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RAND CAPITAL CORP - Quarter Report: 2015 June (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended June 30, 2015

 

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

For the Transition Period from                      to                     

Commission File Number: 814-00235

Rand Capital Corporation

(Exact Name of Registrant as specified in its Charter)

 

New York   16-0961359

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

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

(716) 853-0802

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of August 4, 2015, there were 6,328,538 shares of the registrant’s common stock outstanding.


Table of Contents

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-Q

 

 

  PART I. – FINANCIAL INFORMATION   
Item 1.  

Financial Statements and Supplementary Data

     3   
 

Consolidated Statements of Financial Position as of June 30, 2015 (Unaudited) and December 31, 2014

     3   
 

Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2015 and 2014 (Unaudited)

     4   
 

Consolidated Statements of Changes in Net Assets for the Three Months and Six Months Ended June 30, 2015 and 2014 (Unaudited)

     5   
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)

     6   
 

Consolidated Schedule of Portfolio Investments as of June 30, 2015 (Unaudited)

     7   
 

Consolidated Schedule of Portfolio Investments as of December 31, 2014

     14   
 

Notes to the Consolidated Financial Statements (Unaudited)

     21   
Item 2.  

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

     33   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     39   
Item 4.  

Controls and Procedures

     39   
PART II – OTHER INFORMATION   
Item 1.  

Legal Proceedings

     41   
Item 1A.  

Risk Factors

     41   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   
Item 3.  

Defaults upon Senior Securities

     41   
Item 4.  

Mine Safety Disclosures

     41   
Item 5.  

Other Information

     41   
Item 6.  

Exhibits

     42   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Supplementary Data

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As of June 30, 2015 and December 31, 2014

 

     June 30, 2015
(Unaudited)
    December 31,
2014
 

ASSETS

    

Investments at fair value:

    

Control investments (cost of $1,248,221 and $1,347,300, respectively)

   $ 9,923,221      $ 10,022,300   

Affiliate investments (cost of $18,139,387 and $15,188,935, respectively)

     17,374,393        14,617,378   

Non-affiliate investments (cost of $7,100,532 and $5,677,241, respectively)

     6,961,261        5,665,698   
  

 

 

   

 

 

 

Total investments, at fair value (cost of $26,488,140 and $22,213,476, respectively)

     34,258,875        30,305,376   

Cash

     6,520,170        13,230,717   

Interest receivable (net of allowance: $122,000 at 6/30/15 and $128,311 at 12/31/14)

     207,441        165,094   

Prepaid income tax

     148,807        —     

Other assets

     1,817,277        1,824,800   
  

 

 

   

 

 

 

Total assets

   $ 42,952,570      $ 45,525,987   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

    

Liabilities:

    

Debentures guaranteed by the SBA

   $ 8,000,000      $ 8,000,000   

Income tax payable

     —          2,065,795   

Deferred tax liability

     1,862,464        1,838,351   

Profit sharing and bonus payable – officers

     194,740        953,490   

Accounts payable and accrued expenses

     184,017        290,646   

Deferred revenue

     35,264        24,264   
  

 

 

   

 

 

 

Total liabilities

     10,276,485        13,172,546   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 5)

    

Stockholders’ equity (net assets):

    

Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,328,538 at 6/30/15 and 12/31/14

     686,304        686,304   

Capital in excess of par value

     10,581,789        10,581,789   

Accumulated net investment (loss)

     (506,475     (867,482

Undistributed net realized gain on investments

     18,463,557        18,290,374   

Net unrealized appreciation on investments

     4,898,401        5,109,947   

Treasury stock, at cost; 534,496 shares at 6/30/15 and 12/31/14

     (1,447,491     (1,447,491
  

 

 

   

 

 

 

Total stockholders’ equity (net assets) (per share 6/30/15: $5.16, 12/31/14: $5.11)

     32,676,085        32,353,441   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 42,952,570      $ 45,525,987   
  

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months and the Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

     Three months
ended

June 30, 2015
    Three months
ended

June 30, 2014
    Six months
ended

June 30, 2015
    Six months
ended

June 30, 2014
 

Investment income:

        

Interest from portfolio companies:

        

Control investments

   $ 20,275      $ 29,460      $ 42,420      $ 61,759   

Affiliate investments

     96,522        130,517        211,651        253,373   

Non-Control/Non-Affiliate investments

     66,422        41,320        115,222        79,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from portfolio companies

     183,219        201,297        369,293        394,476   

Interest from other investments:

        

Non-Control/Non-Affiliate investments

     8,369        3,031        15,190        8,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from other investments

     8,369        3,031        15,190        8,197   

Dividend and other investment income:

        

Control investments

     491,208        399,895        903,359        682,981   

Affiliate investments

     29,061        59,232        58,429        90,065   

Non-Control/Non-Affiliate investments

     —          2,531        —          2,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other investment income

     520,269        461,658        961,788        775,577   

Fee income:

        

Control investments

     2,000        2,500        4,000        6,000   

Affiliate investments

     416        1,767        1,833        2,700   

Non-Control/Non-Affiliate investments

     4,251        1,306        8,167        2,556   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     6,667        5,573        14,000        11,256   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     718,524        671,559        1,360,271        1,189,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Salaries

     149,555        147,669        299,110        295,338   

Bonus and profit sharing

     —          (45,635     —          (45,635

Employee benefits

     29,394        24,689        59,801        62,756   

Directors’ fees

     29,300        55,500        51,050        74,250   

Professional fees

     20,433        44,021        93,502        100,512   

Stockholders and office operating

     55,717        55,361        115,114        85,650   

Insurance

     6,300        7,500        17,554        19,909   

Corporate development

     14,400        16,431        31,381        27,556   

Other operating

     2,224        1,979        5,874        3,256   
  

 

 

   

 

 

   

 

 

   

 

 

 
     307,323        307,515        673,386        623,592   

Interest on SBA obligations

     77,569        68,137        151,891        126,417   

Bad debt expense

     —          —          —          6,311   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     384,892        375,652        825,277        756,320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     333,632        295,907        534,994        433,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     101,920        48,712        173,987        97,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     231,712        247,195        361,007        335,343   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) on investments:

        

Affiliate investments

     —          —          —          (778,253

Non-Control/Non-Affiliate investments

     131,181        (444,172     262,925        (446,939
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) before income taxes

     131,181        (444,172     262,925        (1,225,192

Income tax expense (benefit)

     42,591        (142,701     89,742        (422,226
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) on investments

     88,590        (301,471     173,183        (802,966

Net (decrease) increase in unrealized appreciation on investments:

        

Affiliate investments

     (193,436     (356,900     (193,436     29,980   

Non-Control/Non-Affiliate investments

     (73,219     1,236,251        (127,728     1,236,251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized appreciation before income taxes

     (266,655     879,351        (321,164     1,266,231   

Deferred income tax (benefit) expense

     (89,449     305,299        (109,618     448,445   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in unrealized appreciation on investments

     (177,206     574,052        (211,546     817,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain on investments

     (88,616     272,581        (38,363     14,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets from operations

   $ 143,096      $ 519,776      $ 322,644      $ 350,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     6,328,538        6,411,892        6,328,538        6,411,892   

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

   $ 0.02      $ 0.08      $ 0.05      $ 0.05   

See accompanying notes

 

4


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

For the Three Months and the Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

     Three months
ended

June 30, 2015
    Three months
ended

June 30, 2014
    Six months
ended

June 30, 2015
    Six months
ended

June 30, 2014
 

Net assets at beginning of period

   $ 32,532,989      $ 27,899,639      $ 32,353,441      $ 28,069,332   

Net investment income

     231,712        247,195        361,007        335,343   

Net realized gain (loss) on investments

     88,590        (301,471     173,183        (802,966

Net (decrease) increase in unrealized appreciation on investments

     (177,206     574,052        (211,546     817,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets from operations

     143,096        519,776        322,644        350,163   

Purchase of treasury stock

     —          —          —          (80
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net assets

     143,096        519,776        322,644        350,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 32,676,085      $ 28,419,415      $ 32,676,085      $ 28,419,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated net investment (loss)

   ($ 506,475   ($ 553,974   ($ 506,475   ($ 553,974
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

     Six months
ended
June 30, 2015
    Six months
ended
June 30, 2014
 

Cash flows from operating activities:

    

Net increase in net assets from operations

   $ 322,644      $ 350,163   

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

    

Depreciation and amortization

     16,448        12,668   

Original issue discount amortization

     (7,746     (7,746

Change in interest receivable allowance

     (6,311     6,311   

Decrease (increase) in unrealized appreciation on investments

     321,164        (1,266,231

Deferred tax expense (benefit)

     24,113        (170,401

Realized (gain) loss on portfolio investments

     (262,925     1,225,192   

Non-cash conversion of debenture interest

     (32,669     (89,271

Changes in operating assets and liabilities:

    

(Increase) in interest receivable

     (36,036     (34,484

(Increase) decrease in other assets

     (8,925     770,375   

(Increase) in prepaid income taxes

     (148,807     —     

Decrease in income taxes payable

     (2,065,795     (1,218,428

Decrease in accounts payable and accrued expenses

     (106,629     (143,743

Decrease in profit sharing and bonus payable

     (758,750     (828,833

Increase in deferred revenue

     11,000        9,744   
  

 

 

   

 

 

 

Total adjustments

     (3,061,868     (1,734,847
  

 

 

   

 

 

 

Net cash used in operating activities

     (2,739,224     (1,384,684

Cash flows from investing activities:

    

Investments originated

     (4,719,008     (4,501,152

Proceeds from sale of investments

     648,605        62,645   

Proceeds from loan repayments

     99,080        150,469   

Capital expenditures

     —          (1,065
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,971,323     (4,289,103

Cash flows from financing activities:

    

Purchase of treasury shares

     —          (80
  

 

 

   

 

 

 

Net cash used in financing activities

     —          (80
  

 

 

   

 

 

 

Net (decrease) in cash

     (6,710,547     (5,673,867

Cash:

    

Beginning of period

     13,230,717        9,764,810   
  

 

 

   

 

 

 

End of period

   $ 6,520,170      $ 4,090,943   
  

 

 

   

 

 

 

See accompanying notes

 

6


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015

(Unaudited)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

   (b)
Date
Acquired
     (c)
Equity
    Cost      (d)(f)
Fair
Value
     Percent
of Net
Assets
 
Non-Control/Non-Affiliate Investments – 21.3% of net assets: (j)                 

BeetNPath, LLC (e)(g)

Ithaca, NY. Frozen entrées made from 100% whole grain steel cut oats. (Consumer Product)

www.grainful.com

   $150,000 convertible promissory note at 6% due October 20, 2016.      10/20/14         —        $ 150,000       $ 150,000         0.5

Empire Genomics, LLC (e)(g)

Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care)

www.empiregenomics.com

  

$600,000 senior secured convertible term note at 10% due April 1, 2017.

(i) Interest receivable $62,833.

     6/13/14         —          600,000         600,000         1.8

Genicon, Inc. (e)(g)

Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Manufacturing)

www.geniconendo.com

   793,451 Series B preferred shares.      4/10/15         3     500,000         500,000         1.5

HealthTeacher, Inc. (g)

Nashville, TN. Online resource of health education tools. (Software)

www.healthteacher.com

   $1,000,000 secured note at 12% due January 31, 2020.      2/6/15         <1     1,003,948         1,003,948         3.1
   Warrant for 47,324 Series C Preferred shares.           25         25      
          

 

 

    

 

 

    
  

Total HealthTeacher

          1,003,973         1,003,973      
          

 

 

    

 

 

    

Kinex Pharmaceuticals, Inc. (e)(g)

Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care)

www.kinexpharma.com

   11,574 common shares.      9/8/14         <1     143,285         347,220         1.1

Mercantile Adjustment Bureau, LLC (g)

Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center)

www.mercantilesolutions.com

   $1,099,039 subordinated secured note at 13% (3% for the period January 1 through December 31, 2015) due October 30, 2017.      10/22/12         4     1,075,695         1,075,695         4.0
   $150,000 subordinated debenture at 8% due June 30, 2018. (e)           150,000         150,000      
  

Warrant for 3.29% membership interests. Option for 1.5% membership interests.

(i) Interest receivable $94,602.

          97,625         97,625      
          

 

 

    

 

 

    
  

Total Mercantile

          1,323,320         1,323,320      
          

 

 

    

 

 

    

SocialFlow, Inc. (e)(g)

New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software)

www.socialflow.com

   1,049,538 Series B preferred shares. 1,204,819 Series B-1 preferred shares.      4/5/13         4           5.4
   $500,000 convertible promissory           1,250,000         1,250,000      
   note at 8% due September 9, 2015           500,000         500,000      
          

 

 

    

 

 

    
  

Total SocialFlow

          1,750,000         1,750,000      
          

 

 

    

 

 

    

Somerset Gas Transmission Company, LLC (e)

Columbus, OH. Natural gas transportation. (Oil and Gas)

www.somersetgas.com

   26.5337 units.      7/10/02         3     719,097         786,748         2.4

Statisfy, Inc. (e)(g)

Boston, MA. Mobile marketing platform for engagement, advertising and surveys. (Software)

www.statisfy.co

   500,000 Series seed preferred shares.      8/18/14         4     500,000         500,000         1.5
Other Non-Control/Non-Affiliate Investments:                 
DataView, LLC (Software) (e)    Membership Interest      —           —          310,357         —           0.0
UStec/Wi3 (Software) (e)    Common Stock      —           —          100,500         —           0.0
          

 

 

    

 

 

    
Subtotal Non-Control/Non-Affiliate Investments            $ 7,100,532       $ 6,961,261      
          

 

 

    

 

 

    

 

7


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015 (Continued)

(Unaudited)

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

   (b)
Date
Acquired
     (c)
Equity
    Cost      (d)(f)
Fair
Value
     Percent
of Net
Assets
 
Affiliate Investments – 53.2% of net assets (k)                 

Carolina Skiff LLC (g)

Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats.

(Consumer Product)

www.carolinaskiff.com

   $985,000 Class A preferred      1/30/04         7           5.2
   membership interest at 9.8%.         $ 985,000       $ 985,000      
   $250,000 subordinated promissory note at 14% due December 31, 2016.           125,000         125,000      
   6.0825% Class A common membership interest.           15,000         600,000      
          

 

 

    

 

 

    
   Total Carolina Skiff           1,125,000         1,710,000      
          

 

 

    

 

 

    

Chequed.com, Inc. (e)(g)

Saratoga Springs, NY. Web based predictive employee selection and reference checking.

(Software)

www.chequed.com

   408,476 Series A preferred shares.      11/18/10         16     1,383,222         1,383,222         5.0
   $250,000 convertible promissory note at 8% due December 31, 2015              
             250,000         250,000      
          

 

 

    

 

 

    
   Total Chequed.com           1,633,222         1,633,222      
          

 

 

    

 

 

    

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

Batavia, NY. Sells First Crush automated pill

crusher that crushes and grinds medical pills for

nursing homes and medical institutions. (Manufacturing)

www.firstwaveproducts.com

   $500,000 senior term notes at 10%      4/19/12         7           2.5
   (Payment in Kind (PIK) through              
   May 31, 2015) due December 31, 2016.           656,968         500,000      
   $280,000 junior term notes at 10%              
   (PIK through May 31, 2015) due              
   December 31, 2016.           316,469         280,000      
   Warrant for 41,619 capital securities.           22,000         22,000      
          

 

 

    

 

 

    
   Total First Wave           995,437         802,000      
          

 

 

    

 

 

    

GiveGab, Inc. (e)(g)

Ithaca, NY. Social network program that connects

volunteers with nonprofit organizations.

(Software)

www.givegab.com

   5,084,329 Series Seed preferred shares.      3/13/13         10     616,221         616,221         1.9
                
                
                
                
                

G-TEC Natural Gas Systems (e)

Buffalo, NY. Manufactures and distributes systems

that allow natural gas to be used as an alternative

fuel to gases. (Manufacturing)

www.gas-tec.com

   18.545% Class A membership interest.      8/31/99         19     400,000         100,000         0.3
   8% cumulative dividend.              
                
                
                

Intrinsiq Materials, Inc. (e)(g)

Rochester, NY. Produces printable electronics

utilizing a unique process of nanomaterial based

ink in a room-temperature environment.

(Manufacturing)

www.intrinsiqmaterials.com

  

599,055 Series 2 preferred shares.

 

$95,000 convertible promissory note at 8% due June 3, 2016.

     9/19/13         7     600,002         600,002         2.1
                
             95,000         95,000      
          

 

 

    

 

 

    
   Total Intrinsiq           695,002         695,002      
          

 

 

    

 

 

    

Knoa Software, Inc. (e)(g)

New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software)

www.knoa.com

   973,533 Series A-1 convertible preferred shares.      11/20/12         7     750,000         381,503         2.7
   1,876,922 Series B preferred shares.           479,155         490,752      
          

 

 

    

 

 

    
             1,229,155         872,255      
          

 

 

    

 

 

    

KnowledgeVision Systems, Inc. (e)(g)

Lincoln, MA. Online presentation and training

software. (Software)

www.knowledgevision.com

   200,000 Series A-1 preferred shares.      11/13/13         7     250,000         250,000         2.3
   214,285 Series A-2 preferred shares.           300,000         300,000      
   129,033 Series A-3 preferred shares.           165,001         165,001      
   Warrant for 46,743 Series A-3 shares.           35,000         35,000      
          

 

 

    

 

 

    
   Total KnowledgeVision           750,001         750,001      
          

 

 

    

 

 

    

Mezmeriz, Inc. (e)(g)

Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer)

www.mezmeriz.com

   1,554,568 Series Seed preferred shares.      1/9/08         13     742,850         351,477         1.1

Microcision LLC (g)

Philadelphia, PA. Custom manufacturer of medical and dental implants. (Manufacturing)

www.microcision.com

   $1,500,000 subordinated promissory note at 11% due January 31, 2017.      9/24/09         15           5.9
             1,891,964         1,891,964      
   15% Class A common membership interest.              
             —           —        
          

 

 

    

 

 

    
   Total Microcision           1,891,964         1,891,964      
          

 

 

    

 

 

    

 

8


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015 (Continued)

(Unaudited)

 

(a)

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

  

Type of Investment

   (b)
Date
Acquired
     (c)
Equity
    Cost      (d)(f)
Fair
Value
    Percent
of Net
Assets
 

New Monarch Machine Tool, Inc. (g)

Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing)

www.monarchmt.com

   22.84 common shares.      9/24/03         15     22,841         22,841        0.1

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

Buffalo, NY. Maker of patented hollow-metal core golf balls. (Consumer Product)

www.oncoregolf.com

   150,000 Series AA preferred shares.      12/31/14         7     375,000         375,000        1.1

Rheonix, Inc. (e)

Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing. (Health Care)

www.rheonix.com

   9,676 common shares.      10/29/09         5     —           11,000        8.9
   (g) 1,839,422 Series A preferred shares.           2,099,999         2,165,999     
   (g) 50,593 common shares.           —           59,000     
   (g) $680,475.29 convertible promissory notes at 8% due December 31, 2015           680,475         680,475     
          

 

 

    

 

 

   
   Total Rheonix           2,780,474         2,916,474     
          

 

 

    

 

 

   

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company specializing in portable analytical instruments utilizing LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing)

www.sciaps.com

  

187,500 Series A preferred shares.

 

274,299 Series A-1 preferred shares.

     7/12/13         11     1,500,000         1,500,000        6.1
             504,710         504,710     
          

 

 

    

 

 

   
   Total SciAps           2,004,710         2,004,710     
          

 

 

    

 

 

   

SOMS Technologies, LLC (e)(g)

Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products) www.microgreenfilter.com

   5,959,490 Series B membership interests.      12/2/08         9     472,632         528,348        1.6

Teleservices Solutions Holdings, LLC (g)

Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center)

www.ipacesetters.com

   250,000 Class B preferred units.      5/30/14         10     250,000         250,000        4.6
   1,000,000 Class C preferred units.           1,070,680         1,070,680     
   80,000 Class D preferred units.           80,000         80,000     
   104,198 Class E preferred units.           104,198         104,198     
          

 

 

    

 

 

   
   Total Teleservices           1,504,878         1,504,878     
          

 

 

    

 

 

   

Tilson Technology Management, Inc.(g)

Portland, ME. Cellular, fiber optic and wireless information systems, construction, and management. (Professional Services) www.tilsontech.com

   12 Series B preferred shares.      1/20/15         8     600,000         600,000        1.8
Other Affiliate Investments:                
CrowdBouncer, Inc. (e)(g) (Software)    300,000 Series A preferred shares      1/22/14         15     300,000         —          0
          

 

 

    

 

 

   
Subtotal Affiliate Investments            $ 18,139,387       $ 17,374,393     
          

 

 

    

 

 

   
Control Investments – 30.4% of net assets (l)                

Advantage 24/7 LLC (g)

Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company) www.advantage24-7.com

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

Gemcor II, LLC (g)(h)(m)

West Seneca, NY. Designs and sells automatic riveting machines used in the assembly of aircraft. (Manufacturing)

www.gemcor.com

  

$1,000,000 subordinated promissory note at 15% due September 1, 2017.

31.25 membership units.

     6/28/04         31    

 

523,721

625,000

  

  

    

 

523,721

9,300,000

  

  

    30.1
          

 

 

    

 

 

   
   Total Gemcor           1,148,721         9,823,721     
          

 

 

    

 

 

   
Subtotal Control Investments            $ 1,248,221       $ 9,923,221     
          

 

 

    

 

 

   
TOTAL INVESTMENTS – 104.8%            $ 26,488,140       $ 34,258,875     
LIABILITIES IN EXCESS OF OTHER ASSETS – (4.8%)              (1,582,790  
             

 

 

   
NET ASSETS – 100%               $ 32,676,085     
             

 

 

   

 

9


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015 (Continued)

(Unaudited)

Notes to the Consolidated Schedule of Portfolio Investments

 

a) At June 30, 2015, restricted securities represented approximately 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable.
(b) The Date Acquired column indicates the year in which the Corporation acquired its first investment in the company or a predecessor company.
(c) Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.
(d) The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures” which defines fair value and establishes guidelines for measuring fair value. At June 30, 2015, 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 month. 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 which the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).
(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.
(f) As of June 30, 2015, the total cost of investment securities approximated $26.5 million. Net unrealized appreciation was approximately $7.8 million, which was comprised of $9.7 million of unrealized appreciation of investment securities and ($1.9) million related to unrealized depreciation of investment securities. At June 30, 2015, the aggregate gross unrealized gain for federal income tax purposes was $6.3 million and the aggregate gross unrealized loss for federal income tax purposes was ($1.7) million. The net unrealized gain for federal income tax purposes was $4.6 million based on a tax cost of $29.6 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 net of reserves) from investment included as interest receivable on the Corporation’s Statement of Financial Position.
(j) Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments.
(k) Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as those Non-Control investments in companies in which between 5% and 25% of the voting securities are owned by the Corporation.
(l) Control Investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned by the Corporation or where greater than 50% of the board representation is maintained.
(m) Gemcor II, LLC is an “unconsolidated significant subsidiary” as defined in SEC’s Regulation S-X.
(n) Payment in kind represents earned interest that is added to the cost basis of the investment.

 

10


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015 (Continued)

(Unaudited)

 

Investments in and Advances to Affiliates

 

Company

  

Type of Investment

   December 31,
2014 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
    June 30,
2015 Fair
Value
     Amount of
Interest/
Dividend/
Fee
Income

(3)
 

Control Investments:

                

Advantage 24/7 LLC

   53% Membership interest    $ 99,500       $ —         $ —        $ 99,500       $ —     

Gemcor II, LLC

   $1,000,000 subordinated promissory note at 15%      622,800         —           (99,079     523,721         42,420   
   31.25 membership units.      9,300,000         —           —          9,300,000         907,359   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Gemcor      9,922,800         —           (99,079     9,823,721         949,779   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Control Investments    $ 10,022,300       $ —         ($ 99,079   $ 9,923,221       $ 949,779   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Affiliate Investments:

                

Carolina Skiff LLC

   $985,000 Class A preferred membership interest at 9.8%.    $ 985,000       $ —         $ —        $ 985,000       $ 48,265   
   $250,000 subordinated promissory note at 14%      125,000         —           —          125,000         8,750   
   6.0825% Class A common membership interest.      600,000         —           —          600,000         51,512   
     

 

 

    

 

 

      

 

 

    

 

 

 
   Total Carolina Skiff      1,710,000         —           —          1,710,000         108,527   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Chequed.com, Inc.

   408,476 Series A preferred shares.      1,383,222         —           —          1,383,222         —     
   $250,000 convertible promissory note at 8%      250,000         —           —          250,000         9,862   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Chequed      1,633,222         —           —          1,633,222         9,862   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

CrowdBouncer, Inc.

   300,000 Series A preferred shares.      —           —           —          —           —     

First Wave Products Group, LLC

   $500,000 senior term notes at 10%      637,992         18,976         (156,968     500,000         19,476   
   $280,000 junior term notes at 10%      308,687         7,782         (36,469     280,000         8,115   
   Warrant for 41,619 capital securities.      22,000         —           —          22,000         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total First Wave      968,679         26,758         (193,437     802,000         27,591   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

GiveGab, Inc.

   5,084,329 Series Seed preferred shares.      403,388         212,833         —          616,221         —     

G-TEC Natural Gas Systems

   18.545% Class A membership interest. 8% cumulative dividend.      100,000         —           —          100,000         —     

Intrinsiq Materials, Inc.

   599,055 Series 2 preferred shares.      600,002         —           —          600,002         —     
   $95,000 convertible promissory note at 8%      —           95,000         —          95,000         562   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Intrinsiq      600,002         95,000         —          695,002         562   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Knoa Software, Inc.

   973,533 Series A-1 convertible preferred shares.      381,503         —           —          381,503         —     
   1,876,922 Series B preferred shares.      490,752         —           —          490,752         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        872,255         —           —          872,255         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

KnowledgeVision Systems, Inc.

   200,000 Series A-1 preferred shares.      250,000         —           —          250,000         —     
   214,285 Series A-2 preferred shares.      300,000         —           —          300,000         —     
   129,033 Series A-3 preferred shares.      —           165,001         —          165,001         —     
   Warrant for 46,743 Series A-3 shares.      —           35,000         —          35,000         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Knowledge Vision      550,000         200,001         —          750,001         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Mezmeriz, Inc.

   1,554,568 Series seed preferred shares      —           351,477         —          351,477         —     
   $200,000 convertible notes at 8%      200,000         —           (200,000     —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Mezmeriz      200,000         351,477         (200,000     351,477         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Microcision LLC

   $1,500,000 subordinated promissory note at 11%      1,891,964         —           —          1,891,964         104,058   
   15% Class A common membership interest.      —           —           —          —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Microcision      1,891,964         —           —          1,891,964         104,058   
     

 

 

         

 

 

    

 

 

 

New Monarch Machine Tool, Inc.

   22.84 common shares.      22,841         —           —          22,841         1,000   

OnCore Golf Technology, Inc.

   150,000 Series AA preferred shares.      —           375,000         —          375,000         —     

Rheonix, Inc.

   9,676 common shares.      11,000         —           —          11,000         —     
   1,839,422 Series A preferred shares.      2,165,999         —           —          2,165,999         —     
   50,593 common shares.      59,000         —           —          59,000         —     
   $680,475.29 convertible promissory notes at 8%      —           680,475         —          680,475         8,685   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Rheonix      2,235,999         680,475         —          2,916,474         8,685   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

11


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015 (Continued)

(Unaudited)

 

Investments in and Advances to Affiliates

 

Company

  

Type of Investment

   December 31,
2014 Fair
Value
     Gross
Additions

(1)
     Gross
Reductions

(2)
    June 30,
2015 Fair
Value
     Amount of
Interest/
Dividend/
Fee
Income
(3)
 

SciAps, Inc.

   187,500 Series A preferred shares.      1,500,000         —           —          1,500,000         —     
   274,299 Series A-1 preferred shares      —           504,710         —          504,710         4,711   
     

 

 

    

 

 

      

 

 

    

 

 

 
   Total SciAps      1,500,000         504,710         —          2,004,710         4,711   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

SOMS Technologies, LLC

   5,959,490 Series B membership interests.      528,348         —           —          528,348         —     

Teleservices Solutions Holdings, LLC

   250,000 Class B shares.      250,000         —           —          250,000         —     
   1,000,000 Class C shares      1,070,680         —           —          1,070,680         —     
   80,000 Class D preferred units      80,000         —           —          80,000         —     
           

 

 

      
   104,198 Class E preferred units      —           104,198         —          104,198         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Teleservices      1,400,680         104,198           1,504,878         —     
     

 

 

    

 

 

      

 

 

    

 

 

 

Tilson Technology Management, Inc.

   12 Series B preferred shares      —           600,000         —          600,000         6,917   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Affiliate Investments    $ 14,617,378       $ 3,150,452       ($ 393,437   $ 17,374,393       $ 271,913   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Control and Affiliate Investments    $ 24,639,678       $ 3,150,452       ($ 492,516   $ 27,297,614       $ 1,221,692   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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

 

12


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2015 (Continued)

(Unaudited)

 

Industry Classification

   Percentage of Total
Investments (at fair value)
as of June 30, 2015
 

Manufacturing

     46.2

Software

     20.8

Healthcare

     11.3

Contact Center

     8.2

Consumer Product

     8.1

Oil and Gas

     2.3

Professional Services

     1.8

Electronics

     1.0

Marketing

     0.3
  

 

 

 

Total Investments

     100
  

 

 

 

 

13


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2014

 

 

 

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

   (b)
Date
Acquired
     (c)
Equity
    Cost      (d)(f)
Fair
Value
     Percent
of Net
Assets
 
Non-Control/Non-Affiliate Investments – 17.5% of net assets (j)            

BeetNPath, LLC (e)(g)

Ithaca, NY. Frozen entrées made from 100% whole grain steel cut oats. (Consumer Product)

www.grainful.com

   $150,000 convertible promissory note at 6% due October 20, 2016.      10/20/14         —        $ 150,000       $ 150,000         0.5

Crashmob, Inc. (e)(g)

Boston, MA. Mobile marketing platform for engagement, advertising and surveys. (Software)

www.statisfy.co

   500,000 Series seed preferred shares.      8/18/14         4     500,000         500,000         1.5

Empire Genomics, LLC (e)(g)

Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com

   $600,000 senior secured convertible term note at 10% due December 1, 2015.      6/13/14         —          600,000         600,000         1.9

Kinex Pharmaceuticals, Inc. (e)(g)

Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care)

www.kinexpharma.com

   11,574 common shares.      9/8/14         <1     143,285         254,628         0.8

Mercantile Adjustment Bureau, LLC (e)(g)

Williamsville, NY. Full service accounts receivable management and collections company.

(Contact Center)

www.mercantilesolutions.com

  

 

$1,099,039 subordinated secured note at 13% due October 30, 2017.

$150,000 subordinated debenture at 8% due June 30, 2018.

     10/22/12         4     1,070,697         1,070,697         4.1
   Warrant for 3.29% membership interests. Option for 1.5% membership interests.           150,000         150,000      
   (i) Interest receivable $79,025.           97,625         97,625      
          

 

 

    

 

 

    
   Total Mercantile           1,318,322         1,318,322      
          

 

 

    

 

 

    

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

Buffalo, NY. Maker of patented hollow-metal core golf balls. (Consumer Product)

www.oncoregolf.com

   80,000 Series AA preferred shares.      12/31/14         4     200,000         200,000         0.6

SocialFlow, Inc. (e)(g)

New York, NY. Provides instant analysis of social networks using proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com

   1,049,538 Series B preferred shares.
1,204,819 Series B-1 preferred shares.
     4/5/13         4     1,250,000         1,250,000         3.9

Somerset Gas Transmission Company, LLC

Columbus, OH. Natural gas transportation.

(Oil and Gas)

www.somersetgas.com

   26.5337 units.      7/10/02         3     719,097         786,748         2.4

Synacor, Inc. NASDAQ: SYNC (e)(g)(n)(o)

Buffalo, NY. Develops provisioning platforms for aggregation and delivery of content and services across multiple digital devices. (Software)

www.synacor.com

   301,582 unrestricted common shares valued at $2.01 per share.      11/18/02         1     385,680         606,000         1.9
Other Non-Control/Non-Affiliate Investments:                 
DataView, LLC (Software) (e)    Membership Interest      —           —          310,357         —           0.0
UStec/Wi3 (Software) (e)    Common Stock      —           —          100,500         —           0.0
          

 

 

    

 

 

    
Subtotal Non-Control/Non-Affiliate Investments            $ 5,677,241       $ 5,665,698      
          

 

 

    

 

 

    

 

14


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2014 (Continued)

 

 

 

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

   (b)
Date
Acquired
     (c)
Equity
    Cost      (d)(f)
Fair
Value
     Percent
of Net
Assets
 
Affiliate Investments – 45.2% of net assets (k)                 

Carolina Skiff LLC (g)

Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats.

(Consumer Product)

www.carolinaskiff.com

   $985,000 Class A preferred membership interest at 9.8%.      1/30/04         7   $ 985,000       $ 985,000         5.3
   $250,000 subordinated promissory note at 14% due December 31, 2016.           125,000         125,000      
   6.0825% Class A common membership interest.           15,000         600,000      
          

 

 

    

 

 

    
   Total Carolina Skiff           1,125,000         1,710,000      
          

 

 

    

 

 

    

Chequed.com, Inc. (e)(g)

Saratoga Springs, NY. Web based predictive employee selection and reference checking. (Software)

www.chequed.com

   408,476 Series A preferred shares.      11/18/10         16     1,383,222         1,383,222         5.0
   $250,000 convertible promissory note at 8% due December 31, 2015           250,000         250,000      
          

 

 

    

 

 

    
   Total Chequed.com           1,633,222         1,633,222      
          

 

 

    

 

 

    

CrowdBouncer, Inc. (e)(g)

Buffalo, NY. JOBS Act compliance for broker-dealers and crowdfunding portals. (Software)

www.crowdbouncer.com

   300,000 Series A preferred shares.      1/22/14         15     300,000         —           0.0

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

Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Manufacturing)

www.firstwaveproducts.com

  

$500,000 senior term notes at 10% (Payment in Kind (PIK) through May 31, 2015) due December 31, 2016.

$280,000 junior term notes at 10%

     4/19/12         7     637,992         637,992         3.0
   (PIK through May 31, 2015) due December 31, 2016.           308,687         308,687      
   Warrant for 41,619 capital securities.           22,000         22,000      
          

 

 

    

 

 

    
   Total First Wave           968,679         968,679      
          

 

 

    

 

 

    

GiveGab, Inc. (e)(g)

Ithaca, NY. Social network program that connects volunteers with nonprofit organizations. (Software)

www.givegab.com

   2,254,822 Series A preferred shares.      3/13/13         7     403,388         403,388         1.2

G-TEC Natural Gas Systems (e)

Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing)

www.gas-tec.com

   18.545% Class A membership interest. 8% cumulative dividend.      8/31/99         19     400,000         100,000         0.3

Intrinsiq Materials, Inc. (e)(g)

Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing)

www.intrinsiqmaterials.com

   599,055 Series 2 preferred shares.      9/19/13         7     600,002         600,002         1.9

Knoa Software, Inc. (e)(g)

New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software)

www.knoa.com

   973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. (Fully diluted common share equivalent of 3,336,010).      11/20/12         7     1,229,155         872,255         2.7

KnowledgeVision Systems, Inc. (e)(g)

Lincoln, MA. Online presentation and training software. (Software)

www.knowledgevision.com

  

 

200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares.

     11/13/13         5     550,000         550,000         1.7

 

15


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2014 (Continued)

 

 

 

 

(a)

Company, Geographic Location, Business

Description, (Industry) and Website

  

Type of Investment

   (b)
Date
Acquired
     (c)
Equity
    Cost      (d)(f)
Fair
Value
     Percent
of Net
Assets
 

Mezmeriz, Inc. (e)(g)

Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer)

www.mezmeriz.com

   360,526 Series A preferred shares.      1/9/08         8     391,373         0         0.6
   $200,000 convertible notes at 8% due December 31, 2014.           200,000         200,000      
          

 

 

    

 

 

    
   Total Mezmeriz           591,373         200,000      
          

 

 

    

 

 

    

Microcision LLC (g)

Philadelphia, PA. Custom manufacturer of medical and dental implants. (Manufacturing).

www.microcision.com

   $1,500,000 subordinated promissory note at 11% due January 31, 2017.      9/24/09         15     1,891,964         1,891,964         5.8
   15% Class A common membership interest.           —           —        
          

 

 

    

 

 

    
   Total Microcision           1,891,964         1,891,964      
          

 

 

    

 

 

    

New Monarch Machine Tool, Inc. (g)

Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing)

www.monarchmt.com

   22.84 common shares.      9/24/03         15     22,841         22,841         0.1

Rheonix, Inc. (e)(g)

Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing. (Health Care)

www.rheonix.com

   9,676 common shares.      10/29/09         5     —           11,000         6.9
   (g) 1,839,422 Series A preferred shares.           2,099,999         2,165,999      
   (g) 50,593 common shares.           —           59,000      
          

 

 

    

 

 

    
   Total Rheonix           2,099,999         2,235,999      
          

 

 

    

 

 

    

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company specializing in portable analytical instruments utilizing LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing)

www.sciaps.com

   187,500 Series A preferred shares.      7/12/13         9     1,500,000         1,500,000         4.6

SOMS Technologies, LLC (e)(g)

Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products)

www.microgreenfilter.com

   5,959,490 Series B membership interests.      12/2/08         9     472,632         528,348         1.6

Teleservices Solutions Holdings, LLC (g)

Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center)

www.ipacesetters.com

   250,000 Class B preferred units.      5/30/14         9     250,000         250,000         4.3
   1,000,000 Class C preferred units.           1,070,680         1,070,680      
   80,000 Class D preferred units.           80,000         80,000      
          

 

 

    

 

 

    
   Total Teleservices           1,400,680         1,400,680      
          

 

 

    

 

 

    
Subtotal Affiliate Investments            $ 15,188,935       $ 14,617,378      
          

 

 

    

 

 

    
Control Investments – 31.0% of net assets (l)                 

Advantage 24/7 LLC (g)

Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company)

www.advantage24-7.com

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

Gemcor II, LLC (g)(h)(m)

West Seneca, NY. Designs and sells automatic riveting machines used in the assembly of aircraft. (Manufacturing)

www.gemcor.com

   $1,000,000 subordinated promissory note at 15% due September 1, 2017.      6/28/04         31   $ 622,800       $ 622,800         30.7
   31.25 membership units.           625,000         9,300,000      
          

 

 

    

 

 

    
   Total Gemcor           1,247,800         9,922,800      
          

 

 

    

 

 

    
Subtotal Control Investments            $ 1,347,300       $ 10,022,300      
          

 

 

    

 

 

    
TOTAL INVESTMENTS – 93.7%            $ 22,213,476       $ 30,305,376      
          

 

 

       
OTHER ASSETS IN EXCESS OF LIABILITIES – 6.3%              2,048,065      
             

 

 

    
NET ASSETS – 100%               $ 32,353,441      
             

 

 

    

 

16


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2014 (Continued)

 

 

 

 

Notes to the Consolidated Schedule of Portfolio Investments

 

(a) At December 31, 2014, restricted securities represented approximately 98% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable. Freed Maxick CPAs, P.C. has not audited the business descriptions of the portfolio companies.
(b) The Date Acquired column indicates the year in which the Corporation acquired its first investment in the company or a predecessor company. Freed Maxick CPAs, P.C. has not audited the date acquired of the portfolio companies.
(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. Freed Maxick CPAs, P.C. has not audited the equity percentages of the portfolio companies. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.
(d) The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements” which defines fair value and establishes guidelines for measuring fair value. At December 31, 2014, ASC 820 designates 2% of the Corporation’s investments as “Level 1” and 98% 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 month. 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 which the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).
(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.
(f) As of December 31, 2014, the total cost of investment securities approximated $22.2 million. Net unrealized appreciation was approximately $8.1 million, which was comprised of $9.9 million of unrealized appreciation of investment securities and ($1.8) million related to unrealized depreciation of investment securities. At December 31, 2014, the aggregate gross unrealized gain for federal income tax purposes was $6.1 million and the aggregate gross unrealized loss for federal income tax purposes was ($1.5) million. The net unrealized gain was $4.6 million based on a tax cost of $25.8 million.
(g) Rand Capital SBIC, Inc. investment.
(h) Reduction in cost and value from previously reported balances reflects current principal repayment.
(i) Represents interest due (amounts over $50,000 net of reserves) from investment included as interest receivable on the Corporation’s Statement of Financial Position.
(j) Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments.
(k) Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as those Non-Control investments in companies in which between 5% and 25% of the voting securities are owned.
(l) Control Investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned or where greater than 50% of the board representation is maintained.
(m) Gemcor II, LLC is an “unconsolidated significant subsidiary” as defined in SEC’s Regulation S-X.
(n) Publicly owned company.
(o) On December 31, 2014, the Corporation’s shares of Synacor were valued at $2.01 per share in accordance with the Corporation’s valuation policy for unrestricted publicly held securities (Level 1). See Synacor’s publicly disclosed financial reports at sec.gov for additional information on Synacor’s industry, financial results and business operations.
(p) Payment in kind 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, 2014 (Continued)

 

 

 

 

Investments in and Advances to Affiliates

 

Company

  

Type of Investment

   December 31,
2013 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
    December 31,
2014 Fair
Value
     Amount of
Interest/
Dividend/
Fee

Income (3)
 

Control Investments:

                

Advantage 24/7 LLC

   53% Membership interest    $ 99,500       $ —         $ —        $ 99,500       $ 41,695   

Gemcor II, LLC

   $500,000 subordinated promissory note at 15%      110,194         —           (110,194     0         6,279   
   $1,000,000 subordinated promissory note at 15%      800,125         —           (177,325     622,800         105,939   
   31.25 membership units.      9,300,000         —           —          9,300,000         1,516,822   
     

 

 

       

 

 

   

 

 

    

 

 

 
   Total Gemcor      10,210,319            (287,519     9,922,800         1,629,040   
     

 

 

       

 

 

   

 

 

    

 

 

 

NDT Acquisitions

   Common Stock      —           5,336         (5,336     —           2,668   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Control Investments    $ 10,309,819       $ 5,336         (292,855   $ 10,022,300       $ 1,673,403   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Affiliate Investments:

                

Carolina Skiff LLC

   $985,000 Class A preferred membership interest at 9.8%.    $ 985,000       $ —         $ —        $ 985,000       $ 96,530   
   $250,000 subordinated promissory note at 14%      250,000         —           (125,000     125,000         29,701   
   6.0825% Class A common membership interest.      600,000         —           —          600,000         54,089   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Carolina Skiff      1,835,000         —           (125,000     1,710,000         180,320   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Chequed.com, Inc.

   408,476 Series A preferred shares.      1,033,222         350,000         —          1,383,222         —     
   $250,000 convertible promissory note at 8%      —           250,000         —          250,000         767   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Chequed      1,033,222         600,000         —          1,633,222         767   
     

 

 

    

 

 

      

 

 

    

 

 

 

CrowdBouncer, Inc.

   270,000 Series A preferred shares.      —           300,000         (300,000     —           —     

First Wave Products Group, LLC

   $500,000 senior term notes at 10%      571,301         66,691         —          637,992         68,524   
   $280,000 junior term notes at 10%      204,533         104,154         —          308,687         24,154   
   Warrant for 41,619 capital securities.      22,000         —           —          22,000         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total First Wave      797,834         170,845         —          968,679         92,678   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

GiveGab, Inc.

   2,254,822 Series A preferred shares.      250,000         153,388         —          403,388         —     

G-TEC Natural Gas Systems

  

18.545% Class A membership interest.

8% cumulative dividend.

     100,000         —           —          100,000         —     

Intrinsiq Materials, Inc.

   599,055 Series 2 preferred shares.      600,002         —           —          600,002         —     

Knoa Software, Inc.

  

973,533 Series A-1 convertible preferred shares.

1,876,922 Series B preferred shares.

(Fully diluted common share equivalent of 3,336,010).

     750,000         479,155         (356,900     872,255         1,391   

KnowledgeVision Systems, Inc.

   200,000 Series A-1 preferred shares      250,000         —           —          250,000         —     
   214,285 Series A-2 preferred shares      —           300,000         —          300,000      
     

 

 

    

 

 

    

 

 

   

 

 

    
   Total Knowledge Vision      250,000         300,000         —          550,000      
     

 

 

    

 

 

    

 

 

   

 

 

    

Mezmeriz, Inc.

   360,526 Series A preferred shares.      391,373         —           (391,373     —           —     
   Convertible notes at 8% due December 31, 2014.      200,000         —           —          200,000         —     
     

 

 

       

 

 

   

 

 

    
   Total Mezmeriz      591,373            (391,373     200,000      
     

 

 

       

 

 

   

 

 

    

Microcision LLC

   $1,500,000 subordinated promissory note at 11% due January 31, 2017.      1,891,965         —           (1     1,891,964         208,116   
   Class A common membership interest.      —           —           —          —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Microcision      1,891,965         —           (1     1,891,964         208,116   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

New Monarch Machine Tool, Inc.

   22.84 common shares.      22,841         —           —          22,841         47,682   

QuaDPharma, LLC

   $556,285.22 second note allonge at 10%      556,285         —           (556,285     —           59,332   
   141.75 Class A units of membership interest.      350,000            (350,000     —           —     
     

 

 

       

 

 

      

 

 

 
   Total QuaDPharma      906,285            (906,285     —           59.332   
     

 

 

       

 

 

      

 

 

 

Rheonix, Inc.

   9,676 common shares.      11,000         —           —          11,000         —     
   1,839,422 Series A preferred shares.      2,165,999         —           —          2,165,999         —     
   50,593 common shares.      59,000         —           —          59,000         —     
     

 

 

         

 

 

    
   Total Rheonix      2,235,999              2,235,999      
     

 

 

         

 

 

    

SciAps, Inc.

   187,500 Series A preferred shares.      1,000,000         500,000         —          1,500,000         —     

SOMS Technologies, LLC

   5,959,490 Series B membership interests.      528,348         —           —          528,348         —     

 

18


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2014 (Continued)

 

 

 

 

Investments in and Advances to Affiliates

 

Company

  

Type of Investment

   December 31,
2013 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
    December 31,
2014 Fair
Value
     Amount of
Interest/
Dividend/
Fee Income

(3)
 

Teleservices

   250,000 Class B shares.      —           250,000         —          250,000         —     

Solutions Holdings,

   1,000,000 Class C shares      —           1,070,680         —          1,070,680         98,952   

LLC

   80,000 Class D preferred units      —           80,000         —          80,000         —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Teleservices      —           1,400,680         —          1,400,680         98,952   
        

 

 

      

 

 

    

 

 

 
   Total Affiliate Investments    $ 12,792,869         3,904,068         (2,079,559   $ 14,617,378       $ 689,238   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   Total Control and Affiliate Investments    $ 23,102,688       $ 3,909,404       ($ 2,372,414   $ 24,639,678       $ 2,362,641   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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 investment, 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.
(2) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, and net increases in unrealized depreciation and net decreases in unrealized appreciation.
(3) Represents the total amount of interest, fees or dividends credited to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2014 (Continued)

(Unaudited)

 

 

 

 

Industry Classification

   Percentage of Total
Investments (at fair value)
as of December 31, 2014
 

Manufacturing

     49.5

Software

     19.2

Healthcare

     10.2

Contact Center

     9.0

Consumer Product

     8.5

Oil and Gas

     2.6

Electronics

     0.7

Marketing

     0.3
  

 

 

 

Total Investments

     100
  

 

 

 

 

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Rand Capital Corporation and Subsidiary

Notes to the Consolidated Financial Statements

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)

Note 1. ORGANIZATION

Rand Capital Corporation (“Rand”, “we”, “us” and “our”) was incorporated under the laws of New York in February 1969. We completed our initial public offering in 1971 as an internally managed, closed-end, diversified, management investment company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets” and provide managerial assistance to the portfolio companies in which we invest. See Item 1. Business – Regulation, Regulation as a Business Development Company in our Annual Report on Form 10-K for the year ended December 31, 2014.

We make the majority of our investments through our wholly-owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which operates as a small business investment company (“SBIC”) and has been licensed by the U.S. Small Business Administration (“SBA”) since 2002. 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. On February 28, 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC and in March 2012, 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.

We operate as an internally managed investment company whereby our officers and employees conduct the business of the Corporation under the general supervision of our Board of Directors. We have not elected to qualify to be taxed as a regulated investment company as defined under Subchapter M of the Internal Revenue Code.

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

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”.

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, and cash flows 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 not misleading. Our interim results for the six months ended June 30, 2015 are not necessarily indicative of the results for our full year.

 

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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, 2014. Information contained in this filing should also be reviewed in conjunction with our related filings with the SEC prior to the date of this report. Those filings include, but are not limited to, the following:

 

N-54A    Election to Adopt Business Development Company status
DEF-14A    Definitive Proxy Statement submitted to shareholders
Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2014
Form 10-Q    Quarterly Report on Form 10-Q for the quarters ended March 31, 2015, September 30, 2014 and June 30, 2014

Principles of Consolidation—The consolidated financial statements include the accounts of Rand and its wholly-owned subsidiary Rand SBIC. All intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments – The carrying amounts reported in the consolidated statement of financial position of cash, interest receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments.

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 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.

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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After reviewing our portfolio companies’ performance and the circumstances surrounding the investment, the Corporation ceased accruing interest income on First Wave Products Group, LLC in 2015 and G-TEC Natural Gas Systems in 2004.

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 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 holds preferred equity securities that contain cumulative dividend provisions. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred 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 Rand SBIC financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $9,000 and $4,256 for the six months ended June 30, 2015 and 2014, respectively. The board fees were $5,000 and $7,000 for the six months ended June 30, 2015 and 2014, respectively.

Original Issue Discount – Investments may include “original issue discount” or OID income. This occurs when the Corporation simultaneously purchases a warrant and a note or debt instrument from a portfolio company, 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 $7,746 in OID income for each of the six months ended June 30, 2015 and 2014. OID income is estimated to be approximately $8,000 for the remainder of 2015, $12,000 for 2016 and $8,000 for 2017.

Deferred Debenture Costs - SBA debenture origination and commitment costs, which are included in other assets, are amortized ratably over the terms of the SBA debentures and are expensed when the debt is repaid. Amortization expense for the six months ended June 30, 2015 and 2014 was $13,700 and $11,438, respectively. Amortization over the next five years is estimated to be approximately $27,000 per year.

SBA Debenture - The Corporation had $8,000,000 in outstanding SBA debentures at June 30, 2015 and December 31, 2014 with a weighted average interest rate of 3.54% as of June 30, 2015. The $8,000,000 in outstanding SBA leverage matures from 2022 through 2025.

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, which may include our automatic consent to the appointment of SBA or its designee as receiver under Section 311(c) of the Small Business Investment Act of 1958.

Fair Value of SBA Debentures - In March 2015, the SBA pooled its debenture borrowings and they were put to market and competitively priced. The market rate for these debentures was set at 2.517% excluding a mandatory SBA annual charge estimated to be 0.804%, resulting in a total estimated fixed rate for ten years of 3.321%. The carrying value of SBA debentures is a reasonable estimate of fair value because stated interest rates approximate current interest rates that are available for debt with similar terms.

 

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

Supplemental Cash Flow Information - Income taxes paid, net of refunds, during the six months ended June 30, 2015 and 2014 was $2,344,600 and $1,512,891, respectively. Interest paid during the six months ended June 30, 2015 and 2014 was $128,650 and $98,913, respectively. The Corporation converted $32,669 and $89,271 of interest receivable into investments during the six months ended June 30, 2015 and 2014, respectively.

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

Stockholders’ Equity (Net Assets) - At June 30, 2015 and December 31, 2014, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

On October 23, 2014, the Board of Directors extended the repurchase authorization for up to 1,000,000 shares of the Corporation’s outstanding common stock on the open market through October 23, 2015 at prices that are no greater than the then current net asset value. No shares were repurchased during the six months ended June 30, 2015 and the total treasury shares held was 534,496 shares with a total cost of $1,447,491 at June 30, 2015. Therefore, at June 30, 2015, the Corporation had authorization to purchase up to an additional 465,504 shares of common stock.

Profit Sharing and Stock Option Plan - In 2001, the stockholders of the Corporation authorized the establishment of an Employee Stock Option Plan (the “Option Plan”), that provides for the award of stock options to purchase up to 200,000 common shares to eligible employees. In 2002, the Corporation placed the Option Plan on inactive status as it developed a new profit sharing plan for the Corporation’s employees in connection with the formation of its SBIC subsidiary. As of June 30, 2015, 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.

There were no amounts earned pursuant to the Plan for the six months ended June 30, 2015 and June 30, 2014, respectively. During the year ended December 31, 2014, the Corporation approved and accrued $899,500 under the Plan, of which $717,500 was paid during the six months ended June 30, 2015. During the year ended December 31, 2013, the Corporation approved and accrued $887,244 under the Plan, of which $784,560 was paid during the six months ended June 30, 2014.

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.

 

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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 related to tax expense for the six months ended June 30, 2015 or 2014.

The Corporation’s uncertain tax positions are not material and are not expected to change significantly within the next 12 months.

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

At June 30, 2015, Gemcor II, LLC (Gemcor), Rheonix, Inc. (Rheonix), SciAps, Inc. (Sciaps), Microcision, LLC (Microcision) and Social Flow, Inc. (Social Flow) represented 29%, 9%, 6%, 6% and 5%, respectively, of the fair value of the Corporation’s investment portfolio.

Note 3. INVESTMENTS

The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.

Loan investments are defined as traditional loan financings with no equity features. Debt investments are defined as debt financings that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. A financing may also be categorized as a debt financing if it is accompanied by the direct purchase of an equity interest in the company.

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

 

    Loan and debt securities are valued at cost when it is representative of the fair value of the investment or sufficient assets or liquidation proceeds are expected to exist from a sale of a portfolio company at its estimated fair value.

The loan and debt securities may also be valued at an amount other than the price the security would command in order to provide a yield to maturity equivalent to the current yield of similar debt securities. 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 “market approach” or “income approach.” 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.

 

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Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable and significant inputs to determining the fair value.

Financial assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

Any changes in estimated fair value are recorded in the statement of operations as “Net (decrease) increase in unrealized appreciation on investments.”

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.

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

 

    Financial information obtained from each portfolio company, including 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 past sales transactions;

 

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

 

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

 

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

 

    Qualitative assessment of key management;

 

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

 

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

This information is used to determine financial condition, performance, and valuation of the portfolio companies. The valuation may be reduced if a portfolio company’s performance and potential have deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.

Equity Securities

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

 

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Another key factor used in valuing equity investments is a significant recent arms-length equity transaction with a non-strategic unrelated new investor entered into by the portfolio company. 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, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing the Corporation to depart from this basis.

Loan and Debt Securities

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

The following table provides a summary of the significant unobservable inputs used to fair value the Corporation’s Level 3 portfolio investments as of June 30, 2015:

 

Investment Type

   Market
Approach

EBITDA
Multiple
     Market
Approach

Liquidation
Seniority
     Market
Approach

Revenue
Multiple
     Market
Approach
Transaction
Pricing
     Black Scholes
Pricing Model
Stock Pricing
& Volatility
     Face Value
Liquidation
Seniority
     Totals  

Non-Control/Non-Affiliate Equity

   $ 786,748       $ —         $ —         $ 2,597,245       $ 97,625       $ —         $ 3,481,618   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Control/Non-Affiliate Debt

     —           —           —           —           —           3,479,643         3,479,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate

   $ 786,748       $ —         $ —         $ 2,597,245       $ 97,625       $ 3,479,643       $ 6,961,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Equity

   $ 2,113,348       $ 22,841       $ 100,000       $ 11,293,765       $ 22,000       $ —         $ 13,551,954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Debt

     —           —           —           —           —           3,822,439         3,822,439   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate

   $ 2,113,348       $ 22,841       $ 100,000       $ 11,293,765       $ 22,000       $ 3,822,439       $ 17,374,393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Control Equity

   $ 9,399,500       $ —         $ —         $ —         $ —         $ —         $ 9,399,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Control Debt

     —           —           —           —           —           523,721         523,721   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Control

   $ 9,399,500       $ —         $ —         $ —         $ —         $ 523,721       $ 9,923,221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Level 3 Investments

   $ 12,299,596       $ 22,841       $ 100,000       $ 13,891,010       $ 119,625       $ 7,825,803       $ 34,258,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Range

     4.5X-10X         1X         1X         Not Applicable       $ 1.13         Not Applicable      

Weighted Average

     5X         1X         1X         Not Applicable       $ 1.13         Not Applicable      

 

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The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value on a Recurring Basis at June 30, 2015:

 

       Fair Value Measurements at Reported Date Using  

Description

   June 30,
2015
     Quoted Prices in
Active Markets for
Identical Assets

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

Loan investments

   $ 523,720       $ —         $ —         $ 523,720   

Debt investments

     7,302,083         —           —           7,302,083   

Equity investments

     26,433,072         —           —           26,433,072   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,258,875       $ —         $ —         $ 34,258,875   
  

 

 

          

 

 

 

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value on a Recurring Basis at December 31, 2014:

 

       Fair Value Measurements at Reported Date Using  

Description

   December 31,
2014
     Quoted Prices in
Active Markets
for Identical Assets

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

Loan investments

   $ 622,801       $ —         $ —         $ 622,801   

Debt investments

     5,384,339         —           —           5,384,339   

Equity investments

     24,298,236         606,000         —           23,692,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,305,376       $ 606,000       $ 0       $ 29,699,376   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the six months ended June 30, 2015:

 

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

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
     Total  

Ending Balance, December 31, 2014, of Level 3 Assets

   $ 622,801       $ 5,384,339       $ 23,692,236       $ 29,699,376   

Unrealized Gains or Losses included in net change in net assets from operations

           

First Wave Products Group, LLC (First Wave)

     —           (193,436      —           (193,436

Kinex Pharmaceuticals, Inc.

     —           —           92,592         92,592   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Unrealized Gains and Losses

     —           (193,436      92,592         (100,844

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

           

First Wave

     —           26,758         —           26,758   

Genicon, Inc. (Genicon)

     —           —           500,000         500,000   

GiveGab, Inc. (Give Gab)

     —           —           212,833         212,833   

HealthTeacher, Inc. (Health Teacher)

     —           1,003,949         25         1,003,974   

Intrinsiq Material, Inc. (Intrisiq)

     —           95,000         —           95,000   

KnowledgeVision Systems, Inc. (Knowledge Vision)

     —           —           200,001         200,001   

Mercantile Adjustment Bureau, LLC (Mercantile)

     —           4,998         —           4,998   

Mezmeriz, Inc. (Mezmeriz)

     —           (200,000      351,477         151,477   

OnCore Golf Technology, Inc. (Oncore Golf)

     —           —           175,000         175,000   

Rheonix, Inc. (Rheonix)

     —           680,475         —           680,475   

SciAps, Inc. (Sciaps)

     —           —           504,710         504,710   

SocialFlow, Inc. (Social Flow)

     —           500,000         —           500,000   

Teleservices Solutions Holdings, LLC (Teleservices)

     —           —           104,198         104,198   

Tilson Technology Management, Inc. (Tilson)

     —           —           600,000         600,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     —           2,111,180         2,648,244         4,759,424   

Repayments of Securities

           

Gemcor II, LLC (Gemcor)

     (99,081      —           —           (99,081
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Repayments of Securities

     (99,081      —           —           (99,081

Transfers within Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, June 30, 2015, of Level 3 Assets

   $ 523,720       $ 7,302,083       $ 26,433,072       $ 34,258,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Change in unrealized appreciation on investments for the period included in changes in net assets ($100,844)

Net realized (losses) on investments for the period included in changes in net assets $ -

The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the six months ended June 30, 2014:

 

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

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
     Total  

Ending Balance, December 31, 2013, of Level 3 Assets

   $ 1,466,604       $ 4,172,417       $ 21,655,032       $ 27,294,053   

Realized Losses included in net

change in net assets from operations

           

EmergingMed.com, Inc. (Emerging Med)

     —           (778,253      —           (778,253

Liazon Corporation (Liazon)

     —           —           (476,334      (476,334
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Realized Losses

     —           (778,253      (476,334      (1,254,587

Unrealized Gains or Losses included in net change in net assets from operations

           

BinOptics Corporation (Binoptics)

     —           —           1,200,001         1,200,001   

Emerging Med

     —           778,253         —           778,253   

Knoa Software, Inc. (Knoa)

     —           —           (356,900      (356,900

Mezmeriz, Inc. (Mezmeriz)

     —           —           (391,373      (391,373
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Unrealized Gains and Losses

     —           778,253         451,728         1,229,981   

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

           

Chequed.com, Inc. (Chequed)

     —           —           350,000         350,000   

CrowdBouncer, LLC (Crowdbouncer)

     —           —           270,000         270,000   

Empire Genomics, LLC (Empire Genomics)

     —           600,000         —           600,000   

First Wave Products Group, LLC (First Wave)

     —           43,003         —           43,003   

GiveGab, Inc. (Give Gab)

     —           —           153,388         153,388   

Knoa

     —           —           479,155         479,155   

Liazon

     —           —           476,334         476,334   

Mercantile Adjustment Bureau, LLC (Mercantile)

     —           154,998         47,625         202,623   

SciAps, Inc. (Sciaps)

     —           —           500,000         500,000   

SocialFlow, Inc. (Social Flow)

     —           —           750,000         750,000   

Teleservices Solutions Holdings, LLC (Teleservices Holdings)

     —           —           1,250,000         1,250,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     —           798,001         4,276,502         5,074,503   

Repayments of Securities

           

Gemcor II, LLC (Gemcor)

     (150,469      —           —           (150,469
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Repayments of Securities

     (150,469      —           —           (150,469

Transfers within Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, June 30, 2014, of Level 3 Assets

   $ 1,316,135       $ 4,970,418       $ 25,906,928       $ 32,193,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in unrealized appreciation for the period included in changes in net assets

  

   $ 1,229,981   

Total realized (losses) for the period included in changes in net assets

  

   ($ 1,254,587

 

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NOTE 4. - OTHER ASSETS

At June 30, 2015 and December 31, 2014 other assets was comprised of the following:

 

     June 30,
2015
     December 31,
2014
 

Escrow receivable from BinOptics Corporation

   $ 1,510,248       $ 1,510,248   

Deferred debenture costs, net

     213,327         227,027   

Prepaid expenses

     79,635         —     

Equipment (net)

     11,810         14,558   

Operating receivables

     2,257         2,027   

Dividend receivable

     —           37,978   

Escrow receivable from Ultra-Scan

     —           32,962   
  

 

 

    

 

 

 

Total other assets

   $ 1,817,277       $ 1,824,800   
  

 

 

    

 

 

 

During 2014, the Corporation sold its investment in BinOptics Corporation and a portion of the proceeds are held in escrow and scheduled to be released during 2016. During 2013, the Corporation sold its investment in Ultra-Scan Corporation (Ultra-Scan) and a portion of the sales proceeds were held in escrow and released in the first quarter of 2015.

Note 5. COMMITMENTS AND CONTINGENCIES

The Corporation did not have any commitments to fund any investments as of June 30, 2015.

 

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Note 6. UNCONSOLIDATED SIGNIFICANT SUBSIDIARY

In accordance with the SEC’s Regulation S-X Rule 4.08(g), the Corporation has an unconsolidated significant subsidiary that is not required to be consolidated. Accordingly, certain comparative financial information is presented below.

 

     For the six month periods ended (Unaudited)  
     June 30, 2015
(in thousands)
     June 30, 2014
(in thousands)
 

Income Statement:

     

Net sales

   $ 19,289       $ 13,166   

Gross profit

   $ 4,329         3,022   

Net income

   $ 3,130         1,742   

 

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Note 7. FINANCIAL HIGHLIGHTS

The following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the six months ended June 30, 2015 and the year ended December 31, 2014:

 

     Six months ended
June 30, 2015
(Unaudited)
    Year ended
December 31,
2014
 

Income from investment operations (1):

    

Investment income

   $ 0.22      $ 0.40   

Operating expenses

     0.13        0.39   
  

 

 

   

 

 

 

Investment income before income taxes

     0.09        0.01   

Income tax expense

     0.03        0.01   
  

 

 

   

 

 

 

Net investment income

     0.06        0.00   

Purchase of treasury stock (2)

     0.00        0.02   

Net realized and unrealized (loss) gain on investments

     (0.01     0.71   
  

 

 

   

 

 

 

Increase in net asset value

     0.05        0.73   

Net asset value, beginning of period

     5.11        4.38   
  

 

 

   

 

 

 

Net asset value, end of period

   $ 5.16      $ 5.11   
  

 

 

   

 

 

 

Per share market price, end of period

   $ 3.94      $ 4.09   
  

 

 

   

 

 

 

Total return based on market value

     (3.67 %)      33.2

Total return based on net asset value

     1.00     15.26

Supplemental data:

    

Ratio of operating expenses before income taxes to average net assets

     2.54     8.27

Ratio of operating expenses including income taxes to average net assets

     3.01     16.28

Ratio of net investment income to average net assets

     1.11     0.07

Portfolio turnover

     14.8     21.5

Net assets, end of period

   $ 32,676,085      $ 32,353,441   

Weighted shares outstanding, end of period

     6,328,538        6,391,175   

 

(1) Per share data are based on weighted average shares outstanding and the results are rounded to the nearest cent.
(2) Net increase is due to purchase of common stock at prices less than beginning of period net asset value per share.

The Corporation’s interim period results could fluctuate as a result of a number of factors; therefore results for any interim period should not be relied upon as being indicative of performance for the full year or in future periods.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.

FORWARD LOOKING STATEMENTS

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by us from time to time, and forward-looking statements may be included in documents that are filed with the Securities and Exchange Commission. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of the our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part II, Item 1A of this report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

There may be other factors not identified that affect the accuracy of our forward-looking statements. Further, any forward-looking statement speaks only as of the date when it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and we cannot predict all of them.

Overview

We are an internally managed investment company that lends to and invests in small and medium-sized companies primarily in connection with loans or investments made concurrently by other investors. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. We make the majority of our investments through our wholly-owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which operates as a small business investment company (“SBIC”) and has been licensed by the U.S. Small Business Administration (“SBA”) since 2002. We anticipate that most, if not all, of our investments made in the next year will be originated through Rand SBIC.

Outlook

At the end of the second quarter of 2015, we had approximately $6.5 million in cash on hand available for future investments. We believe the combination of cash on hand and prospective investment income provides sufficient capital for us to continue to add new investments to our portfolio while still reinvesting in existing portfolio companies that continue to demonstrate growth potential. The following short and long-term trends provide us with confidence in our ability to grow Rand:

 

    We believe that economic conditions in the United States are stable, and we expect that well run businesses should be able to compete effectively given the low cost of capital, strengthening business and consumer spending, and eager reception of new technologies and service concepts.

 

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    Given our increased scale we are able to invest larger amounts in companies, which will provide us with an opportunity to accelerate our rate of growth.

 

    We continue to manage risk by investing alongside other investors, when possible.

 

    We seek to be actively involved with the management and governance of our portfolio companies, which enables us to support their operating and marketing efforts and to facilitate their growth.

 

    As our portfolio continues to expand, our operating expenses will decline as a percentage of net asset value.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. A summary of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2014 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Financial Condition

 

Overview:    6/30/15      12/31/14      (Decrease)
Increase
     % (Decrease)
Increase
 

Total assets

   $ 42,952,570       $ 45,525,987       ($ 2,573,417      (5.7 %) 

Total liabilities

     10,276,485         13,172,546         (2,896,061      (22.0 %) 
  

 

 

    

 

 

    

 

 

    

Net assets

   $ 32,676,085       $ 32,353,441       $ 322,644         1.0
  

 

 

    

 

 

    

 

 

    

Net asset value per share (NAV) was $5.16 at June 30, 2015 and $5.11 at December 31, 2014.

Our outstanding SBA debentures at June 30, 2015 were $8,000,000 and will mature from 2022 to 2025. Cash approximated 20% of net assets at June 30, 2015 as compared to 41% at December 31, 2014.

Composition of the Our Investment Portfolio

Our financial condition is dependent on the success of our portfolio holdings. We have invested substantially all of our assets in small to medium-sized companies. The following summarizes our investment portfolio at the dates indicated.

 

     6/30/15      12/31/14      Increase
(Decrease)
     % Increase
(Decrease)
 

Investments, at cost

   $ 26,488,140       $ 22,213,476       $ 4,274,664         19.2

Unrealized appreciation, net

     7,770,735         8,091,900         (321,165      (4.0 %) 
  

 

 

    

 

 

    

 

 

    

Investments at fair value

   $ 34,258,875       $ 30,305,376       $ 3,953,499         13.0
  

 

 

    

 

 

    

 

 

    

Our total investments at fair value, as estimated by management and approved by our Board of Directors, approximated 105% of net assets at June 30, 2015 versus 94% of net assets at December 31, 2014.

The change in investments during the six months ended June 30, 2015, at cost, is comprised of the following:

 

     Cost
Increase
(Decrease)
 

New investments:

  

HealthTeacher, Inc. (Health Teacher)

   $ 1,000,025   

Rheonix, Inc. (Rheonix)

     680,475   

Tilson Technology Management, Inc. (Tilson)

     600,000   

Genicon, Inc. (Genicon)

     500,000   

SocialFlow, Inc. (Social Flow)

     500,000   

SciAps, Inc. (Sciaps)

     499,999   

GiveGab, Inc. (Give Gab)

     212,833   

Knowledge Vision Systems Inc. (Knowledge Vision)

     200,001   

OnCore Golf Technology, Inc. (Oncore Golf)

     175,000   

Mezmeriz, Inc. (Mezmeriz)

     151,477   

Teleservices Solutions Holdings, LLC (Teleservices)

     104,198   

Intrinsiq Materials, Inc. (Intrisiq)

     95,000   
  

 

 

 

Total of new investments

     4,719,008   

Other changes to investments:

  

First Wave Products Group, LLC (First Wave) interest conversion and OID amortization

     26,758   

Mercantile Adjustment Bureau, LLC (Mercantile) OID amortization

     4,998   

Sciaps interest conversion

     4,711   

Health Teacher interest conversion

     3,949   
  

 

 

 

Total of other changes to investments

     40,416   

Investments repaid, sold or liquidated

  

Gemcor II, LLC (Gemcor) repayment

     (99,080

Synacor, Inc. (Synacor) shares sold

     (385,680
  

 

 

 

Total investments repaid, sold or liquidated

     (484,760
  

 

 

 

Net change in investments, at cost

   $ 4,274,664   
  

 

 

 

 

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Table of Contents

Results of Operations

Investment Income

Our investment objective is to achieve long-term capital appreciation on our equity investments while investing in a mixture of debenture and equity instruments. The debenture instruments are intended to provide a current return on a portion of our investment portfolio. The equity investments in our portfolio are structured to realize capital appreciation over the long-term.

Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014

 

     June 30,
2015
     June 30,
2014
     (Decrease)
Increase
     %
(Decrease)
Increase
 

Interest from portfolio companies

   $ 369,293       $ 394,476       ($ 25,183      (6.4 %) 

Interest from other investments

     15,190         8,197         6,993         85.3

Dividend and other investment income

     961,788         775,577         186,211         24.0

Fee income

     14,000         11,256         2,744         24.4
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 1,360,271       $ 1,189,506       $ 170,765         14.4
  

 

 

    

 

 

    

 

 

    

Interest from portfolio companies - Our portfolio interest income decreased during the six months ended June 30, 2015 versus the six months ended June 30, 2014 due to decreases in the principal balances on loan and debt investments with Gemcor, II, LLC (Gemcor) and Carolina Skiff, LLC (Carolina Skiff), respectively.

After reviewing the portfolio company’s performance and the circumstances surrounding our investment, we ceased accruing interest income on First Wave Products Group, LLC (First Wave) during 2015.

Interest from other investments - The increase in interest from other investments is primarily due to higher average cash balances during the six months ended June 30, 2015 versus the same period in 2014.

Dividend and other investment income - Dividend income is comprised of distributions from limited liability companies (LLCs) and corporations in which we have invested. Our investment agreements with certain LLCs require those LLCs to distribute funds to us for payment of income taxes on our allocable share of the LLC’s profits. These portfolio companies may also elect to make additional discretionary distributions. Dividend income will fluctuate based upon the profitability of these LLCs and corporations and the timing of the distributions.

Dividend income for the six months ended June 30, 2015 consisted of distributions from Gemcor for $903,359, Carolina Skiff for $51,512, and Tilson Technology Management, Inc. (Tilson) for $6,917. Dividend income for the six months ended June 30, 2014 consisted of distributions from Gemcor for $682,981, Monarch Machine Tool LLC (Monarch) for $45,682, Carolina Skiff for $44,383 and Somerset Gas Transmission Company, LLC (Somerset) for $2,531.

Fee income - Fee income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financings and income associated with portfolio company board attendance fees. The financing fees are amortized ratably over the life of the instrument associated with the fees. The unamortized fees are carried on the balance sheet under the line item “Deferred revenue.”

 

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The income associated with the amortization of financing fees was $9,000 and $4,256 for the six months ended June 30, 2015 and 2014, respectively. The income from board fees was $5,000 and $7,000 for the six months ended June 30, 2015 and 2014, respectively.

Operating Expenses

Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014

 

     June 30,
2015
     June 30,
2014
     Increase      % Increase  

Total operating expenses

   $ 825,277       $ 756,320       $ 68,957         9.1

Operating expenses predominately consist of interest expense on outstanding SBA borrowings, compensation expense, and general and administrative expenses including stockholder and office operating expenses and professional fees.

The 9.1% or approximately $69,000 increase in total operating expenses for the six months ended June 30, 2015 as compared to the same six month period in 2014 is due to an increase in interest expense and bonus and profit sharing expense. The SBA interest expense increased due to higher outstanding balances on the SBA debt during the first six months of 2015 versus the same period in 2014. The increase in our bonus and profit sharing expense of $45,635 is due to a reduction in the Liazon Corporation escrow receivable amount during the six months ended June 30, 2014 to reflect the amount actually received from escrow in the second quarter of 2014. There was no such adjustment during the six months ended June 30, 2015.

Realized Gains and Losses on Investments

Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014

 

     June 30,
2015
     June 30,
2014
     Increase  

Realized gain (loss) on investments before income taxes

   $ 262,925       ($ 1,225,192    $ 1,488,117   

During the six months ended June 30, 2015, we recognized a net realized gain, before income taxes, of $262,925 on the sale of 301,582 shares of Synacor, Inc. (Synacor). Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. As of June 30, 2015, we do not own any shares of Synacor.

During the six months ended June 30, 2014, we recognized a realized loss of $778,253 on our investment in Emerging Med.com when it was sold during January 2014. We did not receive any proceeds from the sale. We also recognized a loss of $476,334 due to an adjustment to the Liazon Corporation escrow receivable during the six months ended June 30, 2014.

During the six months ended June 30, 2014, the Corporation recognized a realized gain of $29,395 on the sale of 25,000 shares of Synacor, Inc. (Synacor). We owned 403,643 shares of Synacor at June 30, 2014.

Change in Unrealized Appreciation of Investments

Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014

 

     June 30,
2015
     June 30,
2014
     Decrease  

Change in unrealized appreciation before income taxes

   ($ 321,164    $ 1,266,231       ($ 1,587,395

 

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The decrease in unrealized appreciation before income taxes for the six months ended June 30, 2015 was comprised of the following:

 

     June 30,
2015
 

Kinex Pharmaceuticals, Inc. (Kinex)

   $ 92,592   

First Wave Products Group, LLC (First Wave)

     (193,436

Synacor, Inc. (Synacor) reclass to a realized gain

     (220,320
  

 

 

 

Total change in net unrealized appreciation of investments before income taxes during the six months ended June 30, 2015

   ($ 321,164
  

 

 

 

In accordance with our valuation policy, we increased the value of our holdings in Kinex based on a significant equity financing during 2015 by a new non-strategic outside investor that had a higher valuation for Kinex than its prior financing rounds.

The First Wave investment was revalued after our management reviewed the portfolio company and its financial condition and determined that a valuation adjustment was necessary.

Synacor, as a publicly traded stock, is marked to market at the end of each quarter. We sold our remaining shares of Synacor during the six months ended June 30, 2015.

The increase in unrealized appreciation for the six months ended June 30, 2014 was comprised of the following:

 

     June 30,
2014
 

BinOptics Corporation (Binoptics)

   $ 1,200,001   

EmergingMed.com, Inc. (Emerging Med) – reclass to a realized loss

     778,253   

Synacor, Inc. (Synacor)

     36,250   

Mezmeriz, Inc. (Mezmeriz)

     (391,373

Knoa Software, Inc. (Knoa)

     (356,900
  

 

 

 

Total change in net unrealized appreciation during the six months ended June 30, 2014

   $ 1,266,231   
  

 

 

 

The value of our investment in Binoptics was increased in accordance with ASC 820 due to an overall improvement in the revenues and financial performance of the company.

The Emerging Med investment was written off during the six months ended June 30, 2014, after the company was sold and we did not receive any proceeds.

Synacor, as a publicly traded stock, is marked to market at the end of each quarter. We valued our 403,643 shares of Synacor at a three day average bid price of $2.62 as of June 30, 2014.

The Mezmeriz investment was revalued during the six months ended June 30, 2014 after our management reviewed the portfolio company and its financial condition and determined that the business of this portfolio company had deteriorated since the time of the original funding. The portfolio company remains in operation and is developing new business strategies.

The valuation of Knoa was decreased during the second quarter of 2014 to value our equity holdings at the price of the most recent insider round of financing.

All of these value adjustments resulted from a review by management using the guidance set forth by ASC 820 and our established valuation policy.

 

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Net Increase in Net Assets from Operations

We account for our operations under GAAP for investment companies. The principal measure of our financial performance is “net increase (decrease) in net assets from operations” on our consolidated statements of operations. For the six months ended June 30, 2015 and 2014, the net increase in net assets from operations was $322,644 and $350,163, respectively.

Liquidity and Capital Resources

Our principal objective is to achieve growth in net asset value per share through capital appreciation. Therefore, a significant portion of our investment portfolio is structured to maximize the potential for capital appreciation and certain portfolio investments may be structured to provide little or no current yield in the form of dividends or interest payments.

As of June 30, 2015, our total liquidity was $6,520,170 in cash.

Management expects that the cash on hand at June 30, 2015, coupled with the scheduled interest payments from our portfolio investments, will be sufficient to meet our liquidity needs through the next twelve months. Future exits from portfolio companies may increase the amount of liquidity available for new investments, operating activities and future SBA debenture obligations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our investment activities contain elements of risk. The portion of our investment portfolio consisting of equity and debt securities in private companies is subject to valuation risk. Because there is typically no public market for the equity and debt securities in which we invest, the valuation of the equity interests in the portfolio is stated at “fair value” as determined in good faith by our management and approved by our Board of Directors. This is in accordance with our investment valuation policy (see the discussion of valuation policy contained in “Note 3.-Investments” in the consolidated financial statements contained in Item 1 of this report, which is hereby incorporated herein by reference.) In the absence of readily ascertainable market values, the estimated value of the portfolio may differ significantly from the values that would be placed on the portfolio if a ready market for the investments existed. Any changes in valuation are recorded on the consolidated statement of operations as “Net (decrease) increase in unrealized appreciation on investments.”

At times a portion of our portfolio may include marketable securities traded in the over-the-counter market. In addition, there may be a portion of the portfolio for which no regular trading market exists. In order to realize the full value of a security, the market must trade in an orderly fashion or a willing purchaser must be available when a sale is to be made. Should an economic or other event occur that would not allow markets to trade in an orderly fashion, we may not be able to realize the fair value of our marketable investments or other investments in a timely manner.

As of June 30, 2015, we did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of June 30, 2015. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s controls and procedures were effective as of June 30, 2015.

 

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Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during the Corporation’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

See Part I, Item 1A, “Risk Factors,” of the Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

 

Period

   Total number of
shares purchased (1)
     Average price paid
per share (2)
     Total number of shares
purchased as part of
publicly
announced plan (3)
     Maximum number of
shares that may yet
be purchased under
the share repurchase
program
 

4/1/2015 – 4/30/2015

     —           —           —           465,504   

5/1/2015 – 5/31/2015

     —           —           —           465,504   

6/1/2015 – 6/30/2015

     —           —           —           465,504   

 

(1) There were no shares repurchased during the second quarter of 2015.
(2) The average price paid per share is calculated on a settlement basis and includes commission.
(3) On October 23, 2014, the Board of Directors extended the repurchase authorization of up to 1,000,000 shares of the Corporation’s common stock on the open market at prices no greater than the then current net asset value through October 23, 2015.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

  (a) Exhibits

The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.

 

(3)(i)   Certificate of Incorporation of the Corporation, incorporated by reference to Exhibit (a) (1) and (a) (2) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. (File No. 333-25617).
(3)(ii)   By-laws of the Corporation, incorporated by reference to Exhibit (b) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. (File No. 333-25617).
(4)   Specimen certificate of common stock certificate, incorporated by reference to Exhibit (d) (1) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. (File No. 333-25617).
(31.1)   Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, filed herewith
(31.2)   Certification of Chief Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, filed herewith
(32.1)   Section 1350 Certifications – Rand Capital Corporation – furnished herewith

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 4, 2015

 

RAND CAPITAL CORPORATION
By:  

/s/ Allen F. Grum

  Allen F. Grum, President
By:  

/s/ Daniel P. Penberthy

  Daniel P. Penberthy, Treasurer

 

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