31, 2017 was $132,000 that was paid during the first quarter of 2018.

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 June 30, 2018.

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 six months ended June 30, 2018 or 2017.

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 June 30, 2018, Genicon, Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Rheonix, Inc. (Rheonix), Tilson Technology Management, Inc. (Tilson), and Outmatch (Outmatch) represented 13%, 11%, 9%, 8% and 7%, respectively, of the fair value of the Corporation’s investment portfolio.

At December 31, 2017, Genicon, Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Rheonix, Inc. (Rheonix), Tilson Technology Management, Inc. (Tilson), and Outmatch (Outmatch) represented 12%, 11%, 9%, 8% 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 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 cost given the carrying interest rate versus the 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.

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 Level 1 or 2 investments as of June 30, 2018.

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;

 

   

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;

 

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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 of less than one year old, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair 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. 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 value inputs are identified causing the Corporation to depart from this basis.

 

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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 June 30, 2018:

 

Investment Type

   Market
Approach
EBITDA
Multiple
     Market
Approach
Liquidation
Seniority
     Market
Approach
Revenue
Multiple
     Market
Approach
Transaction
Pricing
     Totals  

Non-Control/Non-Affiliate Equity

   $ —        $ 25      $ 2,145,496      $ 6,093,729      $ 8,239,250  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Control/Non-Affiliate Debt

   $ 949,040        1,712,818        3,500,000        300,000        6,461,858  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate

   $ 949,040      $ 1,712,843      $ 5,645,496      $ 6,393,729      $ 14,701,108  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Equity

   $ 4,420,000      $ 22,841      $ 4,453,430      $ 1,647,698      $ 10,543,969  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Debt

     5,857,849        —          —          1,125,000        6,982,849  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate

   $ 10,277,849      $ 22,841      $ 4,453,430      $ 2,772,698      $ 17,526,818  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Control Equity

   $ —        $ —        $ 99,500      $ —        $ 99,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Control

   $ —        $ —        $ 99,500      $ —        $ 99,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Level 3 Investments

   $ 11,226,889      $ 1,735,684      $ 10,198,426      $ 9,166,427      $ 32,327,426  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Range

     4X-9X        1X        1X-6X        Not Applicable     

Unobservable Input

     EBITDA Multiple        Asset Value        Revenue Multiple        Transaction Price     

Weighted Average

     5.7X        1X        2.5X        Not Applicable     

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at June 30, 2018:

 

       Fair Value Measurements at Reported Date Using  

Description

   June 30, 2018      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

     9,894,707        —          —          9,894,707  

Equity investments

     18,882,719        —          —          18,882,719  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,327,426      $ —        $ —        $ 32,327,426  
  

 

 

          

 

 

 

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value on a Recurring Basis at December 31, 2017:

 

       Fair Value Measurements at Reported Date Using  

Description

   December 31,
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

     10,096,244        —          —          10,096,244  

Equity investments

     18,637,818        —          —          18,637,818  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,284,062      $ —        $ —        $ 32,284,062  
  

 

 

          

 

 

 

 

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The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the six months ended June 30, 2018:

 

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

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
    Total  

Ending Balance, December 31, 2017, of Level 3 Assets

   $ 3,550,000      $ 10,096,244      $ 18,637,818     $ 32,284,062  

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

          

Empire Genomics, LLC (Empire Genomics)

     —          (651,489      —         (651,489

First Wave Products Group, LLC (First Wave)

     —          (250,000      —         (250,000

GiveGab, Inc. (Givegab)

     —          —          191,907       191,907  

SOMS Technologies, LLC (SOMS)

     —          —          (498,348     (498,348
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Unrealized Losses

     —          (901,489      (306,441     (1,207,930

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

          

Centivo Corporation (Centivo)

     —          —          201,342       201,342  

Genicon, Inc. (Genicon)

     —          80,348        —         80,348  

GoNoodle, Inc. (GoNoodle)

     —          5,153        —         5,153  

KnowledgeVision Systems, Inc. (Knowledgevision)

     —          775,000        —         775,000  

Microcision LLC (Microcision)

     —          9,582        —         9,582  

SciAps, Inc. (Sciaps)

     —          —          250,000       250,000  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     —          870,083        451,342       1,321,425  

Repayments and Sale of Securities:

          

Empire Genomics

     —          (21,665      —         (21,665

Knoa Software, Inc. (Knoa)

     —          (48,466      —         (48,466
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Repayments and Sale of Securities

     —          (70,131      —         (70,131

Transfers within Level 3

     —          (100,000      100,000       —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance, June 30, 2018, of Level 3 Assets

   $ 3,550,000      $ 9,894,707      $ 18,882,719     $ 32,327,426  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     ($ 1,207,930
          

 

 

 

 

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The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the six months ended June 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)

     —          —          197,336       197,336  

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      (848,983     (1,098,983

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

          

Beetnpath

     —          100,000        11,277       111,277  

eHealth Global Technologies, Inc. (eHealth)

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

Genicon, Inc. (Genicon)

     300,000        883,397        120,000       1,303,397  

GoNoodle, Inc. (GoNoodle)

     —          5,102        —         5,102  

KnowledgeVision Systems, Inc. (Knowledge Vision)

     50,000        —          —         50,000  

Mercantile

     —          104,998        —         104,998  

Microcision LLC (Microcision)

     —          12,641        —         12,641  

Sciaps

     —          —          274,274       274,274  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     2,350,000        1,106,138        405,551       3,861,689  
  

 

 

    

 

 

    

 

 

   

 

 

 

Transfers within Level 3

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

Transfers out of Level 3

     —          —          (614,000     (614,000
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 3,550,000      $ 9,006,359      $ 17,092,828     $ 29,649,187  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     ($ 1,296,319
          

 

 

 

NOTE 4. OTHER ASSETS

At June 30, 2018 and December 31, 2017, other assets was comprised of the following:

 

     June 30, 2018      December 31, 2017  

Prepaid expenses

   $ 52,002      $ —    

Operating receivables

     2,564        3,204  

Equipment (net)

     1,390        2,490  

Dividend receivable

     —          37,160  
  

 

 

    

 

 

 

Total other assets

   $ 55,956      $ 42,854  
  

 

 

    

 

 

 

Note 5. COMMITMENTS AND CONTINGENCIES

The Corporation did not have any commitments to fund any investments as of June 30, 2018.

 

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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.

 

     June 30, 2018      December 31, 2017  

Debentures guaranteed by the SBA

   $ 8,000,000      $ 8,000,000  

Less unamortized issue costs

     (131,127      (144,827
  

 

 

    

 

 

 

Debentures guaranteed by the SBA, net

   $ 7,868,873      $ 7,855,173  
  

 

 

    

 

 

 

Note 7. FINANCIAL HIGHLIGHTS

The following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the six months ended June 30, 2018 and 2017:

 

     Six months ended
June 30, 2018
(Unaudited)
    Six months ended
June 30, 2017
(Unaudited)
 

Income from investment operations (1):

    

Investment income

   $ 0.12     $ 0.11  

Operating expenses

     0.16       0.18  
  

 

 

   

 

 

 

Investment loss before income taxes

     (0.04     (0.07

Income tax benefit

     (0.01     (0.03
  

 

 

   

 

 

 

Net investment loss

     (0.03     (0.04

Net realized and unrealized loss on investments

     (0.15     (0.12
  

 

 

   

 

 

 

Decrease in net asset value

     (0.18     (0.16

Net asset value, beginning of period

     5.05       5.16  
  

 

 

   

 

 

 

Net asset value, end of period

   $ 4.87     $ 5.00  
  

 

 

   

 

 

 

Per share market price, end of period

   $ 2.69     $ 2.79  
  

 

 

   

 

 

 

Total return based on market value

     (10.93 %)      (11.70 %) 

Total return based on net asset value

     (3.61 %)      (3.05 %) 

Supplemental data:

    

Ratio of operating expenses before income taxes to average net assets

     3.39     3.50

Ratio of operating expenses including income taxes to average net assets

     2.30     1.79

Ratio of net investment loss to average net assets

     (0.67 %)      (0.85 %) 

Portfolio turnover

     3.8     13.2

Net assets, end of period

   $ 30,766,978     $ 31,634,545  

Weighted shares outstanding, end of period

     6,321,988       6,321,988  

 

(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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Table of Contents
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, 2017.

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 often concurrently with other investors. 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. We have historically made the majority of our 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 2002. During 2017 we established a second SBIC subsidiary, Rand Capital SBIC II, L.P. (“Rand SBIC II”) and began making investments through this SBIC subsidiary. During the first quarter of 2018, together with the SBA, we determined that the optimal structure was to revert back to investing in small businesses through our original SBIC, Rand SBIC, and the assets of Rand SBIC II were transferred to Rand SBIC. Rand SBIC has applied for an additional $6 million in new SBA leverage commitments and is currently undergoing the review and approval process.

 

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Table of Contents

Outlook

At the end of the second quarter of 2018, we had approximately $4.7 million in cash available for future investments and expenses. We believe the combination of cash on hand, proceeds from portfolio exits, anticipated additional 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 strong macroeconomic environment and eager reception of new technologies and service concepts.

 

   

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.

 

   

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

 

   

When our portfolio expands, we are able to better leverage our infrastructure.

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, 2017 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Table of Contents

Financial Condition

 

     June 30, 2018      December 31, 2017      Decrease     % Decrease  

Overview:

          

Total assets

   $ 38,870,649      $ 40,133,913      ($ 1,263,264     (3.1 %) 

Total liabilities

     8,103,671        8,215,228        (111,557     (1.4 %) 
  

 

 

    

 

 

    

 

 

   

Net assets

   $ 30,766,978      $ 31,918,685      ($ 1,151,707     (3.6 %) 
  

 

 

    

 

 

    

 

 

   

Net asset value per share (NAV) was $4.87 at June 30, 2018 and $5.05 at December 31, 2017.

Our gross outstanding SBA debentures at June 30, 2018 were $8,000,000 and will mature from 2022 through 2025. Cash approximated 15% of net assets at June 30, 2018, as compared to 20% at December 31, 2017.

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.

 

     June 30, 2018      December 31, 2017      Increase      % Increase  

Investments, at cost

   $ 37,940,613      $ 36,689,319      $ 1,251,294        3.4

Unrealized depreciation, net

     (5,613,187      (4,405,257      1,207,930        27.4
  

 

 

    

 

 

    

 

 

    

Investments at fair value

   $ 32,327,426      $ 32,284,062      $ 43,364        0.1
  

 

 

    

 

 

    

 

 

    

Our total investments at fair value, as estimated by management and approved by our Board of Directors, approximated 105% of net assets at June 30, 2018 versus 101% of net assets at December 31, 2017.

The change in investments during the six months ended June 30, 2018, at cost, is comprised of the following:

 

     Cost
Increase (Decrease)
 

New investments:

  

KnowledgeVision Systems, Inc. (Knowledgevision)

   $ 775,000  

SciAps, Inc. (Sciaps)

     250,000  

Centivo Corporation (Centivo)

     200,000  
  

 

 

 

Total of new investments

     1,225,000  

Other changes to investments:

  

Genicon Inc. (Genicon) interest conversion and OID amortization

     80,348  

Microcision LLC (Microcision) interest conversion

     9,582  

GoNoodle, Inc. (GoNoodle) interest conversion

     5,153  

Centivo interest conversion

     1,342  
  

 

 

 

Total of other changes to investments

     96,425  

Investments repaid, sold or liquidated:

  

Knoa Software Inc. (Knoa) repayment

     (48,466

Empire Genomics, LLC (Empire Genomics) repayment

     (21,665
  

 

 

 

Total of investments repaid, sold or liquidated

     (70,131
  

 

 

 

Net change in investments, at cost

   $ 1,251,294  
  

 

 

 

 

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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 debt instruments 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 June 30, 2018 to the three months ended June 30, 2017

Investment Income

 

     Three months
ended June 30,
2018
     Three months
ended June 30,
2017
     Increase      %
Increase
 

Interest from portfolio companies

   $ 315,700      $ 277,640      $ 38,060        13.7

Interest from other investments

     7,735        6,859        876        12.8

Dividend and other investment income

     78,942        55,705        23,237        41.7

Fee income

     11,141        8,935        2,206        24.7
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 413,518      $ 349,139      $ 64,379        18.4
  

 

 

    

 

 

    

 

 

    

Interest from portfolio companies – Interest from portfolio companies was approximately 14% higher during the three months ended June 30, 2018 versus the same period in 2017 due to the fact that we have originated more income-producing debt investments in the last year. The new debt instruments were originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth) and several other portfolio companies.

The following investments are on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and portions of the Empire Genomics, LLC (Empire Genomics) and Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balances.

Interest from other investments - The increase in interest from other investments is primarily due to higher average cash balances during the three months ended June 30, 2018 versus the same period in 2017.

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 June 30, 2018
     Three months ended
June 30, 2017
 

Carolina Skiff LLC (Carolina Skiff)

   $ 39,169      $ 42,000  

New Monarch Machine Tool, Inc. (New Monarch)

     27,409        —    

Tilson Technology Management, Inc. (Tilson)

     9,687        5,000  

Empire Genomics LLC (Empire Genomics)

     2,677        2,681  

SOMS Technologies, LLC (SOMS)

     —          6,024  
  

 

 

    

 

 

 

Total dividend and other investment income

   $ 78,942      $ 55,705  
  

 

 

    

 

 

 

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.”

 

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The income associated with the amortization of financing fees was $10,141 and $7,935 for the three months ended June 30, 2018 and 2017, respectively. The income from board fees was $1,000 for each of the three months ended June 30, 2018 and 2017, respectively.

Expenses

 

     Three months ended
June 30, 2018
     Three months ended
June 30, 2017
     Decrease     % Decrease  

Total expenses

   $ 473,670      $ 607,163      ($ 133,493     (22.0 %) 

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 June 30, 2018 versus the same period in 2017 was primarily caused by a 79%, or $140,852, decrease in professional fees. Professional fees were higher during 2017 versus 2018 because we incurred additional expenses in connection with developing and implementing our long-term growth strategy during 2017. 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.

In addition, for the three months ended June 30, 2018 there was a $30,741 charge to bad debt expense while there was no bad debt expense for the three months ended June 30, 2017.

Increase in Unrealized Depreciation of Investments

 

     Three months ended
June 30, 2018
     Three months ended
June 30, 2017
     Increase  

Increase in unrealized depreciation of investments before income taxes

   ($ 756,441    ($ 718,339    $ 38,102  

The increase in unrealized depreciation, before income taxes, for the three months ended June 30, 2018 was comprised of the following:

 

     Three months
ended June 30,
2018
 

Empire Genomics, LLC (Empire Genomics)

   ($ 450,000

SOMS Technologies, LLC (SOMS)

     (498,348

GiveGab, Inc. (Givegab)

     191,907  
  

 

 

 

Total increase in net unrealized depreciation of investments before income taxes during the three months ended June 30, 2018

   ($ 756,441
  

 

 

 

The valuations of our investments in Empire Genomics and SOMS were decreased after we reviewed each of the portfolio company’s operations and current and projected financial condition and determined that a valuation adjustment was necessary.

Givegab’s value was increased to the cost basis of the investment after a financial analysis of the portfolio company indicating continued improved performance.

 

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

 

     Three months
ended June 30,
2017
 

City Dining Cards, Inc. (Loupe)

   ($ 250,000

Teleservices Solutions Holdings, LLC (Teleservices)

     (395,398

SciAps, Inc. (Sciaps)

     (300,000

Athenex, Inc. (Athenex)

     197,336  

BeetNPath, LLC (Beetnpath)

     29,723  
  

 

 

 

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

   ($ 718,339
  

 

 

 

The valuations of our investments in Loupe and Teleservices were decreased after we reviewed each portfolio company and its current and projected financial condition and determined that a valuation adjustment was necessary.

The valuation of Sciaps was decreased to revalue our equity holdings based upon the liquidation preferences of our securities as compared to the most recent equity round of financing completed by Sciaps.

In accordance with our valuation policy, we increased the value of our investment in Beetnpath based on a significant equity financing by a new non-strategic outside entity.

Athenex completed an Initial Public Offering (IPO) during the second quarter of 2017 and its shares of common stock became publicly traded on the NASDAQ Global Select Market under the symbol “ATNX”. We held 46,296 shares of the common stock of Athenex and valued the shares using the three day average bid price for the last three trading days of the reporting period, which was then discounted due to restrictions on the sale of the shares.

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 June 30, 2018 and 2017, the net decrease in net assets from operations was ($631,294) and ($635,337), respectively.

Comparison of the six months ended June 30, 2018 to the six months ended June 30, 2017

Investment Income

 

     Six months
ended June
30, 2018
     Six months
ended June
30, 2017
     Increase
(Decrease)
    % Increase
(Decrease)
 

Interest from portfolio companies

   $ 613,048      $ 523,731      $ 89,317       17.1

Interest from other investments

     12,845        17,834        (4,989     (28.0 %) 

Dividend and other investment income

     133,107        120,590        12,517       10.4

Fee income

     17,327        15,621        1,706       10.9
  

 

 

    

 

 

    

 

 

   

Total investment income

   $ 776,327      $ 677,776      $ 98,551       14.5
  

 

 

    

 

 

    

 

 

   

 

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Interest from portfolio companies – Interest from portfolio companies was approximately 17% higher during the six months ended June 30, 2018 versus the same period in 2017 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) and eHealth Global Technologies, Inc. and several other portfolio companies.

The following investments are on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and a portion of the Empire Genomics, LLC (Empire Genomics) and 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 six months ended June 30, 2018 versus the same period in 2017.

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

 

     Six months
ended June 30,

2018
     Six months
ended June 30,

2017
 

Carolina Skiff LLC (Carolina Skiff)

   $ 80,264      $ 99,373  

New Monarch Machine Tool, Inc. (New Monarch)

     27,409        —    

Tilson Technology Management, Inc. (Tilson)

     19,376        10,000  

Empire Genomics LLC (Empire Genomics)

     6,058        5,193  

SOMS Technologies, LLC (SOMS)

     —          6,024  
  

 

 

    

 

 

 

Total dividend and other investment income

   $ 133,107      $ 120,590  
  

 

 

    

 

 

 

Fee income - The income associated with the amortization of financing fees was $15,327 and $14,621 for the six months ended June 30, 2018 and 2017, respectively. The income from board fees was $2,000 and $1,000 for the six months ended June 30, 2018 and 2017, respectively.

Expenses