Company Quick10K Filing
Rand Capital
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 0 $0
10-Q 2019-11-07 Quarter: 2019-09-30
10-Q 2019-08-06 Quarter: 2019-06-30
10-Q 2019-05-02 Quarter: 2019-03-31
10-K 2019-03-07 Annual: 2018-12-31
10-Q 2018-11-07 Quarter: 2018-09-30
10-Q 2018-08-07 Quarter: 2018-06-30
10-Q 2018-05-02 Quarter: 2018-03-31
10-K 2018-03-08 Annual: 2017-12-31
10-Q 2017-11-06 Quarter: 2017-09-30
10-Q 2017-08-07 Quarter: 2017-06-30
10-Q 2017-04-27 Quarter: 2017-03-31
10-K 2017-03-08 Annual: 2016-12-31
10-Q 2016-11-02 Quarter: 2016-09-30
10-Q 2016-08-02 Quarter: 2016-06-30
10-Q 2016-05-04 Quarter: 2016-03-31
10-K 2016-03-10 Annual: 2015-12-31
10-Q 2015-11-03 Quarter: 2015-09-30
10-Q 2015-08-04 Quarter: 2015-06-30
10-Q 2015-05-05 Quarter: 2015-03-31
10-K 2015-03-13 Annual: 2014-12-31
10-Q 2014-11-04 Quarter: 2014-09-30
10-Q 2014-08-01 Quarter: 2014-06-30
10-Q 2014-05-02 Quarter: 2014-03-31
10-K 2014-03-18 Annual: 2013-12-31
10-Q 2013-11-01 Quarter: 2013-09-30
10-Q 2013-08-01 Quarter: 2013-06-30
10-Q 2013-05-07 Quarter: 2013-03-31
10-K 2013-03-22 Annual: 2012-12-31
10-Q 2012-08-03 Quarter: 2012-06-30
10-Q 2012-05-02 Quarter: 2012-03-31
10-K 2012-03-15 Annual: 2011-12-31
10-Q 2011-11-07 Quarter: 2011-09-30
10-Q 2011-08-08 Quarter: 2011-06-30
10-Q 2011-05-09 Quarter: 2011-03-31
10-K 2011-03-14 Annual: 2010-12-31
10-Q 2010-11-05 Quarter: 2010-09-30
10-Q 2010-08-10 Quarter: 2010-06-30
10-Q 2010-05-13 Quarter: 2010-03-31
10-K 2010-03-18 Annual: 2009-12-31
8-K 2019-12-30 Shareholder Vote
8-K 2019-11-07 Enter Agreement, Sale of Shares, Control, Officers, Amend Bylaw, Regulation FD, Other Events, Exhibits
8-K 2019-05-16 Shareholder Vote
8-K 2019-01-24 Other Events, Exhibits
8-K 2019-01-24 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-04-17 Shareholder Vote
RAND 2019-09-30
Part I. Financial Information
Item 1. Financial Statements and Supplementary Data
Note 1. Organization
Note 2. Summary of Significant Accounting Policies
Note 3. Investments
Note 4. Other Assets
Note 5. Commitments and Contingencies
Note 6. Sba Debentures
Note 7. Changes in Stockholders' Equity (Net Assets)
Note 8. Financial Highlights
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II.
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 d778624dex311.htm
EX-31.2 d778624dex312.htm
EX-32.1 d778624dex321.htm

Rand Capital Earnings 2019-09-30

RAND 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
AIN 2,606 1,458 807 1,030 378 110 244 2,872 37% 11.8 8%
CSWC 444 668 8 11 0 0 1 362 0% 613.5 0%
UFI 341 592 199 709 66 2 43 430 9% 9.9 0%
CULP 231 224 60 300 53 6 14 186 18% 13.3 3%
CRWS 46 55 13 77 23 6 8 43 30% 5.0 11%
AMAL
GLAD
RAND
GIL
CTVA

10-Q 1 d778624d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2019

 

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

For the Transition Period from                      to                     

Commission File Number: 814-00235

 

 

Rand Capital Corporation

(Exact Name of Registrant as specified in its Charter)

 

 

 

New York   16-0961359

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

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

(716) 853-0802

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.10 par value   RAND   Nasdaq Capital Market

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

As of November 7, 2019, there were 6,321,988 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-Q

 

  PART I. – FINANCIAL INFORMATION      1  
Item 1.  

Financial Statements and Supplementary Data

     1  
 

Consolidated Statements of Financial Position as of September  30, 2019 (Unaudited) and December 31, 2018

     1  
 

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

     2  
 

Consolidated Statements of Changes in Net Assets for the Three Months and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

     3  
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)

     4  
 

Consolidated Schedule of Portfolio Investments as of September  30, 2019 (Unaudited)

     5  
 

Consolidated Schedule of Portfolio Investments as of December 31, 2018

     13  
 

Notes to the Consolidated Financial Statements (Unaudited)

     17  
Item 2.  

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

     35  
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     44  
Item 4.  

Controls and Procedures

     44  
  PART II. – OTHER INFORMATION      45  
Item 1.  

Legal Proceedings

     45  
Item 1A.  

Risk Factors

     45  
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     45  
Item 3.  

Defaults upon Senior Securities

     45  
Item 4.  

Mine Safety Disclosures

     45  
Item 5.  

Other Information

     45  
Item 6.  

Exhibits

     46  


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Supplementary Data

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

     September 30,
2019

(Unaudited)
    December 31,
2018
 

ASSETS

    

Investments at fair value:

    

Control investments (cost of $0 and $99,500, respectively)

   $ —       $ 99,500  

Affiliate investments (cost of $20,427,536 and $20,708,659, respectively)

     15,568,648       17,026,091  

Non- Control/Non-Affiliate investments (cost of $14,182,282 and $17,483,984, respectively)

     11,218,550       17,541,213  
  

 

 

   

 

 

 

Total investments, at fair value (cost of $34,609,818 and $38,292,143, respectively)

     26,787,198       34,666,804  

Cash and cash equivalents

     9,288,502       4,033,792  

Interest receivable (net of allowance of $166,413 and $161,000, respectively)

     125,808       145,532  

Deferred tax asset

     1,653,395       525,198  

Prepaid income taxes

     488,768       1,138,708  

Other assets

     317,668       11,690  
  

 

 

   

 

 

 

Total assets

   $ 38,661,339     $ 40,521,724  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

 

Liabilities:

    

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

   $ 10,777,493     $ 8,554,443  

Profit sharing and bonus payable

     —         125,000  

Accounts payable and accrued expenses

     102,733       245,758  

Deferred revenue

     27,948       72,336  
  

 

 

   

 

 

 

Total liabilities

     10,908,174       8,997,537  

Commitments and contingencies (See Note 5)

    

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 as of 9/30/19 and 12/31/18

     686,304       686,304  

Capital in excess of par value

     10,581,789       10,581,789  

Accumulated net investment loss

     (1,851,634     (1,665,552

Undistributed net realized gain on investments

     25,920,065       26,221,443  

Net unrealized depreciation on investments

     (6,114,254     (2,830,692

Treasury stock, at cost: 541,046 shares

     (1,469,105     (1,469,105
  

 

 

   

 

 

 

Total stockholders’ equity (net assets) (per share- 9/30/19: $4.39,12/31/18: $4.99)

     27,753,165       31,524,187  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (net assets)

   $ 38,661,339     $ 40,521,724  
  

 

 

   

 

 

 

See accompanying notes

 

1


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three months
ended

September 30,
2019
    Three months
ended

September 30,
2018
    Nine months
ended

September 30,
2019
    Nine months
ended

September 30,
2018
 

Investment income:

        

Interest from portfolio companies:

        

Affiliate investments

   $ 217,953     $ 192,758     $ 632,705     $ 515,784  

Non-Control/Non-Affiliate investments

     110,150       257,531       416,852       547,553  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from portfolio companies

     328,103       450,289       1,049,557       1,063,337  

Interest from other investments:

        

Non-Control/Non-Affiliate investments

     36,797       7,872       108,146       20,717  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from other investments

     36,797       7,872       108,146       20,717  

Dividend and other investment income:

        

Affiliate investments

     65,996       48,856       307,681       175,905  

Non-Control/Non-Affiliate investments

     —         —         —         6,058  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other investment income

     65,996       48,856       307,681       181,963  

Fee income:

        

Affiliate investments

     3,607       4,042       11,460       11,625  

Non-Control/Non-Affiliate investments

     2,852       151,243       262,927       160,987  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     6,459       155,285       274,387       172,612  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     437,355       662,302       1,739,771       1,438,629  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Salaries

     181,500       169,875       544,500       509,624  

Employee benefits

     40,606       39,845       143,705       148,841  

Directors’ fees

     30,124       28,624       87,372       92,123  

Professional fees

     68,931       81,745       406,859       220,773  

Stockholders and office operating

     85,782       47,839       466,543       176,877  

Insurance

     10,500       8,700       31,070       27,588  

Corporate development

     18,301       15,028       51,627       41,470  

Other operating

     604       4,875       3,413       9,990  
  

 

 

   

 

 

   

 

 

   

 

 

 
     436,348       396,531       1,735,089       1,227,286  

Interest on SBA obligations

     94,191       77,568       303,849       232,406  

Bad debt (recovery) expense

     —         (26,299     5,413       50,342  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     530,539       447,800       2,044,351       1,510,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment (loss) gain before income taxes

     (93,184     214,502       (304,580     (71,405

Income tax (benefit) expense

     (27,635     50,003       (118,498     (24,807
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment (loss) gain

     (65,549     164,499       (186,082     (46,598
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized (loss) gain on sales and dispositions of investments:

        

Control investments

     —         —         80,393       —    

Affiliate investments

     —         (1,125,673     (472,632     (1,125,673
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized loss on sales and dispositions, before income taxes

     —         (1,125,673     (392,239     (1,125,673

Income tax (benefit)

     —         (406,739     (90,861     (406,739
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized loss on sales and dispositions of investments

     —         (718,934     (301,378     (718,934

Net change in unrealized depreciation on investments:

        

Affiliate investments

     (1,847,468     725,673       (1,176,320     169,232  

Non-Control/Non-Affiliate investments

     (1,749,661     (249,871     (3,020,961     (901,360
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized depreciation before income tax benefit

     (3,597,129     475,802       (4,197,281     (732,128

Deferred income tax (benefit) expense

     (783,790     100,669       (913,719     (166,651
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized depreciation on investments

     (2,813,339     375,133       (3,283,562     (565,477
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss on investments

     (2,813,339     (343,801     (3,584,940     (1,284,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in net assets from operations

   ($ 2,878,888   ($ 179,302   ($ 3,771,022   ($ 1,331,009
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

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

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

   ($ 0.46   ($ 0.03   ($ 0.60   ($ 0.21

See accompanying notes

 

2


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Three months
ended

September 30,
2019
    Three months
ended

September 30,
2018
    Nine months
ended

September 30,
2019
    Nine months
ended

September 30,
2018
 

Net assets at beginning of period

   $ 30,632,053     $ 30,766,978     $ 31,524,187     $ 31,918,685  

Net investment (loss) gain

     (65,549     164,499       (186,082     (46,598

Net realized loss on sales and dispositions of investments

     —         (718,934     (301,378     (718,934

Net change in unrealized depreciation on investments

     (2,813,339     375,133       (3,283,562     (565,477
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in net assets from operations

     (2,878,888     (179,302     (3,771,022     (1,331,009
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 27,753,165     $ 30,587,676     $ 27,753,165     $ 30,587,676  
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated net investment loss

   ($ 1,851,634   ($ 1,643,744   ($ 1,851,634   ($ 1,643,744
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine months
ended
September 30,
2019
    Nine months
ended
September 30,
2018
 

Cash flows from operating activities:

    

Net decrease in net assets from operations

   ($ 3,771,022   ($ 1,331,009

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

    

Investments in portfolio companies

     (900,012     (1,365,000

Proceeds from sale of portfolio investments

     39,893       —    

Proceeds from loan repayments

     4,525,000       70,131  

Net realized loss on portfolio investments

     392,239       1,125,673  

Change in unrealized depreciation on investments before income taxes

     4,197,281       732,128  

Deferred tax benefit

     (1,128,197     (220,412

Depreciation and amortization

     27,809       22,200  

Original issue discount amortization

     (30,573     (29,462

Non-cash conversion of debenture interest

     (344,222     (421,665

Change in interest receivable allowance

     5,413       50,342  

Changes in operating assets and liabilities:

    

Decrease in interest receivable

     14,311       32,772  

(Increase) decrease in other assets

     (306,174     2,844  

Decrease (increase) in prepaid income taxes

     649,940       (360,779

Decrease in accounts payable and accrued expenses

     (143,025     (69,462

Decrease in profit sharing and bonus payable

     (125,000     (132,000

(Decrease) increase in deferred revenue

     (44,388     36,234  
  

 

 

   

 

 

 

Total adjustments

     6,830,295       (526,456
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     3,059,273       (1,857,465
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from SBA debentures

     2,250,000       —    

Origination costs to SBA

     (54,563     —    
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,195,437       —    
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     5,254,710       (1,857,465

Cash and cash equivalents:

    

Beginning of period

     4,033,792       6,262,039  
  

 

 

   

 

 

 

End of period

   $ 9,288,502     $ 4,404,574  
  

 

 

   

 

 

 

See accompanying notes

 

4


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019

(Unaudited)

 

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

Description, (Industry) and Website

  

Type of Investment

   Acquired     

Equity

   Cost      Value      Assets  

Non-Control/Non-Affiliate Investments – 40.4% of net assets: (j)

                 

ACV Auctions, Inc. (e)(g)

   1,181,160 Series A Preferred.      8/12/16      <1%      $163,000        $2,776,907        10.0%  

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

www.acvauctions.com

                 

Advantage 24/7 LLC (g)(h)

   $140,000 Term Note at 7% due      12/30/10      0%            0.4%  

Williamsville, NY. Marketing program for wine and

   January 1, 2022            115,000        115,000     
spirits dealers. (Marketing Company) www.advantage24-7.com                  

Centivo Corporation (e)(g)

   190,967 Series A-1 Preferred.      7/5/17      <1%      200,000        200,000        1.1%  

New York, NY. Tech-enabled health solutions

   337,808 Series A-2 Preferred.            101,342        101,342     

company that helps self-insured employers and their

                 

employees save money and have a better experience.

                 

(Health Care)

www.centivo.com

                 
           

 

 

    

 

 

    
  

Total Centivo

           301,342        301,342     
           

 

 

    

 

 

    

Empire Genomics, LLC (g)(l)

   $1,209,014 Senior Secured      6/13/14      0%            2.1%  

Buffalo, NY. Molecular diagnostics company that

   Convertible Term Notes at 10%               

offers a comprehensive menu of assay services for

   (8% PIK through September 30,               

diagnosing and guiding patient therapeutic treatments.

   2019) due December 31, 2020.            1,308,675        300,000     

(Health Care)

   $444,915 Promissory Note at 9%               

www.empiregenomics.com

   (4% PIK) due December 31, 2020.            444,915        302,569     
           

 

 

    

 

 

    
  

Total Empire

           1,753,590        602,569     
           

 

 

    

 

 

    

GiveGab, Inc. (e)(g)

   5,084,329 Series Seed Preferred.      3/13/13      4%      616,221        616,221        2.2%  

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

www.givegab.com

                 

GoNoodle, Inc. (g)(l)

   $1,000,000 Secured Note at 12%      2/6/15      <1%            3.8%  

Nashville, TN. Student engagement education

   due January 31, 2020, (1% PIK).            1,047,481        1,047,481     

software providing core aligned physical activity

   Warrant for 47,324 Series C               

breaks. (Software)

   Preferred.            25        25     

www.gonoodle.com

                 
           

 

 

    

 

 

    
  

Total GoNoodle

           1,047,506        1,047,506     
           

 

 

    

 

 

    

Mercantile Adjustment Bureau, LLC (g)

   $1,199,039 Subordinated Secured      10/22/12      4%            1.8%  

Williamsville, NY. Full service accounts receivable

   Note at 13% (3% for the calendar               

management and collections company. (Contact

   year 2019) due January 31, 2022.            1,199,040        500,000     

Center)

www.mercantilesolutions.com

   (e) $150,000 Subordinated               
   Debenture at 8% due January 31,               
   2022.            150,000        —       
   Warrant for 3.29% Membership               
   Interests. Option for 1.5%               
   Membership Interests.            197,625        —       
           

 

 

    

 

 

    
  

Total Mercantile

           1,446,665        500,000     
           

 

 

    

 

 

    

Outmatch Holdings, LLC (e)(g)

   3,022,799 Class P1 Units.      11/18/10      4%      2,140,007        2,140,007        7.8%  

(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, Inc. (e)(g)

   $300,000 Convertible Promissory      7/25/16      0%            1.1%  

Buffalo, NY. Provides innovative solutions for the

   Note at 5% due July 28, 2020.            300,000        300,000     

post-processing of additive manufactured 3D parts.

                 

(Manufacturing)

www.postprocess.com

                 

 

5


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

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

Description, (Industry) and Website

  

Type of Investment

   Acquired     

Equity

   Cost      Value      Assets  

Rheonix, Inc. (e)

   9,676 Common.      10/29/09      4%      —          —          2.5%  

Ithaca, NY. Developer of fully automated

   (g) 1,839,422 Series A Preferred.            2,099,999        —       

microfluidic based molecular assay and diagnostic

   (g) 50,593 Common.            —          —       

testing devices. (Health Care)

   (g) 589,420 Series B Preferred.            702,732        702,732     

www.rheonix.com

                 
           

 

 

    

 

 

    
  

Total Rheonix

           2,802,731        702,732     
           

 

 

    

 

 

    

SocialFlow, Inc. (e)(g)

   1,049,538 Series B Preferred.      4/5/13      4%      500,000        279,156        3.6%  

New York, NY. Provides instant analysis of social

   1,204,819 Series B-1 Preferred.            750,000        433,735     

networks using a proprietary, predictive analytic

   717,772 Series C Preferred.            500,000        287,109     

algorithm to optimize advertising and publishing.

                 

(Software) www.socialflow.com

                 
           

 

 

    

 

 

    
  

Total Social Flow

           1,750,000        1,000,000     
           

 

 

    

 

 

    

Somerset Gas Transmission Company, LLC (e)

   26.5337 Units.      7/10/02      3%      719,097        500,000        1.8%  

Columbus, OH. Natural gas transportation.

                 

(Oil and Gas) www.somersetgas.com

                 

Tech 2000, Inc. (g)

   $600,000 Term Note at 14% due      11/16/18      0%            2.2%  

Herndon, VA. Develops and delivers IT training.

   November 15, 2021.            610,777        610,777     

(Software) www.t2000inc.com

                 

Other Non-Control/Non-Affiliate Investments:

                 

DataView, LLC (e)

   Membership Interest.      10/1/98      5%      310,357        —          0.0%  

(Software)

                 

UStec/Wi3 (e)

   Common stock.      12/17/98      <1%      100,500        —          0.0%  

(Manufacturing)

                 
           

 

 

    

 

 

    

Subtotal Non-Control/Non-Affiliate Investments

            $ 14,182,282      $ 11,218,550     
           

 

 

    

 

 

    

Affiliate Investments – 56.1% of net assets (k)

                 

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

   1,119,024 Series A-2 Preferred      10/20/14      9%            0.0%  

Ithaca, NY. Frozen entrées made from 100%

   Membership Units.          $ 359,000      $ —       

whole grain steel cut oats under Grainful brand

   1,032,918 Series B Preferred               

name. (Consumer Product)

   Membership Units.            261,277        —       

www.grainful.com

   $262,626.64 Convertible Secured               
   Notes at 8% due December 21, 2019.            262,627        —       
           

 

 

    

 

 

    
  

Total BeetNPath

           882,904        —       
           

 

 

    

 

 

    

Carolina Skiff LLC (g)

   6.0825% Class A Common      1/30/04      7%            6.3%  

Waycross, GA. Manufacturer of ocean fishing and

   Membership Interest.            15,000        1,750,000     

pleasure boats. (Manufacturing) www.carolinaskiff.com

                 

ClearView Social, Inc. (e)(g)

   312,500 Series Seed Plus Preferred.      1/4/16      6%      200,000        200,000        0.7%  

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.firstwavetechnologies.com                  

Genicon, Inc. (e)(g)(l)

   1,586,902 Series B Preferred.      4/10/15      6%      1,000,000        —          9.9%  

Winter Park, FL. Designs, produces and

   $3,250,000 Promissory Notes at 10%               

distributes patented surgical instrumentation.

   due June 12, 2022, (10% PIK).            3,654,750        2,500,000     

(Health Care)

   $250,000 Promissory Note at 10% due               

www.geniconendo.com

   June 12, 2021 (10% PIK).            257,797        250,000     
   Warrants for Common.            120,000        —       
           

 

 

    

 

 

    
  

Total Genicon

           5,032,547        2,750,000     
           

 

 

    

 

 

    

 

6


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

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

Description, (Industry) and Website

  

Type of Investment

   Acquired     

Equity

   Cost      Value      Assets  

Knoa Software, Inc. (e)(g)

   973,533 Series A-1 Convertible      11/20/12      7%            4.4%  

New York, NY. End user experience

   Preferred.            750,000        750,000     

management and performance (EMP) solutions

   1,876,922 Series B Preferred.            479,155        479,155     

utilizing enterprise applications. (Software)

                 

www.knoa.com

                 
           

 

 

    

 

 

    
  

Total Knoa

           1,229,155        1,229,155     
           

 

 

    

 

 

    

KnowledgeVision Systems, Inc. (g)

   200,000 Series A-1 Preferred.      11/13/13      7%      250,000        —          3.5%  

Lincoln, MA. Online presentation and training

   214,285 Series A-2 Preferred.            300,000        —       

software. (Software)

   129,033 Series A-3 Preferred.            165,001        —       

www.knowledgevision.com

   Warrant for 46,743 Series A-3.            35,000        —       
   (e) $75,000 Subordinated Promissory               
   Notes at 8% payable on demand of               
   majority of holders after August 31, 2019.            75,000        75,000     
   $900,000 Term Note at 13% due April 30, 2021.            900,000        900,000     
           

 

 

    

 

 

    
  

Total KnowledgeVision

           1,725,001        975,000     
           

 

 

    

 

 

    

Mezmeriz, Inc. (e)(g)

   1,554,565 Series Seed Preferred.      1/9/08      12%      742,850        351,477        1.3%  
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)(l)

   $1,500,000 Subordinated Promissory      9/24/09      15%            9.2%  

Pennsauken Township, NJ. Manufacturer of

   Note at 12% (1% PIK) due December               

precision machined medical implants,

   31, 2024.            1,947,889        1,947,889     

components and assemblies. (Manufacturing)

   15% Class A Common Membership               

www.microcision.com

   Interest.            —          610,000     
           

 

 

    

 

 

    
  

Total Microcision

           1,947,889        2,557,889     
           

 

 

    

 

 

    

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        1.1%  

Buffalo, NY. Patented and proprietary golf balls utilizing technology and innovation.

                 

(Consumer Product)

www.oncoregolf.com

                 

SciAps, Inc. (e)(g)

   187,500 Series A Preferred.      7/12/13      6%      1,500,000        223,000        5.2%  

Woburn, MA. Instrumentation company

   274,299 Series A-1 Convertible               

producing portable analytical devices using XRF,

   Preferred.            504,710        142,000     

LIBS and RAMAN spectroscopy to identify

   117,371 Series B Convertible Preferred.            250,000        250,000     

compounds, minerals, and elements.

   113,636 Series C Convertible Preferred.            175,000        175,000     

(Manufacturing)

   369,698 Series C-1 Convertible               

www.sciaps.com

   Preferred.            399,274        399,274     
   147,059 Series D Convertible Preferred.            250,000        250,000     
           

 

 

    

 

 

    
  

Total SciAps

           3,078,984        1,439,274     
           

 

 

    

 

 

    

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

   250,000 Class B Preferred Units.      5/30/14      6%      250,000        —          0.0%  

Montvale, NJ. Customer contact center

   1,000,000 Class C Preferred Units.            1,190,680        —       

specializing in customer acquisition and retention

   80,000 Class D Preferred Units.            91,200        —       

for selected industries. (Contact Center)

   104,198 Class E Preferred Units.            104,198        —       

www.ipacesetters.com

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

 

 

    

 

 

    
  

Total Teleservices

           1,636,078        —       
           

 

 

    

 

 

    

 

7


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

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

Description, (Industry) and Website

  

Type of Investment

   Acquired     

Equity

   Cost      Value      Assets  

Tilson Technology Management, Inc. (g)(h)

   120,000 Series B Preferred.      1/20/15      9%      600,000        1,950,000        14.3%  

Portland, ME. Provides network deployment

   21,391 Series C Preferred.            200,000        347,604     

construction and information system services

   70,176 Series D Preferred.            800,000        1,140,360     

management for cellular, fiber optic and wireless

   15,385 Series E Preferred.            500,012        500,012     

systems providers. Its affiliated entity, SQF, LLC

   211,567 SQF Hold Co. Common.            —          22,036     

is a CLEC supporting small cell 5G deployment.

                 

(Professional Services)

www.tilsontech.com

                 
           

 

 

    

 

 

    
  

Total Tilson

           2,100,012        3,960,012     
           

 

 

    

 

 

    

Other Affiliate Investments:

                 

G-TEC Natural Gas Systems(e)

   Membership Interest      8/31/99      17%      400,000        —          0.0%  
           

 

 

    

 

 

    

(Manufacturing)

                 

Subtotal Affiliate Investments

              $20,427,536        $15,568,648     
           

 

 

    

 

 

    

TOTAL INVESTMENTS – 96.5%

              $34,609,818        $26,787,198     
           

 

 

    

 

 

    

OTHER ASSETS IN EXCESS OF

                 

LIABILITIES – 3.5%

                 965,967     
              

 

 

    

NET ASSETS – 100%

                 $27,753,165     
              

 

 

    

 

8


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

Notes to the Consolidated Schedule of Portfolio Investments

(a) At September 30, 2019, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable. Type of investment for equity position is in form of shares unless otherwise noted as units or interests, i.e., preferred shares, common shares.

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

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

(d) The Corporation’s investments are carried at fair value in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At September 30, 2019, ASC 820 designates 100% of the Corporation’s investments as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the reporting period. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3. “Investments” to the Consolidated Financial Statements).

(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward. However, if a debt or a preferred equity fails to make its most recent payment, then the investment will also be classified as non-income producing.

(f) As of September 30, 2019, the total cost of investment securities was approximately $34.6 million. Net unrealized depreciation was approximately ($7.8) million, which was comprised of $6.8 million of unrealized appreciation of investment securities and ($14.6) million of unrealized depreciation of investment securities. At September 30, 2019, the aggregate gross unrealized gain for federal income tax purposes was $6.5 million and the aggregate gross unrealized loss for federal income tax purposes was ($10.6) million. The net unrealized loss for federal income tax purposes was ($4.1) million based on a tax cost of $31.9 million.

(g) Rand Capital SBIC, Inc. investment.

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

(i) Represents interest due (amounts over $50,000) from investments included as interest receivable on the Corporation’s Consolidated Statements of Financial Position. (None at September 30, 2019)

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

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

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

 

9


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

Investments in and Advances to Affiliates

 

 

Company

  

Type of Investment

  December
31, 2018

Fair Value
    Gross
Additions (1)
    Gross
Reductions

(2)
    September
30, 2019

Fair Value
    Net
Realized
Gains
(Losses)
    Amount
of
Interest/
Dividend/
Fee
Income

(3)
 

Control Investments:

              

Advantage 24/7 LLC

  

$140,000 Term Note at 7%.

  $ 99,500     $ —       ($ 99,500   $ —       $ 40,500     $ —    

Gemcor II, LLC

       —         —         —         —         39,893       —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Control Investments   $ 99,500     $ —       ($ 99,500   $ —       $ 80,393     $ —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments:

              

BeetNPath, LLC

   1,119,024 Series A-2 Preferred Membership Units.   $ —       $ —       $ —       $ —       $ —       $ —    
   1,032,918 Series B Preferred Membership Units.     261,277       —         (261,277     —         —         —    
   $262,626.64 Convertible Secured Notes at 8%.     262,627       —         (262,627     —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total BeetNPath     523,904       —         (523,904     —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carolina Skiff LLC

   6.0825% Class A Common Membership interest.     1,750,000       —         —         1,750,000       —         76,914  

ClearView Social, Inc.

   312,500 Series Seed Plus Preferred.     200,000       —         —         200,000       —         —    

First Wave Technologies, Inc.

   670,443.2 Class A Common.     33,000       —         —         33,000       —         —    

Genicon, Inc.

   1,586,902 Series B Preferred.     1,000,000       —         (1,000,000     —         —         —    
  

$3,250,000 Promissory Notes at 10%.

    3,385,586       269,164       (1,154,750     2,500,000       —         305,397  
  

$250,000 Promissory Note at 10%

    —         257,797       (7,797     250,000       —         7,797  
   Warrant for Common.     37,500       —         (37,500     —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Genicon     4,423,086       526,961       (2,200,047     2,750,000       —         313,194  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
G-TEC Natural Gas Systems    16.639% Class A Membership Interest. 8% cumulative dividend.     —         —         —         —         —         —    

Knoa Software, Inc.

   973,533 Series A-1 Convertible Preferred.     750,000       —         —         750,000       —         193,934  
   1,876,922 Series B Preferred.     479,155       —         —         479,155       —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Knoa     1,229,155       —         —         1,229,155       —         193,934  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

KnowledgeVision

   200,000 Series A-1 Preferred.     —         —         —         —         —         —    

Systems, Inc.

   214,285 Series A-2 Preferred.     —         —         —         —         —         —    
   129,033 Series A-3 Preferred.     165,001       —         (165,001     —         —         —    
   $75,000 Subordinated Promissory Notes at 8%.     75,000       —         —         75,000       —         4,488  
   $900,000 Term Note at 13%.     750,000       150,000       —         900,000       —         92,879  
   Warrant for 46,743 Series A-3.     35,000       —         ( 35,000     —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total KnowledgeVision     1,025,001       150,000       (200,001     975,000       —         97,367  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mezmeriz, Inc.

   1,554,565 Series Seed Preferred.     351,477       —         —         351,477       —         —    

Microcision LLC

   $1,500,000 Subordinated Promissory Note at 12% (1% PIK).     1,933,353       14,536       —         1,947,889       —         174,437  
   15% Class A Common Membership Interest.     610,000       —         —         610,000       —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Microcision     2,543,353       14,536       —         2,557,889       —         174,437  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
New Monarch Machine Tool, Inc.    22.84 Common.     22,841       —         —         22,841       —      
OnCore Golf Technology, Inc.    300,483 Series AA Preferred.     300,000       —         —         300,000       —         —    

 

10


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

Investments in and Advances to Affiliates

 

 

Company

  

Type of Investment

  December 31,
2018 Fair
Value
    Gross
Additions
(1)
    Gross
Reductions
(2)
    September
30, 2019 Fair
Value
    Net
Realized
Gains

(Losses)
    Amount of
Interest/
Dividend/
Fee Income

(3)
 

SciAps, Inc.

   187,500 Series A Preferred.     700,000       —         (477,000     223,000       —         —    
   274,299 Series A-1 Convertible Preferred.     250,000       —         (108,000     142,000       —         —    
   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     2,024,274       —         (585,000     1,439,274       —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SOMS

   5,959,490 Series B membership Interests.     —         —         —         —         (472,632     —    

Technologies, LLC

              

Teleservices

   250,000 Class B Preferred Units.     —         —         —         —         —         —    

Solutions

   1,000,000 Class C Preferred Units.     —         —         —         —         —         —    

Holdings, LLC

   80,000 Class D Preferred Units.     —         —         —         —         —         —    
   104,198 Class E Preferred Units.     —         —         —         —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Teleservices     —         —         —         —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tilson Technology

   120,000 Series B Preferred.     600,000       1,350,000       —         1,950,000       —         36,833  

Management, Inc.

   21,391 Series C Preferred.     200,000       147,604       —         347,604       —         —    
   70,176 Series D Preferred.     800,000       340,360       —         1,140,360       —         —    
   15,385 Series E Preferred.     —         500,012       —         500,012       —         —    
   211,567 SQF Hold Co. Common.     —         22,036         22,036       —      
   $200,000 Subordinated Promissory Note at 8%.     200,000       —         (200,000     —         —         11,835  
   $800,000 Subordinated Promissory Note at 8%.     800,000       —         (800,000     —         —         47,332  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Tilson     2,600,000       2,360,012       (1,000,000     3,960,012       —         96,000  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Affiliate Investments   $ 17,026,091     $ 3,051,509     ($ 4,508,952   $ 15,568,648     ($ 472,632   $ 951,846  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total Control and Affiliate Investments   $ 17,125,591     $ 3,051,509     ($ 4,608,452   $ 15,568,648     ($ 392,239   $ 951,846  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

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

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

 

11


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2019 (Continued)

(Unaudited)

 

Industry Classification

   Percentage of Total
Investments (at fair value)
as of September 30, 2019
 

Software

     39.6

Manufacturing

     22.6  

Healthcare

     16.4  

Professional Services

     14.8  

Contact Center

     1.9  

Oil and Gas

     1.9  

Electronics

     1.3  

Consumer Product

     1.1  

Marketing

     0.4  
  

 

 

 

Total Investments

     100
  

 

 

 

 

 

12


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018

 

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% of net 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

   337,808 Series A-2 Preferred.           101,342        101,342     

company that helps self-insured employers and their employees save money and have a better experience. (Health Care)

www.centivo.com

                
          

 

 

    

 

 

    
  

Total Centivo

          301,342        301,342     
          

 

 

    

 

 

    

eHealth Global Technologies, Inc. (g)

   $3,500,000 Term Note at 13% due      6/28/16        0           11.1

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

www.ehealthtechnologies.com

   December 31, 2020.           3,500,000        3,500,000     

Empire Genomics, LLC (g)(m)

   $1,209,014 Senior Secured      6/13/14        0           2.4
Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments.    Convertible Term Notes at 10% (8% PIK through September 30, 2019) due December 31, 2020.           1,233,195        474,181     

(Health Care)

   $444,915 Promissory Note at 9%              

www.empiregenomics.com

   (4% PIK) due December 31, 2020.           444,915        302,569     
          

 

 

    

 

 

    
  

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           3.3

Nashville, TN. Student engagement education

   due January 31, 2020, (1% PIK).           1,039,663        1,039,663     

software providing core aligned physical activity breaks. (Software)

www.gonoodle.com

   Warrant for 47,324 Series C Preferred.           25        25     
          

 

 

    

 

 

    
  

Total GoNoodle

          1,039,688        1,039,688     
          

 

 

    

 

 

    

Mercantile Adjustment Bureau, LLC (g)

   $1,199,039 Subordinated Secured      10/22/12        4           2.2

Williamsville, NY. Full service accounts receivable

   Note at 13% (3% for the calendar              

management and collections company. (Contact

   year 2018) due January 31, 2019.           1,199,040        700,000     

Center)

www.mercantilesolutions.com

   (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 $50,254.           97,625        —       
          

 

 

    

 

 

    
  

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)

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

www.outmatch.com

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

 

 

    

 

 

    
  

Total Outmatch

          2,145,496        2,145,496     
          

 

 

    

 

 

    

PostProcess Technologies LLC (e)(g)

   $300,000 Convertible Promissory      7/25/16        0           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.           300,000        300,000     

 

13


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

 

Company, Geographic Location, Business
Description, (Industry) and Website

  

(a)

Type of Investment

  

(b)

Date
Acquired

    

(c)

    

Equity

   

Cost

    

(d)(f)

Fair Value

    

Percent
of Net
Assets

 

Rheonix, Inc. (e)

   9,676 Common.      10/29/09        4     —          —          7.0

Ithaca, NY. Developer of fully automated

   (g) 1,839,422 Series A Preferred.           2,099,999        1,500,000     

microfluidic based molecular assay and diagnostic

   (g) 50,593 Common.           —          —       

testing devices. (Health Care)

www.rheonix.com

   (g) 589,420 Series B Preferred.           702,732        702,732     
          

 

 

    

 

 

    
  

Total Rheonix

          2,802,731        2,202,732     
          

 

 

    

 

 

    

SocialFlow, Inc. (e)(g)

   1,049,538 Series B Preferred.      4/5/13        4     500,000        731,431        6.6

New York, NY. Provides instant analysis of social

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

networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software)

www.socialflow.com

   717,772 Series C Preferred.           500,000        500,221     
          

 

 

    

 

 

    
  

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      11/16/18        0        

Herndon, VA. Develops and delivers IT training. (Software)

www.t2000inc.com

   through December 31, 2018) due November 15, 2021.           610,777        610,777        1.9

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      10/20/14        9           1.7

Ithaca, NY. Frozen entrées made from 100%

   Membership Units.         $ 359,000      $ —       
whole grain steel cut oats under Grainful brand name. (Consumer Product)    1,032,918 Series B Preferred Membership Units.           261,277        261,277     

www.grainful.com

   $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)

   6.0825% Class A Common      1/30/04        7           5.6
Waycross, GA. Manufacturer of ocean fishing and    Membership Interest.           15,000        1,750,000     

pleasure boats. (Manufacturing)

www.carolinaskiff.com

                

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

                

 

14


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

 

Company, Geographic Location, Business
Description, (Industry) and Website

  

(a)

Type of Investment

  

(b)

Date
Acquired

    

(c)

    

Equity

   

Cost

    

(d)(f)

Fair
Value

    

Percent
of Net
Assets

 

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.    $3,250,000 Promissory Notes at 10% due May 1, 2020, (8% PIK).           3,385,586        3,385,586     

(Health Care) www.geniconendo.com

   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      11/20/12        7           3.9

New York, NY. End user experience

   Preferred.           750,000        750,000     
management and performance (EMP) solutions utilizing enterprise applications. (Software) www.knoa.com    1,876,922 Series B Preferred.           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

   214,285 Series A-2 Preferred.           300,000        —       

software. (Software)

   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)

          75,000        75,000     
   $750,000 Term Note at 11% due April 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           8.1
Pennsauken Township, NJ. Manufacturer of precision machined medical implants,    Note at 12% (1% PIK) due December 31, 2024.           1,933,353        1,933,353     
components and assemblies. (Manufacturing) www.microcision.com    15% Class A Common Membership 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,    274,299 Series A-1 Convertible Preferred.           504,710        250,000     

LIBS and RAMAN spectroscopy to identify

   117,371 Series B Convertible Preferred.           250,000        250,000     

compounds, minerals, and elements.

   113,636 Series C Convertible Preferred.           175,000        175,000     

(Manufacturing) www.sciaps.com

   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     
          

 

 

    

 

 

    

 

15


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

 

Company, Geographic Location, Business
Description, (Industry) and Website

  

(a)

Type of Investment

  

(b)

Date
Acquired

    

(c)

    

Equity

   

Cost

    

(d)(f)

Fair Value

   

Percent
of Net
Assets

 

Teleservices Solutions Holdings, LLC (e)

   250,000 Class B Preferred Units.      5/30/14        6     250,000        —         0.0

(g)(m)

   1,000,000 Class C Preferred Units.           1,190,680        —      

Montvale, NJ. Customer contact center

   80,000 Class D Preferred Units.           91,200        —      
specializing in customer acquisition and retention    104,198 Class E Preferred Units.           104,198        —      
          

 

 

    

 

 

   
for selected industries. (Contact Center) www.ipacesetters.com    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.      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 management. (Professional Services)    70,176 Series D Preferred. $800,000 Subordinated Promissory           800,000        800,000    

www.tilsontech.com

   Notes at 8% due December 1, 2022. $200,000 Subordinated Promissory           800,000        800,000    
   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)

(Manufacturing)

   Membership Interest      8/31/99        17     400,000        —         0.0

SOMS Technologies, LLC (e)(g)

(Consumer Products)

   Membership Interest      12/2/08        9     472,632        —         0.0
          

 

 

    

 

 

   

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 OTHER

               

ASSETS – (10%)

                (3,142,617  
             

 

 

   

NET ASSETS – 100%

              $ 31,524,187    
             

 

 

   

 

16


Table of Contents

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, 2018, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable. Type of investment for equity position is in form of shares unless otherwise noted as units or interests, i.e., preferred shares, common shares.

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

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

(d) The Corporation’s investments are carried at fair value in accordance with FASB Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At December 31, 2018, ASC 820 designates 100% of the Corporation’s investments as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the reporting period. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).

(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward. However, if a debt or a preferred equity fails to make its most recent payment, then the investment will also be classified as non-income producing.

(f) As of December 31, 2018, the total cost of investment securities was approximately $38.3 million. Net unrealized depreciation was approximately ($3.6) million, which was comprised of $5.3 million of unrealized appreciation of investment securities and ($8.9) million of unrealized depreciation of investment securities. At December 31, 2018, the aggregate gross unrealized gain for federal income tax purposes was $5.2 million and the aggregate gross unrealized loss for federal income tax purposes was ($5.9) million. The net unrealized loss for federal income tax purposes was ($0.7) million based on a tax cost of $35.4 million.

(g) Rand Capital SBIC, Inc. investment.

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

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

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

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

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

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

 

17


Table of Contents

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, 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 24/7 LLC

   45% Membership Interest.    $ 99,500      $ —        $ —       $ 99,500      $ —       $ 60,000  
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
  

Total Control Investments

   $ 99,500      $ —        $ —       $ 99,500      $ —       $ 60,000  
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Affiliate Investments:

                  

BeetNPath, LLC

   1,119,024 Series A-2 Preferred Membership Units.    $ 359,000      $ —        ($ 359,000   $ —        $ —       $ —    
   1,032,918 Series B Preferred Membership Units.      291,000        —          (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 Gas Systems    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 Systems, Inc.    200,000 Series A-1 Preferred.      —          —          —         —          —         —    
   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 Monarch Machine Tool, Inc.

   22.84 Common.      22,841        —          —         22,841        —         29,409  

 

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Table of Contents

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,
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

   150,000 Series AA Preferred.      —          300,000        —         300,000        —         —    

Technology, Inc.

   $300,000 Subordinated Convertible 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 investments, follow on investments, capitalized interest and the accretion of discounts. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation, and the movement of an existing portfolio company into this category and out of another category.

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

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

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

 

 

 

 

Industry Classification

   Percentage of Total
Investments (at fair value)
as of December 31, 2018
 

Software

     33.8

Healthcare

     32.4  

Manufacturing

     19.2  

Professional Services

     7.5  

Consumer Product

     2.4  

Contact Center

     2.0  

Oil and Gas

     1.4  

Electronics

     1.0  

Marketing

     0.3  
  

 

 

 

Total Investments

     100
  

 

 

 

 

 

20


Table of Contents

Rand Capital Corporation and Subsidiary

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1. ORGANIZATION

Rand Capital Corporation (“Rand”, “we”, “us” and “our”) was incorporated under the laws of New York in February 1969. We completed our initial public offering in 1971 as an internally managed, closed-end, diversified, investment management company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets” and provide managerial assistance to the portfolio companies in which we invest. See Item 1. Business – Regulation, Regulation as a Business Development Company in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

We established our first small business investment company (“SBIC”) in 2002, Rand Capital SBIC, Inc. (“Rand SBIC”), whereby we utilized funds borrowed from the Small Business Administration (“SBA”) combined with our capital to invest in our portfolio companies. We historically made the majority of our venture capital investments through Rand SBIC. Rand SBIC’s predecessor was organized as a Delaware limited partnership and was converted into a New York corporation on December 31, 2008, at which time our operations as a licensed SBIC were continued. Although Rand SBIC was operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC, and then Rand SBIC filed an election to be regulated as a BDC under the 1940 Act. Rand SBIC’s board of directors is comprised of the directors of Rand, a majority of whom are not “interested persons” of Rand or Rand SBIC.

During 2017 we established a second SBIC subsidiary, Rand Capital SBIC II, L.P. (“Rand SBIC II”), and began making investments through this SBIC subsidiary. During 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 currently operate as an internally managed investment company whereby our officers and employees conduct the business of the Corporation under the general supervision of our Board of Directors. We have not currently elected to qualify to be taxed as a regulated investment company as defined under Subchapter M of the Internal Revenue Code. See Recent Developments for a discussion of our pending Transaction.

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

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

 

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Table of Contents

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”), but in no case a majority, for nomination for election to Rand’s board of directors.

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, provided certain performance measures are met. 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”), required receipt of shareholder approval. Rand’s shareholders approved all proposals related to the Transactions at a special meeting of shareholders that was held on May 16, 2019.

In connection with the completion of the Transactions, Rand intends to accelerate its shift to an investment strategy focused on higher yielding debt investments, to elect tax treatment as a regulated investment company (“RIC”), and, in connection with such RIC election, intends to pay a special dividend to shareholders, and intends to adopt a new dividend policy going forward, that may include regular cash dividends to shareholders.

Rand’s wholly-owned subsidiary, Rand Capital SBIC, Inc., received approval from the SBA in October 2019 for Rand to proceed with the pending Transaction with East. Rand expects the Transaction to close during November 2019.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – It is our opinion that the accompanying consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation in accordance with United States generally accepted accounting principles (“GAAP”) of the consolidated financial position, results of operations, cash flows and statement of changes in net assets for the interim periods presented. Certain information and note disclosures normally included in audited annual consolidated financial statements prepared in accordance with GAAP have been omitted; however, we believe that the disclosures made are adequate to make the information presented herein not misleading. Our interim results for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

These statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. Information contained in this filing should also be reviewed in conjunction with our related filings with the SEC prior to the date of this report. Those filings include, but are not limited to, the following:

 

  N-54A

Election to Adopt Business Development Company status

 

  10-Q

Quarterly Report on Form 10-Q for the quarters ended June 30, 2019 and March 31, 2019

 

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Table of Contents

Principles of Consolidation - The consolidated financial statements include the accounts of Rand and its wholly-owned 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 nature of these financial instruments.

Fair Value of SBA Debentures - In September 2019, the SBIC Funding Corporation completed a pooling of SBA debentures that have a coupon rate of 2.283%, excluding a mandatory SBA annual charge estimated to be 0.094%, resulting in a total estimated fixed rate for ten years of 2.377%. The carrying value of Rand’s SBA debentures is a reasonable estimate of fair value because their stated interest rates approximate current interest rates that are available for debt with similar terms.

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

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

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

Cash and Cash Equivalents - Temporary cash investments having a maturity of less than a year when purchased are considered to be cash equivalents.

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.

 

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The following investments are on non-accrual status: BeetNPath, LLC (Beetnpath), G-TEC Natural Gas Systems (G-Tec) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

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

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

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

Revenue Recognition - Fee Income - Consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of SBIC financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $48,887 and $28,266 for the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019, the Corporation recognized a one-time fee of $225,000 in conjunction with the repayment of the eHealth loan instrument. During the nine months ended September 30, 2018 the Corporation recorded a one-time debt modification fee of approximately $142,000 in connection with the Empire Genomics debt modification. The board fees were $500 and $2,000 for the nine months ended September 30, 2019 and 2018, respectively.

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

Original Issue Discount - Investments may include “original issue discount” or OID income. This occurs when the Corporation purchases a warrant and a note from a portfolio company simultaneously, which requires an allocation of a portion of the purchase price to the warrant and reduces the note or debt instrument by an equal amount in the form of a note discount or OID. The note is reported net of the OID and the OID is accreted into interest income over the life of the loan. The Corporation recognized $30,573 and $29,462 in OID income for the nine months ended September 30, 2019 and 2018, respectively. OID income is estimated to be approximately $10,000 for the remainder of 2019.

Deferred Debenture Costs - SBA debenture origination and commitment costs, which are netted against the debenture obligation (See Note 6 “SBA Debentures”), will be amortized ratably over the terms of the SBA debentures. Amortization expense was $27,614 and $20,550 for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense on currently outstanding debentures for the next five years is estimated to average approximately $30,000 per year.

 

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SBA Debentures - The Corporation had $11,000,000 and $8,750,000 in outstanding SBA debentures at September 30, 2019 and December 31, 2018, respectively, with a weighted average interest rate, including the SBA annual fee, of 3.45% at September 30, 2019. The debentures are presented net of deferred debenture costs (See Note 6 “SBA Debentures”). The $11,000,000 in outstanding SBA leverage matures from 2022 through 2029.

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

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

Supplemental Cash Flow Information - Income taxes refunded during the nine months ended September 30, 2019 and 2018 were $644,821 and $17,006, respectively. Interest paid during each of the nine months ended September 30, 2019 and 2018 was $339,605 and $282,875, respectively. The Corporation converted $344,222 and $279,319 of interest receivable into investments during the nine months ended September 30, 2019 and 2018, respectively. In addition, a debt modification fee of $142,346 was capitalized during the nine months ended September 30, 2018.

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

Stockholders’ Equity (Net Assets) - At September 30, 2019 and December 31, 2018, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

On October 24, 2019, the Board of Directors extended the repurchase authorization for up to an aggregate of 1,541,056 shares of the Corporation’s outstanding common stock on the open market through October 25, 2020 at prices no greater than the then current net asset value. No shares were repurchased during the nine months ended September 30, 2019. At September 30, 2019 and 2018, respectively, the total treasury shares held was 541,046 shares with a total cost of $1,469,105.

Profit Sharing and Stock Option Plan - In 2001, the shareholders of the Corporation authorized the establishment of an Employee Stock Option Plan (the “Option Plan”), that provides for the award of stock options to purchase up to 200,000 common shares to eligible employees. In 2002, the Corporation placed the Option Plan on inactive status as it developed a new profit sharing plan for the Corporation’s employees in connection with the formation of its SBIC subsidiary. As of September 30, 2019, no stock options had been awarded under the Option Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any option, warrant or right is outstanding under an executive compensation plan, no stock options will be granted under the Option Plan while any profit sharing plan is in effect with respect to the Corporation.

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

 

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The Corporation did not record any expense pursuant to the Plan for the nine months ended September 30, 2019 and 2018.

Income Taxes - The Corporation reviews the tax positions it has taken to determine if they meet a “more likely than not threshold” for the benefit of the tax position to be recognized in the consolidated financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in either a reduction of a current or deferred tax asset or receivable, or the recording of a current or deferred tax liability. There were no uncertain tax positions recorded at September 30, 2019 or December 31, 2018.

It is the Corporation’s policy to include interest and penalties related to income tax liabilities in income tax expense. There were no amounts recognized for interest or penalties for the nine months ended September 30, 2019 or 2018.

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

The following are the concentrations of the top five portfolio company values to the fair value of the Corporation’s total investment portfolio:

 

     As of September 30,
2019
 

Tilson Technology Management, Inc. (Tilson)

     15

ACV Auctions, Inc. (ACV)

     10

Genicon, Inc. (Genicon)

     10

Microcision, LLC. (Microcision)

     10

Outmatch Holdings, LLC (Outmatch)

     8

 

     As of 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

Note 3. INVESTMENTS

The Corporation’s 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 company.

 

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

 

   

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

 

   

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

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

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

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.

There were no Level 1 or 2 investments as of September 30, 2019 or December 31, 2018.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Pending debt or capital restructuring of the portfolio company;

 

   

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

 

   

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

 

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

 

   

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

 

   

Qualitative assessment of key management;

 

   

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

 

   

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

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

Equity Securities

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

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

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

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

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

Loan and Debt Securities

The significant unobservable inputs used in the fair value measurement of the Corporation’s loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, as well as the market acceptance for the portfolio company’s products or services. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. The Corporation’s loan and debt investments are often junior secured or unsecured securities. Fair value may also be determined based on other criteria where appropriate. Significant changes to the unobservable inputs may result in a change in fair value. For recent investments, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair value inputs are identified causing the Corporation to depart from this basis.

 

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The following table provides a summary of the significant unobservable inputs used to determine the fair value of the Corporation’s Level 3 portfolio investments as of September 30, 2019:

 

Investment Type

   Market Approach
EBITDA Multiple
     Market
Approach

Liquidation
Seniority
     Market Approach
Revenue Multiple
     Market Approach
Transaction Pricing
     Asset Value
Liquidation
Seniority
     Totals  

Non-Control/Non-Affiliate Equity

   $ —        $ 1,702,757      $ 2,645,496      $ 3,694,470      $ —        $ 8,042,723  

Non-Control/Non-Affiliate Loan and Debt

     500,000        1,650,050        —          1,025,777        —          3,175,827  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate

   $ 500,000      $ 3,352,807      $ 2,645,496      $ 4,720,247        —        $ 11,218,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Equity

   $ —        $ 22,841      $ 2,868,429      $ 7,004,489      $ —        $ 9,895,759  

Affiliate Loan and Debt

     —          975,000        2,750,000        —          1,947,889        5,672,889  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate

   $ —        $ 997,841      $ 5,518,429      $ 7,004,489      $ 1,947,889      $ 15,568,648  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Level 3 Investments

   $ 500,000      $ 4,350,648      $ 8,263,925      $ 11,724,736      $ 1,947,889      $ 26,787,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Range

     6.0X        1X        1X-4X        Not Applicable        Not Applicable     

Unobservable Input

     EBITDA Multiple        Asset Value        Revenue Multiple        Transaction Price        Asset Value     

Weighted Average

     6.0X        1X        2.7X        Not Applicable        Not Applicable     

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at September 30, 2019:

 

       Fair Value Measurements at Reported Date Using  

Description

   September 30,
2019
     Quoted Prices in
Active Markets for
Identical Assets

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

Loan investments

   $ 2,145,692      $ —        $ —        $ 2,145,692  

Debt investments

     6,703,024        —          —          6,703,024  

Equity investments

     17,938,482        —          —          17,938,482  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,787,198      $ —        $ —        $ 26,787,198  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2019:

 

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

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
     Total  

Ending Balance, December 31, 2018, of Level 3 Assets

   $ 4,935,777      $ 9,397,979      $ 20,333,048      $ 34,666,804  

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

           

Advantage 24/7 LLC (Advantage 24/7)

     —          —          (40,500      (40,500

Gemcor II LLC (Gemcor)

     —          —          39,893        39,893  

SOMS Technologies, LLC (SOMS)

     —          —          (472,632      (472,632
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Realized Gains and Losses

     —          —          (392,239      (392,239

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

           

BeetNPath, LLC (Beetnpath)

     —          (262,627      (261,277      (523,904

Empire Genomics, LLC (Empire Genomics)

     —          (249,661      —          (249,661

Genicon, Inc. (Genicon)

     —          (1,162,547      (1,037,500      (2,200,047

KnowledgeVision Systems, Inc. (Knowledge Vision)

     —          —          (200,001      (200,001

Mercantile Adjustment Bureau, LLC (Mercantile)

     —          (200,000      —          (200,000

Rheonix, Inc. (Rheonix)

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

SciAps, Inc. (Sciaps)

     —          —          (585,000      (585,000

SocialFlow, Inc. (Socialflow)

     —          —          (1,071,300      (1,071,300

SOMS

     —          —          472,632        472,632  

Tilson Technology Management, Inc. (Tilson)

     —          —          1,860,000        1,860,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Unrealized Gains and Losses

     —          (1,874,835      (2,322,446      (4,197,281

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

           

Advantage 24/7

     140,000        —          —          140,000  

Empire Genomics

     —          75,481        —          75,481  

Genicon

     —          526,961        —          526,961  

GoNoodle, Inc. (GoNoodle)

     —          7,817        —          7,817  

Knowledge Vision

     150,000        —          —