Rand Capital(RAND) - 2023 Q2 - Quarterly Report

PART I. – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements and Supplementary Data This section presents the unaudited consolidated financial statements of Rand Capital Corporation and its subsidiaries, including the statements of financial position, operations, changes in net assets, cash flows, and detailed schedules of portfolio investments, along with accompanying notes Consolidated Statements of Financial Position as of June 30, 2023 (Unaudited) and December 31, 2022 This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time - Total assets increased by 19.8% from $63.48 million at December 31, 2022, to $76.05 million at June 30, 2023[152] - Total liabilities increased significantly by 154.4% from $5.76 million to $14.65 million, primarily due to an increase in the line of credit[10][152] - Total stockholders' equity (net assets) increased by 6.4% from $57.72 million to $61.40 million[10][152] Consolidated Statements of Financial Position | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total assets | $76,054,837 | $63,481,192 | | Total liabilities | $14,652,809 | $5,759,872 | | Total stockholders' equity (net assets) | $61,402,028 | $57,721,320 | | Net assets per share | $23.79 | $22.36 | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited) This statement details the company's revenues, expenses, and net income over specific periods Consolidated Statements of Operations (Three Months Ended June 30) | Metric | 2023 (Unaudited) | 2022 (Unaudited) | Change (%) | | :--- | :--- | :--- | :--- | | Total investment income | $1,815,432 | $1,353,182 | 34.2% | | Total expenses | $1,306,741 | ($96,198) | NM | | Net investment income | $492,630 | $1,418,137 | -65.3% | | Net realized gain on sales and dispositions of investments | $3,480,089 | $1,540,143 | 126.0% | | Net change in unrealized appreciation/depreciation on investments | ($1,300,829) | ($4,854,669) | 73.2% | | Net increase (decrease) in net assets from operations | $2,671,890 | ($1,896,389) | NM | Consolidated Statements of Operations (Six Months Ended June 30) | Metric | 2023 (Unaudited) | 2022 (Unaudited) | Change (%) | | :--- | :--- | :--- | :--- | | Total investment income | $3,666,930 | $2,477,930 | 48.0% | | Total expenses | $2,354,586 | $249,180 | NM | | Net investment income | $1,207,546 | $2,190,140 | -44.9% | | Net realized gain on sales and dispositions of investments | $3,533,477 | $688,672 | 413.1% | | Net change in unrealized appreciation/depreciation on investments | $101,144 | ($5,185,738) | NM | | Net increase (decrease) in net assets from operations | $4,842,167 | ($2,306,926) | NM | Consolidated Statements of Changes in Net Assets for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited) This statement tracks changes in net assets, including operations and dividends, over specific periods Consolidated Statements of Changes in Net Assets (Six Months Ended June 30) | Metric | 2023 (Unaudited) | 2022 (Unaudited) | | :--- | :--- | :--- | | Net assets at beginning of period | $57,721,320 | $60,745,416 | | Net increase (decrease) in net assets from operations | $4,842,167 | ($2,306,926) | | Declaration of dividend | ($1,161,459) | ($774,306) | | Net assets at end of period | $61,402,028 | $57,664,184 | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (Unaudited) This statement summarizes cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows (Six Months Ended June 30) | Metric | 2023 (Unaudited) | 2022 (Unaudited) | | :--- | :--- | :--- | | Net increase (decrease) in net assets from operations | $4,842,167 | ($2,306,926) | | Net cash provided by operating activities | $48,864 | $1,129,577 | | Net cash provided by (used in) financing activities | $6,938,541 | ($774,306) | | Net increase in cash | $6,987,405 | $355,271 | | Cash at end of period | $8,356,401 | $1,189,146 | Consolidated Schedule of Portfolio Investments as of June 30, 2023 (Unaudited) This schedule details the investment portfolio by fair value, control level, and industry as of June 30, 2023 - Total investments at fair value were $66,791,743 as of June 30, 2023[10] Investment Categories by Fair Value (June 30, 2023) | Category | Percent of Net Assets | | :--- | :--- | | Non-Control/Non-Affiliate Investments | 32.0% | | Affiliate Investments | 70.2% | | Control Investments | 6.6% | Top 5 Portfolio Company Concentrations (June 30, 2023) | Company | Percentage of Total Investments | | :--- | :--- | | Tilson Technology Management, Inc. | 16% | | Seybert's Billiards Corporation | 9% | | SciAps, Inc. | 8% | | BMP Food Service Supply Holdco, LLC | 8% | | Inter-National Electronic Alloys LLC | 6% | Industry Classification (June 30, 2023) | Industry Classification | Percentage of Total Investments | | :--- | :--- | | Professional Services | 32.5% | | Manufacturing | 25.7% | | Consumer Product | 15.0% | | Software | 9.5% | | Distribution | 6.5% | | BDC Investment Funds | 6.0% | | Automotive | 4.8% | | Total Investments | 100% | Consolidated Schedule of Portfolio Investments as of December 31, 2022 This schedule details the investment portfolio by fair value, control level, and industry as of December 31, 2022 - Total investments at fair value were $61,504,259 as of December 31, 2022[10] Investment Categories by Fair Value (December 31, 2022) | Category | Percent of Net Assets | | :--- | :--- | | Non-Control/Non-Affiliate Investments | 34.2% | | Affiliate Investments | 66.3% | | Control Investments | 6.1% | Top 5 Portfolio Company Concentrations (December 31, 2022) | Company | Percentage of Total Investments | | :--- | :--- | | Tilson Technology Management, Inc. | 17% | | Seybert's Billiards Corporation | 10% | | SciAps, Inc. | 8% | | DSD Operating, LLC | 8% | | Caitec, Inc. | 6% | Industry Classification (December 31, 2022) | Industry Classification | Percentage of Total Investments | | :--- | :--- | | Professional Services | 31.4% | | Manufacturing | 22.6% | | Consumer Product | 16.2% | | Automotive | 13.2% | | Software | 10.1% | | BDC Investment Funds | 6.3% | | Oil and Gas | 0.2% | | Total Investments | 100% | Notes to the Consolidated Financial Statements (Unaudited) These notes provide additional information and explanations for the figures in the consolidated financial statements Note 1. ORGANIZATION This note describes the company's structure, regulatory status, and key operational agreements - Rand Capital Corporation operates as an externally managed, closed-end, diversified investment company, regulated as a Business Development Company (BDC) under the 1940 Act[56][59] - East Asset Management invested $25 million in November 2019, acquiring approximately 64% of Rand's common stock, and Rand Capital Management, LLC (RCM) was retained as its external investment adviser and administrator[57] - Rand elected to be treated as a Regulated Investment Company (RIC) for U.S. Federal income tax purposes as of January 1, 2020, requiring distribution of substantially all investment company taxable income[60] - The Board declared quarterly cash dividends of $0.20 and $0.25 per share for Q1 and Q2 2023, respectively[61] - An SEC exemptive order permits Rand to co-invest in portfolio companies with certain affiliates managed by RCM and Callodine Group, LLC, subject to specific conditions and independent director approval[62] Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the financial statements - The consolidated financial statements are unaudited and prepared in accordance with GAAP, with certain disclosures omitted for interim periods[64] - Investments are classified by level of control: Control (over 25% voting securities or 50% board representation), Affiliate (5% to 25% voting securities), or Non-Control/Non-Affiliate[67] - Investments are valued at fair value, determined in good faith by RCM and approved by the Board, with publicly traded securities valued at the average closing price for the last three trading days[68][69] - Revenue recognition policies include accrual basis for interest income (unless in default), PIK interest added to principal, accrual basis for dividend income when estimable, and amortization of financing fees[71][72][73][74][75] - The Board approved a share repurchase plan on April 19, 2023, authorizing repurchases of up to $1,500,000 of common stock at prices no greater than NAV, effective through April 19, 2024, with no shares repurchased during the six months ended June 30, 2023 or 2022[82] Top 5 Portfolio Company Concentrations (June 30, 2023 & December 31, 2022) | Company | June 30, 2023 (%) | December 31, 2022 (%) | | :--- | :--- | :--- | | Tilson Technology Management, Inc. | 16% | 17% | | Seybert's Billiards Corporation | 9% | 10% | | SciAps, Inc. | 8% | 8% | | BMP Food Service Supply Holdco, LLC | 8% | — | | Inter-National Electronic Alloys LLC | 6% | — | | DSD Operating, LLC | — | 8% | | Caitec, Inc. | — | 6% | Note 3. INVESTMENTS This note details investment valuation methodologies and changes in Level 3 assets - Investments are carried at fair value in accordance with FASB ASC 820, classifying inputs into Level 1 (quoted prices in active markets) and Level 3 (unobservable inputs)[92][94][95] - At June 30, 2023, 11% of investments were Level 1 and 89% were Level 3; at December 31, 2022, 10% were Level 1 and 90% were Level 3, with no Level 2 investments in either period[96] - Valuation approaches for Level 3 investments include asset, market (EBITDA/revenue multiples, transaction pricing), and income approaches, considering financial performance, capital structure, and market conditions[96][99][103] Changes in Level 3 Assets (Six Months Ended June 30, 2023) | Description | Loan Investments | Debt Investments | Equity Investments | Total | | :--- | :--- | :--- | :--- | :--- | | Ending balance December 31, 2022 | $14,578,351 | $19,582,616 | $20,935,744 | $55,096,711 | | Total realized gains, net | — | — | $2,152,868 | $2,152,868 | | Total unrealized gains (losses) | — | — | ($994,541) | ($994,541) | | Total purchases of securities/changes to securities/non-cash conversions | $631,838 | $8,871,381 | $1,296,706 | $10,799,925 | | Total repayments and sales of securities | ($3,171,434) | ($340,047) | ($4,154,406) | ($7,665,887) | | Ending balance June 30, 2023 | $12,038,755 | $28,113,950 | $19,236,371 | $59,389,076 | Note 4. OTHER ASSETS This note provides a breakdown of other assets and related amortization expenses - Amortization expense related to deferred financing fees for the six months ended June 30, 2023, was $12,500[109] Composition of Other Assets | Item | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Escrow receivables | $243,719 | $68,983 | | Dividend receivables | $110,440 | $102,655 | | Deferred financing fees, net | $100,000 | $112,500 | | Prepaid expenses | $78,121 | $10,905 | | Total other assets | $532,280 | $295,043 | Note 5. COMMITMENTS AND CONTINGENCIES This note confirms the absence of significant commitments or contingencies for the reported periods - The Corporation had no commitments at June 30, 2023, or December 31, 2022[111] Note 6. SENIOR SECURED REVOLVING CREDIT FACILITY This note details the terms, outstanding balance, and compliance status of the company's credit facility - The Corporation entered into a $25.0 million senior secured revolving credit facility with M&T Bank on June 27, 2022, maturing June 27, 2027[112] - The outstanding balance drawn on the Credit Facility was $10,650,000 at June 30, 2023, compared to $2,550,000 at December 31, 2022[118] - The unused line of credit balance for the Credit Facility was $14,350,000 at June 30, 2023[201] - The interest rate on the Credit Facility was 8.59% at June 30, 2023[113] - The Corporation was in compliance with all financial covenants (tangible net worth, asset coverage ratio, interest coverage ratio) as of June 30, 2023[114] Note 7. CHANGES IN STOCKHOLDERS' EQUITY (NET ASSETS) This note summarizes changes in stockholders' equity, including net assets from operations and dividends Changes in Stockholders' Equity (Net Assets) (Six Months Ended June 30, 2023) | Metric | Amount | | :--- | :--- | | Net assets at January 1, 2023 | $57,721,320 | | Net increase in net assets from operations | $4,842,167 | | Payment of dividend | ($1,161,459) | | Net assets at June 30, 2023 | $61,402,028 | Note 8. RELATED PARTY TRANSACTIONS This note describes the fees and agreements with the external investment adviser and administrator - Rand pays RCM a Base Management Fee (1.50% annually of total assets excluding cash) and an Incentive Fee (Income Based Fee and Capital Gains Fee) under the Investment Management Agreement[120][121] Base Management Fee | Period | Amount | | :--- | :--- | | Six months ended June 30, 2023 | $501,260 | | Six months ended June 30, 2022 | $471,042 | - No Income Based Fees were earned for the six months ended June 30, 2023, or 2022[129] - A capital gains incentive fee accrual of $2,949,000 was recorded at June 30, 2023, based on GAAP (including unrealized gains), compared to $2,499,000 at December 31, 2022, with the actual fee payable to RCM determined annually based on realized gains/losses[133] - RCM provides administrative services to the Corporation, including office facilities, accounting, compliance, and oversight of third-party service providers, under the Administration Agreement[134][135][136] Note 9. FINANCIAL HIGHLIGHTS This note presents key financial performance metrics and ratios for the reported periods Financial Highlights (Six Months Ended June 30) | Metric | 2023 (Unaudited) | 2022 (Unaudited) | | :--- | :--- | :--- | | Net asset value, beginning of period | $22.36 | $23.54 | | Net asset value, end of period | $23.79 | $22.34 | | Total return based on net asset value | 8.39% | (5.07%) | | Ratio of expenses including income taxes to average net assets (annualized) | 9.17% | 0.98% | | Ratio of net investment income to average net assets (annualized) | 4.05% | 7.40% | | Debt/equity ratio | 17.34% | 0% | Note 10. SUBSEQUENT EVENT This note discloses significant events occurring after the reporting period, such as dividend declarations - On July 25, 2023, the Board declared a quarterly cash dividend of $0.25 per share, payable on or about September 14, 2023, to shareholders of record as of August 31, 2023[139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a narrative analysis of the company's financial condition, results of operations, and liquidity, offering management's perspective on key trends, significant events, and future outlook FORWARD LOOKING STATEMENTS This section highlights the inherent uncertainties and risks associated with forward-looking statements - This section contains forward-looking statements subject to risks and uncertainties, including those related to the U.S. economy, securities markets, liquidity, inflation, investment strategies, RIC compliance, and future dividend payments[141] - The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made[142] Overview This section provides a general description of the company's business model, regulatory status, and fee structure - Rand is an externally managed investment company focused on lending to and investing in lower middle market companies, aiming for current income and capital appreciation[143] - The company is regulated as a Business Development Company (BDC) under the 1940 Act and elected Regulated Investment Company (RIC) tax treatment in 2020[144][148] - Rand pays RCM a base management fee and an incentive fee, comprising an Income Based Fee and a Capital Gains Fee[147] - Quarterly cash dividends declared for the six months ended June 30, 2023, were $0.20 for Q1 and $0.25 for Q2[149] SEC Exemptive Order This section explains the SEC order permitting co-investments with affiliates, enhancing investment opportunities - Rand has an SEC exemptive order (New Order, March 29, 2021, amended September 6, 2022) allowing co-investment with affiliates managed by RCM and Callodine, subject to independent director approval and fairness conditions[150] - These co-investments are expected to afford additional investment opportunities and provide greater diversification in the investment portfolio[149] Critical Accounting Policies This section refers to the company's significant accounting policies and the use of estimates - The company prepares its consolidated financial statements in accordance with GAAP, which requires the use of estimates and assumptions[151] - A summary of critical accounting policies can be found in the Annual Report on Form 10-K for the year ended December 31, 2022[151] Financial Condition This section analyzes the company's financial position, including assets, liabilities, and net assets - Cash approximated 13.6% of net assets at June 30, 2023, compared to 2.4% at December 31, 2022[153] - At June 30, 2023, $10,650,000 was drawn on the $25 million senior secured revolving credit facility, with an applicable interest rate of 8.59%[154] Financial Condition Overview | Metric | June 30, 2023 | December 31, 2022 | Increase | % Increase | | :--- | :--- | :--- | :--- | :--- | | Total assets | $76,054,837 | $63,481,192 | $12,573,645 | 19.8% | | Total liabilities | $14,652,809 | $5,759,872 | $8,892,937 | 154.4% | | Net assets | $61,402,028 | $57,721,320 | $3,680,708 | 6.4% | | Net asset value per share (NAV) | $23.79 | $22.36 | | | Composition of Our Investment Portfolio This section details the fair value, cost, and changes in the company's investment portfolio - Total investments at fair value approximated 109% of net assets at June 30, 2023, compared to 107% at December 31, 2022[156] - The investment objective is to generate current income and capital appreciation by targeting higher yielding debt instruments and related equity investments in privately held, lower middle market companies[157] Investment Portfolio Summary | Metric | June 30, 2023 | December 31, 2022 | Increase | % Increase | | :--- | :--- | :--- | :--- | :--- | | Investments, at cost | $60,969,018 | $55,716,237 | $5,252,781 | 9.4% | | Unrealized appreciation, net | $5,822,725 | $5,788,022 | $34,703 | 0.6% | | Investments, at fair value | $66,791,743 | $61,504,259 | $5,287,484 | 8.6% | Net Change in Investments, at Cost (Six Months Ended June 30, 2023) | Category | Cost Increase (Decrease) | | :--- | :--- | | New investments | $10,260,000 | | Other changes to investments (interest conversion, OID amortization) | $534,984 | | Investments repaid, sold, liquidated or converted | ($5,542,203) | | Net change in investments, at cost | $5,252,781 | Results of Operations This section analyzes financial performance, including investment income, expenses, and net assets from operations Comparison of the three months ended June 30, 2023 to the three months ended June 30, 2022 This section compares financial performance for the three-month periods, highlighting key income and expense changes - Total expenses increased significantly to $1,306,741 (from -$96,198), primarily due to a $1,154,000 increase in capital gains incentive fee expense (GAAP accrual) and $258,912 in interest expense from the Credit Facility[164][165][166] - Net investment income decreased to $492,630 from $1,418,137[167] - Realized gain on investments increased to $3,818,247 (from $1,540,143), including a $2,537,765 gain from the DSD Operating, LLC sale and $1,718,767 from the ACV Auctions, Inc. stock sale[168][169] - The change in unrealized appreciation (depreciation) of investments improved to ($1,367,270) (from ($4,854,669)), with significant depreciation from ACV, Open Exchange, and DSD, partially offset by appreciation in Somerset and BDCs[172] Investment Income (Three Months Ended June 30) | Metric | 2023 | 2022 | Increase (Decrease) | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest from portfolio companies | $1,473,540 | $1,004,832 | $468,708 | 46.6% | | Interest from other investments | $104 | $1 | $103 | NM | | Dividend and other investment income | $192,597 | $316,520 | ($123,923) | -39.2% | | Fee income | $149,191 | $31,829 | $117,362 | 368.7% | | Total investment income | $1,815,432 | $1,353,182 | $462,250 | 34.2% | Comparison of the six months ended June 30, 2023 to the six months ended June 30, 2022 This section compares financial performance for the six-month periods, detailing income, expenses, and net asset changes - Total expenses increased significantly to $2,354,586 (from $249,180), mainly due to a $1,685,000 increase in capital gains incentive fee expense (GAAP accrual) and $417,312 in interest expense from the Credit Facility[183][184][185] - Net investment income decreased to $1,207,546 from $2,190,140[187] - Realized gain on investments increased to $3,871,635 (from $688,672), including a $2,537,765 gain from the DSD Operating, LLC sale and $1,718,767 from the ACV Auctions, Inc. stock sale[188][190] - The change in unrealized appreciation (depreciation) of investments turned positive to $34,703 (from ($5,185,738)), with significant appreciation in ACV and Somerset, offset by depreciation in Open Exchange and DSD[193][194] - Net increase (decrease) in net assets from operations turned positive to $4,842,167 (from ($2,306,926))[197] Investment Income (Six Months Ended June 30) | Metric | 2023 | 2022 | Increase | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest from portfolio companies | $2,770,443 | $1,916,971 | $853,472 | 44.5% | | Interest from other investments | $236 | $1 | $235 | NM | | Dividend and other investment income | $667,340 | $489,510 | $177,830 | 36.3% | | Fee income | $228,911 | $71,448 | $157,463 | 220.4% | | Total investment income | $3,666,930 | $2,477,930 | $1,189,000 | 48.0% | Liquidity and Capital Resources This section assesses the company's ability to meet financial obligations and fund operations - Total liquidity consisted of approximately $8,356,000 in cash at June 30, 2023, in addition to publicly traded equity securities[198][200] - At June 30, 2023, $10,650,000 was drawn on the $25 million Credit Facility, leaving an unused line of credit balance of $14,350,000[201] - The company believes it was in compliance with all Credit Facility covenants at June 30, 2023[203] - For the six months ended June 30, 2023, the company experienced a net increase in cash of approximately $6,987,000, comprising $49,000 from operating activities and $6,939,000 from financing activities[204] - The company anticipates funding investment activities through cash generated from operations, sale of publicly traded liquid investments, and borrowings under the Credit Facility[205] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the market risks associated with the company's investment portfolio, particularly valuation risk for private company securities and liquidity risk for marketable securities - The investment portfolio primarily consists of debt and equity securities in private companies, which are subject to valuation risk due to the absence of public market values[206] - Marketable securities may face liquidity risk if markets are disorderly or willing purchasers are unavailable, potentially preventing the realization of fair value in a timely manner[206] - At June 30, 2023, the company did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments[207] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the most recent fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2023[208] - There have been no changes in internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting[209] PART II. – OTHER INFORMATION This section provides additional information not covered in financial statements, including legal and administrative details Item 1. Legal Proceedings This section states that there are no legal proceedings to report - No legal proceedings to report[211] Item 1A. Risk Factors This section refers readers to the 'Risk Factors' section in the company's annual report on Form 10-K for the year ended December 31, 2022, for a comprehensive discussion of potential risks - Refer to the 'Risk Factors' section in the annual report on Form 10-K for the year ended December 31, 2022, for detailed risk information[212] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that no shares of common stock were repurchased during the quarter ended June 30, 2023, under the existing share repurchase plan, which authorizes up to $1,500,000 in repurchases - No shares of Rand's common stock were repurchased by the Corporation during the quarter ended June 30, 2023[213] - A new share repurchase plan, approved on April 19, 2023, authorizes repurchases of up to $1,500,000 of common stock at prices no greater than the then current net asset value, effective through April 19, 2024[217] Item 3. Defaults upon Senior Securities This section states that there were no defaults upon senior securities - No defaults upon senior securities[214] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[215] Item 5. Other Information This section reports that no director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023 - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended June 30, 2023[216] Item 6. Exhibits This section lists the exhibits filed with the report or incorporated by reference, including organizational documents and certifications - The exhibits include the Certificate of Incorporation, By-laws, and various certifications (e.g., Certification of Principal Executive Officer, Certification of Principal Financial Officer, Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)[219]