UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMFORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period fromto
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) |
Registrant’s telephone number, including area code: (716)853-0802
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |
Common Stock, $0.10 par value |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act. Yes ¨☐ No þ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No þ☒
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 þ☒ 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 RegulationS-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 if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. þ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or 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” inRule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | |||||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicated by check mark if the registrant has elected not to use 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 inRule 12b-2 of the Act). Yes ¨☐ No þ☒
The aggregate market value of the registrant’s outstanding common stock held bynon-affiliates of the registrant as of June 30, 20152018 was approximately $22,348,173$15,361,100 based upon the closing price as reported on the NASDAQNasdaq Capital Market on such date.
As of March 4, 2016,1, 2019, there were 6,328,5386,321,988 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation’s definitive proxy statement for the 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
TABLE OF CONTENTS FOR FORM10-K
1 | ||||||
7 | ||||||
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Item | ||||||
Item | ||||||
Item 4. | 13 | |||||
PART II | ||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||||
PART III | ||||||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||||
Certain Relationships and Related Transactions, and Director Independence | ||||||
PART IV | ||||||
Item 16 | 99 |
Item 1. | Business |
Overview of Our Business
Rand Capital Corporation (“Rand”, “we”, “us” and “our”) was incorporated under the laws of New York in February 1969. Throughout our history, our principal business has been to make venture capital investments in early or expansion stage companies, typicallyoften in upstate New York and its surrounding states. We are now seeking investmentsregions in a broader geographic area, inclose proximity. In accordance with our strategic growth plan. Weplan, 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, with a focus on equity investments to drive capital appreciation.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 stock. Our wholly-owned subsidiary,We established our small business investment company (“SBIC”) in 2002, Rand Capital SBIC, Inc. (Rand SBIC)(“Rand SBIC”), whereby we utilized funds borrowed from the Small Business Administration (“SBA”) combined with our capital to invest in our portfolio companies.
Recent Developments
As previously announced, on January 24, 2019, Rand entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among Rand, East Asset Management, LLC (“East”), and, solely for purposes of being bound by Sections 7.10 and 10.9(a) and (b) thereof, Rand Capital Management LLC (“RCM”). Pursuant to the terms of the Stock Purchase Agreement, at the closing of the transaction (the “Closing”), East will purchase 8,333,333.33 shares (the “Shares”) of Rand’s common stock, par value $0.10 per share, at a purchase price of $3.00 per Share for an aggregate purchase price of $25,000,000 (the “Stock Purchase”), which consideration is to be paid to Rand partially in cash and partially through the contribution of existing loans and other securities (the “Contributed Assets”). As a condition to Closing, Rand will enter into a Shareholder Agreement with East (the “Shareholder Agreement”), which provides East with the right to designate two or three persons, depending upon the size of Rand’s board of directors (the “Board”), for nomination for election to the Board.
The Stock Purchase Agreement also contemplates that, at the Closing, Rand will enter into an investment advisory and management agreement (the “Advisory Agreement”) with RCM pursuant to which RCM will serve as Rand’s external investment adviser. Pursuant to the terms of the Advisory Agreement, Rand will pay RCM a base management fee and an incentive fee. At the Closing, Rand will also enter into an administration agreement (the “Administration Agreement”) with RCM pursuant to which RCM will serve as Rand’s administrator.
The transactions contemplated by the Stock Purchase Agreement including the entry into the Advisory Agreement with RCM (which we refer to as the “Transactions”) are subject to shareholder approval. Rand has been our primaryagreed to hold a special meeting of shareholders for purposes of obtaining these approvals.
Additional information regarding the Stock Purchase Agreement and the Transactions is available in Rand’s Current Reports on Form8-K filed with the Securities and Exchange Commission on January 25, 2019. Rand is in the process of preparing and intends to file in the near future a proxy statement with the Securities and Exchange Commission for purposes of seeking to obtain shareholder approval of the Transactions.
In the event the Transactions are completed, Rand intends to accelerate its shift to an investment vehicle since its formationstrategy focused on higher yielding debt investments, to elect tax treatment as a regulated investment company (“RIC”), and we expectin connection with such RIC election to continue this practice.pay a special dividend to shareholders, and to adopt a new dividend policy that may include regular cash dividends to shareholders.
Our Investment Objectives and Strategy
Our principal investment objective is to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments to partially offsetfund expenses. Therefore, we invest in a variety of financial instruments to provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term and typically do not generate current income in the form of dividends or interest.
Typically, ourOur investment strategy is to partner with other investors andto invest in small companies that either have a new product, service or technology they are trying to commercialize or are working to accelerate their rate of growth. We define small companies as businesses that may not yet be generating revenue up to companies with $20 million in revenue.
We have historically made an initial investmentsinvestment of $500,000 to $1,000,000 directly in a company through equity or in debt or loan instruments and frequently providefollow-on investments during our investment tenure. We are now considering larger cumulative investments to drive our growth, within the U.S. Small Business Administration (“SBA”) regulations that limit our total investment in one company to $3.0 million. The loan and debt instruments we acquire generally have a maturity of not more than five years and usually are convertible or have detachable equity warrants. Interest is either paid currently or deferred. We fund new investments and operating expenses through existing cash balances, proceeds from investment exits, and interest and principal payments from our portfolio companies.
Our Investment Process
Our primary business is making subordinated debt and equity investments in small and medium-sized companies that meet some or all of the following criteria:
1) a qualified and experienced management team;
2) a new or unique product or service; and
3) high potential for growth in revenue and cash flow;flow.
Our management team identifies investment opportunities through a network of investment referral relationships. Investment proposals may come to us from other sources, including unsolicited proposals from companies and referrals from banks,accountants, bankers, lawyers accountants and other members of the financial community. We believe that our reputation in the investment community and our experience provide a competitive advantage in originating qualified newquality investments.
In a typical private financing, our management team will review, analyze, and confirm, through due diligence, the business plan and operations of the potential portfolio company. Additionally, we will familiarize
ourselves with the portfolio company’s industry and competition and may conduct reference checks with its customers and suppliers.
Following our initial investment, we may makefollow-on investments in the portfolio company. company, if needed.Follow-on investments may be made to take advantage of warrants or other preferential rights granted to us to increase or maintain our position in a promising portfolio company, or provide an additional investmentfunds to allow a portfolio company to fully implement its business plans, develop a new line of business or recover from unexpected business problems.Follow-on investments in a portfolio company are evaluated individually and may be subject to regulatorySBA restrictions.
Disposition of Investments
We may exit investments through the maturation of a debt security or when a liquidity event takes place, such as the sale, recapitalization, or initial public offering of a portfolio company. The method and timing of the disposition of our portfolio investments can be critical to the realization of maximum total return. We generally expect to dispose of our equity securities through private sales of securities to other investors or through an outrightthe sale or merger of the portfolio company. We anticipate our debt investments will be repaid with interest and hopeexpect to realize further appreciation from the warrants or other equity type instruments we receivereceived in connection with the investment.
Current Portfolio Companies
For a description of our current portfolio company investments, see “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations —– Composition of the Investment Portfolio.”
Competition
We compete for quality investments with other venture capital firms, individual investors, business development companies, and investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks. We believe we are able to compete with these entities primarily on the basis of our referral network, management’sour investing reputation and experience, our responsive, quick and efficient investment analysis and decision-making process, the investment terms we offer, and our willingness to make smaller investments.
For information concerning the competitive risks we face, see “Item 1A. Risk Factors.”
Employees
As of December 31, 2015,2018, we had four employees, unchanged from 2014.2017.
Organization and History
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.requirements as provided for in the 1940 Act and the rules and regulations promulgated thereunder. 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“Item 1. Business — Regulation, Regulation as a– Regulations, Business Development Company.Company Regulations.”
We makehistorically made the majority of our venture capital investments through Rand SBIC, which operates as a small business investment company (“SBIC”) andan SBIC that has been licensed by the SBA since 2002. Rand SBIC’s predecessor was organized as a Delaware limited partnership and was converted into a New York corporation in 2008, at which time our operations as a licensed SBIC were continued. Although Rand SBIC washad operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the SECSecurities and Exchange Commission (“SEC”) granted an Order of Exemption for Rand with respect to the operations of Rand SBIC and Rand SBIC then 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 Capital 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 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.
We operate as an internally managed investment company whereby our officers and employees conduct our business under the general supervision of our Board of Directors. We have not elected to qualify to be taxed as a regulated investment company (“RIC”) as defined under Subchapter M of the Internal Revenue Code.
In this Annual Report on Form10-K, or (“Annual Report,Report”), unless the context otherwise requires, “we”, the “Corporation”, “us”, and “our” refer to Rand Corporation and Rand Capital SBIC, Inc.SBIC.
Our corporate office is located in Buffalo, NY and our website address iswww.randcapital.com. www.randcapital.com. We make available on our website, 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”).SEC. Our shares are traded on the NASDAQNasdaq Capital Market under the ticker symbol “RAND”.“RAND.”
RegulationRegulations
The following discussion is a general summary of the material prohibitions and descriptions governing BDCs and SBA- licensedSBA-licensed SBICs. It does not purport to be a complete description of all of the laws and regulations affecting BDCs and SBICs.
Regulation as a Business Development Company Regulations
We have elected to be regulated as a BDC under the 1940 Act. Although the 1940 Act exempts a BDC from registration under that Act, it contains significant limitations on the operations of BDCs. Among other things, the 1940 Act contains prohibitions and restrictions relating to transactions between a BDC and its affiliates, principal underwriters and affiliates of its affiliates or underwriters. The 1940 Act also prohibits a BDC from changing the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by a vote of the holders of a majority of its outstanding voting securities. BDCs are not required to maintain fundamental investment policies relating to diversification and concentration of investments within a single industry. More specifically, in order to qualify as a BDC, a company must:
(1) be a domestic company;
(2) have registered a class of its equity securities or have filed a registration statement with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”);
(3) operate for the purpose of investing in the securities of certain types of companies, namely immature or emerging companies and businesses suffering or just recovering from financial distress. Generally, a BDC must be primarily engaged in the business of furnishing capital and providing managerial expertise to companies that do not have ready access to capital through conventional financial channels. Such companies are termed “eligible portfolio companies;”
(4) extend significant managerial assistance to such portfolio companies; and
(5) have a majority of “disinterested” directors (as defined in the 1940 Act).
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’stheir total assets. The 1940 Act prohibits business development companiesBDCs from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms and investment companies.
An eligible portfolio company is, generally, a private domestic operating company, or a public domestic operating company whose securities are not listed on a national securities exchange. In addition, any small business investment company that is licensed by the SBA and is a wholly owned subsidiary of a BDC is an eligible portfolio company.
Qualifying assets include:
(1) securities of companies that were eligible portfolio companies at the time the BDC acquired their securities;
(2) securities of bankrupt or insolvent companies that were eligible at the time of the BDC’s initial acquisition of their securities but are no longer eligible, provided that the BDC has maintained a substantial portion of its initial investment in those companies;
(3) securities received in exchange for or distributed on or with respect to any of the foregoing; and
(4) cash items, government securities and high-quality short-term debt.
The 1940 Act also places restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased in order for the securities to be considered qualifying assets.
A BDC is permitted to invest in the securities of public companies and other investments that are not qualifying assets, but those kinds of investments may not exceed 30% of the BDC’s total asset value at the time of the investment. At December 31, 2015,2018, we were in compliance with this rule.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70% test discussed above, a BDC must either control the issuer of the securities or must offer to make available significant managerial assistance; except that, where the BDC purchases the securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.
Small Business Investment Company Regulations
SBA Lending Restrictions
SBICs are designed to stimulate the flow of private debt and/or equity capital to small businesses. The types and dollar amounts of the loans and other investments we may make are limited by the 1940 Act, the Small Business Act (the “SBA Act”) and SBA regulations. Rand SBIC uses funds borrowed from the SBA that can be combined with our own capital to provide loans to, and make equity investments in, businesses that meet the following criteria:
(a) have a tangible net worth not in excess of $18$19.5 million and average net income after U.S. federal income taxes for the preceding two completed fiscal years not in excess of $6$6.5 million, or
(b) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which the businesses are primarily engaged.
In addition, at the end of each fiscal year, an SBIC must have at least 20% (in total dollars) invested in “smaller enterprises.” The SBA defines “smaller enterprises” as businesses that:
(a) do not have a net worth in excess of $6 million and have average net income after U.S. federal income taxes for the preceding two years no greater than $2 million, or
(b) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which the concerns are primarily engaged.
We have complied with this requirementthese requirements since the inception of Rand SBIC.
The RandSBA prohibits an SBIC subsidiary is subjectfrom providing funds to regulationsmall businesses with specific characteristics, such as businesses with the majority of their employees located outside the United States, or from investing in passive ornon-operating businesses, real estate, project financing, farmland, or financial lenders. Without prior SBA approval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory capital in any one company and oversightits affiliates.
The SBA places limitations on the financing terms of investments by SBICs in portfolio companies such as limiting the SBA. Receiptprepayment options, the financing fees that can be charged to a portfolio company, the allowable interest rate on loan and debt securities that an SBIC can charge a portfolio company, and the maximum term of such financing. An SBIC may exercise control over a small business for a period of up to seven years from the date on which the SBIC initially acquires its control position.
The SBA restricts the ability of an SBIC license does not assure that Rand SBIC will receive future SBA guaranteed debenture funding, which is dependent upon it continuing to belend money to any of its officers, directors and employees or to invest in compliance with SBA regulations and policies.associates. The SBA asalso prohibits, without prior SBA approval, a creditor, will have“change of control” of an SBIC or transfers that would result in any person, or a superior claim to Rand SBIC’s assets over our shareholdersgroup of persons acting together, owning 10% or more of a class of capital stock of a licensed SBIC. A “change of control” is any event which would result in the event we liquidate Randtransfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or the SBA exercises its remedies under the SBA-guaranteed debentures issued by Rand SBIC upon an event of default.otherwise.
Rand SBIC may invest directly in thea portfolio company’s equity, of portfolio companies, but may not become a general partner of anon-incorporated entity or otherwise become jointly or severally liable for the general obligations of anon-incorporated entity. Rand SBIC may acquire options or warrants in portfolio companies, and the options or warrants may have redemption provisions, subject to certain restrictions. Pursuant to SBA regulations, the maximum cash which may be invested in any one portfolio company by Rand SBIC is currently $3.0$4.8 million.
In addition the SBA regulations require an examination of a licensed SBIC by an SBA examiner to determine the SBIC’s compliance with the relevant SBA regulations. Our annual report, submitted to the SBA, must be audited by an independent public accounting firm.
SBA Leverage
The SBA raises capital to enable it to provide funds to SBICs by guaranteeing certificates or bonds that are pooled and sold to purchasers of the government guaranteed securities. The amount of funds that the SBA may lend to SBICs is determined by annual Congressional appropriations.
SBA debentures are issued with ten year maturities. Interest only is payable semi-annually until maturity. All of our outstanding SBA debentures may be prepaid without penalty. To reserve the approved SBA debenture leverage, we paid an upfront 1% commitment fee to the SBA as a partial prepayment of the SBA’s nonrefundable 3% leverage fee. These fees are expensed over the life of the corresponding SBA debenture
instruments. The SBA, as a creditor, will have a superior claim to Rand SBIC’s assets over our shareholders in the event we liquidate Rand SBIC or the SBA exercises its remedies under theSBA-guaranteed debentures issued by Rand SBIC upon an event of default.
At December 31, 2015,2018, we had $8,000,000$8,750,000 in outstanding SBA debenture instruments.
Item 1A. | Risk Factors |
Risk FactorsRisks related to our business and structure
Economic downturns or recessions may adversely affectOur financial results will depend on our skill to manage and deploy capital effectively
Our ability to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments depends on our capability to effectively identify, invest and manage our capital.
Accomplishing this investment objective effectively will be based on our management team’s handling of the investment process, starting with its ability to find investments that offer favorable terms and meet our investment objective. They will also have to monitor the portfolio companies’ financialcompany’s performance and therefore harmmay be called upon to provide managerial assistance. These demands on their time may distract them or may slow the rate of investment.
Even if we are able to grow and build on our operating results
The United States economy has periodically experienced periods of instability and recessions and the financial results of the smallinvestment, any failure to medium-sized companies in which we investmanage our growth effectively could be negatively affected by this instability and suffer deterioration in their financial results. This deterioration may have a negativematerial adverse effect on our business, financial performance.
Investing incondition, results of operations and prospects. If we cannot successfully operate our shares may be inappropriate for an investor’s risk tolerance
Our venture capital investments, in accordance withbusiness or implement our investment objective, and principal strategies, result in a greater than average amount of risk and volatility and may result in loss of principal. Our investments in portfolio companies are highly speculative and aggressive and, therefore, an investment init could negatively impact our shares may not be suitable for investors for whom such risk is inappropriate. Neither our investments nor an investment in our shares constitutes a balanced investment program.stock price.
We are subject to risks created by the valuation of our portfolio investments
At December 31, 2015, 100% of our investments are in private securities that are not publicly traded. There is typically no public market for securities of the small privately held companies in which we invest. Investments are valued in accordance with our established valuation policy and are stated at fair value as determined in good faith by management and approved by our Board of Directors. In the absence of a readily ascertainable market value, the estimated value of our portfolio of securities may differ significantly, favorably or unfavorably, from the values that would be placed on the portfolio if a ready market for the securities existed. Any changes in estimated value are recorded in the consolidated statement of operations as “Net increase (decrease) in unrealized appreciation on investments.”
The lack of liquidity in our investments may adversely affect our business
We invest, and will continue to invest, in portfolio companies that are not publicly traded, and whose securities are subject to restrictions on resale and will be less liquid than publicly traded securities. Most of our investments are or will be either equity securities or subordinated debt securities acquired directly from small, private companies. The illiquidity of most of our portfolio may adversely affect our ability to dispose of the securities at times when it may be advantageous for us to liquidate investments. In addition, we may not realize the full value of these private investments if we have to liquidate all or a part of our portfolio quickly.
Investing in private companies involves a high degree of risk
We typically invest a substantial portion of our assets in small and medium sized private companies. These private businesses may be thinly capitalized, unproven companies with risky technologies, may lack management depth, and may not have attained profitability. Because of the speculative nature and the lack of a public market for these investments, there is significantly greater risk of loss than is the case with securities traded on a public exchange. We expect that some of our venture capital investments will become worthless and that some will appear likely to become successful but will never realize their potential. We have been risk seeking rather than risk averse in our approach to venture capital and other investments.
Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Commercial success is difficult to predict and the marketing efforts of the portfolio companies may not be successful.
We typically are minority shareholders in companies
We typically invest as a minority shareholder in our portfolio companies. As a minority shareholder we are unable to require the company to seek or entertain liquidity events as a way to exit our investments. This may cause us to hold investments longer than planned or to seek a sale that may not reflect the full value of our investment.
We are subject to risks created by our regulated environment
We are regulated by the SBASEC and the SEC.SBA. Changes in the laws or regulations that govern SBICsBDCs and BDCsSBICs could significantly affect our business. Regulations and laws may be changed periodically, and the interpretations of the relevant regulations and laws are also subject to change. Any change in the regulations and laws governing our business could have a material impact on our financial condition and our results of operations. Moreover, the laws and regulations that govern BDCs and SBICs may place conflicting demands on the manner in which we operate, and the resolution of those conflicts may restrict or otherwise adversely affect our operations.
We are subject to risks created by borrowing funds from the SBA
Our liabilities may include large amounts of debt instruments issued through the SBA which have fixed interest rates. Until and unless we are able to invest substantially all of the proceeds from debentures at annualized interest or other rates of return that substantially exceed annualized interest rates that Rand SBIC must pay the SBA, our operating results may be adversely affected which may, in turn, depress the market price of our common stock.
CompetitiveIn addition, our outstanding $8,750,000 in SBA debentures will reach maturity and become payable between 2022 and 2029. In order to repay our outstanding SBA debentures, we will need to identify sources of additional funding if the proceeds received upon the exits of our investments are insufficient to fund our operations and repay our SBA obligations. We cannot be assured that the proceeds to be received upon the exits from our investments will be sufficient to meet our funding needs or, if such proceeds are insufficient, that we will be able to obtain access to the necessary funding on terms that are acceptable to us.
We are subject to risks created by the valuation of our portfolio investments
At December 31, 2018, 100% of our investments are in private securities that are not publicly traded. There is typically no public market for securities of the small privately held companies in which we invest. Investments are valued in accordance with our established valuation policy and are stated at fair value as determined in good faith by management and approved by our Board of Directors. In the absence of a readily ascertainable market value, the estimated value of our investment opportunitiesportfolio may differ significantly, favorably or unfavorably, from the values that would be placed on the portfolio if a ready market for the securities existed. Any changes in estimated value are recorded in the consolidated statement of operations as “Net change in unrealized depreciation or appreciation on investments.”
We are dependent upon key management personnel for future success
We are dependent on the skill, diligence, and the network of business contacts of our executive officers for the sourcing and selection, structuring, closing, monitoring and valuation of our investments. Our future success depends, to a significant extent, on the continued employment of these officers and their departure could materially adversely affect our ability to implement our business strategy. We do not maintain key man life insurance or employment agreements on the officers.
We operate in a highlycompetitive market for investment opportunities
We operate in a competitive market for investment opportunities. We face competition in our investing activities from many entities including other SBICs, private venture capital funds, investment affiliates of large companies, wealthy individuals and other domestic or foreign investors. The competition is not limited to entities that operate in the same geographical area as we do. As a regulated BDC, we are required to disclose quarterly and annually the name and business description of our portfolio companies and the value of their portfolio securities. Most of our competitors are not subject to this disclosure requirement. This obligation to disclose this information could hinder our ability to invest in somepotential portfolio companies. Additionally, other
regulations, current and future, may make us less attractive as a potential investor to a given portfolio company than a private venture capital fund.
We are dependent upon key management personnel for future successsubject to cyber security risks and incidents that may adversely affect the operations of our company or the companies in which we invest. A failure in our cyber security systems could impair our ability to conduct business and damage our business relationships, compromise or corrupt our confidential information and ultimately negatively impact business, financial condition and operating results.
WeOur operations are dependent on secure information technology systems for data processing, storage and reporting. Increased cyber security vulnerabilities, threats and more sophisticated and targeted cyber-attacks pose a risk to the skill, diligence,security of our information and the network of business contactsinformation of our two senior officers, Allen F. Grumportfolio companies. These cyber-attacks could affect our computer network, our website or our service providers (such as, but not limited to, accountants, lawyers, and Daniel P. Penberthy, fortransfer agents) and could result in operating disruptions or information misappropriation, which could have a material adverse effect on our business operations and the selection, structuring, closing, monitoringintegrity and valuationavailability of our investments. Our future success depends, to a significant extent, on the continued employment of these two officers and their departure could materially adversely affect our ability to implement our business strategy. We do not maintain key man life insurance on these officers.
financial information. We have attempted to mitigate these cybersecurity risks by employing a limited number of companiesprocesses, procedures and internal controls within our company but we remain potentially vulnerable to additional known and unknown threats.
We may experience fluctuations in our portfolio of investments, and may be subjected to greater risk if any of these companies default
Our portfolio investment values are concentrated in a small number of companies and as such, we may experience a significant loss in our net asset value if one or more of these companies perform poorly or go out of business. The unrealized or realized depreciation in the value of the securities of any one of these companies would negatively impact our net asset value.
Fluctuations of Quarterly Resultsquarterly results
Our quarterly operating results couldmay fluctuate significantly as a result of a number of factors. These factors include, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which portfolio companies encounter competition in their markets, their ability to raise additional capital, if needed, and general economic conditions. As a result of these factors, results for any quarter cannot be relied upon as being indicative of performance in future quarters or for a full year.
Risks related to our investments
We have a limited number of companies in our portfolio of investments, and may be subjected to greater risk if any of these companies default
Our portfolio investment values are concentrated in a small number of companies and as such, we may experience a significant loss in our net asset value if one or more of these companies performs poorly or goes out of business. The unrealized or realized depreciation in the value of the securities of any one of these companies would negatively impact our net asset value.
The lack of liquidity in our investments may adversely affect our business
We invest, and will continue to invest, in portfolio companies whose securities are not publicly traded and may be subject to restrictions on resale, and as a result will be less liquid than publicly traded securities. Most of our investments are or will be either equity securities or subordinated debt securities acquired directly from small, private companies. The illiquidity of most of our portfolio may adversely affect our ability to dispose of the securities at times when it may be advantageous for us to liquidate investments. In addition, we may not realize the full value of these private investments if we have to liquidate all or a part of our portfolio investment quickly, given the lack of available markets for their sale.
Economic downturns or recessions may adversely affect our portfolio companies’ financial performance and therefore harm our operating results
The United States economy has periodically experienced periods of instability and recessions and the financial results of the small companies in which we invest could be more acutely affected negatively by this instability and suffer deterioration in operational or financial results. This deterioration may have a negative effect on our financial performance.
Investing in private companies involves a high degree of risk
We typically invest a substantial portion of our assets in small private companies. These private businesses may be thinly capitalized, unproven companies with risky technologies, products or services, may lack management depth, and may not have attained profitability. Because of the speculative nature and the lack of a public market for these investments, there is significantly greater risk of loss than is the case with securities traded on a public exchange. We expect that some of our investments will become worthless and that some will appear likely to become successful but will never realize their potential. We have been risk seeking rather than risk averse in our approach to our investments.
Even if our portfolio companies are able to develop commercially viable technologies, products or services, the market for those new technologies, products and services is likely to be highly competitive and rapidly changing. Commercial success is difficult to predict and the marketing efforts of the portfolio companies may not be successful.
We generally do not control our portfolio companies
We do not have an expectation to control the decision making in our portfolio companies, even though we may have a board seat or board observation rights. Because of this, we are subject to the risk that our portfolio companies will make business decisions with which we disagree or will incur risks or otherwise act in ways that do not maximize their value and serve our interests as minority debt and equity holders. Due to the lack of liquidity in our investments in these private companies, we may not be able to dispose of our investment in these portfolio companies as freely as we would like or at a valuation that is appropriate. As a result, a portfolio company may make decisions that would decrease the value of our portfolio holdings.
We typically are minority shareholders in our portfolio companies
We typically invest as a minority shareholder in our portfolio companies. As a minority shareholder we are unable to require the company to seek or entertain liquidity events as a way to exit our investments. This may cause us to hold investments longer than planned or to seek a sale that may not reflect the full value of our investment.
We may not have the funds or ability to makefollow-on investments in our portfolio companies
We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a company, we may be asked to participate in another round of financing to the company. There is no assurance that we will make, or have sufficient funds to make, thesefollow-on investments. Any decision to not make an additional investment in a portfolio company may have a negative impact on the portfolio company in need of the capital, and have a negative impact on our ownership in the company.
Item 1B. Risks related to our common stock
Investing in our shares may be inappropriate for an investor’s risk tolerance
Our venture capital investments, in accordance with our investment objective and principal strategies, result in a greater than average amount of risk and volatility and may result in loss of principal. Our investments in portfolio companies are highly speculative and aggressive and, therefore, an investment in our shares may not be suitable for investors for whom such risk is inappropriate. Neither our investments nor an investment in our shares constitutes a balanced investment program.
Sales of substantial amounts of our common stock may have an adverse effect on the market price of our securities.
Sales of substantial amounts of our common stock, or the availability of such securities for sale, could adversely affect the prevailing market prices for our common stock.
Our shares often trade at a discount to our net asset value
Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares and our shares have often traded at such a discount. This characteristic ofclosed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict if, or when, our shares will trade at, above, or below net asset value.
Risks related to the transactions contemplated by the Stock Purchase Agreement
The failure to complete the Transactions may result in a decrease in the market value of our shares.
After the Transactions were announced on January 24, 2019, the market price for our shares of common stock rose significantly. The Transactions are subject to a number of contingencies, including approval by our shareholders and the other closing conditions set forth in the Stock Purchase Agreement. As a result, there is a risk that the Transactions will not be completed. If the Transactions are not completed for any reason or are delayed for a significant period of time, the market price of our shares may decline, including to a price per share that is below the price per share on the date that the Transactions were announced.
If the Transactions are not consummated, there may not be any other offers from potential acquirers or parties interested in a potential strategic transaction.
If the Transactions are not consummated, we may seek another strategic transaction. Although we have had prior discussions with other parties regarding a strategic transaction, these parties may no longer have an interest in a strategic transaction with Rand, or be willing to offer acceptable terms in a transaction.
If we do not complete the Transactions, we may continue to face challenges and uncertainties in our ability to achieve business success.
Historically, Rand has focused on a total return strategy that involved seeking long-term capital appreciation on its equity investments, while maintaining a current cash flow from debt investments and pass-through equity instruments to fund expenses. Rand has observed that this total return strategy has become disfavored among investors resulting in an increasingly larger spread between the share price for the Common Stock and our Net Asset Value (NAV) per share. If the Transactions are not completed, we will not engage an external investment adviser to manage our investment strategy and will remain, for the time being, an internally managed BDC that is likely to continue the same legacy total return strategy. Therefore, if we are unable to complete the Transactions, we may continue to operate our business in a manner that is substantially similar to the manner in which it is currently operated, and would continue to face the same business challenges and uncertainties associated with our current business strategy.
Under certain circumstances, a termination fee may be payable by Rand upon termination of the Stock Purchase Agreement.
The Stock Purchase Agreement provides for the payment by Rand of a termination fee of up to $750,000 if the Stock Purchase Agreement is terminated under certain circumstances. Given our financial condition and amount of cash and cash equivalents on hand, payment of the termination fee in an amount up to $750,000 would likely have a material adverse effect on our financial condition and on our ability to make any significant new investments orfollow-on investments in the near future.
The Stock Purchase Agreement contains restrictions limiting our abiliUnresolved Staff Commentsty to pursue alternatives to theTransactions.
The Stock Purchase Agreement contains provisions that limit our ability to actively solicit, discuss or negotiate competing third-party proposals for strategic transactions. These provisions, which are typical for transactions of this type, and include the termination fee payable under certain circumstances, might discourage a competing acquirer that might have an interest in acquiring all or a significant part of Rand from considering or proposing a transaction even if it were prepared to pay consideration with a higher price than that to be paid by East in the Stock Purchase Agreement or might result in a potential competing acquirer proposing to pay a lower price to acquire Rand than it might otherwise have proposed to pay without Rand’s requirement to pay the termination fee in order to terminate the Stock Purchase Agreement to accept a superior proposal.
The failure of satisfy the closing conditions under the Stock Purchase Agreement, including receipt of shareholder approvals, will result in the Transactions not being completed.
The Transactions are subject to closing conditions, including certain approvals of shareholders and approval of the SBA, which, if not satisfied, will prevent the Transactions from being completed. The closing condition requiring shareholder approvals may not be waived under applicable law and must be satisfied for the Transactions to be completed. In addition to the required approvals from the shareholders, the Transactions are subject to a number of other conditions, some of which are beyond our direct control. We cannot predict when the conditions set forth in the Stock Purchase Agreement will be satisfied or if they will be satisfied at all.
The Company will be subject to operational uncertainties and contractual restrictions while the Transactions are pending.
Uncertainty about the effect of the Transactions may have an adverse effect on Rand while the Transactions are pending. These uncertainties may impair Rand’s ability to retain key personnel until the Transactions are consummated and could cause those that deal with Rand to seek to change their existing relationships with Rand. In addition, the Stock Purchase Agreement imposes limitations on Rand with respect to actions that it can take while the Transactions are pending, which may result in us not pursuing or being unable to pursue certain business opportunities that may arise prior to the completion of the Transactions.
If the Transactions do not close, the Company will not benefit from the expenses incurred in furtherance of the Transactions.
If the Transactions are not completed, Rand will have incurred substantial expenses for which no ultimate benefit will have been received. Rand has incurred, and will continue to incur,out-of-pocket expenses in connection with the Transactions for investment banking, legal and accounting fees and other expenses, much of which will be incurred even if the Transactions are not completed.
If we complete the Transactions, we will face risks associated with the terms and structure of the Transactions.
If the Transactions are completed, there are risks arising from the terms and structure of the Transactions, including the following:
Despite our expressed intentions, we may not declare or pay a special dividend or regular cash dividends to shareholders.
East will exercise significant influence in connection with its ownership of Common Stock.
RCM has no prior experience managing or acting as an investor adviser for a BDC.
We will be dependent upon RCM for our future success.
There are potential conflicts of interest, including the management of other investment funds and accounts by the principals and certain members of the Investment Committee of RCM, which could impact our investment returns.
Our ability to enter into transactions with affiliates of RCM will be restricted.
Item 1B. | Unresolved Staff Comments |
Not applicable.
Item 2. | Properties |
We currently lease office space in Buffalo, New York for our corporate headquarters. We believe that these leased facilities are adequate to support our current staff and expected future needs.
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock (“Common Stock”) is traded on the NASDAQNasdaq Capital Market (“NASDAQ”Nasdaq”) under the symbol “RAND.” The following table sets forth, for the periods indicated, the range of high and low closing sales prices per share as reported by NASDAQ:
2015 Quarter ended: | High | Low | ||||||
March 31 | $ | 4.20 | $ | 3.83 | ||||
June 30 | $ | 4.01 | $ | 3.73 | ||||
September 30 | $ | 4.15 | $ | 3.77 | ||||
December 31 | $ | 4.03 | $ | 3.58 | ||||
2014 Quarter ended: | High | Low | ||||||
March 31 | $ | 3.56 | $ | 3.00 | ||||
June 30 | $ | 3.51 | $ | 3.11 | ||||
September 30 | $ | 3.24 | $ | 2.99 | ||||
December 31 | $ | 4.12 | $ | 3.04 |
We have historically not paid any cash dividends into shareholders. Unless the two most recent fiscal years, andtransactions contemplated by the Stock Purchase Agreement are completed, we have no present intention of paying cash dividends in the upcoming fiscal year.foreseeable future.
Issuer Purchases of Equity Securities
Period | Total number of | Average price paid per | Total number of shares purchased as part of publicly announced | Maximum number of shares that may yet be the share repurchase | ||||||||||||
10/1 – 10/31/ | — | — | — | |||||||||||||
11/1 – 11/30/ | — | — | — | |||||||||||||
12/1 – 12/31/ | — | — | — |
(1) | There were no shares repurchased during the fourth quarter of |
(2) | The average price paid per share is calculated on a settlement basis and includes commission. |
(3) | On October |
Shareholders of Record
On March 4, 20161, 2019, we had a total of 780approximately 908 shareholders, which included 9377 record holders of our Common Stock, and an estimated 687831 holders with shares beneficially owned in nominee name or under clearinghouse positions of brokerage firms or banks.
Corporation Performance Graph
The following graph shows a five-year comparison of cumulative total shareholder returns for our Common Stock, the NASDAQNasdaq Market Index, and ouran old and new Peer Group, assuming a base index of $100 at the end of 2010.2013. The cumulative total return for each annual period within the five years presented is measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend investment,reinvestment, and (B) the difference between share prices at the end and at the beginning of the measurement period by (2) the share price at the beginning of the measurement period.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2015
Comparison of cumulative total return of one or more companies, peer groups, industry indexes and/or broad markets
FISCAL YEAR ENDED
YEAR ENDED DECEMBER 31, | ||||||||||||||||||||||||
Company/Index/Market | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||
Rand Capital Corporation | $ | 100.00 | $ | 133.22 | $ | 122.80 | $ | 102.93 | $ | 98.37 | $ | 81.46 | ||||||||||||
NASDAQ Market Index | $ | 100.00 | $ | 114.75 | $ | 122.74 | $ | 133.62 | $ | 173.22 | $ | 168.30 | ||||||||||||
New Peer Group Index | $ | 100.00 | $ | 90.09 | $ | 69.29 | $ | 46.63 | $ | 54.92 | $ | 54.75 | ||||||||||||
Old Peer Group Index | $ | 100.00 | 99.36 | $ | 52.83 | $ | 45.78 | $ | 51.88 | $ | 60.37 |
The New Peer Group was comprised of the following companies:
Equus Total Return, Inc. (NYSE: EQS)
Company/Index/Market | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||
Rand Capital Corporation | $ | 100.00 | $ | 95.98 | $ | 72.45 | $ | 95.05 | $ | 126.63 | $ | 116.72 | ||||||||||||
NASDAQ Market Index | $ | 100.00 | $ | 99.17 | $ | 116.48 | $ | 163.21 | $ | 187.27 | $ | 200.31 | ||||||||||||
Peer Group Index | $ | 100.00 | $ | 79.20 | $ | 97.14 | $ | 131.08 | $ | 130.23 | $ | 69.25 |
Firsthand Technology Value Fund, Inc. (NasdaqGS: SVVC)
GSV Capital Corp. (NasdaqCM: GSVC)
180 Degree Capital Corp. (NasdaqGM: TURN)
The Old Peer Group was comprised of the following companies:
Capital Southwest Corporation (NasdaqGS: CSWC)
First HandFirsthand Technology Value Fund, Inc. (NasdaqGS:SVVC)
GSV Capital Corp. (NasdaqCM:GSVC)
Harris & Harris Group, Inc.180 Degree Capital Corp. (NasdaqGM:TINY) TURN)
We selected the New Peer Group because it is our belief that the four issuers in the group have investment objectives that are similar to ours, and among the publicly traded companies, they are relatively similar in size to us. Capital Southwest was removed from our peer group to reflect the change in their business strategy.
The performance graph information provided above will not be deemed to be “soliciting material” or “filed” with the SEC or subject to Regulations 14A or 14C, or to the liabilities of section 18 of the Securities Exchange Act, unless in the future we specifically request that the information be treated as soliciting material or specifically incorporate it by reference into any filing under the Securities Act or the Exchange Act.
Item 6. |
The following table provides selected consolidated financial data for the periods indicated. You should read the selected financial data set forth below in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with the consolidated financial statements and related notes appearing within Item 8 of this Annual Report.
Balance Sheet Data as of December 31:
Balance Sheet Data as of December 31: | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Total assets | $ | 40,521,724 | $ | 40,133,913 | $ | 42,418,530 | $ | 44,562,060 | $ | 45,525,987 | ||||||||||
Total liabilities | $ | 8,997,537 | $ | 8,215,228 | $ | 9,789,167 | $ | 10,708,400 | $ | 13,172,546 | ||||||||||
Net assets | $ | 31,524,187 | $ | 31,918,685 | $ | 32,629,363 | $ | 33,853,660 | $ | 32,353,441 | ||||||||||
Net asset value per outstanding share | $ | 4.99 | $ | 5.05 | $ | 5.16 | $ | 5.35 | $ | 5.11 | ||||||||||
Shares of common stock outstanding | 6,321,988 | 6,321,988 | 6,321,988 | 6,328,538 | 6,328,538 | |||||||||||||||
Operating Data for the Years Ended December 31: | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Investment income | $ | 2,106,954 | $ | 1,454,782 | $ | 1,031,858 | $ | 2,824,337 | $ | 2,584,475 | ||||||||||
Total expenses | $ | 2,193,672 | $ | 2,010,977 | $ | 3,401,037 | $ | 1,817,279 | $ | 2,499,297 | ||||||||||
Net investment (loss) gain, net of tax | ($ | 68,406 | ) | ($ | 19,298 | ) | ($ | 1,553,268 | ) | $ | 842,902 | $ | 21,835 | |||||||
Net realized (loss) gain on sales and dispositions of investments, net of tax | ($ | 994,295 | ) | $ | 88,684 | $ | 8,864,653 | ($ | 27,973 | ) | $ | 4,767,484 | ||||||||
Net increase (decrease) in unrealized depreciation or appreciation on investments, net of tax | $ | 668,203 | ($ | 780,064 | ) | ($ | 8,514,068 | ) | $ | 685,290 | ($ | 247,838 | ) | |||||||
Net (decrease) increase in net assets from operations | ($ | 394,498 | ) | ($ | 710,678 | ) | ($ | 1,202,683 | ) | $ | 1,500,219 | $ | 4,541,481 |
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
Total assets | $ | 44,761,687 | $ | 45,525,987 | $ | 39,750,370 | $ | 34,252,413 | $ | 31,331,957 | ||||||||||
Total liabilities | $ | 10,908,027 | $ | 13,172,546 | $ | 11,681,038 | $ | 8,470,113 | $ | 6,932,836 | ||||||||||
Net assets | $ | 33,853,660 | $ | 32,353,441 | $ | 28,069,332 | $ | 25,782,300 | $ | 24,399,121 | ||||||||||
Net asset value per outstanding share | $ | 5.35 | $ | 5.11 | $ | 4.38 | $ | 3.90 | $ | 3.58 | ||||||||||
Shares of common stock outstanding | 6,328,538 | 6,328,538 | 6,411,918 | 6,610,236 | 6,818,934 | |||||||||||||||
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 within Item 8 of this Annual Report.
FORWARD LOOKING STATEMENTS
Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this reportReport 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��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.SEC. 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, “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-lookinginflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part I, Item 1A. of this Annual Report.
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
WeCurrently, we are an internally managed venture capital investment company that lends to and invests in small and medium-sized companies primarily in connectionoften concurrently with loans or investments made concurrently by 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 makehave 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. We anticipate that most, if not all, of our investments madeRand SBIC was approved for an additional $6.0 million in the next year will be originated through Rand SBIC.new SBA leverage commitments during 2018.
Our principal investment objective ishas historically been to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments.instruments to fund our operating expenses. Therefore, we invest in a variety of financial instruments to provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term and typically do not generate current income in the form of dividends or interest.
We look for certain criteria in the companies in which we might invest. These criteria are:
1) a qualified and experienced management team;
2) a new or unique product or service; and
3) high potential for growth in revenue and cash flow;
We have historically made initial investments of $500,000 to $1,000,000 directly in a companycompanies through equity or in debt or loan instruments and frequently providedfollow-on investments during our investment tenure. We are now considering larger cumulative investments to drive our growth, keeping within the SBA regulations that limit our total investment in one company to $3.0 million. The debt instruments generally have a maturity of not more than five years and usually have detachable equity warrants. Interest may be paid currently or deferred, based on the investment structure negotiated.
Our management team identifies investment opportunities through a network of investment referral relationships. Investment proposals may, however, come to us from other sources, including unsolicited proposals from companies and referrals from banks, lawyers, accountants and other members of the financial community. We believe that our reputation in the investment community and experience provide a competitive advantage in originating qualified new investments.
In a typical private financing, our management team will review, analyze, and evaluate, through due diligence, the business plan and operations of the potential portfolio company. Additionally, we will familiarize ourselves with the portfolio company’s industry and competition and may conduct reference checks with their customers and suppliers.
Following an initial investment, we may make follow-on investments in the portfolio company. Follow-on investments may be made to take advantage of warrants or other preferential rights granted to us to increase or maintain our position in a promising portfolio company, or provide an additional investment to allow a portfolio company to fully implement its business plans, develop a new line of business or recover from unexpected business problems. Follow-on investments in a portfolio company are evaluated individually and may be subject to regulatory restrictions. Pursuant to SBA regulations, the maximum cash which may be invested in one portfolio company by Rand SBIC is currently $3.0 million.
We may exit investments through the maturation of a debt security or when a liquidity event takes place, such as the sale, recapitalization, or initial public offering of a portfolio company. The method and timing of the disposition of our portfolio investments can be critical to the realization of maximum total return. We generally expect to dispose of our equity securities through private sales of securities to other investors or through an outright sale of the portfolio company or a merger. We anticipate our debt investments will be repaid with interest and hope to realize further appreciation from the warrants or other equity type instruments we receive in connection with the investment. We fund new investments and operating expenses through existing cash balances, investment returns, and interest and principal payments from our portfolio companies.companies
In January 2019, we entered into a stock purchase agreement to sell approximately 8.3 million shares of our common stock to East Asset Management, LLC (“East”) for $25 million in cash and portfolio assets. The portfolio assets will be income-producing instruments that were originated in the last 48 months. Additionally, a new entity, Rand Capital Management, LLC (“RCM”), will be established as an external management company and will be retained by Rand Capital to be its investment advisor. RCM will have the same management team that is currently at Rand. The sale and issuance of common stock pursuant to the stock purchase agreement as well as the externalization of the management structure are subject to shareholder and other regulatory approvals.
Following the closing of the above-described transactions ( the “Transactions”) and contingent upon meeting certain2015tax-related conditions, we intend to elect to become a regulated investment company (“RIC”) for U.S. federal tax purposes. This will enable the pass through of capital gains and investment income to shareholders without payment of corporate-level U.S. federal income tax by Rand.
2018 Portfolio and Investment Activity
We believe the change in net asset value over time is the leading valuation metric for monitoringof our performance. ChangesExits from quarter to quarter, and at any pointour portfolio holdings are the key driver of growth in time, may vary because of specific activity related to an investment, but the overall growth trend demonstrates the effectiveness of our investment efforts.net asset value over time.
Net asset value of our portfolio increaseddecreased to a record $5.35$4.99 per share, or $33.9$31.5 million, at December 31, 2015, up $0.242018, down ($0.06) per share, or 5%(1.2%), overcompared with net asset value of $5.11$5.05 per share, or $32.4$31.9 million, at the end of the prior year.
The value of Rand’s investments was $36.8 million, which reflected $9.4 million in net pre-tax unrealized appreciation.
At year end, the estimated value of our portfolio, which included investments in securities heldfrom 30 active companies, was $34.7 million. This value included $3.6 million in 31 businesses was $36.8 million.netpre-tax unrealized depreciation.
Approximately 85%59% of the portfolio was equity investments with the remainder being debt and loan investments.
The portfolio generated approximately $2.8$2.1 million in interest, fee, dividend and other income a record level.in 2018.
During 2015,2018, we made $7.0$2.5 million inof new investments in 16 businesses including follow-on investments in existing portfolio companies. We added four8 companies, of which one was a new portfolio companies during the year.company.
Subsequent to year end, we announced the pending sale of our largest portfolio company, Gemcor II, LLC (Gemcor). We expect to receive gross cash proceeds of approximately $14 million upon completion of the sale, anticipated in the first quarter of 2016. The proceeds will be available for investment, as well as for general corporate purposes. Our investment in Gemcor generated approximately $1.8 million in interest and dividend revenue during 2015. As a result of the anticipated closing of the Gemcor sale, interest and dividend revenue will decrease in 2016.
Outlook
At the end of 2015,2018, we had $5.8$4.0 million in cash available for future investments. investments and expenses, a decrease from $6.3 million at the end of 2017. The decrease was primarily due to $2.5 million of investments originated during 2018 as well as funding ongoing operating expenses.
We received SBA approval during 2018 for an additional $6.0 million in leverage and we drew down $750,000 of that leverage as of December 31, 2018 and an additional $2,250,000 in January 2019.
We believe the combination of cash on hand, anticipated proceeds from the Gemcor sale,portfolio exits, 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. BothAdditionally, upon the anticipated closing of the Transactions described above, we will have additional investments in our portfolio and additional cash to invest. The following short and long-term trends provide us confidence in our ability to grow Rand.Rand:
We expect that well run U.S. businesses will require capital to grow and should be able to compete effectively given the low cost of capital, strong business and consumer spending,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 involved with the governance and management of a majority of our portfolio companies, which enables us to support their operating and marketing efforts and facilitate their growth.
As our portfolio expands, we are able to better leverage our infrastructure.
We have sufficient cash to invest in new opportunities and to repurchase shares. At year end, we had authorization to repurchase an additional 465,504458,954 shares of our Common Stock under the current program.
GivenStock. However, our increased scale we are ableprioritized use of cash continues to invest larger amounts in companies, which will provide an opportunity to acceleratebe growing our rate of growth.portfolio.
We continuebelieve the anticipated receipt of cash and portfolio assets from East, as well as the establishment of RCM as an external management company, will broaden our potential pipeline of investment opportunities in order to manage risk by investing with other investors, when possible.
We are actively involved with the governance and management ofbuild our portfolio companies which enables usand grow further. Strategically, we expect to support their operating and marketingadvance our efforts to facilitate their growth.increase our income producing investments that can support a regular cash dividend for shareholders and complement our equity investments that drive capital appreciation.
As our portfolio continues to expand, 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, or GAAP, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. For a summary of all significant accounting policies, including critical accounting policies, see Note 1 to the consolidated financial statements in Item 8 of this Annual Report.
The increasing complexity of the business environment and applicable authoritative accounting guidance require us to closely monitor our accounting policies and procedures. We have two critical accounting policies that require the use of significant judgment. The following summary of critical accounting policies is intended to enhance a reader’s ability to assess our financial condition and results of operations and the potential volatility due to changes in estimates.
Valuation of Investments
Investments are valued at fair value as determined in good faith by management and submitted to theapproved by our Board of Directors for approval.Directors. We invest in loan, instruments, debt, instruments, and equity instruments and there is no single standard for determining fair value of these investments. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment andcompany while employing a consistent valuation process. We analyze and value each investment quarterly, and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of the recorded value of an equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that an underlying portfolio company has appreciated in value and, therefore, its equity security has 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 our assumptions and judgments differ from results of actual liquidation events.
Our investments are carried at fair value in accordance with FASB Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements.
Loan investments are defined as traditional loan financings with no equity features. Debt investments are defined as debt financings that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. A financing may also be categorized as a debt financing if it is accompanied by the direct purchase of an equity interest in the portfolio company.
We useutilize 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 anthe investment or sufficient assets or liquidation proceeds are expected to exist from a sale of a portfolio company at its estimated fair value.
The loan and debt securities However, they may also be valued at an amount other than cost given the pricecarrying interest rate versus the security would command in order to provide a yield to maturity equivalent torelated inherent portfolio risk of the current yield of similar debt securities.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. This approach values the equity at the value remaining after the portfolio company pays of its debt and loan balances and its outstanding liabilities. 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, we adjust 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 our valuation at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable and significant inputs to determining the fair value.
Financial assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Any changes in estimated fair value are recorded in the statement of operations as “Net increase (decrease)change in unrealized appreciationdepreciation on investments.”
Under ourthe valuation policy, we value unrestricted publicly traded companies, categorized as Level 1 investments, at the average closing bid price for the last three trading days of the quarter.reporting period. There were no Level 1 or Level 2 investments as of December 31, 2018.
In the valuation process, we value privaterestricted securities, categorized as Level 3 investments, using financial information from these portfolio companies, which may include:
Financial information obtained from each portfolio company, including auditedAudited 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;investment, or recent fund-raisingfundraising transactions;
Current ability of the portfolio company to raise additional financing if needed;
Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
Internal occurrencescircumstances 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 our management.management to assess valuation.
This information is used to determine the financial condition, performance, and valuation of the portfolio companies. The valuation may be reduced if a portfolio company’s performance and/orand potential have deteriorated.deteriorated significantly. If the factors whichthat led to a reduction in valuation are overcome, the valuation may be readjusted.
Equity Securities
Equity securities in which we investSecurities may include preferred stock, common stock, warrants and limited liability company membership interests.
The significant unobservable inputs used in the fair value measurement of our equity investments are EBITDAearnings before interest, taxes and depreciation and amortization (EBITDA) and revenue multiples, where applicable, the financial and operational performance of the business, and the senior equity preferences whichthat may exist in a deemed liquidation event. Standard industry multiples may be used when available; however, our portfolio companies are typically small and in the early stages of development and these industry standards may have to 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 to the unobservable inputs, such as variances in financial performance from expectations, may result in a significantly higher or lower fair value measurement. 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 transactionstransaction with a sophisticatednon-strategic unrelated new investor(s) ininvestor entered into by the portfolio company. The terms of these equity transactions may not be identical to the equity transactions between us and the portfolio company and us, 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 we use 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 increases or decreaseschanges in any of these unobservable inputs wouldmay result in a significantly higher or lower fair value measurement.estimate.
For recent investments, we generally rely on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing us to depart from this basis.
Loans and Debt Securities
The significant unobservable inputs used in the fair value measurement of our loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio
companies, current market rates for underlying risks associated with the particular company, as well as the market acceptance of the portfolio company’s products or services.services and its future performance. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. Our 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, we generally rely on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing us to depart from this basis.
Revenue Recognition
Interest income generally is recognized on the accrual basis except where the investment is in default or otherwise presumed to be in doubt. In such cases, interest income is recognized at the time of receipt. A reserve for possible losses on interest receivable is maintained when appropriate.
RandOur 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 the loan is in default 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.
We hold debt securities in our investment portfolio that containpayment-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.
We may receive distributions from portfolio companies that are limited liability companies or corporations. 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.
We hold preferred equity securities that may contain cumulative dividend provisions. Cumulative dividends are recorded as dividend income when they are declared and anydeemed a contractual obligation. Any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equitysecurity is redeemed.
Financial Condition
Overview:
12/31/15 | 12/31/14 | (Decrease) Increase | % (Decrease) Increase | 12/31/18 | 12/31/17 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||
Overview: | ||||||||||||||||||||||||||||||||
Total assets | $ | 44,761,687 | $ | 45,525,987 | ($ | 764,300 | ) | (1.7 | %) | $ | 40,521,724 | $ | 40,133,913 | $ | 387,811 | 1.0 | % | |||||||||||||||
Total liabilities | 10,908,027 | 13,172,546 | (2,264,519 | ) | (17.2 | %) | 8,997,537 | 8,215,228 | 782,309 | 9.5 | % | |||||||||||||||||||||
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Net assets | $ | 33,853,660 | $ | 32,353,441 | $ | 1,500,219 | 4.6 | % | $ | 31,524,187 | $ | 31,918,685 | ($ | 394,498 | ) | (1.2 | %) | |||||||||||||||
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Net asset value was $5.35$4.99 per share at December 31, 20152018 versus $5.11$5.05 per share at December 31, 2014.2017.
The outstanding SBA debentures at December 31, 20152018 and 2017 are $8,750,000 and $8,000,000, which willrespectively. The debentures mature from 2022 through 2025.2029.
Cash approximated 17%13% of net assets at December 31, 20152018 compared to 41%20% at December 31, 2014.2017.
Composition of the Investment Portfolio
Our financial condition is dependent on the success of our portfolio holdings. We have invested substantially all of our assetsholdings, which are investments in small to medium-sized companies. The following summarizes our investment portfolio at the year-endsyear ends indicated.
12/31/15 | 12/31/14 | Increase | % Increase | 12/31/18 | 12/31/17 | Change | % Change | |||||||||||||||||||||||||
Investments, at cost | $ | 27,410,742 | $ | 22,213,476 | $ | 5,197,266 | 23.4 | % | $ | 38,292,143 | $ | 36,689,319 | $ | 1,602,824 | 4.4 | % | ||||||||||||||||
Unrealized appreciation, net | 9,421,658 | 8,091,900 | 1,329,758 | 16.4 | % | |||||||||||||||||||||||||||
Unrealized depreciation, net | (3,625,339 | ) | (4,405,257 | ) | 779,918 | (17.7 | %) | |||||||||||||||||||||||||
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Investments, at fair value | $ | 36,832,400 | $ | 30,305,376 | $ | 6,527,024 | 21.5 | % | $ | 34,666,804 | $ | 32,284,062 | $ | 2,382,742 | 7.4 | % | ||||||||||||||||
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Number of Portfolio Companies | 31 | 29 | ||||||||||||||||||||||||||||||
Number of Active Portfolio Companies | 30 | 30 |
Our total investments at fair value, as estimated by management and approved by the Board of Directors, approximated 109%110% of net assets at December 31, 20152018 and 94%101% of net assets at December 31, 2014.2017.
The change in investments, at cost, during the year ended December 31, 2015,2018, is comprised of the following:
Cost Increase (Decrease) | ||||
New investments: | ||||
GoNoodle, Inc. (GoNoodle) (formerly HealthTeacher, Inc.) | $ | 1,000,025 | ||
Genicon, Inc. (Genicon) | 1,000,000 | |||
SciAps, Inc. (SciAps) | 749,999 | |||
Rheonix, Inc. (Rheonix) | 680,475 | |||
Tilson Technology Management, Inc. (Tilson) | 600,000 | |||
Outmatch (formerly Chequed Holdings LLC) | 500,000 | |||
City Dining Cards, Inc. (City Dining) | 500,000 | |||
SocialFlow, Inc. (Social Flow) | 500,000 | |||
OnCore Golf Technology, Inc. (Oncore Golf) | 325,000 | |||
GiveGab, Inc. (Give Gab) | 212,833 | |||
Knowledge Vision Systems Inc. (Knowledge Vision) | 200,001 | |||
BeetNPath, LLC (BeetNPath) | 200,000 | |||
Mezmeriz, Inc. (Mezmeriz) | 151,477 | |||
Statisfy, Inc. (Statisfy) (formerly CrashMob, Inc.) | 150,000 | |||
Teleservices Solutions Holdings, LLC (Teleservices) | 104,198 | |||
Intrinsiq Materials, Inc. (Intrinsiq) | 95,000 | |||
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Total of new investments | 6,969,008 | |||
Other changes to investments: | ||||
Teleservices dividend conversion | 131,200 | |||
First Wave Products Group, LLC (First Wave) interest conversion and OID amortization | 31,353 | |||
Rheonix interest conversion | 22,257 | |||
Outmatch interest conversion | 12,274 | |||
Mercantile Adjustment Bureau, LLC (Mercantile) OID amortization | 9,997 | |||
BeetNPath interest conversion | 9,000 | |||
GoNoodle interest conversion | 8,974 | |||
SciAps interest conversion | 4,711 | |||
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Total of other changes to investments | 229,766 | |||
Investments repaid, sold or liquidated: | ||||
Gemcor II, LLC (Gemcor) repayment | (205,828 | ) | ||
CrowdBouncer, Inc. (Crowdbouncer) realized loss | (300,000 | ) | ||
Synacor, Inc. (Synacor) shares sold | (385,680 | ) | ||
Carolina Skiff LLC (Carolina Skiff) repayment | (1,110,000 | ) | ||
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Total investments repaid, sold or liquidated | (2,001,508 | ) | ||
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Net change in investments, at cost | $ | 5,197,266 | ||
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Cost Increase (Decrease) | ||||
New investments: | ||||
KnowledgeVision Systems, Inc. (Knowledgevision) | $ | 775,000 | ||
Tech 2000, Inc. (Tech 2000) | 600,000 | |||
BeetNPath, LLC (Beetnpath) | 262,627 | |||
Genicon Inc. (Genicon) | 250,000 | |||
SciAps, Inc. (Sciaps) | 250,000 | |||
Centivo Corporation (Centivo) | 200,000 | |||
Tilson Technology Management, Inc. (Tilson) | 100,000 | |||
Empire Genomics, LLC (Empire Genomics) | 50,000 | |||
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Total of new investments | 2,487,627 | |||
Other changes to investments: | ||||
Empire Genomics capitalized fee income and interest conversion | 298,287 | |||
Genicon interest conversion and OID amortization | 231,807 | |||
OnCore Golf Technology, Inc. (Oncore) interest conversion | 77,712 | |||
Microcision LLC (Microcision) interest conversion | 19,213 | |||
Tech 2000 interest conversion | 10,777 | |||
GoNoodle, Inc. (GoNoodle) interest conversion | 10,333 | |||
Centivo interest conversion | 1,342 | |||
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Total of other changes to investments | 649,471 |
Investments repaid, sold or liquidated: | ||||
Intrinsiq Material, Inc. (Intrinsiq) realized loss | (1,125,673 | ) | ||
First Wave Technologies, Inc. (First Wave) realized loss | (338,469 | ) | ||
Knoa Software Inc. (Knoa) repayment | (48,466 | ) | ||
Empire Genomics repayment | (21,667 | ) | ||
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Total of investments repaid, sold or liquidated | (1,534,274 | ) | ||
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Net change in investments, at cost | $ | 1,602,824 | ||
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Our top five portfolio companies represented 50%39% of total assets at December 31, 2015:2018:
Company | Industry | Fair Value at December 31, 2015 | % of Total Assets at December 31, 2015 | |||||||
Gemcor | Manufacturing — Aerospace Machinery | $ | 13,816,972 | 31 | % | |||||
Rheonix | Health Care — Testing Devices | $ | 2,938,731 | 7 | % | |||||
Outmatch | Software | $ | 2,145,496 | 5 | % | |||||
Social Flow, Inc. | Software | $ | 2,071,300 | 4 | % | |||||
Microcision | Manufacturing — Medical Products | $ | 1,891,964 | 4 | % |
Company | Industry | Fair Value at December 31, 2018 | % of Total Assets at December 31, 2018 | |||||||
Genicon, Inc. | Health Care – Testing Device | $ | 4,423,086 | 11 | % | |||||
eHealth Global Technologies, Inc. | Health Care | $ | 3,500,000 | 9 | % | |||||
ACV Auctions, Inc. | Software | $ | 2,776,907 | 7 | % | |||||
Tilson Technology Management, Inc. | Professional Services | $ | 2,600,000 | 6 | % | |||||
Microcision, LLC | Manufacturing | $ | 2,543,353 | 6 | % |
Our top five portfolio companies represented 38%37% of total assets at December 31, 2014:2017:
Company | Industry | Fair Value at December 31, 2014 | % of Total Assets at December 31, 2014 | |||||||
Gemcor | Manufacturing — Aerospace Machinery | $ | 9,922,800 | 22 | % | |||||
Rheonix | Health Care — Testing Devices | $ | 2,235,999 | 5 | % | |||||
Microcision | Manufacturing — Medical Products | $ | 1,891,965 | 4 | % | |||||
Carolina Skiff | Consumer Products — Boats | $ | 1,710,000 | 4 | % | |||||
Chequed.com, Inc. | Software | $ | 1,633,222 | 3 | % |
Below is the geographic breakdown of our investments at fair value as of December 31, 2015 and 2014:
Company | Industry | Fair Value at December 31, 2017 | % of Total Assets at December 31, 2017 | |||||||
Genicon, Inc. | Health Care – Testing Device | $ | 4,023,779 | 10 | % | |||||
eHealth Global Technologies, Inc. | Health Care | $ | 3,500,000 | 9 | % | |||||
Rheonix, Inc. | Health Care – Testing Device | $ | 2,938,731 | 7 | % | |||||
Tilson Technology Management, Inc. | Professional Services | $ | 2,500,000 | 6 | % | |||||
Outmatch Holdings, LLC | Software | $ | 2,145,496 | 5 | % |
Geographic Region | % of Net Asset Value at December 31, 2015 | % of Net Asset Value at December 31, 2014 | ||||||
USA – East | 107 | % | 89 | % | ||||
USA – South | 2 | % | 5 | % | ||||
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109 | % | 94 | % | |||||
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Below | is the geographic breakdown of our investments at fair value as of December 31, 2018 and 2017: |
Geographic Region | % of Net Asset Value at December 31, 2018 | % of Net Asset Value at December 31, 2017 | ||||||
USA – East | 94 | % | 86 | % | ||||
USA - South | 16 | % | 15 | % | ||||
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Total investments as a % of net asset value | 110 | % | 101 | % | ||||
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As of December 31, 20152018 and 2014,2017, the investment portfolio consisted of the following types of investments:
Cost | Percentage of Total Portfolio | Fair Value | Percentage of Total Portfolio | Cost | Percentage of Total Portfolio | Fair Value | Percentage of Total Portfolio | |||||||||||||||||||||||||
December 31, 2015: | ||||||||||||||||||||||||||||||||
December 31, 2018: | ||||||||||||||||||||||||||||||||
Subordinated Debt and Promissory Notes | $ | 5,526,636 | 20 | % | $ | 4,648,604 | 13 | % | $ | 14,017,541 | 36 | % | $ | 13,296,948 | 38 | % | ||||||||||||||||
Convertible Debt | 845,000 | 3 | 845,000 | 2 | 1,866,615 | 5 | 1,036,808 | 3 | ||||||||||||||||||||||||
Equity and Membership Interests | 20,290,424 | 74 | 30,709,739 | 83 | 22,155,337 | 58 | 20,260,523 | 59 | ||||||||||||||||||||||||
Equity Warrants | 748,682 | 3 | 629,057 | 2 | 252,650 | 1 | 72,525 | 0 | ||||||||||||||||||||||||
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Total | $ | 27,410,742 | 100 | % | $ | 36,832,400 | 100 | % | $ | 38,292,143 | 100 | % | $ | 34,666,804 | 100 | % | ||||||||||||||||
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December 31, 2017: | ||||||||||||||||||||||||||||||||
Subordinated Debt and Promissory Notes | $ | 12,924,321 | 35 | % | $ | 11,796,289 | 37 | % | ||||||||||||||||||||||||
Convertible Debt | 1,849,955 | 5 | 1,849,955 | 6 | ||||||||||||||||||||||||||||
Equity and Membership Interests | 21,640,393 | 59 | 18,482,793 | 57 | ||||||||||||||||||||||||||||
Equity Warrants | 274,650 | 1 | 155,025 | 0 | ||||||||||||||||||||||||||||
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Total | $ | 36,689,319 | 100 | % | $ | 32,284,062 | 100 | % | ||||||||||||||||||||||||
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December 31, 2014: Subordinated Debt and Promissory Notes Convertible Debt Equity and Membership Interests Equity Warrants Total Cost Percentage of
Total Portfolio Fair Value Percentage of
Total Portfolio $ 4,807,140 22 % $ 4,807,140 16 % 1,200,000 6 1,200,000 4 16,086,711 72 24,178,611 80 119,625 — 119,625 — $ 22,213,476 100 % $ 30,305,376 100 %
Results of Operations
Investment Income
Our principal investment objective is to achieve long-term capital appreciation on our equity investments while investingmaintaining a current cash flow from our debenture and pass-through equity instruments to fund expenses. Therefore, we invest in a mixturevariety of loan, debenture and equityfinancial instruments which mayto provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term.
Comparison of the years ended December 31, 20152018 and 20142017
December 31, 2018 | December 31, 2017 | Increase | % Increase | |||||||||||||
Interest from portfolio companies | $ | 1,498,740 | $ | 1,155,316 | $ | 343,424 | 30 | % | ||||||||
Interest from other investments | 37,614 | 30,761 | 6,853 | 22 | % | |||||||||||
Dividend and other investment income | 384,382 | 243,614 | 140,768 | 58 | % | |||||||||||
Fee income | 186,218 | 25,091 | 161,127 | 642 | % | |||||||||||
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Total investment income | $ | 2,106,954 | $ | 1,454,782 | $ | 652,172 | 45 | % | ||||||||
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Investment income increased 9%45%, or $239,862,$652,172, from $2,584,475$1,454,782 for the year ended December 31, 20142017 to $2,824,337$2,106,954 for the year ended December 31, 2015.2018. The net increase was primarily attributable to an increase in dividend income.total investment income that is received on a current basis for the year ended December 31, 2018 is received from 9 portfolio companies. This contrasts with the 11 portfolio companies generating current income for the year ended December 31, 2017.
December 31, 2015 | December 31, 2014 | (Decrease) Increase | % (Decrease) Increase | |||||||||||||
Interest from portfolio companies | $ | 691,109 | $ | 789,548 | ($ | 98,439 | ) | (13 | %) | |||||||
Interest from other investments | 22,048 | 14,288 | 7,760 | 54 | % | |||||||||||
Dividend and other investment income | 2,081,847 | 1,750,439 | 331,408 | 19 | % | |||||||||||
Fee income | 29,333 | 30,200 | (867 | ) | (3 | %) | ||||||||||
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Total investment income | $ | 2,824,337 | $ | 2,584,475 | $ | 239,862 | 9 | % | ||||||||
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Interest from portfolio companies – Interest from portfolio companies — Our portfolio interest income decreased was approximately 30% higher during 2015the year ended December 31, 2018 versus the same period in 2017 due to the decrease in principal balances on loan andfact that we have originated more income-producing debt investments in Gemcor, II, LLC (Gemcor)the last year. The new debt instruments were originated from KnowledgeVision Systems, Inc. (Knowledgevision), Tech 2000, Inc. (Tech 2000), Genicon Inc. (Genicon) and Carolina Skiff, LLC (Carolina Skiff), respectively.several other portfolio companies. In addition, during 2018 the Empire Genomics loans were modified and resulted in a recording of interest that had previously not been accrued of approximately $91,000. This amount was capitalized into the loan balance as part of the debt modification and isnon-recurring.
After reviewing their performance and the circumstances surrounding ourThe following investments we ceased accruing interest incomeare on First Wave Products Group, LLC (First Wave), Intrinsiq Materials, Inc. (Intrinsiq),non-accrual status:G-TEC Natural Gas Systems(G-Tec) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance during 2015.balances.
Interest from other investments —- The increase in interest from other investments was primarily due to higher average cash balances during the year ended December 31, 20152018 versus the year ended December 31, 2014.2017.
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.distributions or the impact of new investments or divestitures. The dividend distributions for the respective yearsperiods were:
December 31, 2015 | December 31, 2014 | December 31, 2018 | December 31, 2017 | |||||||||||||
Gemcor, II, LLC (Gemcor) | $ | 1,735,934 | $ | 1,508,822 | ||||||||||||
Teleservices Solutions Holdings, LLC (Teleservices) | 183,680 | 98,952 | ||||||||||||||
Carolina Skiff LLC (Carolina Skiff) | 116,052 | 54,089 | $ | 251,913 | $ | 178,532 | ||||||||||
Advantage 24/7 LLC (Advantage 24/7) | 60,000 | — | ||||||||||||||
Tilson Technology Management, Inc. (Tilson) | 39,002 | 21,579 | ||||||||||||||
New Monarch Machine Tool, LLC (Monarch) | 27,409 | 45,682 | 27,409 | 27,409 | ||||||||||||
Tilson Technology Management, Inc. (Tilson) | 14,417 | — | ||||||||||||||
Empire Genomics, LLC (Empire Genomics) | 6,058 | 10,070 | ||||||||||||||
SOMS Technologies, LLC (SOMS) | 4,355 | — | — | 6,024 | ||||||||||||
Advantage 24/7 LLC (Advantage) | — | 37,695 | ||||||||||||||
NDT Acquisition LLC (NDT) | — | 2,668 | ||||||||||||||
Somerset Gas Transmission Company, LLC (Somerset) | — | 2,531 | ||||||||||||||
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Total dividend and other investment income | $ | 2,081,847 | $ | 1,750,439 | $ | 384,382 | $ | 243,614 | ||||||||
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Fee income —– Fee income typically consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financings and income from portfolio company board attendance fees. The financing fees are amortized ratably over the life of the instrument associated with the fees. The unamortized fees are carried on the balance sheet under the line item “Deferred revenue.”
The income associated with the amortization of financing fees was $18,333$41,872 and $16,200$24,091 for the years ended December 31, 20152018 and 2014,2017, respectively. The financing fee income based on the existing portfolio is expected to be approximately $10,000$46,000 in 2016, $8,0002019, $21,000 in 20172020 and $4,000$6,000 in each of 2018 and 2019.2021.
Fees paid for board service at the portfolio companies were $11,000$2,000 and $14,000$1,000 for the years ended December 31, 20152018 and 2014,2017, respectively.
In addition, we recorded aone-time debt modification fee of approximately $142,000 from Empire Genomics which was capitalized into the Empire Genomics loan balances as part of the debt modification.
Comparison of the years ended December 31, 20142017 and 20132016
December 31, 2017 | December 31, 2016 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Interest from portfolio companies | $ | 1,155,316 | $ | 767,153 | $ | 388,163 | 51 | % | ||||||||
Interest from other investments | 30,761 | 45,139 | (14,378 | ) | (32 | %) | ||||||||||
Dividend and other investment income | 243,614 | 192,932 | 50,682 | 26 | % | |||||||||||
Fee income | 25,091 | 26,634 | (1,543 | ) | (6 | %) | ||||||||||
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Total investment income | $ | 1,454,782 | $ | 1,031,858 | $ | 422,924 | 41 | % | ||||||||
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Investment income increased 5%41%, or $133,439,$422,924, from $2,451,036$1,031,858 for the year ended December 31, 20132016 to $2,584,475$1,454,782 for the year ended December 31, 2014. The net increase was primarily attributable to an increase in dividend income.2017.
December 31, 2014 | December 31, 2013 | (Decrease) Increase | % (Decrease) Increase | |||||||||||||
Interest from portfolio companies | $ | 789,548 | $ | 793,071 | ($ | 3,523 | ) | 0 | % | |||||||
Interest from other investments | 14,288 | 10,932 | 3,356 | 31 | % | |||||||||||
Dividend and other investment income | 1,750,439 | 1,623,633 | 126,806 | 8 | % | |||||||||||
Fee income | 30,200 | 23,400 | 6,800 | 29 | % | |||||||||||
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| |||||||||||
Total investment income | $ | 2,584,475 | $ | 2,451,036 | $ | 133,439 | 5 | % | ||||||||
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Interest from portfolio companies — Our– Interest from portfolio interest income decreased slightlycompanies was 51% higher during 2014the year ended December 31, 2017 versus the same period in 2016 due to the decrease in principal balances on loan andfact that more income-producing debt investments were originated in Gemcor II, LLC and Carolina Skiff, LLC, respectively. This decrease was partially offset because we originated over $1.8 million inthe last year. These new debt instruments duringwere originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Empire Genomics, LLC (Empire Genomics) and several other portfolio companies.
The following investments were onnon-accrual status at December 31, 2017:G-TEC Natural Gas Systems(G-Tec), First Wave Products Group, LLC (First Wave) and a portion of the previous 18 months with interest rates ranging from 6% to 13%. After reviewing the portfolio company’s performance and the circumstances surrounding the investment, we ceased accruing interest income on Mezmeriz during 2014.Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.
Interest from other investments —– The minor increasedecrease in interest from other investments was primarily due to higherlower average cash balances during the year ended December 31, 20142017 versus the year ended December 31, 2013. The cash balances at December 31, 2014 and 2013 were $13,230,717 and $9,764,810, respectively.2016.
Dividend and other investment income — Dividend income is comprised of distributions from limited liability companies (LLCs) in which we have invested. Our investment agreements with certain LLCs require the 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 distribute additional discretionary distributions. Dividend income will fluctuate based upon the profitability of these LLCs and the timing of the distributions.– The dividend distributions for the respective yearsperiods were:
December 31, 2014 | December 31, 2013 | |||||||
Gemcor, II, LLC (Gemcor) | $ | 1,508,822 | $ | 1,481,675 | ||||
Teleservices Solutions Holdings, LLC (Teleservices) | 98,952 | — | ||||||
Carolina Skiff LLC (Carolina Skiff) | 54,089 | 56,239 | ||||||
New Monarch Machine Tool, LLC (Monarch) | 45,682 | 68,522 | ||||||
Advantage 24/7 LLC (Advantage) | 37,695 | — | ||||||
NDT Acquisition LLC (NDT) | 2,668 | 527 | ||||||
Somerset Gas Transmission Company, LLC (Somerset) | 2,531 | 16,670 | ||||||
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Total dividend and other investment income | $ | 1,750,439 | $ | 1,623,633 | ||||
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December 31, 2017 | December 31, 2016 | |||||||
Carolina Skiff LLC (Carolina Skiff) | $ | 178,532 | $ | 131,785 | ||||
New Monarch Machine Tool, LLC (Monarch) | 27,409 | 27,409 | ||||||
Tilson Technology Management, Inc. (Tilson) | 21,579 | 16,250 | ||||||
Empire Genomics, LLC (Empire Genomics) | 10,070 | 4,024 | ||||||
SOMS Technologies, LLC (SOMS) | 6,024 | 13,464 | ||||||
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Total dividend and other investment income | $ | 243,614 | $ | 192,932 | ||||
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Fee income — Fee- The income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financingswas $24,091 and income associated with 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 “Deferred revenue.”
The amortization of financing fees was $16,200 and $7,400$22,634 for the years ended December 31, 20142017 and 2013,2016, respectively. The financing fee income based on the existing portfolio is expected to be approximately $14,000$21,000 in 2015, $6,0002018, $15,000 in 20162019 and $4,000$2,000 in 2017.2020.
Fees paid for board service at the portfolio companies were $14,000$1,000 and $16,000$4,000 for the years ended December 31, 20142017 and 2013,2016, respectively.
Expenses
Comparison of the years ended December 31, 20152018 and 20142017
December 31, 2015 | December 31, 2014 | Decrease | % Decrease | |||||||||||||
Total expenses | $ | 1,817,279 | $ | 2,499,297 | ($ | 682,018 | ) | (27 | %) |
December 31, 2018 | December 31, 2017 | Increase | % Increase | |||||||||||||
Total expenses | $ | 2,193,672 | $ | 2,010,977 | $ | 182,695 | 9 | % |
Operating expensesExpenses predominately consist of compensation expense and related benefits, interest expense on outstanding SBA borrowings, compensation expense, and general and administrative expenses, including shareholderstockholder and office operating expenses and professional fees.
The 27%, or $682,018, decreaseincrease in operating expenses for the year ended December 31, 2015 as compared to the same period in 2014 is due, in part, to the fact that bonus and profit sharing expense decreased approximately $814,000. During the year ended December 31, 2015 we accrued $122,500 in bonus expense. There was no profit sharing expense during the year ended December 31, 2015. During2018 versus the same period in 2017 was primarily caused by a 14%, or approximately $50,000, increase in professional fees. Professional fees are higher during 2018 primarily as a result of expenses incurred in the consideration of strategic alternatives. These expenses included external legal, tax consulting and other advisory expenses to support analysis of our strategic alternatives, which involved assessing options relative to the complex regulatory environment in which we operate.
In addition bonus and profit sharing expense went from $12,000 during the year ended December 31, 2014, we accrued $899,500 in profit sharing obligations and $91,490 in bonus expense. This decrease was partially offset by2017 to $125,000 during the year ended December 31, 2018, an increase in interest and shareholder expense. Interest expense on our SBA borrowings increased due to higher outstanding debt balances during 2015 versus 2014. Shareholder expense increased because we have increased our strategic analysis and communication to shareholders and potential investors.
Comparison of the years ended December 31, 20142017 and 20132016
December 31, 2014 | December 31, 2013 | Increase | % Increase | |||||||||||||
Total expenses | $ | 2,499,297 | $ | 2,359,252 | $ | 140,045 | 6 | % |
December 31, 2017 | December 31, 2016 | Decrease | % Decrease | |||||||||||||
Total expenses | $ | 2,010,977 | $ | 3,401,037 | ($ | 1,390,060 | ) | (41 | %) |
OperatingThe decrease in expenses predominately consistduring the year ended December 31, 2017 versus the same period in 2016 was primarily caused by a decrease of compensation$1,373,052 in bonus and profit sharing expense related to the Gemcor II, LLC (Gemcor) exit in early 2016. Gemcor sold its assets in March 2016 and related benefits, interest expensebased on outstanding SBA borrowings,our ownership percentage, we received gross cash proceeds of approximately $13.8 million, excluding an escrow receivable, and general and administrative expenses including shareholder and office expenses and professional fees.
The 6%, or $140,045, increase in operating expensesrealized a gain, before income taxes, of approximately $13.2 million from the sale. As a result of this sale, we recognized $1,385,052 under our Profit Sharing Plan during the year ended December 31, 2016. There were no amounts earned pursuant to the Profit Sharing Plan for the year ended December 31, 2014 as compared to the same period in 2013 is due, in part, to the fact that the we had a bad debt recovery of $64,654 during the year ended December 31, 2013, whereas we incurred a bad debt expense of $6,311 for the year ended December 31, 2014. In addition, the SBA borrowings increased from $7,000,000 at December 31, 2013 to $8,000,000 at December 31, 2014, causing a 41%, or $77,868, increase in SBA interest expense for the year ended December 31, 2014 as compared to the year ended December 31, 2013. During the year ended December 31, 2014 we accrued $899,500 in profit sharing obligations and $91,490 in bonus expense. For the year ended December 31, 2013 we accrued $887,244 in profit sharing obligations and $80,000 in bonus expense.2017.
Net Realized Gains and Losses on Investments
Comparison of the years ended December 31, 2015 and 2014
December 31, 2015 | December 31, 2014 | Decrease | % Decrease | |||||||||||||
Net realized (loss) gain on sales and dispositions, before income taxes | ($ | 42,469 | ) | $ | 7,237,937 | ($ | 7,280,406 | ) | (101 | %) |
December 31, 2018 | December 31, 2017 | December 31, 2016 | ||||||||||
Net realized (loss) gain on sales and dispositions, before income tax (benefit) expense | ($ | 1,464,142 | ) | $ | 138,240 | $ | 14,138,203 |
During the year ended December 31, 2015,2018, we recognized a realized loss of $1,125,673 on our investment in Intrinsiq Material, Inc. (Intrinsiq) when the company was sold and we did not receive any proceeds. In addition we restructured our notes in First Wave Technologies, Inc. (First Wave) and converted the notes into equity. As part of that restructuring we recognized a realized loss of $338,469 on the junior note and the warrants.
During the year ended December 31, 2017, one of our portfolio companies, Athenex Inc. (Athenex) completed an initial public offering and its common stock became publicly traded on the Nasdaq Global Select Market under the symbol “ATNX”. We sold our shares in Athenex and recognized a net realized gain, before income taxes, of $262,925$638,240 on the sale of 301,582 sharesthe 46,296 Athenex shares.
In addition, during 2017, we recognized a realized loss of Synacor, Inc. (Synacor). Synacor trades$500,000 on our investment in City Dining Cards (Loupe) when the NASDAQ Global Market under the symbol “SYNC”. Ascompany ceased operations.
During 2016 our portfolio company, Gemcor II, LLC, sold its assets, and we received gross cash proceeds of approximately $14.1 million, excluding amounts held in escrow, and recognized a realized gain, before income taxes, of $14,620,063. The escrow holdback at December 31, 2015,2016 was $1,100,000. The escrow was released, in full, during 2017.
In addition, we do not own any sharesrecognized a realized gain of Synacor.
$168,140 during the year ended December 31, 2016 from the earn out provision in connection with the 2014 sale of QuaDPharma, LLC to Athenex Inc. We recognized a realized loss of $5,394 on an adjustment to the BinOptics Corporation (Binoptics) escrow receivable. At December 31, 2015 the Binoptics escrow receivable is $1,504,854. The escrow holdback is recorded in “Other Assets” on the accompanying consolidated statement of financial position. The escrow is scheduled to be released during 2016, subject to potential claims.
We realized a loss of $300,000$650,000 on our investment in CrowdBouncer,Statisfy, Inc. (Statisfy) during the year ended December 31, 20152016 when the company ceased operations during the year.operations.
For the year ended December 31, 2014, we recognized a realized gain on Binoptics of $8,333,344 which included $1,510,248 that was held in escrow at December 31, 2014.
QuaDPharma, LLC (Quadpharma) was purchased by Athenex, Inc. (Athenex) (formerly Kinex Pharmaceuticals, Inc.) during 2014 and we received $923,634 in net proceeds for our debt and equity securities. The realized gain from the sale of $160,634 included $14,737 that was held in escrow and received during 2014. As part of the sale, we also received 11,574 common shares of Athenex that had a fair value at the time of receipt of $254,628.
During the year ended December 31, 2014, we recognized a net realized loss of $9,792 on the sale of 127,061 shares of Synacor. Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. At December 31, 2014, we owned 301,582 shares of Synacor.
In addition, during the year ended December 31, 2014, we recognized a realized loss of $778,253 on Emerging Med. It was sold during January 2014 and we did not receive any proceeds from the sale. This investment had been valued at $0 at December 31, 2013. We also recognized a realized loss of $472,664 on an adjustment to the Liazon Corporation escrow receivable and a gain of $4,668 on an adjustment to the Ultra-Scan escrow receivable.
Comparison of the years ended December 31, 2014 and 2013
December 31, 2014 | December 31, 2013 | Increase | % Increase | |||||||||||||
Net realized gain on sales and dispositions, before income taxes | $ | 7,237,937 | $ | 7,034,180 | $ | 203,757 | 3 | % |
Binoptics was sold to a strategic acquirer during the fourth quarter of 2014 and we received approximately $10.1 million in net proceeds for our equity securities. The realized gain from the sale was $8,333,344 and included $1,510,248 that was held in escrow at December 31, 2014.
We sold our investment in QuaDPharma to Athenex during 2014 and received $923,634 in net cash proceeds for the debt and equity securities and recognized a realized gain of $160,634. As part of the sale, we received 11,574 common shares of Athenex that had a fair value of $254,628 at December 31, 2014 and resulted in an unrealized gain of $111,343.
During the year ended December 31, 2014, we recognized a net realized loss of $9,792 on the sale of 127,061 shares of Synacor. Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. At December 31, 2014, we owned 301,582 shares of Synacor.
In addition, during the year ended December 31, 2014, we recognized a realized loss of $778,253 on Emerging Med. It was sold during January 2014 and we did not receive any proceeds from the sale. This investment had been valued at $0 at December 31, 2013. We also recognized a realized loss of $472,664 on an adjustment to the Liazon Corporation escrow receivable and a gain of $4,668 on an adjustment to the Ultra-Scan escrow receivable.
During 2013 we sold our investment in Liazon Corporation and recognized a realized gain of $6,256,482. In addition, during the year ended December 31, 2013, we recognized a net realized gain of $1,164,545 on the sale of 252,200 shares of Synacor, Inc. (Synacor). Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. At December 31, 2013, we owned 428,643 shares of Synacor.
We also recognized a realized gain of $669,939 on the sale of our shares in Ultra-Scan to a strategic acquirer during the year ended December 31, 2013.
We realized a loss of $1,063,698 on our investment in Mid-America Brick during the year ended December 31, 2013 when the company announced in February 2013 that it had filed for bankruptcy. Due to the subordinated nature of our investment security no recovery was received.
Net IncreaseChange in Unrealized Appreciation ofDepreciation on Investments
Comparison of the years ended December 31, 2015 and 2014
December 31, 2015 | December 31, 2014 | Increase | ||||||||||
Change in net unrealized appreciation before income tax expense (benefit) | $ | 1,329,759 | ($ | 361,844 | ) | $ | 1,691,603 |
The change in unrealized appreciationdepreciation, before income taxes, for the year ended December 31, 20152018 was comprised of the following:
Valuation Change during 2015 | ||||
Gemcor II, LLC (Gemcor) | $ | 4,100,000 | ||
SocialFlow, Inc. (SocialFlow) | 321,300 | |||
CrowdBouncer, Inc.(Crowdbouncer) reclass to a realized loss | 300,000 | |||
Athenex, Inc. (Athenex)(formerly Kinex Pharmaceuticals, Inc.) | 92,592 | |||
OnCore Golf Technology, Inc. (Oncore) | (187,500 | ) | ||
GiveGab, Inc. (Givegab) | (191,907 | ) | ||
Synacor, Inc. (Synacor) reclass to a realized gain | (220,320 | ) | ||
Mercantile Adjustment Bureau, LLC (Mercantile) | (247,625 | ) | ||
KnowledgeVision Systems, Inc. (Knowledge Vision) | (250,000 | ) | ||
Teleservices Solutions Holdings, LLC (Teleservices) | (250,000 | ) | ||
Somerset Gas Transmission Company, LLC (Somerset) | (286,748 | ) | ||
SciAps, Inc. (Sciaps) | (500,000 | ) | ||
Intrinsiq Materials, Inc. (Intrinsiq) | (600,002 | ) | ||
First Wave Products Group, LLC (First Wave) | (750,031 | ) | ||
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| |||
Total change in net unrealized appreciation of investments before income taxes during the year ended December 31, 2015 | $ | 1,329,759 | ||
|
|
Year ended December 31, 2018 | ||||
Empire Genomics, LLC (Empire Genomics) | ($ | 901,360 | ) | |
Rheonix, Inc. (Rheonix) | (735,999 | ) | ||
SOMS Technologies, LLC (SOMS) | (528,348 | ) | ||
BeetNPath, LLC (Beetnpath) | (388,723 | ) | ||
KnowledgeVision Systems, Inc. (Knowledgevision) | (300,000 | ) | ||
Mercantile Adjustment Bureau, LLC (Mercantile) | (249,040 | ) | ||
G-Tec Natural Gas Systems (Gtec) | (100,000 | ) | ||
Genicon, Inc. (Genicon) | (82,500 | ) | ||
OnCore Golf Technology, Inc. (Oncore) | (77,712 | ) | ||
First Wave Products Group (First Wave) | 121,469 | |||
GiveGab, Inc. (Givegab) | 191,907 | |||
Microcision LLC (Microcision) | 610,000 | |||
Intrinsiq Material, Inc. (Intrinsiq) reclassed to a realized loss | 725,673 | |||
ACV Auctions, Inc. (ACV) | 2,494,551 | |||
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| |||
Total change in net unrealized depreciation of investments before income taxes during the year ended December 31, 2018 | $ | 779,918 | ||
|
|
On December 29, 2015
The valuations of our investments in Beetnpath, Empire Genomics, Gtec, Mercantile, Oncore, Rheonix, and SOMS were decreased after we entered into an asset purchase agreement under which we agreed to sell Gemcor. The required percentage of Gemcor shareholders ratified and approved the sale in January 2016. The transaction is anticipated to close in the first quarter of 2016, and remains subject to customary approvals and closing conditions. Based on our ownership of Gemcor, we expect to receive gross cash proceeds of approximately $14 million upon completionreviewed each of the transaction. The final aggregate purchase price payable byportfolio company’s operations, commercial progress against their business plan, and past and projected financial condition and determined that a valuation adjustment was necessary.
Our valuation of First Wave was changed to reflect a conversion from debt instruments to equity holdings. As part of this restructure we recognized a realized loss on the buyer remains subjectjunior note and the warrants.
Givegab’s value was increased to post-closing working capital adjustments. Additionally, we will incur the related profit sharing expense incost basis of the first quarterinvestment after a financial analysis of 2016. We have valued our investment in Gemcor atthe portfolio company indicating continued improved performance.
Our valuation of Knowledgevision and Genicon were decreased during the year ended December 31, 20152018 to revalue our holdings based upon liquidation preferences of our securities and on an EBITDA multiple which approximates our anticipated sales proceeds.a recent round of financing.
In accordance with our valuation policy, we increased the value of our holdings in AthenexACV and Social FlowMicrocision. ACV was increased based on a significant equity financings for each madefinancing during 2015 by2018 with sophisticated newnon-strategic outside investors at a higher valuation for each than their prior financing round valuation. Microcision was increased based on a financial analysis of the company indicating positive cash flow from operations for the past two years.
The CrowdbouncerIntrinsiq investment was written off after the company ceased doing businesswas sold during 2015.
We sold our remaining shares of Synacor during the year ended December 31, 2015.
The Oncore, Givegab, Mercantile2018 and Knowledge Vision investments were revalued after we reviewed each of the portfolio companies’ commercial progress against their business plans and their past financial performance. These reviews indicated a deterioration to their respective businesses had occurred. If the factors which led to these reductions in valuations are overcome, the valuations may be restored.
The Somerset investment was revalued during 2015 after a review of the company’s financial performance and the overall weakness in the oil and gas sector.
The First Wave, Intrinsiq, and Teleservices investments were revalued during 2015 after we reviewed each of the portfolio companies’ progress toward commercialization and broad based acceptance of their respective business technologies and services in their respective markets. We also considered in our review the past financial performance of the companies, their forecasted cash needs, and their fundraising plans for 2016 in determining that reductions in values were appropriate. The three portfolio companies remain in operation, and are developing new business strategies to achieve success in 2016. If the factors which led to the reductions in valuations are overcome, the valuations may be restored.
The valuation of Sciaps was decreased during the year ended December 31, 2015 to revalue our equity holdings based upon liquidation preferences of our securities and on the most recent equity round of financing.did not receive any proceeds.
The change in unrealized appreciationdepreciation, before income taxes, for the year ended December 31, 20142017 was comprised of the following:
Valuation Change during 2014 | ||||
EmergingMed.com, Inc. (Emerging Med) reclass to a realized loss | $ | 778,253 | ||
Athenex, Inc. (Athenex)(formerly Kinex Pharmaceuticals, Inc.) | 111,343 | |||
NDT Acquisitions, LLC (NDT) | 5,336 | |||
Synacor, Inc. (Synacor) | (208,503 | ) | ||
CrowdBouncer, Inc.(Crowdbouncer) | (300,000 | ) | ||
Knoa Software, Inc. (Knoa) | (356,900 | ) | ||
Mezmeriz, Inc. (Mezmeriz) | (391,373 | ) | ||
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| |||
Total change in net unrealized appreciation before income taxes during the year ended December 31, 2014 | ($ | 361,844 | ) | |
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|
Year ended December 31, 2017 | ||||
SciAps, Inc. (Sciaps) | ($ | 554,710 | ) | |
Teleservices Solutions Holdings, LLC (Teleservices) | (395,398 | ) | ||
Intrinsiq Materials, Inc. (Intrinsiq) | (380,000 | ) | ||
Athenex, Inc. (Athenex) reclass to a realized gain | (273,379 | ) | ||
Mercantile Adjustment Bureau, LLC (Mercantile) | (250,000 | ) | ||
BeetNPath, LLC (Beetnpath) | 29,723 | |||
ACV Auctions, Inc. (ACV) | 119,356 | |||
Carolina Skiff LLC (Carolina Skiff) | 650,000 | |||
Knoa Software, Inc. (Knoa) | 779,700 | |||
Total change in net unrealized depreciation on investments before income taxes during the year ended December 31, 2017 | ($ | 274,708 | ) | |
The Emerging Medvaluations of our investments in Intrinsiq, Mercantile 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.
In accordance with our valuation policy, we adjusted the value of our investments in ACV, Beetnpath and Sciaps based on a significant equity financing by a newnon-strategic outside entity, and consideration of the related affect on the liquidation preferences of our existing investment was written off duringinstrument in each of the companies. In addition, our investments in Carolina Skiff and Knoa were increased based on a financial analysis of each portfolio company indicating improved performance.
The change in net unrealized depreciation, before income taxes, for the year ended December 31, 2014, after2016 was comprised of the company wasfollowing:
Year ended December 31, 2016 | ||||
Gemcor II, LLC (Gemcor) reclassed to a realized gain | ($ | 12,775,000 | ) | |
Teleservices Solutions Holdings, LLC (Teleservices) | (990,680 | ) | ||
Knoa Software, Inc. (Knoa) | (422,800 | ) | ||
OnCore Golf Technology, Inc. (Oncore) | (187,500 | ) | ||
Athenex, Inc. (Athenex) | 69,444 | |||
Intrinsiq Materials, Inc. (Intrinsiq) | 254,329 | |||
Carolina Skiff LLC (Carolina Skiff) | 500,000 | |||
Total change in net unrealized depreciation of investments before income taxes during the year ended December 31, 2016 | ($ | 13,552,207 | ) | |
During the first quarter of 2016 Gemcor II, LLC sold its assets and we did not receive proceeds.
received gross cash proceeds of approximately $14.1 million. The Athenex shares were received as part ofrealized gain from the sale, of ourbefore income taxes, was $14,620,063 and included $1,100,000 that was held in escrow at December 31, 2016.
Our investment in Quadpharma. The proceeds from this sale included cash and Athenex stock. The value of the stockTeleservices was based on a 2014 equity financing by Athenex.
The NDT investment value was adjusted for royalties received.
Synacor, as a publicly traded stock, is marked to market at the end of each quarter. We valued our 301,582 shares of Synacor at a three-day average bid price of $2.01 as of December 31, 2014.
The Crowdbouncer and Mezmeriz investments were revalued during 2014 after we reviewed the portfolio companiestheir operations and their financialscurrent and determinedpast financial performance. This review indicated that botha further deterioration of the businessestheir business had deteriorated since the time of our original funding. Bothoccurred. The portfolio companies remainedcompany remains in operation at December 31, 2014 and wereis developing new business strategies.
The valuation of our investment in Knoa was decreased during the year ended December 31, 20142016 to value our equity holdings at the most recent insider round of financing.
Comparison of the years ended December 31, 2014 and 2013
December 31, 2014 | December 31, 2013 | Increase | ||||||||||
Change in net unrealized appreciation before income taxes | ($ | 361,844 | ) | ($ | 2,833,984 | ) | $ | 2,472,140 |
liquidation value. The change in unrealized appreciation for the year ended December 31, 2014 was comprised of the following:
Valuation Change during 2014 | ||||
EmergingMed.com, Inc. (Emerging Med) reclass to a realized loss | $ | 778,253 | ||
Athenex, Inc. (Athenex)(formerly Kinex Pharmaceuticals, Inc.) | 111,343 | |||
NDT Acquisitions, LLC (NDT) | 5,336 | |||
Synacor, Inc. (Synacor) | (208,503 | ) | ||
CrowdBouncer, Inc.(Crowdbouncer) | (300,000 | ) | ||
Knoa Software, Inc. (Knoa) | (356,900 | ) | ||
Mezmeriz, Inc. (Mezmeriz) | (391,373 | ) | ||
|
| |||
Total change in net unrealized appreciation before income taxes during the year ended December 31, 2014 | ($ | 361,844 | ) | |
|
|
The Emerging Med investment was written off during the year ended December 31, 2014, after the company was sold and we did not receive proceeds.
The Athenex shares were received as part of the salevaluation of our investment in Quadpharma. The proceeds from this sale included cash and Athenex stock. The value of the stockOncore was based on a 2014 equity financing by Athenex.
The NDT investment value was adjusted for royalties received.
Synacor, as a publicly traded stock, is marked to market at the end of each quarter. We valued our 301,582 shares of Synacor at a three-day average bid price of $2.01 as of December 31, 2014.
The Crowdbouncer and Mezmeriz investments were revalued during 2014decreased after we reviewed the portfolio companiescompany and their financialsits financial condition and determined that both ofa valuation adjustment was necessary.
In accordance with our valuation policy, we increased the businesses had deteriorated since the timevalue of our original funding. Both portfolio companies remainedinvestment in operation at December 31, 2014 and were developingAthenex based on a significant equity financing by a new business strategies.non-strategic outside entity. This new financing used a higher valuation for Athenex than had been used for its prior financing rounds.
The valuationIntrinsiq’s value was increased based on the completion of Knoa was decreased during the year ended December 31, 2014 to value ouran equity holdings at the most recent insider round of financing.
The change in unrealized appreciation for the year ended December 31, 2013 was comprised of the following items:
Valuation Change during 2013 | ||||
Mid America Brick & Structural Clay Products, LLC (Mid America Brick) reclass to a realized loss | $ | 1,063,698 | ||
Carolina Skiff LLC (Carolina Skiff) | 350,000 | |||
NDT | 19,178 | |||
Emerging Med | (440,707 | ) | ||
Ultra-Scan Corporation (Ultra-Scan) reclass to realized gain | (561,836 | ) | ||
Liazon Corporation (Liazon) reclass to realized gain | (975,133 | ) | ||
Synacor | (2,289,184 | ) | ||
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Total change in net unrealized appreciation before income taxes during the year ended December 31, 2013 | ($ | 2,833,984 | ) | |
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The Mid America Brick investment was written off after the company filed for bankruptcy protectionrefinancing in the firstthird quarter of 2013.
2016. Carolina Skiff’s value was adjustedincreased based on a financial analysis of the portfolio company indicating continued improved performance.
The NDT investment value was adjusted for royalties received.
The Emerging Med investment was written down based on a financial analysis of the company and to reflect anticipated liquidation proceeds.
During the year ended December 31, 2013, we recognized a realized gain in our investment in Liazon Corporation of $6,256,482 and a realized gain of $669,939 on the sale of our shares in Ultra-Scan.
Synacor, as a publicly traded stock, is marked to market at the end of each quarter. We valued our 428,643 shares of Synacor at a three-day average bid price of $2.46 at December 31, 2013.
All of these value adjustments resulted from a review by management using the guidance set forth by ASC 820 and our established valuation policy.
Net IncreaseDecrease 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“Net decrease in net assets from operations” on our consolidated statements of operations. During the year ended December 31, 2015,2018, the net increasedecrease in net assets from operations was $1,500,219($394,498) as compared with net increasesdecreases of $4,541,481($710,678) in 20142017 and $2,873,357($1,202,683) in 2013.2016.
Liquidity and Capital Resources
Our principalHistorically, our principle objective ishas been to achieve capital appreciation. Therefore, a significant portion of the investment portfolio is structured to maximize the potential for capital appreciation and may provide little or no current yield in the form of dividends or interest payments. As discussed above, on the closing of the Transactions contemplated by the Stock Purchase Agreement with East, we expect to receive interest bearing investments and subsequently to position the portfolio to earn a current yield.
As of December 31, 2015,2018, our total liquidity was $5,844,795consisted of $4,033,792 in cash.cash and cash equivalents. In addition we had an outstanding SBA leverage commitment of $5,250,000 at December 31, 2018.
Net cash used by operating activities has averaged approximately $1,413,300$820,000 over the last three years. The cash used for investments in portfolio companies has averaged approximately $4,600,000 over the last three years. Our cash flow may fluctuate based on the timing of the receipt of dividend income, realized gainsexits and the associated income taxes paid.
Our net cash flow (used) provided by investing activities was ($5,007,343), $4,100,675 and $4,607,278 for fiscal years 2015, 2014 and 2013, respectively. We will generally use cash to fund our operating expenses and to invest in investing activitiescompanies as we build our portfolio utilizing our available cash and proceeds from liquidations of portfolio investments.portfolio. We anticipate that we will continue to exit investments. However, the timing of liquidation events within the portfolio is difficult to project with any certainty. As of December 31, 2015, we did not have any outstanding commitments to borrow funds from the SBA.project. Starting in 2022 (See Footnote 5Note 5. in the Notes to the Consolidated Financial Statements) we will begin repaying, our outstanding SBA debt whichbegins to reach maturity and this will require us to determineidentify sources of future funding if liquidation of investments is not sufficient to fund operations and repay the SBA debt obligation.
The following table summarizes the SBA leverage at December 31, 2015 and December 31, 2014:the year ends indicated:
12/31/15 | 12/31/14 | December 31, 2018 | December 31, 2017 | |||||||||||||
Outstanding SBA leverage | $ | 8,000,000 | $ | 8,000,000 | $ | 8,750,000 | $ | 8,000,000 | ||||||||
Outstanding SBA commitment | — | — | $ | 5,250,000 | $ | 0 |
The following table summarizes the cash estimated to be received over the next five years from existing portfolio companies based on contractual obligations as of December 31, 2015. This table does not include any escrow receivable amounts.2018. These payments represent scheduled principal and interest payments that are due
under the terms of the investment securities we own in each portfolio company and are subject to change based on factors such as conversions and restructurings.
Cash Receipts due by year | ||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 and beyond | ||||||||||||||||
Scheduled cash receipts from portfolio companies | $ | 1,032,000 | $ | 4,565,000 | $ | 406,000 | $ | 373,000 | $ | 80,000 |
The preceding table only includes debt instruments and It does not include any equity investments, which may provide additional proceeds upon exit of the investment.
Subsequent to year end, we announced the pending sale of our largest portfolio company, Gemcor II, LLC. We expect to receive gross cash proceeds of approximately $14 million upon completion of the sale, anticipated in the first quarter of 2016. The proceeds will be available for investment, as well as for general corporate purposes.
Cash Receipts due by year | ||||||||||||||||||||
2019 | 2020 | 2021 | 2022 | 2023 and beyond | ||||||||||||||||
Scheduled cash receipts from portfolio companies | $ | 1,507,000 | $ | 12,709,000 | $ | 2,026,000 | $ | 1,100,000 | $ | 2,500,000 | ||||||||||
Number of companies contributing to the scheduled cash receipts | 10 | 10 | 4 | 2 | 1 |
We believe that the cash on hand at December 31, 2015, anticipated proceeds from2018, the Gemcor sale,outstanding SBA leverage commitment and the scheduled interest payments on our portfolio investments will be sufficient to meet our cash needs throughout 2016.2019. We are also evaluatingcontinue to pursue potential exits from portfolio companies to increase the amount of liquidity available for new investments, operating activities and future SBA debenture obligations.
Contractual Obligations
The following table shows our specified contractual obligations at December 31, 2015.2018. We do not have any capital lease obligations or other long-term liabilities reflected on our consolidated statement of financial position.
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||
Total | Less than 1 year | 1-3��years | 3-5 years | More than 5 yrs | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 yrs | |||||||||||||||||||||||||||||||
SBA debentures | $ | 8,000,000 | $ | 0 | $ | 0 | $ | 0 | $ | 8,000,000 | $ | 8,750,000 | $ | 0 | $ | 3,000,000 | $ | 4,000,000 | $ | 1,750,000 | ||||||||||||||||||||
SBA interest expense | $ | 2,230,000 | $ | 284,000 | $ | 846,000 | $ | 564,000 | $ | 536,000 | $ | 1,706,000 | $ | 304,000 | $ | 943,000 | $ | 301,000 | $ | 158,000 | ||||||||||||||||||||
Operating lease obligations (Rent of office space) | $ | 95,700 | $ | 18,540 | $ | 57,420 | $ | 19,740 | $ | 0 | $ | 39,180 | $ | 19,440 | $ | 19,740 | $ | 0 | $ | 0 | ||||||||||||||||||||
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Total | $ | 10,325,700 | $ | 302,540 | $ | 903,420 | $ | 583,740 | $ | 8,536,000 | $ | 10,495,180 | $ | 323,440 | $ | 3,962,740 | $ | 4,301,000 | $ | 1,908,000 | ||||||||||||||||||||
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Our investment activities contain elements of risk. The portion of our investment portfolio consisting of equitydebt and debtequity securities in private companies is subject to valuation risk. Because there is typically no public market for the equitydebt and debtequity securities in which we invest, the valuations of the debt and equity interests in the portfolio are stated at “fair value” as determined in good faith by our management and approved by our Board of Directors. This is in accordance with our investment valuation policy. (The discussion of valuation policy contained in “Note1- Summary of Significant Accounting Policies—Policies - Investments” in the consolidated financial statements contained in Item 8 of this report is incorporated herein by reference.) In the absence of readily ascertainable market values, the estimated value of the portfolio may differ significantly from the values that would be placed on the portfolio if a ready market for the investments existed. Any changes in valuation are recorded on the consolidated statement of operations as “Net increase (decrease)change in unrealized appreciationdepreciation on investments.”
At times, a portion of our portfolio may include marketable securities traded in theover-the-counter market. market or on stock exchange. In addition, there may be a portion of the portfolio for which no regular trading market exists. In order to realize the full value of a security, the market must trade in an orderly fashion or a willing purchaser must be available when a sale is to be made. Should an economic or other event occur that would not allow markets to trade in an orderly fashion, we may not be able to realize the fair value of our marketable investments or other investments in a timely manner.
As of December 31, 2015,2018, we did not have anyoff-balance sheet arrangements or hedging or similar derivative financial instrument investments.
Item 8. |
The following consolidated financial statements and consolidated supplemental schedule of the Corporation and report of Independent Registered Public Accounting Firm thereon are set forth below:
Consolidated Statements of Financial Position as of December 31, | ||||
Consolidated Statements of Operations for the three years in the period ended December 31, | ||||
Consolidated Statements of Cash Flows for the three years in the period ended December 31, | ||||
Consolidated Schedule of Portfolio Investments as of December 31, | ||||
Consolidated Schedule of Portfolio Investments as of December 31, | ||||
Financial Highlights Schedule for the five years in the period ended December 31, | ||||
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
2015 | 2014 | |||||||
ASSETS | ||||||||
Investments at fair value: | ||||||||
Control investments (cost of $1,141,472 and $1,347,300, respectively) | $ | 13,916,472 | $ | 10,022,300 | ||||
Affiliate investments (cost of $17,663,217 and $15,188,935, respectively) | 14,662,219 | 14,617,378 | ||||||
Non-affiliate investments (cost of $8,606,053 and $5,677,241, respectively) | 8,253,709 | 5,665,698 | ||||||
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| |||||
Total investments, at fair value (cost of $27,410,742 and $22,213,476, respectively) | 36,832,400 | 30,305,376 | ||||||
Cash | 5,844,795 | 13,230,717 | ||||||
Interest receivable (net of allowance: 2015: $122,000 and 2014 — $128,311) | 215,224 | 165,094 | ||||||
Prepaid income taxes | 65,228 | — | ||||||
Other assets | 1,804,040 | 1,824,800 | ||||||
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Total assets | $ | 44,761,687 | $ | 45,525,987 | ||||
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Liabilities: |
| |||||||
Debentures guaranteed by the SBA | $ | 8,000,000 | $ | 8,000,000 | ||||
Income tax payable | — | 2,065,795 | ||||||
Deferred tax liability | 2,361,186 | 1,838,351 | ||||||
Profit sharing and bonus payable | 282,000 | 953,490 | ||||||
Accounts payable and accrued expenses | 238,911 | 290,646 | ||||||
Deferred revenue | 25,930 | 24,264 | ||||||
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Total liabilities | 10,908,027 | 13,172,546 | ||||||
Commitments and contingencies (See Note 9) | ||||||||
Stockholders’ equity (net assets): | ||||||||
Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,328,538 as of 12/31/15 and 12/31/14 | 686,304 | 686,304 | ||||||
Capital in excess of par value | 10,581,789 | 10,581,789 | ||||||
Accumulated net investment (loss) | (24,580 | ) | (867,482 | ) | ||||
Undistributed net realized gain on investments | 18,262,401 | 18,290,374 | ||||||
Net unrealized appreciation on investments | 5,795,237 | 5,109,947 | ||||||
Treasury stock, at cost; 534,496 shares as of 12/31/15 and 12/31/14 | (1,447,491 | ) | (1,447,491 | ) | ||||
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Total stockholders’ equity (net assets) (per share 2015: | 33,853,660 | 32,353,441 | ||||||
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Total liabilities and stockholders’ equity | $ | 44,761,687 | $ | 45,525,987 | ||||
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2018 | 2017 | |||||||
ASSETS | ||||||||
Investments at fair value: | ||||||||
Control investments (cost of $ 99,500) | $ | 99,500 | $ | 99,500 | ||||
Affiliate investments (cost of $20,708,659 and $20,871,129, respectively) | 17,026,091 | 17,016,795 | ||||||
Non-Control/Non-Affiliate investments (cost of $17,483,984 and $15,718,690, respectively) | 17,541,213 | 15,167,767 | ||||||
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Total investments, at fair value (cost of $38,292,143 and $36,689,319, respectively) | 34,666,804 | 32,284,062 | ||||||
Cash and cash equivalents | 4,033,792 | 6,262,039 | ||||||
Interest receivable (net of allowance: $161,000) | 145,532 | 231,048 | ||||||
Deferred tax asset | 525,198 | 551,863 | ||||||
Prepaid income taxes | 1,138,708 | 762,047 | ||||||
Other assets | 11,690 | 42,854 | ||||||
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Total assets | $ | 40,521,724 | $ | 40,133,913 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS) | ||||||||
Liabilities: | ||||||||
Debentures guaranteed by the SBA (net of debt issuance costs) | $ | 8,554,443 | $ | 7,855,173 | ||||
Profit sharing and bonus payable | 125,000 | 144,000 | ||||||
Accounts payable and accrued expenses | 245,758 | 178,348 | ||||||
Deferred revenue | 72,336 | 37,707 | ||||||
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Total liabilities | 8,997,537 | 8,215,228 | ||||||
Commitments and contingencies (See Note 9) | ||||||||
Stockholders’ equity (net assets): | ||||||||
Common stock, $0.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,321,988 at 2018 and 2017 | 686,304 | 686,304 | ||||||
Capital in excess of par value | 10,581,789 | 10,581,789 | ||||||
Accumulated net investment loss | (1,665,552 | ) | (1,597,146 | ) | ||||
Undistributed net realized gain on investments | 26,221,443 | 27,215,738 | ||||||
Net unrealized depreciation on investments | (2,830,692 | ) | (3,498,895 | ) | ||||
Treasury stock, at cost: 541,046 shares | (1,469,105 | ) | (1,469,105 | ) | ||||
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Total stockholders’ equity (net assets) (per share 2018: $4.99, 2017: $5.05) | 31,524,187 | 31,918,685 | ||||||
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Total liabilities and stockholders’ equity (net assets) | $ | 40,521,724 | $ | 40,133,913 | ||||
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See accompanying notes
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2015, 20142018, 2017 and 20132016
2015 | 2014 | 2013 | 2018 | 2017 | 2016 | |||||||||||||||||||
Investment income: | ||||||||||||||||||||||||
Interest from portfolio companies: | ||||||||||||||||||||||||
Control investments | $ | 77,077 | $ | 112,218 | $ | 154,695 | $ | — | $ | — | $ | 11,828 | ||||||||||||
Affiliate investments | 388,135 | 481,649 | 491,339 | 741,432 | 563,708 | 403,850 | ||||||||||||||||||
Non-Control/Non-Affiliate investments | 225,897 | 195,681 | 147,037 | 757,308 | 591,608 | 351,475 | ||||||||||||||||||
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Total interest from portfolio companies | 691,109 | 789,548 | 793,071 | 1,498,740 | 1,155,316 | 767,153 | ||||||||||||||||||
Interest from other investments: | ||||||||||||||||||||||||
Non-Control/Non-Affiliate investments | 22,048 | 14,288 | 10,932 | 37,614 | 30,761 | 45,139 | ||||||||||||||||||
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Total interest from other investments | 22,048 | 14,288 | 10,932 | 37,614 | 30,761 | 45,139 | ||||||||||||||||||
Dividend and other investment income: | ||||||||||||||||||||||||
Control investments | 1,735,934 | 1,549,185 | 1,482,202 | 60,000 | — | — | ||||||||||||||||||
Affiliate investments | 345,913 | 198,723 | 124,761 | 318,324 | 233,544 | 188,908 | ||||||||||||||||||
Non-Control/Non-Affiliate investments | — | 2,531 | 16,670 | 6,058 | 10,070 | 4,024 | ||||||||||||||||||
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Total dividend and other investment income | 2,081,847 | 1,750,439 | 1,623,633 | 384,382 | 243,614 | 192,932 | ||||||||||||||||||
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Fee income: | ||||||||||||||||||||||||
Control investments | 8,000 | 12,000 | 14,000 | — | — | 2,000 | ||||||||||||||||||
Affiliate investments | 4,666 | 8,866 | 4,400 | 15,667 | 8,416 | 5,862 | ||||||||||||||||||
Non-Control/Non-Affiliate investments | 16,667 | 9,334 | 5,000 | 170,551 | 16,675 | 18,772 | ||||||||||||||||||
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Total fee income | 29,333 | 30,200 | 23,400 | 186,218 | 25,091 | 26,634 | ||||||||||||||||||
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Total investment income | 2,824,337 | 2,584,475 | 2,451,036 | 2,106,954 | 1,454,782 | 1,031,858 | ||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Salaries | 598,220 | 590,675 | 541,500 | 679,499 | 661,650 | 621,749 | ||||||||||||||||||
Bonus and profit sharing | 122,500 | 936,344 | 967,244 | |||||||||||||||||||||
Profit sharing and bonuses | 125,000 | 12,000 | 1,385,052 | |||||||||||||||||||||
Employee benefits | 117,937 | 169,808 | 233,967 | 194,818 | 160,779 | 174,796 | ||||||||||||||||||
Directors’ fees | 129,000 | 112,500 | 101,250 | 128,750 | 142,499 | 184,750 | ||||||||||||||||||
Professional fees | 202,194 | 164,740 | 126,612 | 407,159 | 356,936 | 339,823 | ||||||||||||||||||
Shareholders and office operating | 222,431 | 133,505 | 135,483 | 230,050 | 249,085 | 227,631 | ||||||||||||||||||
Insurance | 32,086 | 35,709 | 34,304 | 34,187 | 31,876 | 32,134 | ||||||||||||||||||
Corporate development | 62,553 | 64,490 | 80,338 | 62,117 | 65,202 | 64,412 | ||||||||||||||||||
Other operating | 23,330 | 19,116 | 14,977 | 21,092 | 20,675 | 21,414 | ||||||||||||||||||
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1,510,251 | 2,226,887 | 2,235,675 | 1,882,672 | 1,700,702 | 3,051,761 | |||||||||||||||||||
Interest on SBA obligations | 307,028 | 266,099 | 188,231 | 311,000 | 310,275 | 310,276 | ||||||||||||||||||
Bad debt expense (recovery) | — | 6,311 | (64,654 | ) | ||||||||||||||||||||
Bad debt expense | — | — | 39,000 | |||||||||||||||||||||
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Total expenses | 1,817,279 | 2,499,297 | 2,359,252 | 2,193,672 | 2,010,977 | 3,401,037 | ||||||||||||||||||
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Investment gain before income taxes | 1,007,058 | 85,178 | 91,784 | |||||||||||||||||||||
Income tax expense (benefit) | 164,156 | 63,343 | (62,694 | ) | ||||||||||||||||||||
Investment loss before income taxes | (86,718 | ) | (556,195 | ) | (2,369,179 | ) | ||||||||||||||||||
Income tax benefit | (18,312 | ) | (536,897 | ) | (815,911 | ) | ||||||||||||||||||
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Net investment gain | 842,902 | 21,835 | 154,478 | |||||||||||||||||||||
Net investment loss | (68,406 | ) | (19,298 | ) | (1,553,268 | ) | ||||||||||||||||||
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Net realized (loss) gain on sales and dispositions of investments: | ||||||||||||||||||||||||
Affiliate investments | (300,000 | ) | (617,619 | ) | (1,063,698 | ) | ||||||||||||||||||
Non-Control/Non-Affiliate investments | 257,531 | 7,855,556 | 8,097,878 | |||||||||||||||||||||
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Net realized (loss) gain on sales and dispositions, before income tax (benefit) expense | (42,469 | ) | 7,237,937 | 7,034,180 | ||||||||||||||||||||
Income tax (benefit) expense | (14,496 | ) | 2,470,453 | 2,659,826 | ||||||||||||||||||||
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Net realized (loss) gain on sales and disposition of investments | (27,973 | ) | 4,767,484 | 4,374,354 | ||||||||||||||||||||
Net increase (decrease) in unrealized appreciation on investments: | ||||||||||||||||||||||||
Control investments | 4,100,000 | 5,336 | 19,178 | — | — | 14,620,063 | ||||||||||||||||||
Affiliate investments | (2,429,440 | ) | (270,020 | ) | 972,991 | (1,464,142 | ) | — | (650,000 | ) | ||||||||||||||
Non-Control/Non-Affiliate investments | (340,801 | ) | (97,160 | ) | (3,826,153 | ) | — | 138,240 | 168,140 | |||||||||||||||
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Change in unrealized appreciation before income tax expense (benefit) | 1,329,759 | (361,844 | ) | (2,833,984 | ) | |||||||||||||||||||
Net realized (loss) gain on sales and dispositions, before income taxes | (1,464,142 | ) | 138,240 | 14,138,203 | ||||||||||||||||||||
Income tax (benefit) expense | (469,847 | ) | 49,556 | 5,273,550 | ||||||||||||||||||||
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Net realized (loss) gain on sales and dispositions of investments | (994,295 | ) | 88,684 | 8,864,653 | ||||||||||||||||||||
Net change in unrealized depreciation on investments: | ||||||||||||||||||||||||
Control investments | — | — | (12,775,000 | ) | ||||||||||||||||||||
Affiliate investments | 608,207 | 129,315 | (846,651 | ) | ||||||||||||||||||||
Non-Control/Non-Affiliate investments | 171,711 | (404,023 | ) | 69,444 | ||||||||||||||||||||
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Change in unrealized depreciation before income taxes | 779,918 | (274,708 | ) | (13,552,207 | ) | |||||||||||||||||||
Deferred income tax expense (benefit) | 644,469 | (114,006 | ) | (1,178,509 | ) | 111,715 | 505,356 | (5,038,139 | ) | |||||||||||||||
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Net increase (decrease) in unrealized appreciation on investments | 685,290 | (247,838 | ) | (1,655,475 | ) | |||||||||||||||||||
Net change in unrealized depreciation or appreciation on investments | 668,203 | (780,064 | ) | (8,514,068 | ) | |||||||||||||||||||
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Net realized and unrealized gain on investments | 657,317 | 4,519,646 | 2,718,879 | |||||||||||||||||||||
Net realized and unrealized (loss) gain on investments | (326,092 | ) | (691,380 | ) | 350,585 | |||||||||||||||||||
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Net increase in net assets from operations | $ | 1,500,219 | $ | 4,541,481 | $ | 2,873,357 | ||||||||||||||||||
Net decrease in net assets from operations | ($ | 394,498 | ) | ($ | 710,678 | ) | ($ | 1,202,683 | ) | |||||||||||||||
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Weighted average shares outstanding | 6,328,538 | 6,391,175 | 6,513,385 | 6,321,988 | 6,321,988 | 6,325,792 | ||||||||||||||||||
Basic and diluted net increase in net assets from operations per share | $ | 0.24 | $ | 0.71 | $ | 0.44 | ||||||||||||||||||
Basic and diluted net decrease in net assets from operations per share | (0.06 | ) | (0.11 | ) | (0.19 | ) |
See accompanying notes
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For The Years Ended December 31, 2015, 20142018, 2017 and 20132016
2015 | 2014 | 2013 | ||||||||||
Net assets at beginning of period | $ | 32,353,441 | $ | 28,069,332 | $ | 25,782,300 | ||||||
Net investment gain | 842,902 | 21,835 | 154,478 | |||||||||
Net realized (loss) gain on sales and dispositions of investments | (27,973 | ) | 4,767,484 | 4,374,354 | ||||||||
Net increase (decrease) in unrealized appreciation on investments | 685,290 | (247,838 | ) | (1,655,475 | ) | |||||||
|
|
|
|
|
| |||||||
Net increase in net assets from operations | 1,500,219 | 4,541,481 | 2,873,357 | |||||||||
Purchase of treasury stock | — | (257,372 | ) | (586,325 | ) | |||||||
|
|
|
|
|
| |||||||
Total increase in net assets | 1,500,219 | 4,284,109 | 2,287,032 | |||||||||
|
|
|
|
|
| |||||||
Net assets at end of period | $ | 33,853,660 | $ | 32,353,441 | $ | 28,069,332 | ||||||
|
|
|
|
|
| |||||||
Accumulated net investment (loss) | �� | ($ | 24,580 | ) | ($ | 867,482 | ) | ($ | 889,317 | ) | ||
|
|
|
|
|
|
2018 | 2017 | 2016 | ||||||||||
Net assets at beginning of year | $ | 31,918,685 | $ | 32,629,363 | $ | 33,853,660 | ||||||
Net investment loss | (68,406 | ) | (19,298 | ) | (1,553,268 | ) | ||||||
Net realized (loss) gain on sales and dispositions of investments | (994,295 | ) | 88,684 | 8,864,653 | ||||||||
Net increase (decrease) in unrealized depreciation or appreciation on investments | 668,203 | (780,064 | ) | (8,514,068 | ) | |||||||
|
|
|
|
|
| |||||||
Net decrease in net assets from operations | (394,498 | ) | (710,678 | ) | (1,202,683 | ) | ||||||
Purchase of treasury stock | — | — | (21,614 | ) | ||||||||
|
|
|
|
|
| |||||||
Total decrease in net assets | (394,498 | ) | (710,678 | ) | (1,224,297 | ) | ||||||
|
|
|
|
|
| |||||||
Net assets at end of year | $ | 31,524,187 | $ | 31,918,685 | $ | 32,629,363 | ||||||
|
|
|
|
|
| |||||||
Accumulated net investment loss | ($ | 1,665,552 | ) | ($ | 1,597,146 | ) | ($ | 1,577,848 | ) | |||
|
|
|
|
|
|
See accompanying notes.
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2015, 20142018, 2017 and 20132016
2015 | 2014 | 2013 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net increase in net assets from operations | $ | 1,500,219 | $ | 4,541,481 | $ | 2,873,357 | ||||||
Adjustments to reconcile net increase in net assets to net cash (used in) operating activities: | ||||||||||||
Depreciation and amortization | 33,051 | 28,175 | 38,758 | |||||||||
Original issue discount accretion | (17,339 | ) | (15,492 | ) | (15,492 | ) | ||||||
Change in interest receivable allowance | (6,311 | ) | 6,311 | (74,795 | ) | |||||||
(Increase) decrease in unrealized appreciation on investments | (1,329,759 | ) | 361,844 | 2,833,984 | ||||||||
Deferred tax expense (benefit) | 522,835 | (368,457 | ) | (739,806 | ) | |||||||
Net realized loss (gain) on portfolio investments | 42,469 | (7,237,937 | ) | (7,034,180 | ) | |||||||
Non-cash conversion of debenture interest | (212,426 | ) | (211,127 | ) | (310,322 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
(Increase) decrease in interest receivable | (43,819 | ) | (113,312 | ) | 49,727 | |||||||
(Increase) decrease in other assets | (14,917 | ) | 795,404 | 19,882 | ||||||||
Increase in prepaid income taxes | (65,228 | ) | — | — | ||||||||
(Decrease) increase in income taxes payable | (2,065,795 | ) | 842,368 | 1,195,732 | ||||||||
(Decrease) increase in profit sharing and bonus payable | (671,490 | ) | 66,246 | 537,244 | ||||||||
(Decrease) increase in accounts payable and accrued liabilities | (51,735 | ) | (46,450 | ) | 125,155 | |||||||
Increase (decrease) in deferred revenue | 1,666 | (2,200 | ) | (7,400 | ) | |||||||
|
|
|
|
|
| |||||||
Total adjustments | (3,878,798 | ) | (5,894,627 | ) | (3,381,513 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash (used in) operating activities | (2,378,579 | ) | (1,353,146 | ) | (508,156 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Investments originated | (6,969,008 | ) | (6,091,152 | ) | (4,866,273 | ) | ||||||
Proceeds from sale of portfolio investments | 648,605 | 9,234,323 | 9,023,539 | |||||||||
Proceeds from loan repayments | 1,315,829 | 968,803 | 457,559 | |||||||||
Capital expenditures | (2,769 | ) | (11,299 | ) | (7,547 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by investing activities | (5,007,343 | ) | 4,100,675 | 4,607,278 | ||||||||
Cash flows from financing activities: | ||||||||||||
Repayment of SBA debentures | — | — | (900,000 | ) | ||||||||
Proceeds from SBA debentures | — | 1,000,000 | 3,000,000 | |||||||||
Origination costs to SBA | — | (24,250 | ) | (72,750 | ) | |||||||
Purchase of treasury shares | — | (257,372 | ) | (586,325 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash provided by financing activities | — | 718,378 | 1,440,925 | |||||||||
|
|
|
|
|
| |||||||
Net (decrease) increase in cash | (7,385,922 | ) | 3,465,907 | 5,540,047 | ||||||||
|
|
|
|
|
| |||||||
Cash: | ||||||||||||
Beginning of year | 13,230,717 | 9,764,810 | 4,224,763 | |||||||||
|
|
|
|
|
| |||||||
End of year | $ | 5,844,795 | $ | 13,230,717 | $ | 9,764,810 | ||||||
|
|
|
|
|
|
2018 | 2017 | 2016 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net decrease in net assets from operations | ($ | 394,498 | ) | ($ | 710,678 | ) | ($ | 1,202,683 | ) | |||
Adjustments to reconcile net decrease in net assets to net cash (used in) provided by operating activities: | ||||||||||||
Investments originated | (2,487,627 | ) | (5,400,000 | ) | (5,883,012 | ) | ||||||
Proceeds from sale of portfolio investments | — | 781,525 | 15,413,203 | |||||||||
Proceeds from loan repayments | 70,131 | — | 416,972 | |||||||||
Net realized loss (gain) on portfolio investments | 1,464,142 | (138,240 | ) | (14,138,203 | ) | |||||||
Change in unrealized depreciation on investments | (779,918 | ) | 274,708 | 13,552,207 | ||||||||
Deferred tax expense (benefit) | 26,665 | 613,301 | (3,526,350 | ) | ||||||||
Depreciation and amortization | 29,686 | 31,433 | 33,390 | |||||||||
Original issue discount accretion | (39,653 | ) | (32,129 | ) | (9,996 | ) | ||||||
Change in interest receivable allowance | — | — | 39,000 | |||||||||
Non-cash conversion of debenture interest | (609,817 | ) | (269,445 | ) | (19,252 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Decrease (increase) in interest receivable | 85,516 | 93,189 | (148,013 | ) | ||||||||
Decrease in other assets | 28,936 | 1,101,621 | 450,752 | |||||||||
(Increase) decrease in prepaid income taxes | (376,661 | ) | (762,047 | ) | 65,228 | |||||||
(Decrease) increase in income taxes payable | — | (320,008 | ) | 320,008 | ||||||||
(Decrease) increase in profit sharing and bonus payable | (19,000 | ) | (1,126,052 | ) | 988,052 | |||||||
Increase (decrease) in accounts payable and accrued liabilities | 67,410 | (146,189 | ) | 85,626 | ||||||||
Increase (decrease) in deferred revenue | 34,629 | (9,090 | ) | 20,867 | ||||||||
|
|
|
|
|
| |||||||
Total adjustments | (2,505,561 | ) | (5,307,423 | ) | 7,660,479 | |||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by operating activities | (2,900,059 | ) | (6,018,101 | ) | 6,457,796 | |||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | — | — | (837 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | — | — | (837 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from SBA debentures | 750,000 | — | — | |||||||||
Origination costs to SBA | (78,188 | ) | — | — | ||||||||
Purchase of treasury shares | — | — | (21,614 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) financing activities | 671,812 | — | (21,614 | ) | ||||||||
|
|
|
|
|
| |||||||
Net (decrease) increase in cash | (2,228,247 | ) | (6,018,101 | ) | 6,435,345 | |||||||
|
|
|
|
|
| |||||||
Cash: | ||||||||||||
Beginning of year | 6,262,039 | 12,280,140 | 5,844,795 | |||||||||
|
|
|
|
|
| |||||||
End of year | $ | 4,033,792 | $ | 6,262,039 | $ | 12,280,140 | ||||||
|
|
|
|
|
|
See accompanying notes
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20152018
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Non-Control/Non-Affiliate Investments — 24.4% of net assets:(j) | ||||||||||||||||||||||
Athenex, Inc.(e)(g) (Formerly Kinex Pharmaceuticals, Inc.) Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care) www.athenex.com | 46,296 common shares. | 9/8/14 | <1 | % | $ | 143,285 | $ | 347,220 | 1.0 | % | ||||||||||||
City Dining Cards, Inc. (Loupe)(e)(g) Buffalo, NY. Customer loyalty technology company that helps businesses attract and retain customers. (Software) www.citydiningcards.com | 9,525.25 Series B preferred shares. | 9/1/15 | 4 | % | 500,000 | 500,000 | 1.5 | % | ||||||||||||||
Empire Genomics, LLC(e)(g) Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com | $600,000 senior secured convertible term note at 10% due April 1, 2017. (i) Interest receivable $92,833. | 6/13/14 | — | 600,000 | 600,000 | 1.8 | % | |||||||||||||||
GoNoodle, Inc.(g) (Formerly HealthTeacher, Inc.) Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software) www.gonoodle.com | $1,000,000 secured note at 12% due January 31, 2020, (1% Payment in Kind (PIK)). Warrant for 47,324 Series C Preferred shares. | 2/6/15 | <1 | % |
| 1,008,974
25 |
|
| 1,008,974
25 |
| 3.0 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total GoNoodle | 1,008,999 | 1,008,999 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Mercantile Adjustment Bureau, LLC(g) Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center) www.mercantilesolutions.com | $1,099,039 subordinated secured note at 13% (3% for the calendar year 2015) due October 30, 2017. (e)$150,000 subordinated debenture at 8% due June 30, 2018. Warrant for 3.29% membership interests. Option for 1.5% membership interests. (i)Interest receivable $93,455. | 10/22/12 | 4 | % |
|
1,080,694 150,000
97,625 |
|
|
1,080,694 0
0 |
| 3.2 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Mercantile | 1,328,319 | 1,080,694 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Outmatch(e)(g) (Formerly Chequed Holdings, LLC) Saratoga Springs, NY. Web based predictive employee selection and reference checking. (Software) www.outmatch.com | 2,264,995 Class P1 Units. 109,788 Class C1 Units. | 11/18/10 | 4 | % |
| 2,140,007 5,489 |
|
| 2,140,007 5,489 |
| 6.3 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Outmatch | 2,145,496 | 2,145,496 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
SocialFlow, Inc.(e)(g) New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com | 1,049,538 Series B preferred shares. 1,204,819 Series B-1 preferred shares. 717,772 Series C preferred | 4/5/13 | 4 | % |
| 500,000 750,000 500,000 |
|
| 731,431 839,648 500,221 |
| 6.1 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Social Flow | 1,750,000 | 2,071,300 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Somerset Gas Transmission Company, LLC(e) Columbus, OH. Natural gas transportation. (Oil and Gas) www.somersetgas.com | 26.5337 units. | 7/10/02 | 3 | % | 719,097 | 500,000 | 1.5 | % | ||||||||||||||
Other Non-Control/Non-Affiliate Investments: | ||||||||||||||||||||||
DataView, LLC(Software) (e) | Membership Interest | — | — | 310,357 | — | 0.0 | % | |||||||||||||||
UStec/Wi3 (Manufacturing) (e) | Common Stock. | — | — | 100,500 | — | 0.0 | % | |||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Non-Control/Non-Affiliate Investments | $ | 8,606,053 | $ | 8,253,709 | ||||||||||||||||||
|
|
|
|
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 – 55.7% ofnet assets: (j) | ||||||||||||||||||||||
ACV Auctions, Inc. (e)(g) | 1,181,160 Series A Preferred. | 8/12/16 | <1 | % | $ | 163,000 | $ | 2,776,907 | 8.8 | % | ||||||||||||
Buffalo, NY. Live mobile wholesale auctions for new and used car dealers. (Software) www.acvauctions.com | ||||||||||||||||||||||
Centivo Corporation (e)(g) | 190,967 Series A-1 Preferred. | 7/5/17 | <1 | % | 200,000 | 200,000 | 1.0 | % | ||||||||||||||
New York, NY. Tech-enabled health solutions company that helps self-insured employers and their employees save money and have a better experience. (Health Care) www.centivo.com | 337,808 Series A-2 Preferred. | 101,342 | 101,342 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Centivo | 301,342 | 301,342 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
eHealth Global Technologies, Inc. (g) Henrietta, NY. eHealth Connect® improves health care delivery through intelligently aggregated clinical record and images for patient referrals. (Health Care) www.ehealthtechnologies.com | $3,500,000 Term Note at 13% due December 31, 2020. | 6/28/16 | 0 | % | 3,500,000 | 3,500,000 | 11.1 | % | ||||||||||||||
Empire Genomics, LLC (g)(m) Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com | $1,209,014 Senior Secured Convertible Term Notes at 10% (8% PIK through September 30, 2019) due December 31, 2020. $444,915 Promissory Note at 9% (4% PIK) due December 31, 2020. | 6/13/14 | 0 | % |
| 1,233,195
444,915 |
|
| 474,181
302,569 |
| 2.4 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Empire | 1,678,110 | 776,750 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
GiveGab, Inc. (e)(g) | 5,084,329 Series Seed Preferred. | 3/13/13 | 4 | % | 616,221 | 616,221 | 2.0 | % | ||||||||||||||
Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software) www.givegab.com | ||||||||||||||||||||||
GoNoodle, Inc. (g)(m) | $1,000,000 Secured Note at 12% | 2/6/15 | <1 | % | 1,039,663 | 1,039,663 | 3.3 | % | ||||||||||||||
Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software) www.gonoodle.com | due January 31, 2020, (1% PIK). Warrant for 47,324 Series C Preferred. |
|
25 |
|
|
25 |
| |||||||||||||||
|
|
|
| |||||||||||||||||||
Total GoNoodle | 1,039,688 | 1,039,688 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Mercantile Adjustment Bureau, LLC (g) Williamsville, NY. Full service | $1,199,039 Subordinated Secured Note at 13% (3% for the calendar year 2018) due January 31, 2019. | 10/22/12 | 4 | % | 1,199,040 | 700,000 | 2.2 | % | ||||||||||||||
accounts receivable management and collections company. (Contact Center) | (e)$150,000 Subordinated Debenture at 8% due June 30, 2018. | 150,000 | — | |||||||||||||||||||
www.mercantilesolutions.com | Warrant for 3.29% Membership Interests. Option for 1.5% Membership Interests. | 97,625 | — | |||||||||||||||||||
(i)Interest receivable $50,254. | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Mercantile | 1,446,665 | 700,000 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Outmatch Holdings, LLC (e)(g) | 2,798,883 Class P1 Units. | 11/18/10 | 4 | % | 2,140,007 | 2,140,007 | 6.8 | % | ||||||||||||||
(Chequed Holdings, LLC) | 109,788 Class C1 Units. | 5,489 | 5,489 | |||||||||||||||||||
Dallas, TX. Web based predictive employee selection and reference checking. (Software) www.outmatch.com | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Outmatch | 2,145,496 | 2,145,496 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
PostProcess Technologies LLC (e)(g) | $300,000 Convertible Promissory | 7/25/16 | 0 | % | 300,000 | 300,000 | 1.0 | % | ||||||||||||||
Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing) www.postprocess.com | Note at 5% due July 28, 2020. |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20152018 (Continued)
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Affiliate Investments — 43.3% of net assets(k) | ||||||||||||||||||||||
BeetNPath, LLC(e)(g) Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product) www.grainful.com | 1,119,024 Series A-2 Preferred Membership Units. | 10/20/14 | 9 | % | $ | 359,000 | $ | 359,000 | 1.0 | % | ||||||||||||
Carolina Skiff LLC(g) Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com | 6.0825% Class A common membership interest. | 1/30/04 | 7 | % | 15,000 | 600,000 | 1.8 | % | ||||||||||||||
First Wave Products Group, LLC(e)(g) Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Health Care) www.firstwaveproducts.com | $500,000 senior term notes at 10% due December 31, 2016. $280,000 junior term notes at 10% due December 31, 2016. Warrant for 41,619 capital securities. | 4/19/12 | 7 | % |
| 661,563 316,469
22,000 |
|
| 250,000 0
0 |
| 0.7 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total First Wave | 1,000,032 | 250,000 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Genicon, Inc.(e)(g) Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care) www.geniconendo.com | 1,586,902 Series B preferred shares. | 4/10/15 | 6 | % | 1,000,000 | 1,000,000 | 3.0 | % | ||||||||||||||
GiveGab, Inc.(e)(g) Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software) www.givegab.com | 5,084,329 Series Seed preferred shares. | 3/13/13 | 9 | % | 616,221 | 424,314 | 1.2 | % | ||||||||||||||
G-TEC Natural Gas Systems(e) Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing) www.gas-tec.com | 17.845% Class A membership interest. 8% cumulative dividend. | 8/31/99 | 18 | % | 400,000 | 100,000 | 0.3 | % | ||||||||||||||
Intrinsiq Materials, Inc.(e)(g) Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing) | 599,055 Series 2 preferred shares. $95,000 convertible promissory note at 8% due March 31, 2016. | 9/19/13 | 7 | % |
| 600,002 95,000 |
|
| 0 95,000 |
| 0.3 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.intrinsiqmaterials.com | Total Intrinsiq | 695,002 | 95,000 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Knoa Software, Inc.(e)(g) New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software) www.knoa.com | 973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. | 11/20/12 | 7 | % |
| 750,000 479,155 |
|
| 381,503 490,752 |
| 2.6 | % | ||||||||||
|
|
|
| |||||||||||||||||||
1,229,155 | 872,255 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||
KnowledgeVision Systems, Inc.(e)(g) Lincoln, MA. Online presentation and training software. (Software) www.knowledgevision.com | 200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. 129,033 Series A-3 preferred shares. Warrant for 46,743 Series A-3 shares. | 11/13/13 | 7 | % |
| 250,000 300,000 165,001 35,000 |
|
| 0 300,000 165,001 35,000 |
| 1.5 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total KnowledgeVision | 750,001 | 500,001 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Mezmeriz, Inc.(e)(g) Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer) www.mezmeriz.com | 1,554,565 Series Seed preferred shares. | 1/9/08 | 15 | % | 742,850 | 351,477 | 1.0 | % |
Company, Geographic Location, Business | (a) Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||
Rheonix, Inc. (e) | 9,676 Common. | 10/29/09 | 4 | % | — | — | 7.0 | % | ||||||||||||
Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care) www.rheonix.com | (g)1,839,422 Series A Preferred. | 2,099,999 | 1,500,000 | |||||||||||||||||
(g)50,593 Common. | — | — | ||||||||||||||||||
(g)589,420 Series B Preferred. | 702,732 | 702,732 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total Rheonix | 2,802,731 | 2,202,732 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
SocialFlow, Inc. (e)(g) New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com | 1,049,538 Series B Preferred. 1,204,819 Series B-1 Preferred. 717,772 Series C Preferred. | 4/5/13 | 4 | % | | 500,000 750,000 500,000 | | | 731,431 839,648 500,221 | | 6.6 | % | ||||||||
|
|
|
| |||||||||||||||||
Total Social Flow | 1,750,000 | 2,071,300 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
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 | ||||||||||||||||||||
Tech 2000, Inc. (g)(m) | $600,000 Term Note at 14% (PIK through December 31, 2018) due November 15, 2021. | 11/16/18 | 0 | % | 610,777 | 610,777 | 1.9 | % | ||||||||||||
Herndon, VA. Develops and delivers IT training. (Software) www.t2000inc.com | ||||||||||||||||||||
Other Non-Control/Non-Affiliate Investments: | ||||||||||||||||||||
DataView, LLC (e)(Software) | Membership Interest. | 10/1/98 | 5 | % | 310,357 | — | 0.0 | % | ||||||||||||
UStec/Wi3 (e)(Manufacturing) | Common stock. | 12/17/98 | <1 | % | 100,500 | — | 0.0 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Subtotal Non-Control/Non-Affiliate Investments | $ | 17,483,984 | $ | 17,541,213 | ||||||||||||||||
|
|
|
| |||||||||||||||||
Affiliate Investments – 54.0% of net assets (k) | ||||||||||||||||||||
BeetNPath, LLC (Grainful) (e)(g) | 1,119,024 Series A-2 Preferred Membership Units. | 10/20/14 | 9 | % | $ | 359,000 | $ | — | 1.7 | % | ||||||||||
Ithaca, NY. Frozen entrées made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product) www.grainful.com | ||||||||||||||||||||
1,032,918 Series B Preferred Membership Units. | ||||||||||||||||||||
261,277 | 261,277 | |||||||||||||||||||
$262,626.64 Convertible Secured Notes at 8% due December 21, 2019. | 262,627 | 262,627 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total BeetNPath | 882,904 | 523,904 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Carolina Skiff LLC (g) Waycross, GA. Manufacturer of ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com | 6.0825% Class A Common Membership Interest. | 1/30/04 | 7 | % | 15,000 | 1,750,000 | 5.6 | % | ||||||||||||
ClearView Social, Inc. (e)(g) | 312,500 Series Seed Plus Preferred. | 1/4/16 | 6 | % | 200,000 | 200,000 | 0.6 | % | ||||||||||||
Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software) www.clearviewsocial.com | ||||||||||||||||||||
First Wave Technologies, Inc. (e)(g) | 670,443.2 Class A Common. | 4/19/12 | 5 | % | 661,563 | 33,000 | 0.1 | % | ||||||||||||
Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds pills for nursing homes and medical institutions. (Health Care) www.firstwaveproducts.com |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20152018 (Continued)
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Microcision LLC(g) Philadelphia, PA. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing) www.microcision.com | $1,500,000 subordinated promissory note at 11% due January 31, 2017. 15% Class A common membership interest. | 9/24/09 | 15 | % |
| 1,891,964 — |
|
| 1,891,964 — |
| 5.6 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Microcision | 1,891,964 | 1,891,964 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
New Monarch Machine Tool, Inc.(g) Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing) www.monarchmt.com | 22.84 common shares. | 9/24/03 | 15 | % | 22,841 | 22,841 | 0.1 | % | ||||||||||||||
OnCore Golf Technology, Inc.(e)(g) Buffalo, NY. Maker of patented hollow-metal core golf balls. (Consumer Product) www.oncoregolf.com | 150,000 Series AA preferred shares. $150,000 subordinated convertible promissory note at 6% due January 24, 2017. | 12/31/14 | 7 | % |
| 375,000
150,000 |
|
| 187,500
150,000 |
| 1.0 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total OnCore | 525,000 | 337,500 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Rheonix, Inc.(e) Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care) www.rheonix.com | 9,676 common shares. (g)1,839,422 Series A preferred shares.(g) 50,593 common shares. (g) 589,420 Series B preferred shares. | 10/29/09 | 5 | % |
| — 2,099,999 — 702,732 |
|
| 11,000 2,165,999 59,000 702,732 |
| 8.7 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Rheonix | 2,802,731 | 2,938,731 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
SciAps, Inc.(e)(g) Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing) | 187,500 Series A convertible preferred shares. 274,299 Series A-1 convertible preferred shares. 117,371 Series B preferred shares. | 7/12/13 | 9 | % |
| 1,500,000 504,710 250,000 |
|
| 1,000,000 504,710 250,000 |
| 5.2 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.sciaps.com | Total SciAps | 2,254,710 | 1,754,710 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
SOMS Technologies, LLC(e)(g) Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products) www.microgreenfilter.com | 5,959,490 Series B membership interests. | 12/2/08 | 9 | % | 472,632 | 528,348 | 1.5 | % | ||||||||||||||
Statisfy, Inc.(e)(g) Boston, MA. Mobile marketing platform for engagement, advertising and surveys. (Software) | 65,000 Series seed preferred shares. Warrant for 1,950,000 Series seed preferred shares. | 8/18/14 | 10 | % |
| 20,968 629,032 |
|
| 20,968 629,032 |
| 1.9 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.statisfy.co | Total Statisfy | 650,000 | 650,000 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Teleservices Solutions Holdings, LLC(g)(n) Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center) | 250,000 Class B preferred units. 1,000,000 Class C preferred units. 80,000 Class D preferred units. 104,198 Class E preferred units. PIK dividend for Series C and D at 12% and 14%, respectively. | 5/30/14 | 6 | % |
| 250,000 1,190,680 91,200
104,198 |
|
| 0 1,190,680 91,200
104,198 |
| 4.1 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.ipacesetters.com | Total Teleservices | 1,636,078 | 1,386,078 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Tilson Technology Management, Inc.(g) Portland, ME. Cellular, fiber optic and wireless information systems, construction, and management. (Professional Services) www.tilsontech.com | 12 Series B preferred shares. | 1/20/15 | 8 | % | 600,000 | 600,000 | 1.8 | % | ||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Affiliate Investments | $ | 17,663,217 | $ | 14,662,219 | ||||||||||||||||||
|
|
|
|
Company, Geographic Location, Business | (a) Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||
Genicon, Inc. (g) (m) | 1,586,902 Series B Preferred. | 4/10/15 | 6 | % | 1,000,000 | 1,000,000 | 14.0 | % | ||||||||||||
Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care) www.geniconendo.com | $3,250,000 Promissory Notes at 10% | |||||||||||||||||||
due May 1, 2020, (8% PIK). | 3,385,586 | 3,385,586 | ||||||||||||||||||
Warrants for 500,000 Common. | 120,000 | 37,500 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total Genicon | 4,505,586 | 4,423,086 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Knoa Software, Inc. (e)(g) | 973,533 Series A-1 Convertible Preferred. 1,876,922 Series B Preferred. | 11/20/12 | 7 | % | 750,000 | 750,000 | 3.9 | % | ||||||||||||
New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software) www.knoa.com |
|
479,155 |
|
|
479,155 |
| ||||||||||||||
|
|
|
| |||||||||||||||||
Total Knoa | 1,229,155 | 1,229,155 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
KnowledgeVision Systems, Inc. (g) | 200,000 Series A-1 Preferred. | 11/13/13 | 7 | % | 250,000 | — | 3.2 | % | ||||||||||||
Lincoln, MA. Online presentation and training software. (Software) | 214,285 Series A-2 Preferred. | 300,000 | — | |||||||||||||||||
129,033 Series A-3 Preferred. | 165,001 | 165,001 | ||||||||||||||||||
www.knowledgevision.com | Warrant for 46,743 Series A-3. | 35,000 | 35,000 | |||||||||||||||||
$75,000 Subordinated Promissory Notes at 8% payable on demand of majority of holders after August 31, 2019.(e) $750,000 Term Note at 11% due April | 75,000 | 75,000 | ||||||||||||||||||
30, 2021. | 750,000 | 750,000 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total KnowledgeVision | 1,575,001 | 1,025,001 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Mezmeriz, Inc. (e)(g) | 1,554,565 Series Seed Preferred. | 1/9/08 | 12 | % | 742,850 | 351,477 | 1.1 | % | ||||||||||||
Ithaca, NY. Technology company developing novel reality capture tools for 3D mapping, reality modeling, object tracking and classification. (Electronics Developer) www.mezmeriz.com | ||||||||||||||||||||
Microcision LLC (g)(m) | $1,500,000 Subordinated Promissory | 9/24/09 | 15 | % | 1,933,353 | 1,933,353 | 8.1 | % | ||||||||||||
Pennsauken Township, NJ. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing) | Note at 12% (1% PIK) due December | |||||||||||||||||||
31, 2024. | ||||||||||||||||||||
15% Class A Common Membership | ||||||||||||||||||||
www.microcision.com | Interest. | — | 610,000 | |||||||||||||||||
|
|
|
| |||||||||||||||||
Total Microcision | 1,933,353 | 2,543,353 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
New Monarch Machine Tool, Inc. (g) | 22.84 Common. | 9/24/03 | 15 | % | 22,841 | 22,841 | 0.1 | % | ||||||||||||
Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing) | ||||||||||||||||||||
www.monarchmt.com | ||||||||||||||||||||
OnCore Golf Technology, Inc. (e)(g) | 300,483 Preferred AA. | 12/31/14 | 8 | % | 752,712 | 300,000 | 1.0 | % | ||||||||||||
Buffalo, NY. Patented and Proprietary Golf Balls utilizing breakthrough technology and innovation, inspiring golfers at all skill levels and abilities. (Consumer Product) | ||||||||||||||||||||
www.oncoregolf.com | ||||||||||||||||||||
SciAps, Inc. (e)(g) | 187,500 Series A Preferred. | 7/12/13 | 6 | % | 1,500,000 | 700,000 | 6.4 | % | ||||||||||||
Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing) www.sciaps.com | 274,299 Series A-1 Convertible Preferred. | 504,710 | 250,000 | |||||||||||||||||
117,371 Series B Convertible Preferred. | 250,000 | 250,000 | ||||||||||||||||||
113,636 Series C Convertible Preferred. | 175,000 | 175,000 | ||||||||||||||||||
369,698 Series C-1 Convertible Preferred. | 399,274 | 399,274 | ||||||||||||||||||
147,059 Series D Convertible Preferred. | 250,000 | 250,000 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total SciAps | 3,078,984 | 2,024,274 | ||||||||||||||||||
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20152018 (Continued)
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Control Investments — 41.1% of net assets(l) | ||||||||||||||||||||||
Advantage 24/7 LLC(e)(g) Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company) www.advantage24-7.com | 53% Membership interest. | 12/30/10 | 53 | % | $ | 99,500 | $ | 99,500 | 0.3 | % | ||||||||||||
Gemcor II, LLC(g)(h)(m) West Seneca, NY. Designs and sells automatic riveting machines used in the assembly of aircraft. (Manufacturing) | $1,000,000 subordinated promissory note at 15% due September 1, 2017. 31.25 membership units. | 6/28/04 | 31 | % |
| 416,972
625,000 |
|
| 416,972
13,400,000 |
| 40.8 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.gemcor.com | Total Gemcor | 1,041,972 | 13,816,972 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Control Investments | $ | 1,141,472 | $ | 13,916,472 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
TOTAL INVESTMENTS — 108.8% | $ | 27,410,742 | $ | 36,832,400 | ||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS — (8.8%) |
| (2,978,740 | ) | |||||||||||||||||||
|
| |||||||||||||||||||||
NET ASSETS — 100% | $ | 33,853,660 | ||||||||||||||||||||
|
|
Company, Geographic Location, Business | (a) Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||
Teleservices Solutions Holdings, LLC (e)(g)(m) | 250,000 Class B Preferred Units. | 5/30/14 | 6 | % | 250,000 | — | 0.0 | % | ||||||||||||
Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center) www.ipacesetters.com | 1,000,000 Class C Preferred Units. 80,000 Class D Preferred Units. 104,198 Class E Preferred Units. PIK dividend for Series C and D at 12% and 14%, respectively. | 1,190,680 | — | |||||||||||||||||
91,200 | — | |||||||||||||||||||
104,198 | — | |||||||||||||||||||
|
|
|
| |||||||||||||||||
Total Teleservices | 1,636,078 | — | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Tilson Technology Management, Inc. (g) | 120,000 Series B Preferred. | 1/20/15 | 11 | % | 600,000 | 600,000 | 8.2 | % | ||||||||||||
Portland, ME. Cellular, fiber optic and wireless | 21,391 Series C Preferred. | 200,000 | 200,000 | |||||||||||||||||
information systems, construction, and | 70,176 Series D Preferred. | 800,000 | 800,000 | |||||||||||||||||
management. (Professional Services) | $800,000 Subordinated Promissory | |||||||||||||||||||
www.tilsontech.com | Notes at 8% due December 1, 2022. | 800,000 | 800,000 | |||||||||||||||||
$200,000 Subordinated Promissory | ||||||||||||||||||||
Note at 8% due September 28, 2021. | 200,000 | 200,000 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total Tilson | 2,600,000 | 2,600,000 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Other Affiliate Investments: | ||||||||||||||||||||
G-TEC Natural Gas Systems(e) | Membership Interest | 8/31/99 | 17 | % | 400,000 | — | 0.0 | % | ||||||||||||
(Manufacturing) | ||||||||||||||||||||
SOMS Technologies, LLC (e)(g) | Membership Interest | 12/2/08 | 9 | % | 472,632 | — | 0.0 | % | ||||||||||||
(Consumer Products) | ||||||||||||||||||||
|
|
|
| |||||||||||||||||
Subtotal Affiliate Investments | $ | 20,708,659 | $ | 17,026,091 | ||||||||||||||||
|
|
|
| |||||||||||||||||
Control Investments – 0.3% of net assets (l) | ||||||||||||||||||||
Advantage 24/7 LLC (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 – 110% | $ | 38,292,143 | $ | 34,666,804 | ||||||||||||||||
|
|
|
| |||||||||||||||||
LIABILITIES IN EXCESS OF OTHERASSETS – (10%) | (3,142,617 | ) | ||||||||||||||||||
|
| |||||||||||||||||||
NET ASSETS – 100% | $ | 31,524,187 | ||||||||||||||||||
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2018 (Continued)
Notes to the Consolidated Schedule of Portfolio Investments
(a) | At December 31, |
(b) | The Date Acquired column indicates the |
(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, |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2015 (Continued)
(e) | These investments arenon-income producing. All other investments are income producing.Non-income producing investments have not generated cash payments of interest or dividends including LLCtax-related distributions within the last twelve months, or are not expected to do so going forward. However, if a debt or a preferred equity fails to make its most recent payment, then the investment will also be classified asnon-income producing. |
(f) | As of December 31, |
(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 |
(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 thoseNon-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. |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2018 (Continued)
Investments in and Advances to Affiliates
Company | Type of Investment | December 31, 2014 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2015 Fair Value | Amount of Interest/ Dividend/ Fee Income(3) | ||||||||||||||||
Control Investments: | ||||||||||||||||||||||
Advantage 24/7 LLC | 53% Membership interest. | $ | 99,500 | $ | — | $ | — | $ | 99,500 | $ | — | |||||||||||
Gemcor II, LLC | $1,000,000 subordinated promissory note at 15%. 31.25 membership units. |
| 622,800 9,300,000 |
|
| — 4,100,000 |
|
| (205,828 — | )
|
| 416,972 13,400,000 |
|
| 77,077 1,743,934 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Gemcor | 9,922,800 | 4,100,000 | (205,828 | ) | 13,816,972 | 1,821,011 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Control Investments | $ | 10,022,300 | $ | 4,100,000 | ($ | 205,828 | ) | $ | 13,916,472 | $ | 1,821,011 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Affiliate Investments: | ||||||||||||||||||||||
BeetNPath, LLC | 1,119,024 Series A-2 Preferred Membership Units. | — | $ | 359,000 | — | $ | 359,000 | 7,250 | ||||||||||||||
Carolina Skiff LLC | $985,000 Class A preferred membership interest at 9.8%. $250,000 subordinated promissory note at 14%. 6.0825% Class A common membership interest. |
| 985,000 125,000 600,000 |
|
| — — — |
|
| (985,000 (125,000 — | ) )
|
| — — 600,000 |
|
| 81,782 14,778 116,052 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Carolina Skiff | 1,710,000 | — | (1,110,000 | ) | 600,000 | 212,612 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Chequed.com, Inc. | 408,476 Series A preferred shares. $250,000 convertible promissory note at 8%. |
| 1,383,222 250,000 |
|
| — — |
|
| (1,383,222 (250,000 | ) ) |
| — — |
|
| — 11,507 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Chequed | 1,633,222 | — | (1,633,222 | ) | — | 11,507 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Company | Type of Investment | December 31, 2017 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2018 Fair Value | Net Realized (Losses) | Amount of Interest/ Dividend/ Fee Income (3) | |||||||||||||||||||
Control Investments: | ||||||||||||||||||||||||||
Advantage 24/7LLC | 45% Membership Interest. | $ | 99,500 | $ | — | $ | — | $ | 99,500 | $ | — | $ | 60,000 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Control Investments | $ | 99,500 | $ | — | $ | — | $ | 99,500 | $ | — | $ | 60,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
AffiliateInvestments: | ||||||||||||||||||||||||||
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 | — | (29,723 | ) | 261,277 | — | — | |||||||||||||||||||
$262,626.64 Convertible Secured Note at 8% | — | 262,627 | — | 262,627 | — | 5,413 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total BeetNPath | 650,000 | 262,627 | (388,723 | ) | 523,904 | — | 5,413 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Carolina Skiff LLC | 6.0825% Class A Common Membership interest. | 1,750,000 | — | — | 1,750,000 | — | 251,913 | |||||||||||||||||||
ClearView Social,Inc. | 312,500 Series Seed Plus Preferred. | 200,000 | — | — | 200,000 | — | — | |||||||||||||||||||
First Wave Technologies, Inc. | $500,000 senior term notes at 10%. | 250,000 | — | (250,000 | ) | — | (316,469 | ) | — | |||||||||||||||||
$280,000 junior term notes at 10% | — | — | — | — | — | — | ||||||||||||||||||||
Warrant for 41,619 capital securities. | — | — | — | — | ( 22,000 | ) | — | |||||||||||||||||||
670,443.2 Class A Common. | — | 33,000 | — | 33,000 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total First Wave | 250,000 | 33,000 | (250,000 | ) | 33,000 | (338,469 | ) | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Genicon, Inc. | 1,586,902 Series B Preferred. | 1,000,000 | — | — | 1,000,000 | — | — | |||||||||||||||||||
$3,250,000 Promissory Notes at 8%. | 2,903,779 | 481,807 | — | 3,385,586 | — | 348,512 | ||||||||||||||||||||
Warrant for 250,000 Common. | 120,000 | — | (82,500 | ) | 37,500 | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Genicon | 4,023,779 | 481,807 | (82,500 | ) | 4,423,086 | — | 348,512 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
GiveGab, Inc. | 5,084,329 Series Seed Preferred. | 424,314 | 191,907 | (616,221 | ) | — | — | — | ||||||||||||||||||
G-TEC Natural GasSystems | 16.639% Class A Membership Interest. 8% cumulative dividend. | 100,000 | — | (100,000 | ) | — | (1,125,673 | ) | — | |||||||||||||||||
Intrinsiq Materials,Inc. | 4,161,747 Series A Preferred. | 400,000 | — | (400,000 | ) | — | — | — | ||||||||||||||||||
Knoa Software, Inc. | 973,533 Series A-1 Convertible Preferred. | 750,000 | — | — | 750,000 | — | — | |||||||||||||||||||
1,876,922 Series B Preferred. | 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. | — | — | — | — | — | — | |||||||||||||||||||
Systems, Inc. | 214,285 Series A-2 Preferred. | 300,000 | — | (300,000 | ) | — | — | — | ||||||||||||||||||
129,033 Series A-3 Preferred. | 165,001 | — | — | 165,001 | — | — | ||||||||||||||||||||
$75,000 Subordinated Promissory Notes at | ||||||||||||||||||||||||||
8% | 50,000 | 25,000 | — | 75,000 | — | 5,408 | ||||||||||||||||||||
$750,000 term note at 11% | — | 750,000 | — | 750,000 | — | 60,241 | ||||||||||||||||||||
Warrant for 46,743 Series A-3. | 35,000 | — | — | 35,000 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total KnowledgeVision | 550,001 | 775,000 | (300,000 | ) | 1,025,001 | — | 65,649 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Mezmeriz, Inc. | 1,554,565 Series Seed Preferred. | 351,477 | — | — | 351,477 | — | — | |||||||||||||||||||
Microcision LLC | $1,500,000 Subordinated Promissory Note at 12% (1% PIK) due December 31, 2024. | 1,914,140 | 19,213 | — | 1,933,353 | — | 230,559 | |||||||||||||||||||
15% Class A Common Membership Interest. | — | 610,000 | — | 610,000 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Microcision | 1,914,140 | 629,213 | — | 2,543,353 | — | 230,559 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
New MonarchMachine Tool, Inc. | 22.84 Common. | 22,841 | — | — | 22,841 | — | 29,409 |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20152018 (Continued)
Company | Type of Investment | December 31, 2014 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2015 Fair Value | Amount of Interest/ Dividend/ Fee Income(3) | ||||||||||||||||
CrowdBouncer, Inc. | 300,000 Series A preferred shares. | — | — | — | — | — | ||||||||||||||||
First Wave Products Group, LLC | $500,000 senior term notes at 10%. $280,000 junior term notes at 10%. Warrant for 41,619 capital securities. |
| 637,992 308,687 22,000 |
|
| 23,571 7,782 — |
|
| (411,563 (316,469 (22,000 | ) ) ) |
| 250,000 — — |
|
| 24,571 8,447 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total First Wave | 968,679 | 31,353 | (750,032 | ) | 250,000 | 33,018 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Genicon, Inc. | 1,586,902 Series B preferred shares. | — | 1,000,000 | — | 1,000,000 | — | ||||||||||||||||
GiveGab, Inc. | 5,084,329 Series Seed preferred shares. | 403,388 | 212,833 | (191,907 | ) | 424,314 | — | |||||||||||||||
G-TEC Natural Gas Systems | 17.8% Class A membership interest. 8% cumulative dividend. | 100,000 | — | — | 100,000 | — | ||||||||||||||||
Intrinsiq Materials, Inc. | 599,055 Series 2 preferred shares. $95,000 convertible promissory note at 8%. |
| 600,002 — |
|
| — 95,000 |
|
| (600,002 — | )
|
| — 95,000 |
|
| — 2,436 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Intrinsiq | 600,002 | 95,000 | (600,002 | ) | 95,000 | 2,436 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Knoa Software, Inc. | 973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. |
| 381,503 490,752 |
|
| — — |
|
| — — |
|
| 381,503 490,752 |
|
| — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
872,255 | — | — | 872,255 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
KnowledgeVision Systems, Inc. | 200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. 129,033 Series A-3 preferred shares. Warrant for 46,743 Series A-3 shares. |
| 250,000 300,000 — — |
|
| — — 165,001 35,000 |
|
| (250,000 — — — | )
|
| — 300,000 165,001 35,000 |
|
| — — — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Knowledge Vision | 550,000 | 200,001 | (250,000 | ) | 500,001 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Mezmeriz, Inc. | 1,554,565 Series seed preferred shares. $200,000 convertible notes at 8%. |
| — 200,000 |
|
| 351,477 — |
|
| — (200,000 | ) |
| 351,477 — |
|
| — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Mezmeriz | 200,000 | 351,477 | (200,000 | ) | 351,477 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Microcision LLC | $1,500,000 subordinated promissory note at 11%. 15% Class A common membership interest. |
| 1,891,964 — |
|
| — — |
|
| — — |
|
| 1,891,964 — |
|
| 208,116 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Microcision | 1,891,964 | — | — | 1,891,964 | 208,116 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
New Monarch Machine Tool, Inc. | 22.84 common shares. | 22,841 | — | — | 22,841 | 30,409 | ||||||||||||||||
OnCore Golf Technology, Inc. | 150,000 Series AA preferred shares. $150,000 subordinated convertible promissory note at 6%. |
| — — |
|
| 375,000 150,000 |
|
| (187,500 — | )
|
| 187,500 150,000 |
|
| — 3,945 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total OnCore | — | 525,000 | (187,500 | ) | 337,500 | 3,945 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Rheonix, Inc. | 9,676 common shares. 1,839,422 Series A preferred shares. 50,593 common shares. 589,420 Series B preferred shares. $680,475 convertible promissory notes at 8%. |
| 11,000 2,165,999 59,000 — — |
|
| — — — 702,732 702,732 |
|
| — — — — (702,732 |
) |
| 11,000 2,165,999 59,000 702,732 — |
|
| — — — — 22,258 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Rheonix | 2,235,999 | 1,405,464 | (702,732 | ) | 2,938,731 | 22,258 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
SciAps, Inc. | 187,500 Series A convertible preferred shares. 274,299 Series A-1 convertible preferred shares. 117,371 Series B preferred shares. |
| 1,500,000 — — |
|
| — 504,710 250,000 |
|
| (500,000 — — | )
|
| 1,000,000 504,710 250,000 |
|
| — 4,711 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total SciAps | 1,500,000 | 754,710 | (500,000 | ) | 1,754,710 | 4,711 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
SOMS Technologies, LLC | 5,959,490 Series B membership interests. | 528,348 | — | — | 528,348 | 4,355 | ||||||||||||||||
Statisfy, Inc. | 65,000 Series seed preferred shares. Warrant for 1,950,000 Series seed preferred shares. |
| — — |
|
| 20,968 629,032 |
|
| — — |
|
| 20,968 629,032 |
|
| — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Statisfy | — | 650,000 | — | 650,000 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2015 (Continued)Investments in and Advances to Affiliates
Company | Type of Investment | December 31, 2014 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2015 Fair Value | Amount of Interest/ Dividend/ Fee Income(3) | ||||||||||||||||
Teleservices Solutions Holdings, LLC | 250,000 Class B shares. 1,000,000 Class C shares. 80,000 Class D preferred units. 104,198 Class E preferred units. |
| 250,000 1,070,680 80,000 — |
|
| — 120,000 11,200 104,198 |
|
| (250,000 — — — | )
|
| — 1,190,680 91,200 104,198 |
|
| — 168,000 15,680 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Teleservices | 1,400,680 | 235,398 | (250,000 | ) | 1,386,078 | 183,680 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Tilson Technology Management, Inc. | 12 Series B preferred shares. | — | 600,000 | — | 600,000 | 14,417 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Affiliate Investments | $ | 14,617,378 | $ | 6,420,236 | ($ | 6,375,395 | ) | $ | 14,662,219 | $ | 738,714 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Control and Affiliate Investments | $ | 24,639,678 | $ | 10,520,236 | ($ | 6,581,223 | ) | $ | 28,578,691 | $ | 2,559,725 | |||||||||||
|
|
|
|
|
|
|
|
|
|
Company | Type of Investment | December 31, 2017 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2018 Fair Value | Net Realized (Losses) | Amount of Interest/ Dividend/ Fee Income (3) | |||||||||||||||||||
OnCore Golf Technology, Inc. | 150,000 Series AA Preferred. $300,000 Subordinated Convertible | — | 300,000 | — | 300,000 | — | — | |||||||||||||||||||
Promissory notes at 6%. | 300,000 | — | (300,000 | ) | — | — | 27,370 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total OnCore | 300,000 | 300,000 | (300,000 | ) | 300,000 | — | 27,370 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
SciAps, Inc. | 187,500 Series A Convertible Preferred. | 700,000 | — | — | 700,000 | — | — | |||||||||||||||||||
274,299 Series A-1 Convertible Preferred. | 250,000 | — | — | 250,000 | — | — | ||||||||||||||||||||
117,371 Series B Convertible Preferred. | 250,000 | — | — | 250,000 | — | — | ||||||||||||||||||||
113,636 Series C Preferred. | 175,000 | — | — | 175,000 | — | — | ||||||||||||||||||||
369,698 Series C-1 Preferred. | 399,274 | — | — | 399,274 | — | — | ||||||||||||||||||||
147,059 Series D Convertible Preferred | — | 250,000 | — | 250,000 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total SciAps | 1,774,274 | 250,000 | — | 2,024,274 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
SOMS Technologies, LLC | 5,959,490 Series B membership Interests. | 528,348 | — | (528,348 | ) | — | — | — | ||||||||||||||||||
Teleservices Solutions Holdings, LLC | 250,000 Class B Preferred Units. | — | — | — | — | — | — | |||||||||||||||||||
1,000,000 Class C Preferred Units. | — | — | — | — | — | — | ||||||||||||||||||||
80,000 Class D Preferred Units. | — | — | — | — | — | — | ||||||||||||||||||||
104,198 Class E Preferred Units. | — | — | — | — | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Teleservices | — | — | — | — | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Tilson Technology Management, Inc. | 120,000 Series B Preferred. | 600,000 | — | — | 600,000 | — | 20,000 | |||||||||||||||||||
21,391 Series C Convertible Preferred. | 200,000 | — | — | 200,000 | — | — | ||||||||||||||||||||
70,176 Series D Preferred. | 750,000 | 50,000 | — | 800,000 | — | 19,003 | ||||||||||||||||||||
$200,000 Subordinated Promissory Note at 8%. | 200,000 | — | — | 200,000 | — | 16,000 | ||||||||||||||||||||
$800,000 Subordinated Promissory Note at 8%. | 750,000 | 50,000 | — | 800,000 | — | 60,822 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Tilson | 2,500,000 | 100,000 | — | 2,600,000 | — | 115,825 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Affiliate Investments | $ | 17,016,795 | $ | 3,023,554 | ($ | 3,014,258 | ) | $ | 17,026,091 | ($ | 1,464,142 | ) | $ | 1,075,423 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Control and Affiliate Investments | $ | 17,116,295 | $ | 3,023,554 | ($ | 3,014,258 | ) | $ | 17,125,591 | ($ | 1,464,142 | ) | $ | 1,135,423 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 |
(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. |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20152018 (Continued)
Industry Classification | Percentage of Total Investments (at fair value) as of December 31, | |||
| ||||
Software | % | |||
Healthcare | ||||
Manufacturing | 19.2 | |||
Professional Services | 7.5 | |||
Consumer Product | 2.4 | |||
Contact Center | ||||
| ||||
| ||||
Oil and Gas | 1.4 | |||
Electronics | 1.0 | |||
Marketing | 0.3 | |||
Total Investments | 100 | % | ||
|
| |||
| ||||
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20142017
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Non-Control/Non-Affiliate Investments — 17.5% (j) | ||||||||||||||||||||||
BeetNPath, LLC(e)(g) Ithaca, NY. Frozen entrées made from 100% whole grain steel cut oats. www.grainful.com | $150,000 convertible promissory note at 6% due October 20, 2016. | 10/20/14 | — | $ | 150,000 | $ | 150,000 | 0.5 | % | |||||||||||||
Crashmob, Inc.(e)(g) Boston, MA. Mobile marketing platform for engagement, advertising and surveys. (Software) www.statisfy.co | 500,000 Series seed preferred shares. | 8/18/14 | 4 | % | 500,000 | 500,000 | 1.5 | % | ||||||||||||||
Empire Genomics, LLC(e)(g) Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com | $600,000 senior secured convertible term note at 10% due December 1, 2015. | 6/13/14 | — | 600,000 | 600,000 | 1.9 | % | |||||||||||||||
Kinex Pharmaceuticals, Inc.(e)(g) Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care) www.kinexpharma.com | 11,574 common shares. | 9/8/14 | <1 | % | 143,285 | 254,628 | 0.8 | % | ||||||||||||||
Mercantile Adjustment Bureau, LLC(e)(g) Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center) www.mercantilesolutions.com | $1,099,039 subordinated secured note at 13% due October 30, 2017. $150,000 subordinated debenture at 8% due June 30, 2018. Warrant for 3.29% membership interests. Option for 1.5% membership interests. (i)Interest receivable $79,025. | 10/22/12 | 4 | % |
| 1,070,697 150,000 97,625 |
|
| 1,070,697 150,000 97,625 |
| ||||||||||||
|
|
|
| |||||||||||||||||||
Total Mercantile | 1,318,322 | 1,318,322 | 4.1 | % | ||||||||||||||||||
OnCore Golf Technology, Inc.(e)(g) Buffalo, NY. Maker of patented hollow-metal core golf balls. (Consumer Product) www.oncoregolf.com | 80,000 Series AA preferred shares. | 12/31/14 | 4 | % | 200,000 | 200,000 | 0.6 | % | ||||||||||||||
SocialFlow, Inc.(e)(g) New York, NY. Provides instant analysis of social networks using proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com | 1,049,538 Series B preferred shares. 1,204,819 Series B-1 preferred shares. | 4/5/13 | 4 | % | 1,250,000 | 1,250,000 | 3.9 | % | ||||||||||||||
Somerset Gas Transmission Company, LLC Columbus, OH. Natural gas transportation. (Oil and Gas) www.somersetgas.com | 26.5337 units. | 7/10/02 | 3 | % | 719,097 | 786,748 | 2.4 | % | ||||||||||||||
Synacor, Inc. NASDAQ: SYNC(e)(g)(n)(o) Buffalo, NY. Develops provisioning platforms for aggregation and delivery of content and services across multiple digital devices. (Software) www.synacor.com | 301,582 unrestricted common shares valued at $2.01 per share. | 11/18/02 | 1 | % | 385,680 | 606,000 | 1.9 | % | ||||||||||||||
Other Non-Control/Non-Affiliate Investments: | ||||||||||||||||||||||
DataView, LLC(Software)(e) | Membership Interest | — | — | 310,357 | 0 | 0.0 | % | |||||||||||||||
UStec/Wi3(Software)(e) | Common Stock | — | — | 100,500 | 0 | 0.0 | % | |||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Non-Control/Non-Affiliate Investments | $ | 5,677,241 | $ | 5,665,698 | ||||||||||||||||||
|
|
|
|
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% ofnet assets: (j) | ||||||||||||||||||||||
ACV Auctions, Inc. (e)(g) Buffalo, NY. Live mobile wholesale auctions for new and used car dealers. (Software) www.acvauctions.com | 1,181,160 Series A preferred shares. | 8/12/16 | <1 | % | $ | 163,000 | $ | 282,356 | 0.9 | % | ||||||||||||
Centivo Corporation (e)(n) New York, NY. Tech-enabled health solutions company that helps self-insured employers and their employees save money and have a better experience. (Health Care) | $100,000 convertible unsecured note at 2% due February 1, 2019. | 7/5/17 | 0 | % | 100,000 | 100,000 | 0.3 | % | ||||||||||||||
eHealth Global Technologies, Inc. Henrietta, NY. eHealth Connect® improves health care delivery through intelligently aggregated clinical record and images for patient referrals. (Health Care) www.ehealthtechnologies.com | (g)$1,500,000 term note at 10% due September 2, 2019. (n)$2,000,000 term note at 10% due September 2, 2019. | 6/28/16 | 0 | % | 1,500,000 | 1,500,000 | 11.0 | % | ||||||||||||||
2,000,000 | 2,000,000 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total eHealth | 3,500,000 | 3,500,000 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Empire Genomics, LLC (g) Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com | $1,101,489 senior secured convertible term notes at 10% due April 30, 2018. $250,000 promissory note at 12% due December 31, 2019. | 6/13/14 | 0 | % | 1,101,489 | 1,101,489 | 4.2 | % | ||||||||||||||
250,000 | 250,000 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||
(i)Interest receivable $65,906. | ||||||||||||||||||||||
Total Empire | 1,351,489 | 1,351,489 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
GoNoodle, Inc. (g)(m) (Formerly HealthTeacher, Inc.) Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software) www.gonoodle.com | $1,000,000 secured note at 12% due January 31, 2020, (1% Payment in Kind (PIK)). Warrant for 47,324 Series C Preferred shares. | 2/6/15 | <1 | % | 1,029,330 | 1,029,330 | 3.2 | % | ||||||||||||||
25 | 25 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total GoNoodle | 1,029,355 | 1,029,355 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Mercantile Adjustment Bureau, LLC (g) Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center) www.mercantilesolutions.com | $1,199,039 subordinated secured note at 13% (3% for the calendar year 2017) due January 31, 2018. | 10/22/12 | 4 | % | 1,199,040 | 949,040 | 3.0 | % | ||||||||||||||
(e)$150,000 subordinated debenture at 8% due June 30, 2018. | 150,000 | — | ||||||||||||||||||||
Warrant for 3.29% membership interests. Option for 1.5% membership interests. (i)Interest receivable $55,983. | 97,625 | — | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Mercantile | 1,446,665 | 949,040 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Outmatch Holdings, LLC (e)(g) (Chequed Holdings, LLC) Dallas, TX. Web based predictive employee selection and reference checking. (Software) www.outmatch.com | 2,641,899 Class P1 Units. 109,788 Class C1 Units. | 11/18/10 | 4 | % | 2,140,007 | 2,140,007 | 6.7 | % | ||||||||||||||
5,489 | 5,489 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Outmatch | 2,145,496 | 2,145,496 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
PostProcess Technologies LLC (e)(g) Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing) www.postprocess.com | $300,000 convertible promissory note at 5% due July 28, 2018. | 7/25/16 | 0 | % | 300,000 | 300,000 | 0.9 | % |
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20142017 (Continued)
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Affiliate Investments — 45.2% of net assets (k) | ||||||||||||||||||||||
Carolina Skiff LLC(g) Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Consumer Product) www.carolinaskiff.com | $985,000 Class A preferred membership interest at 9.8%. $250,000 subordinated promissory note at 14% due December 31, 2016. 6.0825% Class A common membership interest. | 1/30/04 | | 7 | % | $
| 985,000 125,000 15,000 |
| $
| 985,000 125,000 600,000 |
| |||||||||||
|
|
|
| |||||||||||||||||||
Total Carolina Skiff | 1,125,000 | 1,710,000 | 5.3 | % | ||||||||||||||||||
Chequed.com, Inc.(e)(g) Saratoga Springs, NY. Web based predictive employee selection and reference checking. (Software) www.chequed.com | 408,476 Series A preferred shares. $250,000 convertible promissory note at 8% due December 31, 2015. | 11/18/10 | 16 | % |
| 1,383,222 250,000 |
|
| 1,383,222 250,000 |
| 5.0 | % | ||||||||||
|
|
|
| |||||||||||||||||||
Total Chequed.com | 1,633,222 | 1,633,222 | ||||||||||||||||||||
CrowdBouncer, Inc.(e)(g) Buffalo, NY. JOBS Act compliance for broker-dealers and crowdfunding portals. (Software) www.crowdbouncer.com | 300,000 Series A preferred shares. | 1/22/14 | 15 | % | 300,000 | 0 | 0.0 | % | ||||||||||||||
First Wave Products Group, LLC(e)(g)(p) Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Manufacturing) www.firstwaveproducts.com | $500,000 senior term notes at 10% (Payment in Kind (PIK) through May 31, 2015) due December 31, 2016. $280,000 junior term notes at 10% (PIK through May 31, 2015) due December 31, 2016. Warrant for 41,619 capital securities. | 4/19/12 | 7 | % |
| 637,992 308,687 22,000 |
|
| 637,992 308,687 22,000 |
|
|
3.0 |
% | |||||||||
|
|
|
| |||||||||||||||||||
Total First Wave | 968,679 | 968,679 | ||||||||||||||||||||
GiveGab, Inc.(e)(g) Ithaca, NY. Social network program that connects volunteers with nonprofit organizations. (Software) www.givegab.com | 2,254,822 Series A preferred shares. | 3/13/13 | 7 | % | 403,388 | 403,388 | 1.2 | % | ||||||||||||||
G-TEC Natural Gas Systems(e) Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing) www.gas-tec.com | 18.545% Class A membership interest. 8% cumulative dividend. | 8/31/99 | 19 | % | 400,000 | 100,000 | 0.3 | % | ||||||||||||||
Intrinsiq Materials, Inc.(e)(g) Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing) www.intrinsiqmaterials.com | 599,055 Series 2 Preferred shares. | 9/19/13 | 7 | % | 600,002 | 600,002 | 1.9 | % | ||||||||||||||
Knoa Software, Inc.(e)(g) New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software) www.knoa.com | 973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. (Fully diluted common share equivalent of 3,336,010). | 11/20/12 | 7 | % | 1,229,155 | 872,255 | 2.7 | % | ||||||||||||||
KnowledgeVision Systems, Inc.(e)(g) Lincoln, MA. Online presentation and training software. (Software) www.knowledgevision.com | 200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. | 11/13/13 | 5 | % | 550,000 | 550,000 | 1.7 | % | ||||||||||||||
Mezmeriz, Inc.(e)(g) Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer) | 360,526 Series A preferred shares. $200,000 convertible notes at 8% due December 31, 2014. | 1/9/08 | 8 | % |
| 391,373 200,000 |
|
| 0 200,000 |
| 0.6 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.mezmeriz.com | Total Mezmeriz | 591,373 | 200,000 |
Company, Geographic Location, Business Description, (Industry) and Website | (a) Type of Investment | (b) Date | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Rheonix, Inc. (e) Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care) www.rheonix.com | 9,676 common shares. | 10/29/09 | 4 | % | — | 11,000 | 9.2 | % | ||||||||||||||
(g)1,839,422 Series A preferred shares. | 2,099,999 | 2,165,999 | ||||||||||||||||||||
(g)50,593 common shares. | — | 59,000 | ||||||||||||||||||||
(g)589,420 Series B preferred shares. | 702,732 | 702,732 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Rheonix | 2,802,731 | 2,938,731 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
SocialFlow, Inc. (e)(g) New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com | 1,049,538 Series B preferred shares. | 4/5/13 | 4 | % | 500,000 | 731,431 | 6.5 | % | ||||||||||||||
1,204,819 Series B-1 preferred shares. | 750,000 | 839,648 | ||||||||||||||||||||
717,772 Series C preferred shares. | 500,000 | 500,221 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Social Flow | 1,750,000 | 2,071,300 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Somerset Gas Transmission Company, LLC (e) Columbus, OH. Natural gas transportation. (Oil and Gas) www.somersetgas.com | 26.5337 units. | 7/10/02 | 3 | % | 719,097 | 500,000 | 1.6 | % | ||||||||||||||
Other Non-Control/Non-Affiliate Investments: | ||||||||||||||||||||||
DataView, LLC(Software)(e) | Membership Interest. | — | — | 310,357 | — | 0.0 | % | |||||||||||||||
UStec/Wi3(Manufacturing)(e) | Common Stock. | — | — | 100,500 | — | 0.0 | % | |||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Non-Control/Non-Affiliate Investments | $ | 15,718,690 | $ | 15,167,767 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Affiliate Investments – 53.3% of net assets (k) | ||||||||||||||||||||||
BeetNPath, LLC (Grainful) (e)(g) Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product) www.grainful.com | 1,119,024 Series A-2 Preferred Membership Units. | 10/20/14 | 9 | % | $ | 359,000 | $ | 359,000 | 2.0 | % | ||||||||||||
1,032,918 Series B Preferred Membership Units. | 261,277 | 291,000 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total BeetNPath | 620,277 | 650,000 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Carolina Skiff LLC (g) Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com | 6.0825% Class A common membership interest. | 1/30/04 | 7 | % | 15,000 | 1,750,000 | 5.5 | % | ||||||||||||||
ClearView Social, Inc. (e)(g) Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software) www.clearviewsocial.com | 312,500 Series seed plus preferred shares. | 1/4/16 | 6 | % | 200,000 | 200,000 | 0.6 | % | ||||||||||||||
First Wave Products Group, LLC (e)(g) Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Health Care) www.firstwaveproducts.com | $500,000 senior term notes at 10% due July 31, 2017. | 4/19/12 | 7 | % | 661,563 | 250,000 | 0.8 | % | ||||||||||||||
$280,000 junior term notes at 10% due July 31, 2017. | 316,469 | — | ||||||||||||||||||||
Warrant for 41,619 capital securities. | 22,000 | — | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total First Wave | 1,000,032 | 250,000 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Genicon, Inc. Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care) www.geniconendo.com | (g)1,586,902 Series B preferred shares. | 4/10/15 | 6 | % | 1,000,000 | 1,000,000 | 12.6 | % | ||||||||||||||
(g)$2,000,000 promissory note at 8% due May 1, 2020. | 1,936,002 | 1,936,002 | ||||||||||||||||||||
(g)Warrant for 250,000 common 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 | ||||||||||||||||||||
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20142017 (Continued)
(a) Company, Geographic Location, Business and Website | Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||||
Microcision LLC(g) Philadelphia, PA. Custom manufacturer of medical and dental implants. (Manufacturing). | $1,500,000 subordinated promissory note at 11% due January 31, 2017. 15% Class A common membership interest. | 9/24/09 | 15 | % |
| 1,891,964 0 |
|
| 1,891,964 0 |
| 5.8 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.microcision.com | Total Microcision | 1,891,964 | 1,891,964 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
New Monarch Machine Tool, Inc. (g) Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing) www.monarchmt.com | 22.84 common shares. | 9/24/03 | 15 | % | 22,841 | 22,841 | 0.1 | % | ||||||||||||||
Rheonix, Inc.(e)(g) Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing. (Health Care) | 9,676 common shares. (g)1,839,422 Series A preferred shares. (g) 50,593 common shares. | 10/29/09 | 5 | % |
| 0 2,099,999 0 |
|
| 11,000 2,165,999 59,000 |
| 6.9 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.rheonix.com | Total Rheonix | 2,099,999 | 2,235,999 | |||||||||||||||||||
SciAps, Inc.(e)(g) Woburn, MA. Instrumentation company specializing in portable analytical instruments utilizing LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing) www.sciaps.com | 187,500 Series A preferred shares. | 7/12/13 | 9 | % | 1,500,000 | 1,500,000 | 4.6 | % | ||||||||||||||
SOMS Technologies, LLC(e)(g) Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products) www.microgreenfilter.com | 5,959,490 Series B membership interests. | 12/2/08 | 9 | % | 472,632 | 528,348 | 1.6 | % | ||||||||||||||
Teleservices Solutions Holdings, LLC(g) Montvale, NJ. Customer contact center specializing in customer acquisition and | 250,000 Class B preferred units. 1,000,000 Class C preferred units. 80,000 Class D preferred units. | 5/30/14 | 9 | % |
| 250,000 1,070,680 80,000 |
|
| 250,000 1,070,680 80,000 |
| 4.3 | % | ||||||||||
retention for selected industries. (Contact Center) www.ipacesetters.com | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total Teleservices | 1,400,680 | 1,400,680 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Affiliate Investments | $ | 15,188,935 | $ | 14,617,378 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Control Investments — 31.0%(l) | ||||||||||||||||||||||
Advantage 24/7 LLC (g) Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company) www.advantage24-7.com | 53% Membership interest. | 12/30/10 | 53 | % | $ | 99,500 | $ | 99,500 | 0.3 | % | ||||||||||||
Gemcor II, LLC (g)(h)(m) West Seneca, NY. Designs and sells automatic riveting machines used in the assembly of aircraft. (Manufacturing) | $1,000,000 subordinated promissory note at 15% due September 1, 2017. 31.25 membership units. | 6/28/04 | 31 | % |
| 622,800 625,000 |
|
| 622,800 9,300,000 |
| 30.7 | % | ||||||||||
|
|
|
| |||||||||||||||||||
www.gemcor.com | Total Gemcor | 1,247,800 | 9,922,800 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Subtotal Control Investments | $ | 1,347,300 | $ | 10,022,300 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
TOTAL INVESTMENTS — 93.7% | $ | 22,213,476 | $ | 30,305,376 | ||||||||||||||||||
|
| |||||||||||||||||||||
OTHER ASSETS IN EXCESS OF LIABILITIES — 6.3% | 2,048,065 | |||||||||||||||||||||
|
| |||||||||||||||||||||
NET ASSETS — 100% | $ | 32,353,441 | ||||||||||||||||||||
|
|
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 | ||||||||||||||
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) Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing) www.gas-tec.com | 16.639% Class A membership interest. 8% cumulative dividend. | 8/31/99 | 17 | % | 400,000 | 100,000 | 0.3 | % | ||||||||||||
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) New York, NY. End user experience | 973,533 Series A-1 convertible preferred shares. | 11/20/12 | 7 | % | 750,000 | 750,000 | 4.0 | % | ||||||||||||
management and performance (EMP) solutions utilizing enterprise applications. (Software) | 1,876,922 Series B preferred shares. $48,466 convertible promissory note at | 479,155 | 479,155 | |||||||||||||||||
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 software. (Software) | 214,285 Series A-2 preferred shares. | 300,000 | 300,000 | |||||||||||||||||
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) Pennsauken Township, NJ. Manufacturer of precision machined medical implants, | $1,500,000 subordinated promissory note at 12% (1% PIK) due December 31, 2024. | 9/24/09 | 15 | % | 1,914,140 | 1,914,140 | 6.0 | % | ||||||||||||
components and assemblies. (Manufacturing) www.microcision.com | 15% Class A common membership 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 | �� |
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20142017 (Continued)
Company, Geographic Location, Business | (a) Type of Investment | (b) Date Acquired | (c) Equity | Cost | (d)(f) Fair Value | Percent of Net Assets | ||||||||||||||
OnCore Golf Technology, Inc. (e)(g) Buffalo, NY. Maker of patented golf balls. (Consumer Product) www.oncoregolf.com | 150,000 Series AA preferred shares. $300,000 subordinated convertible promissory notes at 6% (10% for calendar year 2017) due January 24, 2018. | 12/31/14 | 9 | % | 375,000 | — | 0.9 | % | ||||||||||||
(i)Interest receivable $50,342. | 300,000 | 300,000 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total OnCore | 675,000 | 300,000 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
SciAps, Inc. (e)(g) Woburn, MA. Instrumentation | 187,500 Series A convertible preferred shares. | 7/12/13 | 8 | % | 1,500,000 | 700,000 | 5.6 | % | ||||||||||||
company producing portable analytical devices using XRF, LIBS and | 274,299 Series A-1 convertible preferred shares. | 504,710 | 250,000 | |||||||||||||||||
RAMAN spectroscopy to identify compounds, minerals, and elements. | 117,371 Series B convertible preferred shares. | 250,000 | 250,000 | |||||||||||||||||
(Manufacturing) | 113,636 Series C preferred shares. | 175,000 | 175,000 | |||||||||||||||||
www.sciaps.com | 369,698 Series C-1 preferred shares. | 399,274 | 399,274 | |||||||||||||||||
|
|
|
| |||||||||||||||||
Total SciAps | 2,828,984 | 1,774,274 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
SOMS Technologies, LLC (e)(g) Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products) www.microgreenfilter.com | 5,959,490 Series B membership interests. | 12/2/08 | 9 | % | 472,632 | 528,348 | 1.7 | % | ||||||||||||
Teleservices Solutions Holdings, LLC (e)(g)(m) Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center) www.ipacesetters.com | 250,000 Class B preferred units. | 5/30/14 | 6 | % | 250,000 | — | 0.0 | % | ||||||||||||
1,000,000 Class C preferred units. | 1,190,680 | — | ||||||||||||||||||
80,000 Class D preferred units. | 91,200 | — | ||||||||||||||||||
104,198 Class E preferred units. | 104,198 | — | ||||||||||||||||||
PIK dividend for Series C and D at 12% 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 information systems, construction, and management. (Professional Services) www.tilsontech.com | 21,391 Series C convertible preferred shares. | 200,000 | 200,000 | |||||||||||||||||
(g)$200,000 subordinated promissory 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 | ||||||||||||||||
LIABLITIES IN EXCESS OF OTHERASSETS – (1.1%) | (365,377 | ) | ||||||||||||||||||
|
| |||||||||||||||||||
NET ASSETS – 100% | $ | 31,918,685 | ||||||||||||||||||
|
|
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, |
(b) | The Date Acquired column indicates the year in which the Corporation first acquired |
(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. |
(d) | The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value |
(e) | These investments arenon-income producing. All other investments are income producing.Non-income producing investments have not generated cash payments of interest or dividends including LLCtax-related distributions within the last twelve months, or are not expected to do so going forward. |
(f) | As of December 31, |
(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 |
(j) | Non-Control/Non-Affiliate |
RAND CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2014 (Continued)
(k) | Affiliate |
(l) | Control |
(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. |
RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2017 (Continued)
Investments in and Advances to Affiliates
Company | Type of Investment | December 31, 2013 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2014 Fair Value | Amount of Interest/ Dividend/ Fee Income (3) | ||||||||||||||||
Control Investments: | ||||||||||||||||||||||
Advantage 24/7 LLC | 53% Membership interest. | $ | 99,500 | $ | — | $ | — | $ | 99,500 | $ | 41,695 | |||||||||||
Gemcor II, LLC | $500,000 subordinated promissory note at 15%. $1,000,000 subordinated promissory note at 15% 31.25 membership units. |
| 110,194 800,125 9,300,000 |
|
| — — — |
|
| (110,194 (177,325 — | ) )
|
| 0 622,800 9,300,000 |
|
| 6,279 105,939 1,516,822 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Gemcor | 10,210,319 | — | (287,519 | ) | 9,922,800 | 1,629,040 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
NDT Acquisitions | Common Stock. | — | 5,336 | (5,336 | ) | — | 2,668 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Control Investments | $ | 10,309,819 | $ | 5,336 | $ | (292,855 | ) | $ | 10,022,300 | $ | 1,673,403 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Affiliate Investments: | ||||||||||||||||||||||
Carolina Skiff LLC | $985,000 Class A preferred membership interest at 9.8%. $250,000 subordinated promissory note at 14%. 6.0825% Class A common membership interest. | $
| 985,000 250,000 600,000 |
| $
| — — — |
| $
| — (125,000 — | )
| $
| 985,000 125,000 600,000 |
| $
| 96,530 29,701 54,089 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Carolina Skiff | 1,835,000 | — | (125,000 | ) | 1,710,000 | 180,320 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Chequed.com, Inc. | 408,476 Series A preferred shares. $250,000 convertible promissory note at 8% |
| 1,033,222 — |
|
| 350,000 250,000 |
|
| — — |
|
| 1,383,222 250,000 |
|
| — 767 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Chequed | 1,033,222 | 600,000 | — | 1,633,222 | 767 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
CrowdBouncer, Inc. | 270,000 Series A preferred shares. | — | 300,000 | (300,000 | ) | 0 | — | |||||||||||||||
First Wave Products Group, LLC | $500,000 senior term notes at 10%. $280,000 junior term notes at 10%. Warrant for 41,619 capital securities. |
| 571,301 204,533 22,000 |
|
| 66,691 104,154 — |
|
| — — — |
|
| 637,992 308,687 22,000 |
|
| 68,524 24,154 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total First Wave | 797,834 | 170,845 | — | 968,679 | 92,678 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
GiveGab, Inc. | 2,254,822 Series A preferred shares. | 250,000 | 153,388 | — | 403,388 | — | ||||||||||||||||
G-TEC Natural Gas Systems | 18.545% Class A membership interest. 8% cumulative dividend. | 100,000 | — | — | 100,000 | — | ||||||||||||||||
Intrinsiq Materials, Inc. | 599,055 Series 2 Preferred shares. | 600,002 | — | — | 600,002 | — |
Company | Type of Investment | December 31, 2016 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2017 Fair Value | Net Realized Gains (Losses) | Amount of Interest/ Dividend/ Fee Income (3) | |||||||||||||||||||
Control Investments: | ||||||||||||||||||||||||||
Advantage 24/7 LLC | 53% Membership interest. | $ | 99,500 | $ | — | $ | — | $ | 99,500 | $ | — | $ | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Control Investments | $ | 99,500 | $ | — | $ | — | $ | 99,500 | $ | — | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Affiliate Investments: | ||||||||||||||||||||||||||
BeetNPath, LLC | 1,119,024 Series A-2 Preferred Membership Units. 1,032,918 Series B Preferred Membership Units $150,000 convertible promissory note at 8%. | $ | 359,000 | $ | — | $ | — | $ | 359,000 | $ | — | $ | — | |||||||||||||
— | $ | 291,000 | — | 291,000 | | — — | | — | ||||||||||||||||||
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 interest. | 1,100,000 | 650,000 | — | 1,750,000 | — | 178,532 | |||||||||||||||||||
ClearView Social, Inc. | 312,500 Series seed plus preferred shares. | 200,000 | — | — | 200,000 | — | — | |||||||||||||||||||
First Wave Products Group, LLC | $500,000 senior term notes at 10%. | 250,000 | — | — | 250,000 | — | — | |||||||||||||||||||
$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. $1,100,000 senior term loans at 12%. $600,000 term loan at 14%. $2,000,000 promissory note at 8% $1,000,000 promissory note at 8% Warrant for 250,000 common shares Warrant for 125,000 common shares | 1,000,000 | — | — | 1,000,000 | — | — | |||||||||||||||||||
1,100,000 | — | (1,100,000 | ) | — | — | 50,234 | ||||||||||||||||||||
600,000 | — | (600,000 | ) | — | — | 32,200 | ||||||||||||||||||||
— | 2,016,002 | (80,000 | ) | 1,936,002 | — | 129,752 | ||||||||||||||||||||
— | 1,007,777 | (40,000 | ) | 967,777 | — | 60,860 | ||||||||||||||||||||
— | 80,000 | — | 80,000 | — | ||||||||||||||||||||||
— | 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 Systems | 16.639% Class A membership interest. 8% 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 shares. 1,876,922 Series B preferred shares. $48,466 convertible promissory note at 8%. | — | 750,000 | — | 750,000 | — | — | |||||||||||||||||||
449,455 | 29,700 | — | 479,155 | — | — | |||||||||||||||||||||
48,466 | — | — | 48,466 | — | 3,877 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Knoa | 497,921 | 779,700 | — | 1,277,621 | — | 3,877 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
KnowledgeVision Systems, Inc. | 200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. 129,033 Series A-3 preferred shares. $50,000 subordinated promissory note at 8% Warrant for 46,743 Series A-3 shares. | — | — | — | — | — | — | |||||||||||||||||||
300,000 | — | — | 300,000 | — | — | |||||||||||||||||||||
165,001 | — | — | 165,001 | — | — | |||||||||||||||||||||
— | 50,000 | — | 50,000 | — | 3,748 | |||||||||||||||||||||
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 11%. | 1,891,964 | 22,176 | — | 1,914,140 | — | 228,239 | |||||||||||||||||||
New Monarch Machine Tool, Inc. | 22.84 common shares. | 22,841 | — | — | 22,841 | — | 28,409 |
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20142017 (Continued)
Company | Type of Investment | December 31, 2013 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2014 Fair Value | Amount of Interest/ Dividend/ Fee Income (3) | ||||||||||||||||
Knoa Software, Inc. | 973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. (Fully diluted common share equivalent of 3,336,010). | 750,000 | 479,155 | (356,900 | ) | 872,255 | 1,391 | |||||||||||||||
KnowledgeVision Systems, Inc. | 200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. |
| 250,000 — |
|
| — 300,000 |
|
| — — |
|
| 250,000 300,000 |
|
| — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Knowledge Vision | 250,000 | 300,000 | — | 550,000 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Mezmeriz, Inc. | 360,526 Series A preferred shares. Convertible notes at 8% due December 31, 2014. |
| 391,373 200,000 |
|
| — — |
|
| (391,373 — | )
|
| 0 200,000 |
|
| — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Mezmeriz | 591,373 | — | (391,373 | ) | 200,000 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Microcision LLC | $1,500,000 subordinated promissory note at 11% due January 31, 2017. Class A common membership interest. |
| 1,891,965 — |
|
| — — |
|
| (1 — | )
|
| 1,891,964 — |
|
| 208,116 — |
| ||||||
New Monarch Machine Tool, Inc. | 22.84 common shares. | 22,841 | — | — | 22,841 | 47,682 | ||||||||||||||||
QuaDPharma, LLC | $556,285.22 second note allonge at 10%. 141.75 Class A units of membership interest. |
| 556,285 350,000 |
|
| — — |
|
| (556,285 (350,000 | ) ) |
| — — |
|
| 59,332 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total QuaDPharma | 906,285 | — | (906,285 | ) | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Rheonix, Inc. | 9,676 common shares. 1,839,422 Series A preferred shares. 50,593 common shares. |
| 11,000 2,165,999 59,000 |
|
| — — — |
|
| — — — |
|
| 11,000 2,165,999 59,000 |
|
| — — — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Rheonix | 2,235,999 | — | — | 2,235,999 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
SciAps, Inc. | 187,500 Series A preferred shares. | 1,000,000 | 500,000 | — | 1,500,000 | — | ||||||||||||||||
SOMS Technologies, LLC | 5,959,490 Series B membership interests. | 528,348 | — | — | 528,348 | — | ||||||||||||||||
Teleservices Solutions Holdings, LLC | 250,000 Class B shares. 1,000,000 Class C shares. 80,000 Class D preferred units. |
| — — — |
|
| 250,000 1,070,680 80,000 |
|
| — — — |
|
| 250,000 1,070,680 80,000 |
|
| — 98,952 — |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Teleservices | — | 1,400,680 | — | 1,400,680 | 98,952 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Affiliate Investments | $ | 12,792,869 | $ | 3,904,068 | ($ | 2,079,559 | ) | $ | 14,617,378 | $ | 689,238 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Control and Affiliate Investments | $ | 23,102,688 | $ | 3,909,404 | ($ | 2,372,414 | ) | $ | 24,639,678 | $ | 2,362,641 | |||||||||||
|
|
|
|
|
|
|
|
|
|
Investments in and Advances to Affiliates
Company | Type of Investment | December 31, 2016 Fair Value | Gross Additions (1) | Gross Reductions (2) | December 31, 2017 Fair Value | Net Realized Gains (Losses) | Amount of Interest/ Dividend/ Fee Income (3) | |||||||||||||||||||
OnCore Golf Technology, Inc. | 150,000 Series AA preferred shares. | — | — | — | — | — | — | |||||||||||||||||||
$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 | |||||||||||||||||||
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Total SciAps | 2,054,710 | 574,274 | (854,710 | ) | 1,774,274 | — | 7,107 | |||||||||||||||||||
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SOMS Technologies, LLC | 5,959,490 Series B membership interests. | 528,348 | — | — | 528,348 | — | 6,024 | |||||||||||||||||||
Teleservices Solutions Holdings, LLC | 250,000 Class B shares. 1,000,000 Class C shares. 80,000 Class D preferred units. 104,198 Class E preferred units. | — | — | — | — | — | — | |||||||||||||||||||
200,000 | — | (200,000 | ) | — | — | — | ||||||||||||||||||||
91,200 | — | ( 91,200 | ) | — | — | — | ||||||||||||||||||||
104,198 | — | (104,198 | ) | — | — | — | ||||||||||||||||||||
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Total Teleservices | 395,398 | — | (395,398 | ) | — | — | — | |||||||||||||||||||
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Tilson Technology Management, Inc. | 120,000 Series B preferred shares. | 600,000 | — | — | 600,000 | — | 20,000 | |||||||||||||||||||
21,391 Series C convertible preferred shares. $200,000 subordinated promissory note at 8%. 65,790 Series D preferred shares. $750,000 subordinated promissory note at 8%. | 200,000 | — | — | 200,000 | — | — | ||||||||||||||||||||
200,000 | — | 200,000 | — | 16,000 | ||||||||||||||||||||||
— | 750,000 | 750,000 | 1,579 | |||||||||||||||||||||||
— | 750,000 | — | 750,000 | — | 5,096 | |||||||||||||||||||||
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Total Tilson | 1,000,000 | 1,500,000 | — | 2,500,000 | — | 42,675 | ||||||||||||||||||||
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Total Affiliate Investments | $ | 13,605,974 | $ | 7,010,929 | ($ | 3,600,108 | ) | $ | 17,016,795 | $ | — | $ | 805,668 | |||||||||||||
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Total Control and Affiliate Investments | $ | 13,705,474 | $ | 7,010,929 | ($ | 3,600,108 | ) | $ | 17,116,295 | $ | — | $ | 805,668 | |||||||||||||
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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 |
(2) | Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, |
(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. |
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 20142017 (Continued)
Industry Classification | Percentage of Total Investments (at fair value) as of December 31, | |||
| % | |||
Software | ||||
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Professional Services | 7.7 | |||
Consumer Product | 4.6 | |||
Contact Center | ||||
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Oil and Gas | ||||
Electronics | ||||
Marketing | 0.3 | |||
Total Investments | 100 | % | ||
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RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
For the Five Years Ended December 31, 2018, 2017, 2016, 2015 2014, 2013, 2012 and 20112014
The following is a schedule of financial highlights for the years ended December 31, 2015, 2014, 2013, 2012 and 2011:ended:
2015 | 2014 | 2013 | 2012 | 2011 | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||
Per Share Data: | ||||||||||||||||||||||||||||||||||||||||
Income from investment operations(1): | ||||||||||||||||||||||||||||||||||||||||
Income from investment operations (1): | ||||||||||||||||||||||||||||||||||||||||
Investment income | $ | 0.45 | $ | 0.40 | $ | 0.38 | $ | 0.39 | $ | 0.19 | $ | 0.33 | $ | 0.23 | $ | 0.16 | $ | 0.45 | $ | 0.40 | ||||||||||||||||||||
Expenses | 0.29 | 0.39 | 0.37 | 0.27 | 0.24 | 0.34 | 0.32 | 0.54 | 0.29 | 0.39 | ||||||||||||||||||||||||||||||
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Investment gain (loss) before income taxes | 0.16 | 0.01 | 0.01 | 0.12 | (0.05 | ) | ||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | 0.02 | 0.01 | (0.01 | ) | 0.02 | (0.04 | ) | |||||||||||||||||||||||||||||||||
Investment (loss) gain before income taxes | (0.01 | ) | (0.09 | ) | (0.38 | ) | 0.16 | 0.01 | ||||||||||||||||||||||||||||||||
Income tax (benefit) expense | (0.00 | ) | (0.09 | ) | (0.13 | ) | 0.02 | 0.01 | ||||||||||||||||||||||||||||||||
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Net investment gain (loss) | 0.14 | 0.00 | 0.02 | 0.10 | (0.01 | ) | ||||||||||||||||||||||||||||||||||
Issuance of common stock | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||||||||||||||||||||||
Purchase of treasury stock(2) | 0.00 | 0.02 | 0.04 | 0.04 | 0.00 | |||||||||||||||||||||||||||||||||||
Net realized and unrealized gain on investments | 0.10 | 0.71 | 0.42 | 0.18 | 0.21 | |||||||||||||||||||||||||||||||||||
Net investment (loss) gain | (0.01 | ) | (0.00 | ) | (0.25 | ) | 0.14 | 0.00 | ||||||||||||||||||||||||||||||||
Purchase of treasury stock (2) | 0.00 | 0.00 | 0.00 | 0.00 | 0.02 | |||||||||||||||||||||||||||||||||||
Net realized and unrealized (loss) gain on investments | (0.05 | ) | (0.11 | ) | 0.06 | 0.10 | 0.71 | |||||||||||||||||||||||||||||||||
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Increase in net asset value | 0.24 | 0.73 | 0.48 | 0.32 | 0.20 | |||||||||||||||||||||||||||||||||||
(Decrease) increase in net asset value | (0.06 | ) | (0.11 | ) | (0.19 | ) | 0.24 | 0.73 | ||||||||||||||||||||||||||||||||
Net asset value, beginning of year, based on weighted average shares | 5.11 | 4.38 | 3.90 | 3.58 | 3.38 | 5.05 | 5.16 | 5.35 | 5.11 | 4.38 | ||||||||||||||||||||||||||||||
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Net asset value, end of year, based on weighted average shares | $ | 5.35 | $ | 5.11 | $ | 4.38 | $ | 3.90 | $ | 3.58 | $ | 4.99 | $ | 5.05 | $ | 5.16 | $ | 5.35 | $ | 5.11 | ||||||||||||||||||||
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Per share market value, end of year | $ | 3.77 | $ | 4.09 | $ | 3.07 | $ | 2.34 | $ | 3.10 | $ | 2.50 | $ | 3.02 | $ | 3.16 | $ | 3.77 | $ | 4.09 | ||||||||||||||||||||
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Total return based on market value | (7.82 | %) | 33.2 | % | 31.2 | % | (24.5 | )% | (4.02 | )% | (17.22 | %) | (4.43 | %) | (16.1 | %) | (7.8 | %) | 33.2 | % | ||||||||||||||||||||
Total return based on net asset value | 4.64 | % | 15.26 | % | 8.87 | % | 5.67 | % | 5.85 | % | (1.24 | %) | (2.18 | %) | (3.62 | %) | 4.64 | % | 15.26 | % | ||||||||||||||||||||
Supplemental Data: | ||||||||||||||||||||||||||||||||||||||||
Ratio of expenses before income taxes to average net assets | 5.49 | % | 8.27 | % | 8.76 | % | 7.16 | % | 7.00 | % | 6.92 | % | 6.23 | % | 10.23 | % | 5.49 | % | 8.27 | % | ||||||||||||||||||||
Ratio of expenses including taxes to average net assets | 7.89 | % | 16.28 | % | 14.03 | % | 11.01 | % | 10.41 | % | 5.73 | % | 6.29 | % | 8.48 | % | 7.89 | % | 16.28 | % | ||||||||||||||||||||
Ratio of net investment gain (loss) to average net assets | 2.55 | % | 0.07 | % | 0.57 | % | 2.73 | % | (0.34 | )% | ||||||||||||||||||||||||||||||
Ratio of net investment (loss) gain to average net assets | (0.22 | %) | (0.06 | %) | (3.62 | %) | 2.55 | % | 0.07 | % | ||||||||||||||||||||||||||||||
Portfolio turnover | 21.4 | % | 21.5 | % | 17.9 | % | 22.6 | % | 11.7 | % | 7.4 | % | 18.1 | % | 18.4 | % | 21.4 | % | 21.5 | % | ||||||||||||||||||||
Net assets end of year | $ | 33,853,660 | $ | 32,353,441 | $ | 28,069,332 | $ | 25,782,300 | $ | 24,399,121 | $ | 31,524,187 | $ | 31,918,685 | $ | 32,629,363 | $ | 33,853,660 | $ | 32,353,441 | ||||||||||||||||||||
Weighted average shares outstanding, end of year | 6,328,538 | 6,391,175 | 6,513,385 | 6,770,389 | 6,818,934 | 6,321,988 | 6,321,988 | 6,325,792 | 6,328,538 | 6,391,175 |
(1) | Per share data are based on shares outstanding and results are rounded. |
(2) | Net increase is due to purchase of common stock at prices less than beginning of period net asset value per share. |
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. –- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business –-Rand Capital Corporation (“Rand”) was incorporated under the laws of New York in 1969. Beginning in 1971, Rand operated as a publicly traded,closed-end, diversified management company that was registered under Section 8 of the Investment Company Act of 1940 (the “1940 Act”). In 2001, Rand elected to be treated as a business development company (“BDC”) under the 1940 Act. In 2002, Rand formed a wholly-owned subsidiary for the purpose of operating it as a small business investment company (“SBIC”) licensed by the U.S. Small Business Administration (“SBA”). The subsidiary received an SBA license to operate as an SBIC in 2002. The subsidiary, which had been organized as a Delaware limited partnership, was converted into a New York corporation on December 31, 2008, at which time its operations as a licensed SBIC were continued by the newly formed corporation under the name of Rand Capital SBIC, Inc. (“Rand SBIC”). In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC. At that time, although Rand SBIC was operated as if it were a BDC, it was registered as an investment company under the 1940 Act. Upon Rand’s receipt of the order granting the exemptions, Rand SBIC filed an election to be regulated as a BDC under the 1940 Act. The following discussion describes the operations of Rand and its wholly-owned subsidiary Rand SBIC (collectively, the “Corporation”).
Principles of Consolidation –- The consolidated financial statements include the accounts of Rand and its wholly-owned subsidiary Rand SBIC.subsidiary. 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 maturity of these financial instruments.
Fair Value of SBA Debentures–-In September 2015,2018, the SBASBIC Funding Corporation completed a pooling of SBA debenture borrowings withdebentures that have a coupon rate of 2.829%3.548%, excluding a mandatory SBA annual charge estimated to be 0.804%. The, resulting in a total estimated fixed rate for this pooling is 3.633%ten years of 4.352%. Once pooled, the coupon rate becomes fixed for a 10-year period. 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” if 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-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
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. (See Note 2 “Investments.”)
Qualifying Assets –- All of the Corporation’s investments werehave been 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.
RAND CAPITAL CORPORATION AND SUBSIDIARYCash and Cash Equivalents - Temporary cash investments having a maturity of less than a year when purchased are considered to be cash equivalents.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
After reviewing each of our portfolio companies’ performance and the circumstances surrounding each investment, the Corporation ceased accruing interest incomeThe following investments are on First Wave Products Group, LLC (First Wave), Intrinsiq Materials Inc. (Intrinsiq)non-accrual status:G-TEC Natural Gas Systems(G-Tec) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) in 2015 and G-TEC Natural Gas Systems in 2004.outstanding loan balance.
The Corporation holds debt securities in its investment portfolio that containpayment-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 holdsmay hold preferred equity securities that contain cumulative dividend provisions. Cumulative dividends are recorded as dividend income, if declared and deemed collectible,
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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– ConsistsPrimarily consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $18,333, $16,200$41,872, $24,091 and $7,400$22,634 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively and is estimated to be $9,800approximately $46,000 in 2016, $8,1002019, $21,000 in 2017,2020 and $4,000$6,000 in each of 2018 and 2019.2021. The board fees were $11,000, $14,000$2,000, $1,000 and $16,000$4,000 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. In addition, we recorded a fee of approximately $142,000 for modifying a debt instrument during the year ended December 31, 2018.
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. Proceeds held in escrow are reported in other assets. 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 valuation of the investments and the cost basis of the investments.
Original Issue Discount – Investments may include “original issue discount”, or OID, income. This occurs, for example, 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 purchase price allocated to the note or debt instrument by an equal amount in the form of a note discount or OID. The note is reported net of the OID and the OID is accreted into interest income over the life of the loan. The Corporation recognized $17,339, $15,492$39,653, $32,129 and $15,492$9,996 in OID income for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. OID income is estimated to be approximately $10,000 and $8,000$41,000 for 2016 and 2017, respectively.
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred Debenture Costs –- SBA debenture origination and commitment costs, which are included in other assets,netted against the debenture obligation (See Note 5 “SBA Debenture Obligations”), will be amortized ratably over the terms of the SBA debentures. Amortization expense duringwas $27,400 for each of the years ended December 31, 2015, 20142018, 2017 and 2013 was $27,400, $24,686 and $37,958,2016, respectively. Amortization expense on currently outstanding debentures for the next five years is estimated to average $27,000$29,000 per year.
Net Assets Per Share – Net-Net assets per share are based on the number of shares of common stock outstanding. There are no common stock equivalents.equivalents outstanding.
Supplemental Cash Flow Information –- Income taxes paidrefunded (paid) during the years ended December 31, 2015, 20142018, 2017 and 20132016 amounted to $2,402,317, $1,945,879$26,448, ($486,769) and $962,697,($2,560,614), respectively. Interest paid during the years ended December 31, 2015, 20142018, 2017 and 20132016 was $269,066, $220,667$282,875, $282,875 and $128,083,$283,650, respectively. During 2015, 20142018, 2017 and 2013,2016, the Corporation converted $212,426, $211,127$609,817, $269,445 and $310,322,$19,252, respectively, of interest receivable andpayment-in-kind (PIK) interest (PIK) into debt investments. During the year ended December 31, 2014, the Corporation exchanged membership interests in QuaDPharma, LLC in the amount of $143,285 for common shares of Kinex Pharmaceuticals, Inc. During the year ended December 31, 2014,2016, the Corporation recorded one escrow receivable for $1,510,248$1,100,000 from the sale of BinOptics Corporation.Gemcor II LLC, which was collected during 2017. During 2014the year ended December 31, 2016, the Corporation collected escrows of $680,612 from Liazon Corporation and $160,847 from Ultra-Scan Corporation. During 2015, the Corporation collected $32,962$1,510,248 in escrow receivable from Ultra-ScanBinOptics Corporation.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 insurableinsured limits. Management does not anticipatenon-performance by the banks.
As of December 31, 2015, 62%2018, 45% of the Corporation’s total investment value was held in notesdebt and equity securities inof five portfolio companies. As of December 31, 2014, 57%2017, 47% of the Corporation’s total investment value was held in notesdebt and equity securities in five portfolio companies.
The following are the concentrations of the top five portfolio company values to the fair value of the Corporation’s total investment portfolio:
December 31, 2018 | ||||
Genicon, Inc. (Genicon) | 13 | % | ||
eHealth Global Technologies, Inc. (eHealth), | 10 | % | ||
ACV Auctions, Inc. (ACV) | 8 | % | ||
Tilson Technology Management, Inc. (Tilson) | 7 | % | ||
Microcision, LLC. (Microcision) | 7 | % | ||
December 31, 2017 | ||||
Genicon, Inc. (Genicon) | 12 | % | ||
eHealth Global Technologies, Inc. (eHealth), | 11 | % | ||
Rheonix, Inc. (Rheonix) | 9 | % | ||
Tilson Technology Management, Inc. (Tilson) | 8 | % | ||
Outmatch (Outmatch) | 7 | % |
Income Taxes –-The Corporation reviews the tax positions it has taken to determine if they meet the “more likely than not threshold” for the benefit of the tax position to be recognized in the 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. (See Note 4 “Income Taxes.”)
Accounting Estimates –- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (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.
SBA Debenture –-The Corporation had $8,750,000 and $8,000,000 in outstanding SBA debentures at December 31, 20152018 and December 31, 20142017, respectively, with a weighted average interest rate of 3.54%3.58% as of December 31, 2015.2018. The $8,000,000$8,750,000 in outstanding SBA leveragedebentures matures from 2022 through 2025.2029.
The Corporation
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As a requirement of being licensed the SBA, Rand SBIC has accepted the SBA’s standard default language which states that Rand SBIC 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, which 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.
Reclassification – Certain balances in prior years were reclassified to conform to presentations adopted in 2015.
Recent Accounting Pronouncement –In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as an asset. It is effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-03 is not anticipated to have a material impact on the Corporation’s consolidated financial statements.
NOTE 2. – 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 thea portfolio company.
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.
The loan and debt securities However, they may also be valued at an amount other than cost given the pricecarrying interest rate versus the security would command in order to provide a yield to maturity equivalent torelated inherent portfolio risk of the current yield of similar debt securities.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. This approach values the equity at the value remaining after the portfolio company pays of its debt and loan balances and its outstanding liabilities. 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.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated statement of operations as “Net increase (decrease) in unrealized appreciation on investments.”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 such Level 1 or 2 investments as of December 31, 2015.
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2018.
In the valuation process, the Corporation values restricted securities, categorized as Level 3 investments, using financial information from these portfolio companies, which may include:
Financial information obtained from each portfolio company, including auditedAudited 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;
Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
Internal occurrencescircumstances 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.
This information is used to determine financial condition, performance, and valuation of the portfolio companies. 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 Securitiessecurities may include Preferred Stock, Common Stock, Warrantspreferred stock, common stock, warrants and Limited Liability Company Membership Interests.limited liability company membership interests.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The significant unobservable inputs used in the fair value measurement of the Corporation’s equity investments are EBITDAearnings 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 to thein any of these unobservable inputs such as variances in financial performance from expectations, may result in a significantly higher or lower fair value measurement.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 entered into by the portfolio company.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
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 market value inputs are identified causing the Corporation to depart from this basis.
Loan and Debt Securities
The significant unobservable inputs used in the fair value measurement of the Corporation’s loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, as well as the market acceptance for the portfolio company’s products or services. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. The Corporation’s loan and debt investments are often junior secured or unsecured debt securities. Fair value may also be determined based on other criteria where appropriate. Significant changes to the unobservable inputs may result in a change in fair value.
For recent investments, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing the Corporation to depart from this basis.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2015:2018:
Investment Type | Market Approach EBITDA Multiple | Market Approach Liquidation Seniority | Market Approach Revenue Multiple | Market Approach Transaction Pricing | Asset Approach Liquidation Method | Totals | Market Approach EBITDA Multiple | Market Approach Liquidation Seniority | Market Approach Revenue Multiple | Market Approach Transaction Pricing | Totals | |||||||||||||||||||||||||||||||||
Non-Control/Non-Affiliate Equity | $ | 1,080,694 | $ | — | $ | — | $ | 5,064,041 | $ | 500,000 | $ | 6,644,735 | $ | — | $ | 25 | $ | 2,645,496 | $ | 7,968,502 | $ | 10,614,023 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Non-Control/Non-Affiliate Debt | — | — | — | — | 1,608,974 | 1,608,974 | $ | 700,000 | 5,316,413 | — | 910,777 | 6,927,190 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
TotalNon-Control/Non-Affiliate | $ | 1,080,694 | $ | — | $ | — | $ | 5,064,041 | $ | 2,108,974 | $ | 8,253,709 | $ | 700,000 | $ | 5,316,438 | $ | 2,645,496 | $ | 8,879,279 | $ | 17,541,213 | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Affiliate Equity | $ | 1,128,348 | $ | 22,841 | $ | 600,001 | $ | 10,524,065 | $ | — | $ | 12,275,255 | $ | 2,360,000 | $ | 22,841 | $ | 4,690,930 | $ | 2,545,754 | $ | 9,619,525 | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Affiliate Debt | — | — | — | 150,000 | 2,236,964 | 2,386,964 | 1,933,353 | — | 3,385,586 | 2,087,627 | 7,406,566 | |||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Total Affiliate | $ | 1,128,348 | $ | 22,841 | $ | 600,001 | $ | 10,674,065 | $ | 2,236,964 | $ | 14,662,219 | $ | 4,293,353 | $ | 22,841 | $ | 8,076,516 | $ | 4,633,381 | $ | 17,026,091 | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Control Equity | $ | 13,400,000 | $ | — | $ | 99,500 | $ | — | $ | — | $ | 13,499,500 | $ | — | $ | — | $ | — | $ | 99,500 | $ | 99,500 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Control Debt | 416,972 | — | — | — | — | 416,972 | ||||||||||||||||||||||||||||||||||||||
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|
|
|
|
| |||||||||||||||||||||||||||||||||||||||
Total Control | $ | 13,816,972 | $ | — | $ | 99,500 | $ | — | $ | — | $ | 13,916,472 | $ | — | $ | — | $ | — | $ | 99,500 | $ | 99,500 | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Total Level 3 Investments | $ | 16,026,014 | $ | 22,841 | $ | 699,501 | $ | 15,738,106 | $ | 4,345,938 | $ | 36,832,400 | $ | 4,993,353 | $ | 5,339,279 | $ | 10,722,012 | $ | 13,612,160 | $ | 34,666,804 | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Range | 3.6X-7.5X | 1X | 0.75X-2.5X | 0.0X – 1.0X | Not Applicable | 3.9X-7X | 1X | 1X-4.0X | Not Applicable | |||||||||||||||||||||||||||||||||||
Unobservable Input | | EBITDA Multiple | |
| Asset Value |
| | Revenue Multiple | | Discount |
| Asset Value |
| EBITDA Multiple | Asset Value | Revenue Multiple | Transaction Price | |||||||||||||||||||||||||||
Weighted Average | 6.2X | 1X | 2X | 0 .94X | Not Applicable | 5.3X | 1X | 2.6X | Not Applicable |
The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at December 31, 2018:
Fair Value Measurements at Reported Date Using | ||||||||||||||||
Description | December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Other Significant Unobservable Inputs (Level 3) | ||||||||||||
Loan investments | $ | 4,935,777 | $ | — | $ | — | $ | 4,935,777 | ||||||||
Debt investments | 9,397,979 | — | — | 9,397,979 | ||||||||||||
Equity investments | 20,330,048 | — | — | 20,330,048 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 34,666,804 | $ | — | $ | — | $ | 34,666,804 | ||||||||
|
|
|
|
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the year ended December 31, 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 | ||||||||
Realized loss included in net change in net assets from operations: | ||||||||||||||||
First Wave Products Group, LLC (First Wave) | — | (316,469 | ) | (22,000 | ) | (338,469 | ) | |||||||||
Intrinsiq Material, Inc. (Intrinsiq) | — | — | (1,125,673 | ) | (1,125,673 | ) | ||||||||||
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|
|
|
|
|
|
| |||||||||
Total Realized Losses | — | (316,469 | ) | (1,147,673 | )) | (1,464,142 | ) | |||||||||
Unrealized Gains and Losses included in net change in net assets from operations: | ||||||||||||||||
ACV Auctions, Inc. (ACV Auctions) | — | — | 2,494,551 | 2,494,551 | ||||||||||||
BeetNPath, LLC (Beetnpath) | — | — | (388,723 | ) | (388,723 | ) | ||||||||||
Empire Genomics, LLC (Empire Genomics) | — | (901,360 | ) | — | (901,360 | ) | ||||||||||
First Wave | — | 66,469 | 55,000 | 121,469 | ||||||||||||
Genicon, Inc. (Genicon) | — | — | (82,500 | ) | (82,500 | ) | ||||||||||
GiveGab, Inc. (Givegab) | — | — | 191,907 | 191,907 | ||||||||||||
G-TEC Natural Gas Systems(G-tec) | — | — | (100,000 | ) | (100,000 | ) | ||||||||||
Intrinsiq | — | — | 725,673 | 725,673 | ||||||||||||
KnowledgeVision Systems, Inc. (Knowledgevision) | — | — | (300,000 | ) | (300,000 | ) | ||||||||||
Mercantile Adjustment Bureau, LLC (Mercantile) | — | (249,040 | ) | — | (249,040 | ) | ||||||||||
Microcision LLC (Microcision) | — | — | 610,000 | 610,000 | ||||||||||||
OnCore Golf Technology, Inc. (Oncore Golf) | — | — | (77,712 | ) | (77,712 | ) | ||||||||||
Rheonix, Inc. (Rheonix) | — | — | (735,999 | ) | (735,999 | ) | ||||||||||
SOMS Technologies, LLC (SOMS) | — | — | (528,348 | ) | (528,348 | ) | ||||||||||
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|
|
|
|
|
| |||||||||
Total Unrealized Gains and Losses | — | (1,083,931 | ) | 1,863,849 | 779,918 | |||||||||||
Purchases of Securities/Changes toSecurities/Non-cash conversions: | ||||||||||||||||
BeetNPath, LLC (Beetnpath) | — | 262,627 | — | 262,627 | ||||||||||||
Centivo Corporation (Centivo) | — | — | 201,342 | 201,342 | ||||||||||||
Empire Genomics | — | 348,287 | — | 348,287 | ||||||||||||
Genicon, Inc. (Genicon) | — | 481,806 | — | 481,806 | ||||||||||||
GoNoodle, Inc. (GoNoodle) | — | 10,333 | — | 10,333 | ||||||||||||
Knowledgevision | 775,000 | — | — | 775,000 | ||||||||||||
Microcision LLC (Microcision) | — | 19,213 | — | 19,213 | ||||||||||||
Oncore Golf | — | — | 77,712 | 77,712 | ||||||||||||
SciAps, Inc. (Sciaps) | — | — | 250,000 | 250,000 | ||||||||||||
Tech 2000, Inc. (Tech 2000) | 610,777 | — | — | 610,777 | ||||||||||||
Tilson Technology Management, Inc. (Tilson) | — | 50,000 | 50,000 | 100,000 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total Purchases of Securities/Changes toSecurities/Non-cash conversions | 1,385,777 | 1,172,266 | 579,054 | 3,137,097 |
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Repayments and Sale of Securities: | ||||||||||||||||
Empire Genomics | — | (21,665 | ) | — | (21,665 | ) | ||||||||||
Knoa Software, Inc. (Knoa) | — | (48,466 | ) | — | (48,466 | ) | ||||||||||
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|
|
|
|
|
|
| |||||||||
Total Repayments and Sale of Securities | — | (70,131 | ) | — | (70,131 | ) | ||||||||||
Transfers within Level 3 | — | (400,000 | ) | 400,000 | — | |||||||||||
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|
|
|
|
|
|
| |||||||||
Ending Balance, December 31, 2018, of Level 3 Assets | $ | 4,935,777 | $ | 9,397,979 | $ | 20,333,048 | $ | 34,666,804 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Change in unrealized depreciation on investments for the period included in changes in net assets |
| $ | 779,918 | |||||||||||||
|
| |||||||||||||||
Net realized loss on investments for the period included in changes in net assets |
| ($ | 994,295 | ) | ||||||||||||
|
|
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 December 31, 2017:
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 | $ | 5,792,387 | $ | 7,937,908 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Non-Control/Non-Affiliate Debt | 949,040 | 2,380,819 | 3,500,000 | 400,000 | 7,229,859 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TotalNon-Control/Non-Affiliate | $ | 949,040 | $ | 2,380,844 | $ | 5,645,496 | $ | 6,192,387 | $ | 15,167,767 | ||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Affiliate Equity | $ | 4,420,000 | $ | 22,841 | $ | 5,156,092 | $ | 1,001,477 | $ | 10,600,410 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Affiliate Debt | 5,767,919 | — | 98,466 | 550,000 | 6,416,385 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Affiliate | $ | 10,187,919 | $ | 22,841 | $ | 5,254,558 | $ | 1,551,477 | $ | 17,016,795 | ||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Control Equity | $ | — | $ | — | $ | 99,500 | $ | — | $ | 99,500 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Control Debt | — | — | — | — | — | |||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Total Control | $ | — | $ | — | $ | 99,500 | $ | — | $ | 99,500 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Level 3 Investments | $ | 11,136,959 | $ | 2,403,685 | $ | 10,999,554 | $ | 7,743,864 | $ | 32,284,062 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Range | 4X-9X | 1X | 0.5X-6.2X | Not Applicable | ||||||||||||||||
Unobservable Input | EBITDA Multiple | Asset Value | Revenue Multiple | Transaction Price | ||||||||||||||||
Weighted Average | 5.8X | 1X | 2.3X | Not Applicable |
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2015:2017:
Fair Value Measurements at Reported Date Using | ||||||||||||||||
Description | December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Other Significant Unobservable Inputs (Level 3) | ||||||||||||
Loan investments | $ | 416,972 | $ | — | $ | — | $ | 416,972 | ||||||||
Debt investments | 5,076,632 | — | — | 5,076,632 | ||||||||||||
Equity investments | 31,338,796 | — | — | 31,338,796 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 36,832,400 | $ | — | $ | — | $ | 36,832,400 | ||||||||
|
|
|
|
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 | ||||||||
|
|
|
|
|
|
|
|
The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the year ended December 31, 2015:2017:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Venture Capital Investments | ||||||||||||||||
Description | Loan Investments | Debt Investments | Equity Investments | Total | ||||||||||||
Ending Balance, December 31, 2014, of Level 3 Assets | $ | 622,801 | $ | 5,384,339 | $ | 23,692,236 | $ | 29,699,376 | ||||||||
Realized Gains (Losses) included in net change in net assets from operations: | ||||||||||||||||
BinOptics Corporation (Binoptics) | — | — | (5,394 | ) | (5,394 | ) | ||||||||||
CrowdBouncer, Inc. (Crowdbouncer) | — | — | (300,000 | ) | (300,000 | ) | ||||||||||
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|
|
|
|
|
|
| |||||||||
Total Realized Gains (Losses) | — | — | (305,394 | ) | (305,394 | ) | ||||||||||
Unrealized Gains or Losses included in net change in net assets from operations: | ||||||||||||||||
Athenex, Inc. (Athenex) | — | — | 92,592 | 92,592 | ||||||||||||
Crowdbouncer | — | — | 300,000 | 300,000 | ||||||||||||
First Wave Products Group, LLC (First Wave) | — | (728,031 | ) | (22,000 | ) | (750,031 | ) | |||||||||
Gemcor II, LLC (Gemcor) | — | — | 4,100,000 | 4,100,000 | ||||||||||||
GiveGab, Inc. (Give Gab) | — | — | (191,907 | ) | (191,907 | ) | ||||||||||
Intrinsiq Material, Inc. (Intrinsiq) | — | — | (600,002 | ) | (600,002 | ) | ||||||||||
KnowledgeVision Systems, Inc. (Knowledge Vision) | — | — | (250,000 | ) | (250,000 | ) | ||||||||||
Mercantile Adjustment Bureau, LLC (Mercantile) | — | (150,000 | ) | (97,625 | ) | (247,625 | ) | |||||||||
OnCore Golf Technology, Inc. (Oncore Golf) | — | — | (187,500 | ) | (187,500 | ) | ||||||||||
SciAps, Inc. (Sciaps) | — | — | (500,000 | ) | (500,000 | ) | ||||||||||
SocialFlow, Inc. (Social Flow) | — | — | 321,300 | 321,300 | ||||||||||||
Somerset Gas Transmission Company, LLC (Somerset) | — | — | (286,748 | ) | (286,748 | ) | ||||||||||
Teleservices Solutions Holdings, LLC (Teleservices) | — | — | (250,000 | ) | (250,000 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Unrealized Gains and Losses | — | (878,031 | ) | 2,428,110 | 1,550,079 | |||||||||||
Purchases of Securities/Changes to Securities/Non-cash conversions: | ||||||||||||||||
BeetNPath, LLC (Beetnpath) | — | — | 209,000 | 209,000 | ||||||||||||
Binoptics | — | — | 5,394 | 5,394 | ||||||||||||
Chequed.com, Inc. (Chequed) | — | (250,000 | ) | (1,383,222 | ) | (1,633,222 | ) | |||||||||
City Dining Cards, Inc. (City Dining) | — | — | 500,000 | 500,000 | ||||||||||||
First Wave | — | 31,353 | — | 31,353 | ||||||||||||
Genicon, Inc. (Genicon) | — | — | 1,000,000 | 1,000,000 | ||||||||||||
Give Gab | — | — | 212,833 | 212,833 | ||||||||||||
GoNoodle, Inc. (GoNoodle) | — | 1,008,974 | 25 | 1,008,999 | ||||||||||||
Intrinsiq | — | 95,000 | — | 95,000 | ||||||||||||
Knowledge Vision | — | — | 200,001 | 200,001 | ||||||||||||
Mercantile | — | 9,997 | — | 9,997 | ||||||||||||
Mezmeriz, Inc. (Mezmeriz) | — | (200,000 | ) | 351,477 | 151,477 | |||||||||||
Oncore Golf | — | 150,000 | 175,000 | 325,000 | ||||||||||||
Outmatch (formerly Chequed Holdings, LLC) | — | — | 2,145,496 | 2,145,496 | ||||||||||||
Rheonix, Inc. (Rheonix) | — | — | 702,732 | 702,732 | ||||||||||||
Sciaps | — | — | 754,710 | 754,710 | ||||||||||||
Social Flow | — | — | 500,000 | 500,000 | ||||||||||||
Statisfy, Inc. (Statisfy) | — | — | 150,000 | 150,000 | ||||||||||||
Teleservices | — | — | 235,398 | 235,398 | ||||||||||||
Tilson Technology Management, Inc. (Tilson) | — | — | 600,000 | 600,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Purchases of Securities/Changes to Securities/Non-cash conversions | — | 845,324 | 6,358,844 | 7,204,168 | ||||||||||||
Repayments of Securities: | ||||||||||||||||
Carolina Skiff, LLC (Carolina Skiff) | — | (125,000 | ) | (985,000 | ) | (1,110,000 | ) | |||||||||
Gemcor II, LLC (Gemcor) | (205,829 | ) | — | — | (205,829 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Repayments of Securities | (205,829 | ) | (125,000 | ) | (985,000 | ) | (1,315,829 | ) | ||||||||
Transfers within Level 3 | — | (150,000 | ) | 150,000 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending Balance, December 31, 2015, of Level 3 Assets | $ | 416,972 | $ | 5,076,632 | $ | 31,338,796 | $ | 36,832,400 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Change in unrealized appreciation on investments for the period included in changes in net assets |
| 1,550,079 | ||||||||||||||
Net realized (losses) on investments for the period included in changes in net assets |
| ($ | 305,394 | ) |
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 | ||||||||
Realized Loss included in net change in net assets from operations: | ||||||||||||||||
City Dining Cards, Inc. (Loupe) | — | — | (500,000 | ) | (500,000 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Realized Loss | — | — | (500,000 | ) | (500,000 | ) | ||||||||||
Unrealized Gains and Losses included in net change in net assets from operations: | ||||||||||||||||
ACV Auctions, Inc. (ACV Auctions) | — | — | 119,356 | 119,356 | ||||||||||||
BeetNPath, LLC (Beetnpath) | — | — | 29,723 | 29,723 | ||||||||||||
Carolina Skiff LLC (Carolina Skiff) | — | — | 650,000 | 650,000 | ||||||||||||
Intrinsiq Material, Inc. (Intrinsiq) | — | — | (380,000 | ) | (380,000 | ) | ||||||||||
Knoa Software, Inc. (Knoa) | — | — | 779,700 | 779,700 | ||||||||||||
Mercantile Adjustment Bureau, LLC (Mercantile) | — | (250,000 | ) | — | (250,000 | ) | ||||||||||
SciAps, Inc. (Sciaps) | — | — | (554,710 | ) | (554,710 | ) | ||||||||||
Teleservices Solutions Holdings, LLC (Teleservices) | — | — | (395,398 | ) | (395,398 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Unrealized Gains and Losses | — | (250,000 | ) | 248,671 | (1,329 | ) |
RAND CAPITAL CORPORATION AND SUBSIDIARYSUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a summary of the significant unobservable inputs used to fair value the Corporation’s Level 3 portfolio investments as of December 31, 2014:
Investment Type | Market Approach EBITDA Multiple | Market Approach Liquidation Seniority | Market Approach Revenue Multiple | Market Approach Transaction Pricing | Black Scholes Pricing Model Stock Pricing & Volatility | Face Value Liquidation Seniority | Totals | |||||||||||||||||||||
Non-Control/Non-Affiliate Equity | $ | 786,748 | $ | — | $ | — | $ | 2,204,628 | $ | 97,625 | $ | — | $ | 3,089,001 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Non-Control/Non-Affiliate Debt | — | — | — | — | — | 1,970,697 | 1,970,697 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Non-Control/Non-Affiliate | $ | 786,748 | $ | — | $ | — | $ | 2,204,628 | $ | 97,625 | $ | 1,970,697 | $ | 5,059,698 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Affiliate Equity | $ | 2,113,348 | $ | 22,841 | $ | 100,000 | $ | 8,945,546 | $ | 22,000 | $ | — | $ | 11,203,735 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Affiliate Debt | — | — | — | — | — | 3,413,643 | 3,413,643 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Affiliate | $ | 2,113,348 | $ | 22,841 | $ | 100,000 | $ | 8,945,546 | $ | 22,000 | $ | 3,413,643 | $ | 14,617,378 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Control Equity | $ | 9,399,500 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9,399,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Control Debt | — | — | — | — | — | 622,800 | 622,800 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Control | $ | 9,399,500 | $ | — | $ | — | $ | — | $ | — | $ | 622,800 | $ | 10,022,300 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Level 3 Investments | $ | 12,299,596 | $ | 22,841 | $ | 100,000 | $ | 11,150,174 | $ | 119,625 | $ | 6,007,140 | $ | 29,699,376 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Range | 4.5X-10X | 1X | 1X | Not Applicable | $ | 1.13 | Not Applicable | |||||||||||||||||||||
Weighted Average | 5X | 1X | 1X | N/A | $ | 1.13 | N/A |
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, 2014:
Fair Value Measurements at Reported Date Using | ||||||||||||||||
Description | December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Other Significant Unobservable Inputs (Level 3) | ||||||||||||
Loan investments | $ | 622,801 | $ | — | $ | — | $ | 622,801 | ||||||||
Debt investments | 5,384,339 | — | — | 5,384,339 | ||||||||||||
Equity investments | 24,298,236 | 606,000 | — | 23,692,236 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 30,305,376 | $ | 606,000 | $ | 0 | $ | 29,699,376 | ||||||||
|
|
|
|
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the year ended December 31, 2014:
Purchases of Securities/Changes to Securities/Non-cash conversions: | ||||||||||||||||
Beetnpath | — | 100,000 | 11,277 | 111,277 | ||||||||||||
Centivo Corporation (Centivo) | — | 100,000 | — | 100,000 | ||||||||||||
eHealth Global Technologies, Inc. (eHealth) | 2,000,000 | — | — | 2,000,000 | ||||||||||||
Empire Genomics, LLC (Empire Genomics) | — | 201,489 | — | 201,489 | ||||||||||||
Genicon, Inc. (Genicon) | 300,000 | 903,779 | 120,000 | 1,323,779 | ||||||||||||
GoNoodle, Inc. (GoNoodle) | — | 10,229 | — | 10,229 | ||||||||||||
KnowledgeVision Systems, Inc. (Knowledge Vision) | 50,000 | — | — | 50,000 | ||||||||||||
Mercantile | — | 108,350 | — | 108,350 | ||||||||||||
Microcision LLC (Microcision) | — | 22,176 | — | 22,176 | ||||||||||||
Sciaps | — | — | 274,274 | 274,274 | ||||||||||||
Tilson Technology Management, Inc. (Tilson) | — | 750,000 | 750,000 | 1,500,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Purchases of Securities/Changes toSecurities/Non-cash conversions | 2,350,000 | 2,196,023 | 1,155,551 | 5,701,574 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Transfers within Level 3 | (2,000,000 | ) | 1,450,000 | 550,000 | — | |||||||||||
Transfers out of Level 3 | — | — | (416,664 | ) | (416,664 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending Balance, December 31, 2017, of Level 3 Assets | $ | 3,550,000 | $ | 10,096,244 | $ | 18,637,818 | $ | 32,284,062 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Decrease in unrealized depreciation on investments for the period included in changes in net assets |
| ($ | 274,708 | ) | ||||||||||||
|
| |||||||||||||||
Net realized gain on investments for the period included in changes in net assets |
| $ | 138,240 | |||||||||||||
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Venture Capital Investments | ||||||||||||||||
Description | Loan Investments | Debt Investments | Equity Investments | Total | ||||||||||||
Ending Balance, December 31, 2013, of Level 3 Assets | $ | 1,466,604 | $ | 4,172,417 | $ | 21,655,032 | $ | 27,294,053 | ||||||||
Realized Gains (Losses) included in net change in net assets from operations: | ||||||||||||||||
BinOptics Corporation (Binoptics) | — | — | 8,333,344 | 8,333,344 | ||||||||||||
EmergingMed.com, Inc. (Emerging Med) | — | (778,253 | ) | — | (778,253 | ) | ||||||||||
Liazon Corporation (Liazon) | — | — | (472,664 | ) | (472,664 | ) | ||||||||||
QuaDPharma, LLC (Quadpharma) | — | — | 160,634 | 160,634 | ||||||||||||
Ultra-Scan Corporation (Ultra-Scan) | — | — | 4,668 | 4,668 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Realized Gains (Losses) | — | (778,253 | ) | 8,025,982 | 7,247,729 | |||||||||||
Unrealized Gains (Losses) included in net change in net assets from operations: | ||||||||||||||||
CrowdBouncer, Inc. (Crowdbouncer) | — | — | (300,000 | ) | (300,000 | ) | ||||||||||
Emerging Med | — | 778,253 | — | 778,253 | ||||||||||||
Kinex Pharmaceuticals, Inc. (Kinex) | — | — | 111,343 | 111,343 | ||||||||||||
Knoa Software, Inc. (Knoa) | — | — | (356,900 | ) | (356,900 | ) | ||||||||||
Mezmeriz, Inc. (Mezmeriz) | — | — | (391,373 | ) | (391,373 | ) | ||||||||||
NDT Acquisitions, LLC (NDT) | — | — | 5,336 | 5,336 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Unrealized Gains (Losses) | — | 778,253 | (931,594 | ) | (153,341 | ) | ||||||||||
Purchases of Securities/Changes to Securities/Non-cash conversions: | ||||||||||||||||
BeetNPath, LLC (Beetnpath) | — | 150,000 | — | 150,000 | ||||||||||||
Chequed.com, Inc. (Chequed) | — | 250,000 | 350,000 | 600,000 | ||||||||||||
Crashmob, Inc. (Crashmob) | — | — | 500,000 | 500,000 | ||||||||||||
Crowdbouncer | — | — | 300,000 | 300,000 | ||||||||||||
Empire Genomics, LLC (Empire Genomics) | — | 600,000 | — | 600,000 | ||||||||||||
First Wave Products Group, LLC (First Wave) | — | 170,844 | — | 170,844 | ||||||||||||
GiveGab, Inc. (Give Gab) | — | — | 153,388 | 153,388 | ||||||||||||
Kinex | — | — | 143,285 | 143,285 | ||||||||||||
Knoa | — | — | 479,155 | 479,155 | ||||||||||||
KnowledgeVision Systems, Inc. (Knowledge Vision) | — | — | 300,000 | 300,000 | ||||||||||||
Liazon | — | — | 476,334 | 476,334 | ||||||||||||
Mercantile Adjustment Bureau, LLC (Mercantile) | — | 166,078 | 47,625 | 213,703 | ||||||||||||
OnCore Golf Technology, Inc. (Oncore Golf) | — | — | 200,000 | 200,000 | ||||||||||||
Quadpharma | — | — | (143,285 | ) | (143,285 | ) | ||||||||||
SciAps, Inc. (Sciaps) | — | — | 500,000 | 500,000 | ||||||||||||
SocialFlow, Inc. (Social Flow) | — | — | 750,000 | 750,000 | ||||||||||||
Teleservices Solutions Holdings, LLC (Teleservices Holdings) | — | — | 1,400,680 | 1,400,680 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Purchases of Securities/Changes to Securities/Non-cash conversions | — | 1,336,922 | 5,457,182 | 6,794,104 | ||||||||||||
Repayments of Securities: | ||||||||||||||||
Binoptics | — | — | (10,133,343 | ) | (10,133,343 | ) | ||||||||||
Carolina Skiff LLC (Carolina Skiff) | — | (125,000 | ) | — | (125,000 | ) | ||||||||||
Gemcor II, LLC (Gemcor) | (287,518 | ) | — | — | (287,518 | ) | ||||||||||
Liazon | — | — | (3,670 | ) | (3,670 | ) | ||||||||||
Quadpharma | (556,285 | ) | — | (367,349 | ) | (923,634 | ) | |||||||||
NDT | — | — | (5,336 | ) | (5,336 | ) | ||||||||||
Ultra-Scan | — | — | (4,668 | ) | (4,668 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Repayments of Securities | (843,803 | ) | (125,000 | ) | (10,514,366 | ) | (11,483,169 | ) | ||||||||
Transfers within Level 3 | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending Balance, December 31, 2014, of Level 3 Assets | $ | 622,801 | $ | 5,384,339 | $ | 23,692,236 | $ | 29,699,376 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Change in unrealized appreciation on investments for the period included in changes in net assets |
| ($ | 153,341 | ) | ||||||||||||
Net realized gains on investments for the period included in changes in net assets |
| $ | 7,247,729 |
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. –- OTHER ASSETS
At December 31, 2015 and 2014, otherOther assets was comprised of the following:following at December 31:
2015 | 2014 | 2018 | 2017 | |||||||||||||
Escrow receivable from BinOptics Corporation | $ | 1,504,854 | $ | 1,510,248 | ||||||||||||
Deferred debenture costs, net | 199,627 | 227,027 | ||||||||||||||
Operating receivables | $ | 11,428 | $ | 3,204 | ||||||||||||
Equipment (net) | 262 | 2,490 | ||||||||||||||
Dividend receivable | 86,724 | 37,978 | — | 37,160 | ||||||||||||
Escrow receivable from Ultra-Scan | — | 32,962 | ||||||||||||||
Equipment (net) | 11,676 | 14,558 | ||||||||||||||
Operating receivables | 1,159 | 2,027 | ||||||||||||||
|
|
|
| |||||||||||||
Total other assets | $ | 1,804,040 | $ | 1,824,800 | $ | 11,690 | $ | 42,854 | ||||||||
|
|
|
|
During 2014 the Corporation sold its investment in BinOptics Corporation and a portion of the proceeds were held in escrow and is scheduled to be released during 2016. During 2013, the Corporation sold its investment in Ultra-Scan Corporation (Ultra-Scan) and a portion of the sales proceeds were held in escrow and released during 2014 and 2015.
NOTE 4. –- INCOME TAXES
Deferred tax assets and liabilities are recorded for temporary differences between the financial statement and tax bases of assets and liabilities using the tax rate expected to be in effect when the taxes are actually paid or recovered.
In December 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act decreases the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018. The impact of there-measurement on the Corporation’s net deferred tax asset, as of December 31, 2017, was approximately $346,000 in additional income tax expense. The Act also
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
includes a number of other provisions including, among others, the elimination of net operating loss carrybacks and limitations on the use of future losses, the repeal of the Alternative Minimum Tax regime and the repeal of the domestic production activities deduction. These provisions are not expected to have a material effect on the Corporation. For the year ended December 31, 2018, approximately $164,000 of income tax benefit was recorded based on the additional tax benefit expected to be claimed on a capital loss carryback. At December 31, 2018, the Corporation has completed its accounting for the income tax effects of the Act.
The tax effect of the major temporary differences and carryforwards that give rise to the Corporation’s net deferred tax assets and (liabilities)asset at December 31, 20152018 and 20142017 are approximately as follows:
2015 | 2014 | 2018 | 2017 | |||||||||||||
Operations | $ | 305,000 | $ | 288,000 | ($ | 50,000 | ) | ($ | 134,000 | ) | ||||||
Investments | (2,701,000 | ) | (2,170,000 | ) | 504,000 | 638,000 | ||||||||||
NOL & tax credit carryforwards | 69,000 | 44,000 | 145,000 | 91,000 | ||||||||||||
Valuation allowance | (34,000 | ) | — | (74,000 | ) | (43,000 | ) | |||||||||
|
|
|
| |||||||||||||
Deferred tax liability, net | ($ | 2,361,000 | ) | ($ | 1,838,000 | ) | ||||||||||
Deferred tax asset, net | $ | 525,000 | $ | 552,000 | ||||||||||||
|
|
|
|
The major temporary differences cited above include differences in the book and tax bases of the Corporation’s joint ventureportfolio company investments, as well as unrealized gains and losses on corporate investments that will be taxed when realized in future years. The Corporation assesses the recoverability of its deferred tax assets annually to determine if a valuation allowance is necessary. In performing this assessment, it considers estimated future taxable income and ongoing tax planning strategies. Based on this assessment, it was determined that a valuation allowance was necessary against the deferred tax asset relating to certain state net operating loss carryforwards (NOL). No allowance was deemed necessary for 2014.
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of income tax expense (benefit) reported in the consolidated statements of operations are as follows for the years ended December 31:
2015 | 2014 | 2013 | 2018 | 2017 | 2016 | |||||||||||||||||||
Current: | ||||||||||||||||||||||||
Federal | $ | 257,279 | $ | 2,670,129 | $ | 1,946,727 | ($ | 411,509 | ) | ($ | 490,730 | ) | $ | 2,571,560 | ||||||||||
State | 14,015 | 118,118 | 211,702 | 8,400 | (104,556 | ) | 374,290 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
271,294 | 2,788,247 | 2,158,429 | (403,109 | ) | (595,286 | ) | 2,945,850 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Deferred: | ||||||||||||||||||||||||
Federal | 320,546 | (437,470 | ) | (534,640 | ) | 110,426 | 601,777 | (3,151,558 | ) | |||||||||||||||
State | 202,289 | 69,013 | (205,166 | ) | (83,761 | ) | 11,524 | (374,792 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
522,835 | (368,457 | ) | (739,806 | ) | 26,665 | 613,301 | (3,526,350 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 794,129 | $ | 2,419,790 | $ | 1,418,623 | ($ | 376,444 | ) | $ | 18,015 | ($ | 580,500 | ) | ||||||||||
|
|
|
|
|
|
A reconciliation of the (benefit) expense (benefit) for income taxes at the federal statutory rate to the expense reported is as follows:
2015 | 2014 | 2013 | 2018 | 2017 | 2016 | |||||||||||||||||||
Net investment gain, realized gain and unrealized gain before income tax expense | $ | 2,294,348 | $ | 6,961,271 | $ | 4,291,980 | ||||||||||||||||||
Net investment (loss) gain, realized gain and unrealized (loss) gain before income tax expense | ($ | 770,942 | ) | ($ | 692,663 | ) | ($ | 1,783,183 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Expected tax expense at statutory rate | $ | 780,078 | $ | 2,366,832 | $ | 1,459,273 | ||||||||||||||||||
Expected tax (benefit) expense at statutory rate | ($ | 161,898 | ) | ($ | 235,505 | ) | ($ | 606,282 | ) | |||||||||||||||
State - net of federal effect | 142,459 | 123,506 | 13,096 | (57,110 | ) | (59,906 | ) | (2,586 | ) | |||||||||||||||
Pass-through benefit from portfolio investment | (135,262 | ) | (71,850 | ) | (51,156 | ) | ||||||||||||||||||
Pass-through expense (benefit) from portfolio investment | 24,075 | (3,536 | ) | 31,213 | ||||||||||||||||||||
Dividend received deduction | (4,977 | ) | (5,436 | ) | (8,154 | ) | (13,946 | ) | (11,659 | ) | (15,368 | ) | ||||||||||||
Federal Act Rate Change | (164,395 | ) | 346,292 | 0 | ||||||||||||||||||||
Other | 11,831 | 6,738 | 5,564 | (3,170 | ) | (17,671 | ) | 12,523 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 794,129 | $ | 2,419,790 | $ | 1,418,623 | ($ | 376,444 | ) | $ | 18,015 | ($ | 580,500 | ) | ||||||||||
|
|
|
|
|
|
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 20152018 and 2014,2017, the Corporation had no federal net operating loss carryforwards or capital loss carryforwards. For state tax purposes, there was a Pennsylvaniawere various state net operating loss carryforward of $517,541carryforwards totaling $1,501,811 and $837,526 at December 31, 2015. As mentioned previously, the2018 and 2017, respectively. The related deferred tax asset has a valuation allowance sinceof $74,000 and $43,000 at December 31, 2018 and 2017, respectively on the Pennsylvania net operating loss, which is not expected to be utilized. For state tax purposes the Corporation had a NYS Qualified Emerging Technology Company (QETC) tax credit carryforward of $29,204 and $21,733 at December 31, 2015 and 2014. The QETC credit carryforward does not have an expiration date. The Corporation also has a Georgia Employer’s Jobs Tax Credit carryforward of $23,325$49,619 and $24,328$40,081 at December 31, 20152018 and 20142017, respectively and this credit expires in the next ninefive to ten years.
The Corporation is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 20122015 through 2015.2018. In general, the Corporation’s state income tax returns are open to audit under the statute of limitations for the years ended December 31, 20122015 through 2015.2018.
It is the Corporation’s policy to include interest and penalties related to income tax liabilities in income tax expense on the Statement of Operations. There wasIn addition, the Corporation records uncertain tax positions in accordance with ASC 740, “Income Taxes”, (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. The uncertain tax benefits for the years ended December 31, 2018, 2017 and 2016 were de minimus and no amount recognizedamounts were recorded for interest and penalties related to unrecognized tax benefitspositions for the years ended December 31, 2015, 2014,2018, 2017, and 2013.2016.
NOTE 5. –- SBA DEBENTURE OBLIGATIONS
At December 31, 20152018 and 2014,2017, Rand SBIC had debentures payable to and guaranteed by the SBA totaling $8,000,000.$$8,750,000 and 8,000,000, respectively. The weighted average interest rate at December 31, 20152018 was 3.54%3.58%.
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The debenture terms require semiannual payments of interest at annual interest rates ranging from 2.245% to 3.644%, plus an annual charge of 0.804%. The debentures have fixed interest rates and a 10 year maturity date. As of December 31, 2015, no2018, the Corporation had $5,250,000 in additional leverage is available from the SBA.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The debentures outstanding at December 31, 20152018 will mature as follows:
Maturity Date | Leverage | Leverage | ||||||
2022 | 3,000,000 | $ | 3,000,000 | |||||
2023 | 2,500,000 | 2,500,000 | ||||||
2024 | 1,500,000 | 1,500,000 | ||||||
2025 | 1,000,000 | 1,000,000 | ||||||
2029 | 750,000 | |||||||
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Total Outstanding | $ | 8,000,000 | $ | 8,750,000 | ||||
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The Corporation wasis required to pay thepre-pay a SBA a commitment fee equal to 1% of the face amount of the SBA leverage reserved as a partial prepayment of the SBA’s nonrefundable 3% leverage draw fees. CommitmentThe Corporation paid a commitment fee of $60,000 to the SBA during the year ended December 31, 2018 to secure $6,000,000 in SBA leverage through September 30, 2023. In addition, the Corporation paid $18,188 in leverage draw down fees during the fourth quarter of 2018 in conjunction with the drawdown of $750,000 in SBA leverage. There were no commitment and leverage draw fees of $0, $24,250 and $72,750 were paid during the years ended December 31, 2015, 20142017 and 2013, respectively.2016.
The CorporationRand SBIC 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, which may include the Corporation’san automatic consent to the appointment of SBA or its designee as receiver under section 311(c) of the Act.
Pursuant to Accounting Standard Update (ASU)2015-03, the debt origination costs directly associated with the SBA debt obligations are presented as a direct deduction from the related debt liability.
December 31, 2018 | December 31, 2017 | |||||||
Debentures guaranteed by the SBA | $ | 8,750,000 | $ | 8,000,000 | ||||
Less unamortized issue costs | (195,557 | ) | (144,827 | ) | ||||
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Debentures guaranteed by the SBA, net | $ | 8,554,443 | $ | 7,855,173 | ||||
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NOTE 6. –- STOCKHOLDERS’ EQUITY (NET ASSETS)
At December 31, 20152018 and 2014,2017, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.
On October 22, 2015,25, 2018, the Board of Directors authorizedextended the repurchase ofauthorization for up to 1,000,000 shares of the Corporation’s outstanding common stock on the open market through October 22, 201625, 2019 at prices that are no greater than the then current net asset value. No shares were repurchased during the yearyears ended December 31, 2015. During 2014, the Corporation repurchased 83,380 shares for $257,372 and paid an average of $3.09 per share.2018 or 2017. At December 31, 2015,2018 and 2017 the total treasury shares held was 534,496541,046 shares with a total cost of $1,447,491.$1,469,105.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summary of change in equity accounts:
Accumulated Net Investment Loss | Undistributed Net Realized Gain on Investments | Net Unrealized Appreciation on Investments | ||||||||||
Balance, December 31, 2013 | ($ | 889,317 | ) | $ | 13,522,890 | $ | 5,357,785 | |||||
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Net increase (decrease) in net assets from operations | 21,835 | 4,767,484 | (247,838 | ) | ||||||||
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Balance, December 31, 2014 | ($ | 867,482 | ) | $ | 18,290,374 | $ | 5,109,947 | |||||
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Net increase (decrease) in net assets from operations | 842,902 | (27,973 | ) | 685,290 | ||||||||
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Balance, December 31, 2015 | ($ | 24,580 | ) | $ | 18,262,401 | $ | 5,795,237 | |||||
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Accumulated Net Investment Loss | Undistributed Net Realized Gain on Investments | Net Unrealized Depreciation or Appreciation on Investments | ||||||||||
Balance, December 31, 2016 | ($ | 1,577,848 | ) | $ | 27,127,054 | ($ | 2,718,831 | ) | ||||
Net (decrease) increase in net assets from operations | (19,298 | ) | 88,684 | (780,064 | ) | |||||||
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Balance, December 31, 2017 | (1,597,146 | ) | 27,215,738 | (3,498,895 | ) | |||||||
Net (decrease) increase in net assets from operations | (68,406 | ) | (994,295 | ) | 668,203 | |||||||
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Balance, December 31, 2018 | ($ | 1,665,552 | ) | $ | 26,221,443 | ($ | 2,830,692 | ) | ||||
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NOTE 7. –- STOCK OPTION PLANS
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 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
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
profit sharing plan for the Corporation’s employees in connection with the formation of its SBIC subsidiary. As of December 31, 2015, 20142018, 2017 and 2013,2016, 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 options will be granted under the Option Plan while any profit sharing plan is in effect with respect to the Corporation (See Note 8)8. “Employee Benefit Plans”).
NOTE 8. –- EMPLOYEE BENEFIT PLANS
The Corporation has a defined contribution 401(k) Plan (the “401K Plan”). The 401K Plan provides a base contribution of 1% for eligible employees and also provides up to 5% matching contributions. The employer contributions to the 401K Plan amounted to $44,793, $55,690$45,990, $29,199 and $40,710$39,673 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
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 on investments of its SBIC subsidiary, net of all realized capital losses and unrealized depreciation on the investments 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 (loss) gain and its net realized gain (loss) on sales and dispositions of 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 expensed $0, $899,500 and $887,244did not record any expense under the Plan for the years ended December 31, 2015, 20142018 or 2017 and 2013, respectively.recorded $1,270,052 during the year ended December 31, 2016. Included in the profit sharing and bonus payable line on the accompanying consolidated statement of financial position at December 31, 20152017 is $182,000 to be$132,000 that was paid to the executive officers upon collection of the escrow receivable in 2016.2018. Estimated payroll taxes and benefits on the profit sharing have been accrued at December 31, 2015, 2014 and 2013.accrued. The amounts approved do not exceed the defined limits.
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. –- COMMITMENTS AND CONTINGENCIES
The Corporation has an agreement which provides health benefits for the spouse of a former officer of the Corporation. Remaining payments projected to be paid to the surviving spouse have been fully accrued. Total accrued health benefits under this agreement at December 31, 2015 and 2014 were $27,869 and $34,015, respectively.
The Corporation has a lease for office space which expires in December 2020. Rent expense under this operating lease for the years ended December 31, 2015, 20142018, 2017 and 20132016 was $19,200, $18,840$20,100, $19,800 and $18,480,$19,500, respectively. The operating lease obligations are approximately as follows:
Year | Amount | |||
2016 | $ | 18,500 | ||
2017 | 18,800 | |||
2018 | 19,100 | |||
2019 | 19,400 | |||
Thereafter | 19,700 | |||
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Total | $ | 95,500 | ||
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Year | Amount | |||
2019 | 19,400 | |||
2020 | 19,700 | |||
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Total | $ | 39,100 | ||
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On March 2, 2017, the Corporation filed with the Securities and Exchange Commission (the “SEC”) certain Change in Control Agreements, which have been executed with each of its named executive officers, (“NEOs”), which provide each NEO with certain financial benefits in the event that (i) such NEO’s employment is terminated without cause (as defined in the Change in Control Agreement) in connection with, or within eighteen months after, a Change in Control (as defined in the Change in Control Agreement) of the Corporation or (ii) such NEO terminates his employment in connection with, or within eighteen months after, a Change in Control for good reason (as defined in the Change in Control Agreement). Upon the occurrence of such events, each Change in Control Agreement provides for a lump sum payment to the NEO in an amount equal to (i) one (1.0) times such NEO’s annual base salary then in effect plus (ii) the average of the annual incentive bonuses and profit sharing payments earned by such NEO for the last five fiscal years ended prior to such NEO’s employment termination date. However, the amount of the payment to any NEO cannot exceed (and will be reduced in order not to exceed) 1.5% of the total equity capitalization of the Corporation implied by the Change in Control event.
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. – UNCONSOLIDATED SIGNIFICANT SUBSIDIARY
In accordance with the Rule 4.08(g) of Regulation S-X, the Corporation has an unconsolidated significant subsidiary that is not required to be consolidated. Accordingly, comparative financial information is presented below.
For the years ended December 31 | ||||||||
2015 (000’s) | 2014 (000’s) | |||||||
Balance Sheet: | ||||||||
Current assets | $ | 18,131 | $ | 18,136 | ||||
Non-current assets | $ | 10,417 | $ | 10,506 | ||||
Current liabilities | $ | 8,609 | $ | 7,438 | ||||
Non-current liabilities | $ | 356 | $ | 834 | ||||
Income Statement: | ||||||||
Net sales | $ | 36,603 | $ | 29,875 | ||||
Gross profit | $ | 7,704 | $ | 7,537 | ||||
Net income | $ | 4,768 | $ | 4,727 |
NOTE 11. –- QUARTERLY OPERATIONS AND EARNINGS DATA – UNAUDITED
4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | |||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Investment income | $ | 745,787 | $ | 718,279 | $ | 718,524 | $ | 641,747 | ||||||||||||||||||||||||
Net increase in net assets from operations | $ | 891,078 | $ | 286,497 | $ | 143,096 | $ | 179,548 | ||||||||||||||||||||||||
Basic and diluted net increase in net assets per share from operations | $ | 0.14 | $ | 0.05 | $ | 0.02 | $ | 0.03 | ||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||
Investment income | $ | 825,620 | $ | 569,349 | $ | 671,559 | $ | 517,947 | $ | 668,325 | $ | 662,302 | $ | 413,518 | $ | 362,809 | ||||||||||||||||
Net increase (decrease) in net assets from operations | $ | 3,967,876 | $ | 223,442 | $ | 519,776 | ($ | 169,613 | ) | $ | 936,511 | ($ | 179,302 | ) | ($ | 631,294 | ) | ($ | 520,413 | ) | ||||||||||||
Basic and diluted net increase (decrease) in net assets per share from operations | $ | 0.63 | $ | 0.03 | $ | 0.08 | ($ | 0.03 | ) | $ | 0.15 | ($ | 0.03 | ) | ($ | 0.10 | ) | ($ | 0.08 | ) | ||||||||||||
2017 | ||||||||||||||||||||||||||||||||
Investment income | $ | 379,987 | $ | 397,019 | $ | 349,139 | $ | 328,637 | ||||||||||||||||||||||||
Net increase (decrease) in net assets from operations | $ | 226,209 | $ | 57,931 | ($ | 635,337 | ) | ($ | 359,481 | ) | ||||||||||||||||||||||
Basic and diluted net increase (decrease) in net assets per share from operations | $ | 0.04 | $ | 0.01 | ($ | 0.10 | ) | ($ | 0.06 | ) |
RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12.11. – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Corporation maintains an allowance for doubtful accounts for estimated uncollectible interest payments due from portfolio investments. The allowance for doubtful accounts is based on a review of the overall condition of the receivable balances and a review of past due amounts. Changes in the allowance for doubtful accounts consist of the following:
2015 | 2014 | 2013 | 2018 | 2017 | 2016 | |||||||||||||||||||
Balance at beginning of year | ($ | 128,311 | ) | ($ | 122,000 | ) | ($ | 196,795 | ) | ($ | 161,000 | ) | ($ | 161,000 | ) | ($ | 122,000 | ) | ||||||
Provision for losses | — | (6,311 | ) | — | — | — | (39,000 | ) | ||||||||||||||||
Write offs/Recoveries | 6,311 | — | 74,795 | |||||||||||||||||||||
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Balance at end of year | ($ | 122,000 | ) | ($ | 128,311 | ) | ($ | 122,000 | ) | ($ | 161,000 | ) | ($ | 161,000 | ) | ($ | 161,000 | ) | ||||||
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NOTE 12. – SUBSEQUENT EVENT
In January 2019 the Corporation entered into a stock purchase agreement to sell approximately 8.3 million shares of Rand’s common stock to East Asset Management, LLC for $25 million in cash and portfolio assets. Additionally, a new entity, Rand Capital Management, LLC will be established as an external management company and will be retained by Rand Capital to be its investment advisor. The sale and issuance of common stock pursuant to the stock purchase agreement as well as the externalization of the management structure are subject to shareholder and other regulatory approvals.
In connection with the anticipated closing of the above-described transactions and contingent upon meeting certaintax-related conditions, the Corporation intends to elect to become a regulated investment company (“RIC”) for U.S. federal tax purposes. This will enable the pass through of capital gains and investment income to shareholders without payment of corporate-level U.S. federal income tax by Rand.
RAND CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. – SUBSEQUENT EVENT
On December 29, 2015 the Corporation entered into an asset purchase agreement under which it agreed to sell its investment in Gemcor II LLC (Gemcor). The required percentage of Gemcor shareholders ratified and approved the sale in January 2016. The transaction is anticipated to close in the first quarter of 2016, and remains subject to customary approvals and closing conditions. Based on the Corporation’s ownership of Gemcor, gross cash proceeds of approximately $14 million are expected upon completion of the transaction. The final aggregate purchase price payable by the buyer remains subject to post-closing working capital adjustments. Additionally, the Corporation will incur the related profit sharing expense in the first quarter of 2016.
RAND CAPITAL CORPORATION AND SUBSIDIARY
SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT
COST AND REALIZED LOSS
For the Year Ended December 31, 20152018
Cost Increase (Decrease) | Realized Gain (Loss) | |||||||
New investments: | ||||||||
GoNoodle, Inc. (GoNoodle) (formerly HealthTeacher, Inc.) | $ | 1,000,025 | $ | — | ||||
Genicon, Inc. (Genicon) | 1,000,000 | — | ||||||
SciAps, Inc. (SciAps) | 749,999 | — | ||||||
Rheonix, Inc. (Rheonix) | 680,475 | — | ||||||
Tilson Technology Management, Inc. (Tilson) | 600,000 | — | ||||||
Outmatch (formerly Chequed Holdings LLC) | 500,000 | — | ||||||
City Dining Cards, Inc. (City Dining) | 500,000 | — | ||||||
SocialFlow, Inc. (Social Flow) | 500,000 | — | ||||||
OnCore Golf Technology, Inc. (Oncore Golf) | 325,000 | — | ||||||
GiveGab, Inc. (Give Gab) | 212,833 | — | ||||||
Knowledge Vision Systems Inc. (Knowledge Vision) | 200,001 | — | ||||||
BeetNPath, LLC (BeetNPath) | 200,000 | — | ||||||
Mezmeriz, Inc. (Mezmeriz) | 151,477 | — | ||||||
Statisfy, Inc. (Statisfy) (formerly CrashMob, Inc.) | 150,000 | — | ||||||
Teleservices Solutions Holdings, LLC (Teleservices) | 104,198 | — | ||||||
Intrinsiq Materials, Inc. (Intrinsiq) | 95,000 | — | ||||||
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Total of new investments | 6,969,008 | — | ||||||
Other changes to investments: | ||||||||
Teleservices dividend conversion | 131,200 | — | ||||||
First Wave Products Group, LLC (First Wave) interest conversion and OID amortization | 31,353 | — | ||||||
Rheonix interest conversion | 22,257 | — | ||||||
Outmatch interest conversion | 12,274 | — | ||||||
Mercantile Adjustment Bureau, LLC (Mercantile) OID amortization | 9,997 | — | ||||||
BeetNPath interest conversion | 9,000 | — | ||||||
GoNoodle interest conversion | 8,974 | — | ||||||
SciAps interest conversion | 4,711 | — | ||||||
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Total of other changes to investments | 229,766 | — | ||||||
Investments repaid, sold or liquidated: | ||||||||
Gemcor II, LLC (Gemcor) repayment | (205,828 | ) | — | |||||
CrowdBouncer, Inc. (Crowdbouncer) realized loss | (300,000 | ) | (300,000 | ) | ||||
Synacor, Inc. (Synacor) shares sold | (385,680 | ) | 262,925 | |||||
Carolina Skiff LLC (Carolina Skiff) repayment | (1,110,000 | ) | — | |||||
Binoptics Corporation (Binoptics) escrow adjustment | — | (5,394 | ) | |||||
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Total investments repaid, sold or liquidated | (2,001,508 | ) | (42,469 | ) | ||||
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Net change in investments, at cost | $ | 5,197,266 | ($ | 42,469 | ) | |||
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Cost Increase (Decrease) | Realized Loss | |||||||
New investments: | ||||||||
KnowledgeVision Systems, Inc. (Knowledgevision) | $ | 775,000 | $ | — | ||||
Tech 2000, Inc. (Tech 2000) | 600,000 | — | ||||||
BeetNPath, LLC (Beetnpath) | 262,627 | — | ||||||
Genicon Inc. (Genicon) | 250,000 | — | ||||||
SciAps, Inc. (Sciaps) | 250,000 | — | ||||||
Centivo Corporation (Centivo) | 200,000 | — | ||||||
Tilson Technology Management, Inc. (Tilson) | 100,000 | — | ||||||
Empire Genomics, LLC (Empire Genomics) | 50,000 | — | ||||||
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Total of new investments | 2,487,627 | |||||||
Other changes to investments: | ||||||||
Empire Genomics capitalized fee income and interest conversion | 298,287 | — | ||||||
Genicon interest conversion and OID amortization | 231,806 | — | ||||||
OnCore Golf Technology, Inc. (Oncore) interest conversion | 77,712 | — | ||||||
Microcision LLC (Microcision) interest conversion | 19,213 | — | ||||||
Tech 2000 interest conversion | 10,777 | — | ||||||
GoNoodle, Inc. (GoNoodle) interest conversion | 10,333 | — | ||||||
Centivo interest conversion | 1,342 | — | ||||||
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Total of other changes to investments | 649,470 | |||||||
Investments repaid, sold or liquidated: | ||||||||
Intrinsiq Material, Inc. (Intrinsiq) realized loss | (1,125,673 | ) | (1,125,673 | ) | ||||
First Wave Technologies, Inc. (First Wave) realized loss | (338,469 | ) | (338,469 | ) | ||||
Knoa Software Inc. (Knoa) repayment | (48,466 | ) | — | |||||
Empire Genomics repayment | (21,666 | ) | — | |||||
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Total of investments repaid, sold or liquidated | (1,534,274 | ) | (1,464,142 | ) | ||||
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Net change in investments, at cost | $ | 1,602,823 | ($ | 1,464,142 | ) | |||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors and Stockholders
of Rand Capital Corporation and SubsidiarySubsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position, including the consolidated schedules of portfolio investments, of Rand Capital Corporation and SubsidiarySubsidiaries (the “Corporation”)Corporation) as of December 31, 20152018 and 2014, including the consolidated schedule of portfolio investments as of December 31, 2015 and 2014,2017, and the related consolidated statements of operations, cash flows and changes in net assets and cash flows for each of the three years in the period ended December 31, 2015,2018, and the related notes to the consolidated financial statements, and the financial highlights schedule for each of the five years in the period then ended. ended December 31, 2018 (collectively, the financial statements). In our opinion, the financial statements and financial highlights schedule present fairly, in all material respects, the financial position of Rand Capital Corporation and Subsidiaries as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, and the financial highlights for each of the five years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements and the financial highlights schedule are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidatedthe Corporation’s financial statements and financial highlights schedule based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights schedule are free of material misstatement.misstatement, whether due to error or fraud. The CorporationCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights schedule, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements.statements and financial highlights schedule. Our proceduresaudits also included examination or confirmation of securities owned as of December 31, 2015 and 2014. An audit also includes assessingevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements and financial highlights schedule. Our procedures included confirmation of investments as of December 31, 2018 and 2017, by correspondence with portfolio companies and custodian(s); when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial highlights schedule referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2015 and 2014, the results of their operations, their cash flows and the changes in their net assets for each of the three years in the period ended December 31, 2015, and the financial highlights schedule for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2, the investment securities included in the consolidated financial statements valued at $36,832,400 (109%$34,666,804 (110% of net assets) and $30,305,376 (94%$32,284,062 (101% of net assets) as of December 31, 20152018 and 2014,2017, respectively, include securities valued at $36,832,400$34,666,804 and $29,699,376,$32,284,062, respectively, whose fair values have been estimated by management in the absence of readily ascertainable fair value. The fair value estimates are then approved by the Board of Directors. We have reviewed the procedures used by management in preparing the valuations of investment securities and have inspected the underlying documentation, and in the circumstances we believe the procedures are reasonable and the documentation appropriate. Those estimated values may differ from the values that would have been used had a ready market for the investments existed.
The supplementarysupplemental schedule of consolidated changes in investments at cost and realized lossgain for the year ended December 31, 20152018 has been subjected to audit procedures performed in conjunction with the audit of the Corporation’s consolidated financial statements. The supplemental informationschedule is the responsibility of the Corporation’s management. Our audit procedures included determining whether the supplemental informationschedule reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable and performing procedures
to test the completeness and accuracy of the information presented in the supplemental information.schedule. In forming our opinion on the supplemental schedule, we evaluated whether the supplemental schedule, including its form and content, is presented in conformity with accounting principles generally accepted in the United States of America. In our opinion, the supplemental schedule of consolidated changes in investments at cost and realized lossgain for the year ended December 31, 20152018 is fairly stated, in all material respects, in relation to the financial statements as a whole.
/s/ FREED MAXICK CPAs, P.C.
We have served as the Corporation’s auditor since 2003.
Buffalo, New York
March 10, 20167, 2019
Item 9. |
|
None
Item 9A. Controls and Procedures
Item 9A. | Controls and Procedures |
Management Report on Internal Control Over Financial Reporting. The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is a process designed to provide reasonable assurance to the Corporation’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on its assessment, management believes that, as of December 31, 2015, the Corporation’s internal control over financial reporting is effective based on those criteria.
Disclosure Controls and Procedures.The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of December 31, 2015.2018. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s controls and procedures were effective as of December 31, 2015.2018.
Management Report on Internal Control Over Financial Reporting.The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is a process designed to provide reasonable assurance to the Corporation’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on its assessment, management believes that, as of December 31, 2018, the Corporation’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Corporation’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to rules of the Securities and Exchange CommissionSEC that permit the corporationCorporation to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting.There have been no changes in our internal control over financial reporting during the Corporation’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B. | Other Information |
None
Item 10. | Directors, Executive Officers, and Corporate Governance |
Information regarding Directors and Executive Officers
The following table provides information concerning all persons who are Directors or executive officers of Rand. Rand is not part of a fund complex.
Name, Age and Address | Position(s) held with Fund | Length of Time Served as a Director (1) | Business Experience and Occupations During Last Five Years | Other Directorships (2) | ||||
Directors who areInterested Persons (3) | ||||||||
Allen F. Grum (61) c/o 2200 Rand Building Buffalo NY 14203 | President and Chief Executive Officer of Rand and a Director | 1996 | President and Chief Executive Officer since 1996. Prior thereto, Mr. Grum served as Senior Vice President of Rand Capital Corporation commencing in June 1995. From 1994 to 1995, Mr. Grum was Executive Vice President of Hamilton Financial Corporation and from 1991-1994 he served as Senior Vice President of Marine Midland Mortgage Corporation. Mr. Grum serves on a number of Boards of Directors of companies in which Rand Capital Corporation has an investment. His in-depth knowledge of Rand Capital Corporation’s operations, and the industries in which the Corporation operates makes Mr. Grum qualified to serve as a Director. | None | ||||
Directors who are not Interested Persons | ||||||||
Erland E. Kailbourne (77) c/o 2200 Rand Building Buffalo, NY 14203 | Director and Chair of the Board | 1999 | Director of Albany International Corporation since May 2009. From May 2009 until February 2019, Mr. Kailbourne was Chairman of Albany International Corporation. From January 2006 until May 2010, Mr. Kailbourne was Chairman of Financial Institutions, Inc. and its subsidiary Five Star Bank. He retired as Chairman and Chief Executive Officer (New York Region) of Fleet National Bank, a banking subsidiary of Fleet Financial Group, Inc., in 1998. From 1995 to 2000, he was Vice Chairman State University of New York (SUNY). He was Chairman and Chief Executive Officer of Fleet Bank, also a subsidiary of Fleet Financial Group, Inc., from 1993 until its merger into Fleet National Bank in 1997. He is a Director of REV LNG, LLC, Albany International Corporation, Allegany Co-op Insurance Company, Conemaugh Valley Insurance Company, and The Thomas and Laura Moogan Foundation. Mr. Kailbourne’s extensive banking and financial experience provide necessary attributes as a Director of Rand. | Director of Albany International Corporation |
Ross B. Kenzie (87) 1961 Wehrle Drive Suite 5 Buffalo, NY 14221 | Director | 1996 | Mr. Kenzie has been retired since 1989. Prior thereto, he was the Chairman of the Board and Chief Executive Officer of Goldome Bank, Buffalo, NY, a savings bank, from 1980. Prior thereto, Mr. Kenzie was Executive Vice President and Director of Merrill Lynch, Pierce, Fenner & Smith as well as Merrill Lynch & Co. Mr. Kenzie is a former Director of Biophan Technologies, Inc. and Natural Nano, Inc., development companies specializing in highly marketable business devices and naturally occurring nanotube technologies; and a former Director of Merchants Mutual Insurance Company. Mr. Kenzie is a former Director of Chicago Board of Options Exchange (CBOE). Mr. Kenzie’s banking and financial experience in addition to his involvement with emerging companies, provide invaluable expertise as a Director of Rand. | None | ||||
Jayne K. Rand (58) c/o 2200 Rand Building Buffalo, NY 14203 | Director | 1989 | Since 1993, Miss Rand has been a Vice President of M&T Bank. Miss Rand’s banking experience and credit underwriting abilities provide necessary expertise as a Director of Rand. | None | ||||
Robert M. Zak (61) 250 Main Street Buffalo, NY 14202 | Director and Vice Chair of the Board | 2005 | Since 1995, Mr. Zak has been President and Chief Executive Officer of Merchants Mutual Insurance Company, which operates under the trade name Merchants Insurance Group. Mr. Zak joined Merchants in 1985. Prior to that his career was in public accounting. Mr. Zak served as a director of Manning & Napier, Inc. from November 2011 until June 2016. Mr. Zak’s executive leadership and public accounting experience provide desirable attributes as a Director of Rand. | None | ||||
Non-Director Executive Officers (3) | ||||||||
Daniel P. Penberthy (56) c/o 2200 Rand Building Buffalo, NY 14203 | Executive Vice President, Treasurer and Chief Financial Officer of Rand | N/A | Mr. Penberthy has served as Treasurer of Rand since August 1997. Since January 2002, Mr. Penberthy has served as Executive Vice President, and he has continued to serve as the Chief Financial Officer since 1997. From 1993 to 1997, Mr. Penberthy served as Chief Financial Officer for both the Greater Buffalo Partnership (formerly the Chamber of Commerce) and the Greater Buffalo Convention and Visitors Bureau. Prior thereto, from 1990 to 1993, Mr. Penberthy was employed by Greater Buffalo Development Foundation and KPMG. | None |
(1) | Indicates initial year in which such person became a Director. All Directors’ terms of office will be through the next annual meeting of shareholders and until their successors have been duly elected and qualified. |
(2) | Indicates current directorships of companies with a class of equity securities registered under Section 12 of the Exchange Act, subject to the requirements of Section 15(d) of the Exchange Act, or registered as an investment company under the 1940 Act. |
(3) | Indicates an executive officer of Rand, who is deemed to be an “interested person” under Section 2(a)(19) of the 1940 Act. |
Committee Information
The Committees of the Board of Directors have the following members:
Compensation Committee | Governance and Nominating Committee | Audit Committee | ||
Robert M. Zak (Chair) | Erland E. Kailbourne (Chair) | Ross B. Kenzie (Chair) | ||
Erland E. Kailbourne | Ross B. Kenzie | Erland E. Kailbourne | ||
Jayne K. Rand | Jayne K. Rand | Robert M. Zak |
Compensation Committee
The Compensation Committee is comprised of independent Board members, each of whom meet the independence requirements of the Nasdaq Stock Market and Corporate Governance
Information in response to this Item is incorporated herein by referenceapplicable law, and advises the independent members of the Board with respect to the informationcompensation of the executive officers and reviews the criteria that form the basis for management compensation. None of the persons on the Compensation Committee are “interested persons” as defined in Section 2(a)(19) of the 1940 Act.
The compensation levels of Rand’s President/CEO and Executive Vice President/CFO were recommended by Rand’s Compensation Committee and approved by the independent members of the Board, which represents a majority of its membership.
The Compensation Committee’s charter may be accessed at Rand’s website, www.randcapital.com.
Governance and Nominating Committee
The primary purposes of the Governance and Nominating Committee include:
developing, recommending to the Board and assessing corporate governance policies for Rand;
overseeing the evaluation of the Board and its committees; and
recommending to the Board the individuals qualified to serve on the Board for election by shareholders at each annual meeting of shareholders, and recommending to the Board candidates to fill vacancies on the Board.
The Governance and Nominating Committee’s charter may be accessed at Rand’s website, www.randcapital.com. None of the persons on the Governance and Nominating Committee are “interested persons” as defined in Section 2(a)(19) of the 1940 Act. The Governance and Nominating Committee is comprised of members each of whom meet the independence requirements of the Nasdaq Stock Market.
Audit Committee
The Board of Directors has determined that none of the members of the Audit Committee are “interested persons” as defined in Section 2(a)(19) of the 1940 Act. The Audit Committee is comprised of independent Directors, all of whom meet the independence requirements of the Nasdaq Stock Market and the rules of the SEC. The Board has determined that Ross B. Kenzie is an audit committee financial expert (as defined by SEC regulations) (see Mr. Kenzie’s relevant work experience is described in the table above under “Information regarding Directors and Executive Officers”) and each of the other members of the Audit Committee also have qualifications and experience to be considered financial experts.
The Audit Committee’s charter may be accessed at Rand’s website, www.randcapital.com. The Audit Committee reviews the scope and results of the annual audit, receives reports from Rand’s independent registered public accountants, and reports the Audit Committee’s findings and recommendations to the Board.
The Audit Committee has adopted necessary reporting procedures for the confidential submission, receipt, retention and treatment of accounting and auditing complaints.
Factors used in the Audit Committee’s Assessment of the External Auditor Qualifications and Work Quality:
The Audit Committee is responsible for appointment, compensation and oversight of external auditors.
The Audit Committee annually reviews the Corporation’s independent public registered accountants’ (the “audit firm”) performance and independence in deciding whether to continue to retain such audit firm. In the course of these reviews, the Audit Committee considers, among other things:
The quality and efficiency of the audit firm’s historical and recent audit plans.
The audit firm’s capabilities and expertise in handling the breadth and complexity of private equity accounting, portfolio valuation and public company reporting.
The desired balance of the audit firm’s experience and the fresh perspective occasioned by mandatory audit partner rotation every five years, and the audit firm’s periodic rotation of other audit management.
Public Company Accounting Oversight Board (PCAOB) reports on the audit firm, if any.
The appropriateness of the audit firm’s fees, which the Audit Committee evaluates, reviews and approves.
The effectiveness of the audit firm’s communications and working relationships with the Audit Committee and management.
The audit firm’s independence and objectivity.
The audit firm’s tenure, having served as the Corporation’s independent registered public accounting firm since 2003.
Evaluation of the audit by management and the Audit Committee.
The Audit Committee considersnon-audit fee/services provided when assessing auditor independence.
Code of Conduct and Business Ethics
Our Code of Conduct and Business Ethics policy each requires that all employees and Directors avoid conflicts of interests that interfere with the performance of their duties or the best interests of the Corporation. The Business Ethics policy includes additional procedures modeled on Rule17j-1 under the headings “ PROPOSAL 1 – ELECTION OF DIRECTORS”, “COMMITTEES AND MEETING DATA,”1940 Act to prevent employees and “Section 16(a) Beneficial Ownership Compliance” provided inDirectors from abusing their access to information about the Corporation’s definitive Proxy Statement for its 2016 Annual Meeting of Shareholders, to be filed under Regulation 14A (the “2016 Proxy Statement”).investments.
The CorporationRand has adopted a written Code of EthicsConduct that applies to our principal executive officer, principal financial officerRand’s Chief Executive Officer, Chief Financial Officer and vice presidentVice President of finance,Finance, and a Business Ethics Policy applicable to the Corporation’s directors,Rand’s Directors, officers and employees. The Corporation’s Code of EthicsConduct and the Business Ethics Policy are each available free of charge, in the Governance section of Rand’s website at www.randcapital.com.
They are also available in print to any shareholder who requests it. Rand will disclose any substantive amendments to, or waiver from provisions of, the Code of Conduct made with respect to the Chief Executive Officer, Chief Financial Officer or Vice President of Finance on its website.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Rand’s Directors and executive officers, and persons who own more than ten percent of Rand’s shares, to file with the SEC initial reports of stock ownership and reports of changes to stock ownership. Reporting persons are required by SEC regulations to furnish Rand with all Section 16(a) reports that they file.
To our knowledge, based solely on review of the copies of such reports furnished to Rand and written representations that no other reports were required, Rand believes all Section 16(a) filing requirements applicable to its executive officers, Directors and greater than ten percent beneficial owners of Rand’s shares were complied with during the year ended December 31, 2018.
Item 11. | Executive Compensation |
Compensation Discussion and Analysis
Rand’s principal executive officer is its President/Chief Executive Officer, Allen F. Grum, and Rand’s principal financial officer is its Executive Vice President/Chief Financial Officer, Daniel P. Penberthy. They are Rand’s Named Executive Officers (“NEOs”).
The President/Chief Executive Officer and Executive Vice President/Chief Financial Officer serve as the Management and Investment Committee of Rand SBIC, and are parties to a Profit Sharing Plan (the “Profit Sharing Plan”) of Rand SBIC that was adopted by Rand as a requirement for the licensing of Rand SBIC as a SBIC by the SBA.
The Compensation Committee, all of the members of which are independent Directors of the Board, makes determinations and recommendations to the Board with respect to the compensation of the NEOs. Each member (i) satisfies all of the independence requirements under the current rules and guidelines of the Nasdaq Stock Market, (ii) is an “outside Director” (as defined in the regulations pursuant to Section 162(m) of the IRS Code), and (iii) arenon-employee Directors (as defined in Rule16b-3 of the Exchange Act). The Compensation Committee’s responsibilities and authority are set forth in the Compensation Committee charter, which is disclosed on Rand’s website. The Compensation Committee recommendations are then reviewed by the independent Directors of the Board, who are responsible for establishing such compensation. Rand’s President and Chief Executive Officer is responsible for establishing the compensation of Rand’s staff other than the NEOs.
Introduction
This Compensation Discussion and Analysis is designed to provide shareholders with an understanding of our compensation philosophy and objectives as well as the analysis that was performed in setting executive compensation. It discusses the Compensation Committee’s determination of how and why, in addition to what, compensation actions were taken with respect to the NEOs.
Objectives of Rand’s Compensation Programs and What they are Designed to Reward
Rand depends on the management and analytical abilities of its NEOs for its long-term success and the enhancement of long-term shareholder value. The objectives of Rand’s compensation programs are to provide appropriate levels of compensation, reward above average corporate performance, recognize individual initiative and achievement, attract and retain qualified individuals to contribute to Rand’s success, and motivate management to enhance shareholder value.
Key Elements of Rand’s Compensation Plans and Why they are Paid:
Base Salary – Base salaries meet the objectives of attracting and retaining the management talent needed to operate the business successfully. Individual salary amounts are not determined by formulas, but instead reflect the Compensation Committee’s judgment with respect to each NEO’s responsibility, performance, experience and past compensation, internal equity considerations and other factors, including NEO retention. Annually, the Board, on recommendation of the Compensation Committee, sets base salaries for the NEOs that it believes are appropriate given the scope of their duties and responsibilities.
Bonus – Rand provides the opportunity to earn bonuses to its NEOs and staff to motivate them to achieve results that exceed the annual budget and provide value to the Corporation. A bonus, if any, is based on a qualitative consideration of individual and Corporation performance. For purposes of determining whether a bonus was warranted for 2018 performance, the Compensation Committee considered the Corporation’s website locatedoperating performance, the price performance of the Corporation’s common shares, the change in the Net Asset Value per share and the accomplishments of each officer during the year, including the achievement of strategic initiatives. The Compensation Committee considers, and may make appropriate adjustments for, unusual items that are deemed to be outside the control of the NEOs. Based upon the Compensation Committee’s analysis, a $50,000 bonus was awarded to each of the NEOs for 2018 to reflect the progress on the strategic initiatives, SBA approval, increase in interest income and the proposed transaction with East Asset Management.
Profit Sharing Plan – Rand provides long-term incentives to its NEOs through the Profit Sharing Plan, which allows them to participate in the growth of Rand’s portfolio and aligns their interests with those of Rand’s shareholders. The terms of Rand’s license to operate Rand SBIC require that it maintain a profit sharing plan, which provides for payment by Rand of designated percentages of net realized capital gains (net of all realized capital losses and unrealized depreciation) of Rand SBIC. Amounts paid or accrued pursuant to the Profit Sharing Plan cannot exceed 20% of Rand’s net income in a given year. The Compensation Committee does not have discretion to change the amounts due under the Profit Sharing Plan. For 2018, no amounts were accrued nor paid pursuant to the Profit Sharing Plan and as a result, no amounts are expected to be paid in 2019 pertaining to 2018 portfolio exits.
Equity – Although we believe that equity ownership by management enhances shareholder value, restrictions imposed by the 1940 Act preclude Rand from offering stock options or other equity incentives to its NEOs at www.randcapital.com.any time when they participate in a profit sharing plan. The Compensation Committee believes that each of the NEOs own shares in Rand that are significant to their respective net worth.
Standard Employee Benefits – Rand provides employee benefits it considers competitive and necessary to attract and retain talented personnel. Rand maintains a 401(k) plan for its employees under which participants may elect to contribute up to 20% of their compensation on a pretax basis, to a maximum of $18,500 ($24,500 if age 50 or over) for 2018. Rand makes a contribution of 1% of compensation for each participant and matches participant contributions up to 5% of compensation, subject to IRS annual compensation and contribution limits. Rand may also elect to contribute discretionary amounts under the 401(k) plan as determined by the Board. No discretionary amounts have been contributed since the 401(k) plan’s inception. Rand also provides life insurance, automobile reimbursement and club membership benefits to its NEOs.
Item 11. Consideration of Prior Shareholder Advisory Vote on Executive Compensation
InformationAt our 2019 Annual Meeting of Shareholders, we will provide our shareholders the opportunity to vote to approve, on an advisory basis, the compensation of our NEOs. At the 2018 Annual Meeting of Shareholders, our shareholders cast 1,418,622 votes, or 95%, in responsefavor of approving the compensation of our NEOs and 58,972 votes, or 4%, against approving such compensation, with 16,694 votes, or 1%, abstaining. Our Compensation Committee and Board value the opinions expressed by our shareholders, including thenon-binding advisory vote on executive compensation. We are mindful of the strong support our shareholders expressed for our philosophy of seeking to link compensation to our operating and strategic objectives and the enhancement of shareholder value. As a result, our Compensation Committee took the results of the advisory vote on executive compensation into account in determining that our 2018, and anticipated 2019, executive compensation policies remain consistent with our policies in prior years and should continue to emphasize the performance, alignment, and retention objectives described above.
How the Amounts of Each Element of the Compensation are Determined and How They Fit Into Rand’s Overall Compensation Objectives
Salary, Bonus and Profit Sharing
The Compensation Committee determined that the amount of the base salary paid to each of the NEOs for 2018 was in the best interests of shareholders. A discretionary bonus payment was paid for 2018 to each of the NEOs for the reasons noted previously. The NEOs did not earn a profit sharing payment under the Profit Sharing Plan in 2018. In making its determination regarding compensation for each of the NEOs, the Compensation Committee considered whether the salaries, bonuses and profit sharing amounts due to its NEOs were consistent with the compensation philosophy described above.
The Analysis Used in Setting Compensation Levels
When making individual compensation decisions for NEOs, the Compensation Committee takes many factors into account, including the individual’s role and responsibilities, performance, and experience; the overall performance of Rand; the recommendations of Board committee chairs; the individual’s past compensation; and a comparison to the other NEO of Rand. The Compensation Committee may engage a compensation consultant to provide insight into setting compensation levels.
Specifically, the Compensation Committee has considered factors such as:
total compensation in relation to Rand’s size, and the composition and performance of its investments and total investment capital available;
Rand’s success in identifying appropriate investment opportunities and returns on its investments;
the value of Rand’s assets in accordance with Accounting Standards Codification 820 “fair value measurement”;
the responsibilities and duties of the NEOs;
whether there has been any adjustment or potential recovery of prior payments resulting from the restatement of prior performance measures upon which bonus or profit sharing awards were based (no such adjustments or recovery occurred during 2016, 2017 or 2018); and
realized income from investment exits in the consolidated Rand and Rand SBIC portfolios.
Evaluating Performance
The Compensation Committee evaluates the performance of the NEOs annually, and consults with the other Directors and committee chairs regarding that performance. The Compensation Committee also seeks the advice of the President and Chief Executive Officer in connection with the performance evaluation for the other NEO; however, the President and Chief Executive Officer is not present when the Compensation Committee meets to evaluate his performance and recommend compensation for the NEOs.
The Compensation Committee uses discretion in qualitatively evaluating individual performance and considers the following factors, among others, in recommending to the Board any annual bonus awards to the NEOs: the input of other Board Committee Chairs, and each NEO’s contribution to Rand’s leadership, management, strategic planning, business development, and investment returns.
Change in Control Agreements
The Corporation and the Board believe that maintaining a Change in Control Agreement with each of our NEOs is in the best interest of the Corporation and its
shareholders as it will assist in retaining our leadership in the event of a change in control and provides our NEOs with reasonable financial security in the case of a loss of employment resulting from a change in control. The Corporation and the Board believe that it is in the best interest of the Corporation and its shareholders to have the dedication of our NEOs, without the distraction of personal uncertainties that can result from a change in control. In addition, the Corporation believes the Change in Control Agreements help the Corporation maintain a competitive compensation program and encourages retention of the NEOs.
The Change in Control Agreement provides each NEO with a right to receive certain payments in the event that (i) such NEO’s employment is terminated without cause (as defined in the Change in Control Agreement) (other than for death or disability (as defined in the Change in Control Agreement)) in connection with, or within eighteen months after, a Change in Control of the Corporation or (ii) such NEO terminates his employment in connection with, or within eighteen months after, a Change in Control for “Good Reason”, which is defined in the Change in Control Agreements as (i) a change in the location at which such NEO performs his duties for the Corporation to a new location that is at least 50 miles from the prior location; (ii) a material decrease in the NEO’s authority, duties or responsibilities; (iii) a reduction in the NEO’s annual base salary or (iv) a reduction in the NEO’s annual bonus and profit sharing opportunity as compared to the opportunity for the prior fiscal year. As defined in more detail in the Change in Control Agreements, a “Change in Control” means the occurrence of any of the following events: (1) any person or entity becomes the beneficial owner, directly or indirectly, of securities representing more than 50% of the total voting power of the Corporation’s outstanding securities; (2) a merger or consolidation of the Corporation, other than one that results in the outstanding voting securities of the Corporation prior to such merger or consolidation representing at least 50% of the total voting power after such merger or consolidation; (3) the sale or disposition by the Corporation of all or substantially all of the Corporation’s assets or (4) a change in the composition of the Board that results in fewer than a majority of the Directors being Incumbent Directors (as defined in the Change in Control Agreements).
Upon the occurrence of such events, the Change in Control Agreements provide for a lump sum payment to the NEO from the Corporation in an amount equal to (i) the NEO’s annual base salary then in effect plus (ii) the average of the annual incentive bonus amounts and profit sharing payments earned by the NEO for the last five fiscal years ended prior to the NEO’s employment termination date. However, the amount of this payment per NEO cannot exceed (and will otherwise be reduced in order not to exceed) 1.5% of the total equity capitalization of the Corporation implied by the Change in Control event. Prior to receipt of such payment, the Change in Control Agreements require the NEO to execute a general release agreement, which includes a general release of claims against the Corporation by the NEO and agreements by the NEO to comply with ongoing confidentiality andnon-disparagement obligations.
The term of the Change in Control Agreements commenced on March 1, 2017 and shall continue in effect until December 31, 2019, with subsequent automatic extensions of the term for one (1) additional year, unless, not later than nine months prior to the conclusion of any term, the Corporation or the NEO provides notice to the other not to extend the term. Under the terms of the proposed East Asset Management transaction, the Change of Control Agreements will be cancelled without any payment due or payable to the NEOs.
For each of the NEOs, the table below estimates the amount that each such NEO would be paid under the Change in Control Agreements if a Change in Control of the Corporation occurs and such NEO is terminated without cause or voluntarily terminates his employment for Good Reason in connection with, or within eighteen months after, the occurrence of the Change in Control event. The amounts below assume that each employment termination was effective as of December 31, 2018.
Name | Current Annual Base Salary | Five Year Average of Annual Incentive Bonus and Profit Sharing Payments(1) | Total Payment Amount(2) | |||||||||
Allen F. Grum | $ | 245,000 | $ | 227,005 | $ | 472,005 | ||||||
Daniel P. Penberthy | $ | 230,000 | $ | 227,005 | $ | 457,005 |
(1) | Annual incentive bonus and profit sharing payments are computed using an average of the annual incentive bonus amount and profit sharing payments for the prior five completed fiscal years. |
(2) | Assumes that the total amount of such payment to a NEO does not exceed 1.5% of the total equity capitalization of the Corporation as implied by a hypothetical Change in Control event. In the event that the total payment amount would be greater than 1.5% of the total equity capitalization implied by the Change in Control event, the amount of such payment will be reduced in order not to exceed 1.5% of the total equity capitalization implied by the Change in Control event. |
Accounting and Tax Treatments of Compensation
The Compensation Committee’s policy is to structure compensation in a way that allows it to be fully tax deductible, where doing so will further the purposes of the executive compensation programs. The Compensation Committee also considers it important to retain flexibility to design compensation programs that recognize a full range of criteria important to Rand’s success, even where compensation payable under the programs may not be fully tax deductible.
Compensation Consultant
During 2018, the Corporation did not utilize a compensation consultant. The Compensation Committee anticipates that it may use an independent advisor periodically.
Profit Sharing Plan
We believe Rand’s base salaries, bonuses and the Profit Sharing Plan collectively create an appropriate focus on long-term objectives and promote NEO retention. The terms of the SBA’s license for Rand SBIC require it to maintain a profit sharing plan that provides for payment to the NEOs of the designated percentages of the net realized capital gains (net of all unrealized capital losses and unrealized depreciation) of Rand SBIC. The Compensation Committee does not have discretion to change the amounts due under the Profit Sharing Plan.
Under the Profit Sharing Plan, Rand pays its NEOs cumulative profit sharing payments equal to 12% of realized capital gains of Rand SBIC, net of realized capital losses and unrealized depreciation of Rand SBIC, for each fiscal year of Rand SBIC, computed in accordance with the Profit Sharing Plan.
The profit sharing payments are shared equally between Rand’s two NEOs, who are fully vested in the Profit Sharing Plan. Under the Investment Advisers Act of 1940 (Section 205(b)(3)) requirements, the aggregate amount which may be paid or accrued under the Profit Sharing Plan and any other incentive based plan maintained by Rand during any fiscal year, may not exceed 20% of Rand’s net income after taxes, as defined, for that fiscal year. In accordance with the 1940 Act requirements, a majority of the members of the Board who were not interested persons approved the Profit Sharing Plan on the basis that it is reasonable and fair to Rand’s shareholders, and does not involve overreaching of Rand or its shareholders on the part of any person concerned.
In 2018, no payments were due or payable to the NEOs under the Profit Sharing Plan.
Disbursement Triggers onNon-Equity Incentive Compensation
Realized gains from portfolio exits are typically received by Rand in a combination of lump sum payment (cash) and a release of escrow 12 to 24 months following closing. Profit sharing payments under the Profit Sharing Plan that are accrued by the Corporation are typically disbursed to the NEOs upon the receipt of cash proceeds. If a loss or deduction to funds held in escrow occurs due to post-closing adjustments or claims, thepro-rata profit sharing obligation payable to NEOs under the Profit Sharing Plan is forfeited. No money was accrued nor expected to be paid at December 31, 2018 pertaining to the Profit Sharing Plan.
Risk Considerations in our Compensation Program
The compensation of the NEOs consists of fixed and variable compensation. The fixed (or salary) portion of compensation is designed to provide a steady income so executives do not feel pressured to focus exclusively on short-term gains or annual stock price performance, which may be to the detriment of long-term appreciation and other business metrics. The variable (bonus and profit sharing) portions of compensation are designed to reward both short- and long-term corporate performance. For short-term performance, bonuses are qualitatively determined by the Compensation Committee and approved by the Board. For long-term performance, profit sharing is determined based on realized income from portfolio investment exits, net of realized and unrealized losses and depreciation. In addition, the following risk mitigation components exist:
Bonus payments are not tied directly to specific financial metrics, which reduces the risk that management is incented inappropriately to achieve desired targets and performance metrics;
Maintenance of the Profit Sharing Plan is required under the terms of the SBA’s license for Rand SBIC, and the SBA’s requirement to maintain the Profit Sharing Plan suggests that it believes that the Profit Sharing Plan provides for compensation to participants in an appropriate manner and in appropriate amounts;
Profit sharing payments under the Profit Sharing Plan are limited by the Investment Advisers Act of 1940 to 20% of Rand’s net income after taxes as defined in any fiscal year;
The Board, Compensation Committee and independent registered public accountants review all profit sharing calculations prior to disbursement;
Each NEO’s personal investment portfolio includes a significant amount of Rand’s shares, which aligns their respective interests with the interests of our shareholders in Rand’s long-term success and stock price appreciation. At the end of 2018, Allen F. Grum owned 173,642 shares and Daniel P. Penberthy owned 84,467 shares.
The Profit Sharing Plan and our approach to payment of bonuses each have been in place for a number of years, and we have seen no evidence that they encourage unnecessary or excessive risk taking;
Rand has specific quarterly reporting, review and approval processes with its Board, which we believe are adequate to prevent manipulation by any employee, including our NEOs; and
The compensation and bonus of non-executive officers are qualitatively determined by the President and Chief Executive Officer, which we believe encourages a balanced approach to overall corporate performance.
Conclusion
Through the compensation and incentive structure described above, a significant portion of the amounts that may be payable as compensation have been, and will continue to be, contingent on Rand’s performance, and realization of incentive benefits is closely linked to increases in long-term shareholder value. Rand remains committed to this philosophy of pay for performance, recognizing the volatility of Rand’s investments may result in highly variable compensation from year to year.
In January 2019, the independent Directors of the Board approved a 6.1% increase in base salary for Mr. Grum, and a 10.9% increase in base salary for Mr. Penberthy.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item is incorporated herein by reference402(b) of Regulation S-K with management and, based on its review and discussions with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Submitted by the Compensation Committee
Robert M. Zak, Chair
Erland E. Kailbourne
Jayne K. Rand
The information provided in the Corporation’s 2016 Proxy Statementpreceding Compensation Committee Report will not be deemed to be “soliciting material” or “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act, unless in the future the Corporation specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into any filing under the headings “COMPENSATION DISCUSSION AND ANALYSIS”Securities Act of 1933, as amended or the Exchange Act.
Summary Compensation Table
The following table sets forth information with respect to the compensation paid or earned for the 2018, 2017 and “DIRECTOR COMPENSATION.”2016 fiscal years to each NEO. Rand is not part of a fund complex.
Name and Principal Position (1) | Year | Salary (2) | Bonus (2)(3) | Non-Equity Incentive Plan Compensation(3)(7) (Profit Sharing Plan) | All Other Compensation (4)(5) | Total Compensation (6) | ||||||||||||||||
Allen F. Grum, President and Chief Executive Officer | 2018 | $ | 245,000 | $ | 50,000 | $ | 0 | $ $ | 16,500 16,666 | (4) (5) | $ | 328,166 | ||||||||||
2017 | $ | 240,000 | $ | 0 | $ | 0 | $ $ | 16,020 16,666 | (4) (5) | $ | 272,686 | |||||||||||
2016 | $ | 223,871 | $ | 0 | $ | 635,026 | $ $ | 15,989 16,060 | (4) (5) | $ | 890,946 | |||||||||||
Daniel P. Penberthy, Executive Vice President and Chief Financial Officer | 2018 | $ | 230,000 | $ | 50,000 | $ | 0 | $ $ | 16,500 10,797 | (4) (5) | $ | 307,297 | ||||||||||
2017 | $ | 225,000 | $ | 0 | $ | 0 | $ $ | 16,020 10,797 | (4) (5) | $ | 251,817 | |||||||||||
2016 | $ | 207,880 | $ | 0 | $ | 635,026 | $ $ | 15,473 12,024 | (4) (5) | $ | 870,403 |
(1) | Mr. Grum is Rand’s principal executive officer, and Mr. Penberthy is Rand’s principal financial officer. |
(2) | Represent amounts earned, prior to employee 401(k) contributions. |
(3) | Bonuses andnon-equity incentive plan compensation were fully accrued as of December 31 of the respective year. Bonus amounts were disbursed subsequent to the respectiveyear-end and,non-equity incentive compensation is expected to be paid in installments following receipt of respective realized gain proceeds, to include the completion of the escrow holdback period, which typically occurs in a 12 – 24 month period following exit from an investment. |
(4) | Includes contributions made by Rand to the 401(k) plan account for the NEOs. Rand’s 401(k) plan is available to all Rand employees. Under the 401(k) plan, participants may elect to contribute up to 20% of their compensation on a pretax basis by salary reduction up to a maximum of $18,500 ($24,500 if age 50 or over) for 2018. For eligible employees, Rand makes a contribution of 1% of compensation and matches employee contributions up to 5%, subject to IRS annual compensation and contribution limits. In addition, Rand may elect to contribute an annual discretionary amount as determined by the Board of Directors. In 2018, 2017 and 2016, Rand did not make a discretionary contribution to the 401(k) plan. |
(5) | Amount indicated includes the cost of life insurance, disability insurance and business automobile reimbursement benefits. |
(6) | Non-equity incentive compensation from the Profit Sharing Plan was 0% of total compensation for the NEOs in 2018. Total salary and bonus for the NEOs approximated 90%, 89% and 25% of total compensation in 2018, 2017 and 2016, respectively. |
(7) | Non-equity incentive plan compensation consists of payments under the Profit Sharing Plan (in each case 6% of net realized capital gains of Rand SBIC as defined in the Profit Sharing Plan). |
Option Plan
Rand does not have any outstanding equity awards, options or stock vesting rights.
Pension Benefits
Rand does not provide anytax-qualified defined benefit plan or supplemental executive retirement plan, or similar plan that provides for specified retirement payments or benefits.
Director Compensation
Effective January 1, 2016, Board compensation was changed so that each Board member receives a $25,000 per annum stipend for Board and Committee service, and per meeting fees were eliminated. Committee Chairs receive an additional stipend of $2,500 (Audit), $1,000 (Compensation) or $1,000 (Governance and Nominating). The Board Chair receives an additional $10,000 retainer. No other forms of compensation are utilized; however, Rand reimbursesout-of-town Directors for travel andout-of-pocket expenses incurred in connection with their service on our Board.
The following table sets forth information with respect to the compensation paid to or earned by eachnon-employee Director for 2018. Rand did not pay or accrue any other compensation to Directors for 2018.
Name | Fees Earned or Paid in Cash | |||
Erland E. Kailbourne | $ | 31,000 | ||
Ross B. Kenzie | $ | 27,500 | ||
Reginald B. Newman, II (1) | $ | 16,250 | ||
Jayne K. Rand | $ | 25,000 | ||
Robert M. Zak | $ | 26,000 |
(1) | Mr. Newman served as Chairman of the Board until his death on April 7, 2018 |
Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and applicable SEC rules, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of our President/Chief Executive Officer. The following is a reasonable estimate, prepared under applicable SEC rules, of the ratio of the annual total compensation
of our President/Chief Executive Officer to the median of the annual total compensation of our other employees. We determined our median employee based on base salary, as reflected in our payroll records, for each of our three employees (excluding the President/Chief Executive Officer) as of December 31, 2018. The annual total compensation of our median employee (other than the President/Chief Executive Officer) for 2018 was $175,820. As disclosed in the Summary Compensation Table, our President/Chief Executive Officer’s annual total compensation for 2018 was $328,166. Based on the foregoing, our estimate of the ratio of the annual total compensation of our President/Chief Executive Officer to the median of the annual total compensation of all other employees was 1.9 to 1. Given the different methodologies that various public companies will use to determine an estimate of their pay ratio, the estimated ratio reported above should not be used as a basis for comparison between companies.
Compensation Committee Interlocks and Insider Participation
During the last fiscal year, none of the members of the Compensation Committee was an officer or employee or former officer or employee of Rand or had any relationship with respect to Rand that would require disclosure under RegulationS-K, Item 404.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
InformationBeneficial Ownership of Shares
Unless otherwise indicated, the following table sets forth beneficial ownership of our shares on March 1, 2019, by (a) persons known by us to be beneficial owners of more than 5% of the outstanding shares, (b) the Directors and the NEOs, and (c) all Directors and executive officers as a group. For purposes of the table, the address for each of our Directors and NEOs is c/o 2200 Rand Building, Buffalo, NY 14203. Unless otherwise stated, each person named in responsethe table has sole voting and investment power with respect to thisthe shares indicated as beneficially owned by that person.
Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class (3) | ||||||
(a) More than 5% Owners: | ||||||||
User-Friendly Phone Book, LLC 10200 Grogan’s Mill Road Suite 44440 The Woodlands, TX77380 | 1,455,993 | 23.0 | % | |||||
(b) Directors and named executive officers: | ||||||||
Allen F. Grum | 173,642 | 2.7 | % | |||||
Erland E. Kailbourne | 40,000 | * | ||||||
Ross B. Kenzie | 113,000 | 1.8 | % | |||||
Jayne K. Rand | 115,433 | 1.8 | % | |||||
Robert M. Zak | 85,000 | 1.3 | % | |||||
Daniel P. Penberthy | 84,467 | 1.3 | % | |||||
* Less than 1%. | ||||||||
(c) All Directors and executive officers as a group (six persons)(2) | 611,542 | 9.7 | % |
(1) | The beneficial ownership information presented is based upon information furnished by each person or contained in filings made with the SEC. |
(2) | Members of the group have sole voting and investment power over these shares. |
(3) | Percent of Class calculated based on 6,321,988 shares outstanding on March 1, 2019. |
For a discussion of the Transactions, including previously announced sale of 8,333,333.33 shares of Rand’s common stock to East in the Stock Purchase, please see “Part I, Item 1 – Recent Developments.”
Item 13. | Certain Relationships and Related Transactions and Director Independence |
Director Independence
The Board has affirmatively determined that all of thenon-employee Directors, Erland E. Kailbourne, Ross B. Kenzie, Jayne K. Rand and Robert M. Zak are “Independent Directors” under the rules of the SEC and under the rules and guidelines of the Nasdaq Stock Market. Therefore, a majority of Rand’s five-person Board is incorporated herein bycurrently independent as so defined. The Board has determined that there are no relationships between Rand and any of the Directors determined to be independent, other than service on its Board and compensation paid to those Directors. In addition, Reginald B. Newman II, who served as the Chairman of the Board during 2018, until his death on April 7, 2018 was also determined to be an Independent Director during such term of service as a Director.
Allen F. Grum has been determined to be an “interested person” under Section 2(a)(19) of the 1940 Act with respect to Rand because he is an executive officer of Rand. Directors who are determined to be interested persons do not qualify as Independent Directors under the rules and guidelines of the Nasdaq Stock Market.
The Board, with reference to the information providedSEC rules and the Nasdaq Stock Market rules and guidelines, also determined that:
each member of the Audit Committee, the Governance and Nominating Committee, and the Compensation Committee is independent under the applicable Nasdaq Stock Market rules and guidelines and SEC rules for purposes of determining independence of members of each of those committees;
the compensation paid to the executive officers of Rand during 2018 was determined by a majority of the Independent Directors of the Board;
each member of the Audit Committee also meets the additional independence requirements under Rule10A-3(b) of the Exchange Act and Nasdaq Rule 5605(c)(2)(a); and
each member of the Compensation Committee also meets the independence requirements under the rules and guidelines of Nasdaq Rule 5605(d)(2).
Rand’s Chairman, Mr. Kailbourne, serves as chair of meetings of the Independent Directors. It is currently contemplated that “executive sessions” of the Independent Directors will occur at least twice during the year ending December 31, 2019. The Corporation will also hold separate committee meetings of the Board of Directors during 2019, which committees are comprised of Independent Directors.
Related Person Transactions
For the year ended December 31, 2018, there were no transactions, or proposed transactions, exceeding $120,000 in which the Corporation was or is a participant in which any related person had or will have a direct or indirect material interest.
In order to ensure that the Corporation does not engage in any related-party transactions with any persons affiliated with the Corporation, the Corporation requires that the Audit Committee must review in advance any “related-party” transaction, or series of similar transactions, to which the Corporation or any of its subsidiaries was or is to be a party, in which the amount involved exceeds $120,000 and in which such related party had, or will have, a direct or indirect material interest.
Item 14. | Principal Accountant Fees and Services |
Independent Registered Public Accountant (“Independent Accountant”) Fees
The aggregate fees for each of the last two fiscal years for services rendered by Freed Maxick CPAs, P.C. (“Freed”) are as follows:
Fee Description | 2018 | 2017 | ||||||
Audit | $ | 111,975 | $ | 108,475 | ||||
Audit Related | $ | 0 | $ | 0 | ||||
Tax | $ | 37,827 | $ | 31,000 | ||||
All Other | $ | 0 | $ | 0 |
For fiscal years 2018 and 2017, all of the services of Freed described in the Corporation’s 2016 Proxy Statement underabove categories werepre-approved by the heading “BENEFICIAL OWNERSHIP OF SHARES.”Audit Committee.
Audit Fees
This category consists of fees for the audit of annual consolidated financial statements, review of consolidated financial statements included in quarterly reports on FormItem 13. Certain Relationships10-Q and services that are normally provided by the independent accountant in connection with statutory and regulatory filings or audit engagements for those fiscal years.
Audit Related TransactionsFees
This category consists of assurance and Director Independence
Information in response to this Item is incorporated hereinrelated services by referencethe independent accountant that are reasonably related to the information inperformance of the Corporation’s 2016 Proxy Statementaudit and review of consolidated financial statements and are not reported under audit fees.
Tax Fees
This category consists of professional services rendered by the heading “DIRECTOR INDEPENDENCE.”independent accountant for tax compliance and tax planning. The services for the fees disclosed under this category include tax return preparation and technical advice provided by Freed.
Item 14. Principal AccountantAll Other Fees
This category consists of fees not covered by Audit Fees, Audit Related Fees and ServicesTax Fees.
Information concerningEstimates of annual audit, quarterly review and tax fees to be paid during the Corporation’s independent auditors,year are submitted annually to the audit committee’s pre-approval policyAudit Committee for auditits review andpre-approval and then budgeted for by Rand. All othernon-audit services and our principal accountant fees and services is contained inmust bepre-approved by the Corporation’s 2016 Proxy Statement underAudit Committee prior to engagement, as required by the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTANT (INDEPENDENT ACCOUNTANT) FEES”.Audit Committee’s charter.
Item 15. Exhibits and Financial Statement Schedules
Item 15. | Exhibits and Financial Statement Schedules |
(a) | The following documents are filed as part of this report and included in Item 8: |
(1) | CONSOLIDATED FINANCIAL STATEMENTS |
Statements of Financial Position as of December 31, 2015 and 2014
Statements of Operations for the three years in the period ended December 31, 2015
Statements of Changes in Net Assets for the three years in the period ended December 31, 2015
Statements of Cash Flows for the three years in the period ended December 31, 2015
Schedule of Portfolio Investments as of December 31, 2015
Schedule of Portfolio Investments as of December 31, 2014
Financial Highlights Schedule for the five years in the period ended December 31, 2015
Notes to the Consolidated Financial Statements
Supplemental Schedule of Consolidated Changes in Investments at Cost and Realized Loss for the year ended December 31, 2015
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Position as of December 31, 2018 and 2017 | ||||
Consolidated Statements of Operations for the three years in the period ended December 31, 2018 | ||||
Consolidated Statements of Changes in Net Assets for the three years in the period ended December 31, 2018 | ||||
Consolidated Statements of Cash Flows for the three years in the period ended December 31, 2018 | ||||
Consolidated Schedule of Portfolio Investments as of December 31, 2018 | ||||
Consolidated Schedule of Portfolio Investments as of December 31, 2017 | ||||
Financial Highlights Schedule for the five years in the period ended December 31, 2018 | ||||
Notes to the Consolidated Financial Statements | ||||
Supplemental Schedule of Consolidated Changes in Investments at Cost and Realized Gain for the year ended December 31, 2018 | ||||
Report of Independent Registered Public Accounting Firm | ||||
(2) | FINANCIAL STATEMENT SCHEDULES |
The required financial statement Schedule II – Valuation and Qualifying Accounts has been omitted because the information required is included in the note 12
(b) | The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of |
(3.1)(i) | Certificate of Incorporation of the Corporation, incorporated by reference to Exhibit (a)(1) of Form N-2 filed with the |
(3.1)(ii) | By-laws of the Corporation, incorporated by reference to Exhibit |
(3.2)(i) | Certificate of Incorporation of Rand Merger Corporation as filed by the NY Department of State on 12/18/08 – incorporated by reference to Exhibit 1(a) to Registration StatementNo. 811-22276 on FormN-5 of Rand Capital SBIC, Inc. filed with the SEC on February 6, 2009. (FileNo. 811-22276). |
(3.2)(ii) | By-laws of Rand Capital SBIC, Inc. – incorporated by reference to Exhibit 2 to Registration StatementNo. 811-22276 on FormN-5 of Rand Capital SBIC, Inc. filed with the SEC on February 6, 2009. (FileNo. 811-22276). |
(4) | Specimen certificate of common stock certificate, incorporated by reference to Exhibit (b) of FormN-2 filed with the SEC on April 22, 1997. (FileNo. 333-25617). | |||
(10.2) | Certificate of Merger of Rand Capital SBIC, L.P. and Rand Capital Management, LLC into Rand Merger Corporation, as filed by the NY Department of State on 12/18/08 – incorporated by reference to Exhibit 1(b) to Registration StatementNo. 811-22276 on FormN-5 of Rand Capital SBIC, Inc. filed with the SEC on February 6, |
(10.3) | Rand Capital Corporation Amended and Restated Profit Sharing Plan applicable to Rand Capital SBIC, Inc. – incorporated by reference to Exhibit 7 to Registration StatementNo. 811-22276 on FormN-5 of Rand Capital SBIC, Inc. filed with the SEC on February 6, 2009. (FileNo. 811-22276).* | |||
(10.4) | Change in Control Agreement, dated as of March 1, 2017, by and between the Corporation and Allen F. Grum, incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form8-K filed with the SEC on March 3, 2017. (FileNo. 814-00235).* | |||
(10.5) | Change in Control Agreement, dated as of March 1, 2017, by and between the Corporation and Daniel P. Penberthy, incorporated by reference to Exhibit 10.2 to the Corporation’s Current Report on Form8-K filed with the SEC on March 3, 2017. (FileNo. 814-00235).* |
(10.6) | Stock Purchase Agreement dated as of January 24, 2019 by and among East Asset Management LLC, Rand Capital Corporation and, solely for purposes of being bound by Sections 7.10 and 10.9(a) and (b) thereof, Rand Capital Management LLC, incorporated by reference to exhibit 10.1 to the Corporation’s Current Report on Form8-K filed with the SEC on January 25, 2019. | |||
(31.1) | Certification of Principal Executive Officer Pursuant to Rules13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended – filed herewith. |
(31.2) | Certification of Principal Financial Officer Pursuant to Rules13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended – filed herewith. |
(32.1) | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Rand Capital Corporation – filed herewith. |
* | Management contract or compensatory plan. |
Item 16. | Form10-K Summary |
None
Signatures
Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange Act of 1934, the registrant has duly caused this Report onForm 10-K to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March | RAND CAPITAL CORPORATION | |||||
By: /s/ Allen F. Grum | ||||||
Allen F. Grum, President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form10-K has been signed below by the following persons on behalf of the Corporation in the capacities and on the dates indicated.
Signature/Title | ||||
| ||||
| ||||
| ||||
/s/
| ||||
Allen F. Grum / | March | |||
| ||||
(ii) Principal Accounting & Financial Officer: | ||||
/s/ Daniel P. Penberthy | ||||
Daniel P. Penberthy / Treasurer | March 7, 2019 | |||
(iii) Directors: | ||||
/s/ Allen F. Grum | ||||
Allen F. Grum / Director | March | |||
/s/ Erland E. Kailbourne | ||||
Erland E. Kailbourne / Director | March | |||
/s/ Ross B. Kenzie | ||||
Ross B. Kenzie / Director | March | |||
| ||||
| ||||
| ||||
/s/ Jayne K. Rand | ||||
Jayne K. Rand / Director | March | |||
/s/ Robert M. Zak | ||||
Robert M. Zak / Director | March |
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