Rand Capital(RAND) - 2024 Q4 - Annual Report

Management Fees and Incentives - The Base Management Fee is set at an annual rate of 1.50% of total assets, excluding cash[41]. - The Incentive Fees consist of an Income Based Fee and a Capital Gains Fee, with the Income Based Fee calculated quarterly based on Pre-Incentive Fee Net Investment Income[42][53]. - The hurdle rate for Pre-Incentive Fee Net Investment Income is 1.75% per quarter, equating to 7% annualized[46]. - If Pre-Incentive Fee Net Investment Income exceeds 2.1875% (8.75% annualized), the Income Based Fee is 20% of the amount above this threshold[51]. - The Capital Gains Fee is calculated at 20% of the positive difference between cumulative realized capital gains and cumulative realized capital losses at the end of each calendar year[53]. Investment Management and Operations - The Investment Committee, led by Daniel Penberthy and Scott Barfield, is responsible for all investment decisions[37]. - RCM did not utilize any Sub-Advisors for investment advice in the calendar year 2024[36]. - The company has no employees; operations are managed by RCM, the investment adviser[34]. - The Investment Committee's experience provides a competitive advantage in managing investments in lower middle-market companies[38]. - The company reimburses RCM for overhead and other expenses incurred in performing its obligations under the Administration Agreement[35]. Financial Performance and Results - Total assets decreased from $81,021,982 in 2023 to$ 72,457,433 in 2024, a decline of approximately 10.3%[306]. - Total investment income increased to $8,559,285 in 2024, up 16.6% from$ 7,338,163 in 2023[308]. - Net investment income rose to $3,425,077 in 2024, representing a 15.4% increase compared to$ 2,967,733 in 2023[308]. - Net realized gain on sales and dispositions of investments surged to $11,124,864 in 2024, compared to$ 691,397 in 2023, marking a significant increase[308]. - The net change in unrealized appreciation/depreciation on investments was a loss of $5,722,329 in 2024, contrasting with a gain of$ 2,867,520 in 2023[308]. Asset Coverage and Regulatory Compliance - The asset coverage ratio as of December 31, 2024, was 10,988.8%, significantly higher than the 474.2% recorded in 2023[79]. - The modified asset coverage requirement under the 1940 Act will change from 200% to 150%, effective January 24, 2025[78]. - A BDC must ensure that qualifying assets represent at least 70% of total assets at the time of acquisition[80]. - Non-qualifying investments may not exceed 30% of the BDC's total asset value[82]. - The Corporation must meet specified source-of-income and asset-diversification requirements to maintain RIC qualifications[84]. Risks and Challenges - Political and regulatory conditions, including the impact of the 2024 U.S. presidential election, could materially affect business operations and financial performance[98]. - RCM faces competition from larger entities with greater financial resources, which may impact the company's ability to secure favorable investment terms[100]. - The company may face cybersecurity risks that could impair operations and negatively impact financial condition and operating results[125]. - The company has a limited number of portfolio companies, increasing risk if any of these companies default, which could significantly impact net asset value[128]. - Economic downturns may negatively affect the financial performance of portfolio companies, impacting the company's overall financial performance[130]. Investment Strategy and Portfolio Composition - The company invests primarily in small private companies, which may present a greater risk of loss compared to larger companies due to limited access to capital and higher funding costs[137]. - The company’s investments are primarily in debt securities, which may rank equal to or senior to its investments, posing risks in insolvency scenarios[142]. - The Corporation's investment strategy includes a focus on restricted securities, which represented 100% of the fair value of the investment portfolio as of December 31, 2024[323]. - The portfolio includes significant investments in Professional and Business Services at 47.6%, followed by Consumer Products at 17.7%[332]. - Total investments amount to $68,120,235, with a fair value of$ 70,818,041, indicating an investment leverage of 108.4%[319]. Debt and Financing - As of December 31, 2024, the company had $600,000 in principal amount of outstanding indebtedness under its Credit Facility, with an annualized interest cost of 8.91%[151]. - The company’s ability to service existing and future debt depends largely on its financial performance, which is influenced by the performance of its portfolio companies and prevailing economic conditions[148]. - The company may face increased investment risk due to the potential increase in its maximum debt-to-equity ratio from one-to-one to two-to-one under the new asset coverage requirements[160]. - The company’s net investment income may be adversely affected by rising market interest rates, which could increase its cost of capital under its Credit Facility[157]. - The company is subject to risks related to its indebtedness, including the potential for loss magnification due to leverage[147]. Shareholder and Corporate Governance - East beneficially owns approximately 64% of the company’s outstanding common stock, allowing it to significantly influence corporate decisions[165]. - Conflicts of interest may arise from RCM managing multiple funds, potentially impacting investment returns for the company[101]. - The company is prohibited from certain transactions with affiliates without prior approval, which may restrict investment flexibility[104]. - The company is required to distribute at least 90% of its net ordinary income and realized net short-term capital gains to maintain RIC tax treatment[174]. - The company declared dividends totaling$ 12,982,536 in 2024, significantly higher than $3,432,757 in 2023[310].