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RAND CAPITAL CORP - Quarter Report: 2016 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, 2016

 

¨ 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 2, 2016, 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, 2016 (Unaudited) and December 31, 2015

     3   
 

Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2016 and 2015 (Unaudited)

     4   
 

Consolidated Statements of Changes in Net Assets for the Three Months and Six Months Ended June 30, 2016 and 2015 (Unaudited)

     5   
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

     6   
 

Consolidated Schedule of Portfolio Investments as of June 30, 2016 (Unaudited)

     7   
 

Consolidated Schedule of Portfolio Investments as of December 31, 2015

     15   
 

Notes to the Consolidated Financial Statements (Unaudited)

     23   

Item 2.

 

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

     34   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     40   

Item 4.

 

Controls and Procedures

     41   
PART II – OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     42   

Item 1A.

 

Risk Factors

     42   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     42   

Item 3.

 

Defaults upon Senior Securities

     42   

Item 4.

 

Mine Safety Disclosures

     42   

Item 5.

 

Other Information

     42   

Item 6.

 

Exhibits

     43   

 

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, 2016 and December 31, 2015

 

     June 30, 2016
(Unaudited)
    December 31,
2015
 

ASSETS

    

Investments at fair value:

    

Control investments (cost of $99,500 and $1,141,472, respectively)

   $ 1,512,000      $ 13,916,472   

Affiliate investments (cost of $16,708,952 and $17,663,217, respectively)

     12,824,154        14,662,219   

Non-Control/Non-Affiliate investments (cost of $13,468,832 and $8,606,053, respectively)

     13,321,933        8,253,709   
  

 

 

   

 

 

 

Total investments, at fair value (cost of $ 30,277,284 and $27,410,742, respectively)

     27,658,087        36,832,400   

Cash

     14,376,673        5,844,795   

Interest receivable (net of allowance: $122,000 at 6/30/16 and 12/31/15)

     254,801        215,224   

Deferred tax asset

     633,086        —     

Prepaid income taxes

     —          65,228   

Other assets

     1,650,534        1,604,413   
  

 

 

   

 

 

 

Total assets

   $ 44,573,181      $ 44,562,060   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

    

Liabilities:

    

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

   $ 7,814,073      $ 7,800,373   

Income tax payable

     1,417,888        —     

Deferred tax liability

     —          2,361,186   

Profit sharing and bonus payable

     1,593,659        282,000   

Accounts payable and accrued expenses

     249,177        238,911   

Deferred revenue

     60,336        25,930   
  

 

 

   

 

 

 

Total liabilities

     11,135,133        10,708,400   

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 as of 6/30/16 and 12/31/15

     686,304        686,304   

Capital in excess of par value

     10,581,789        10,581,789   

Accumulated net investment loss

     (1,261,104     (24,580

Undistributed net realized gain on investments

     26,629,373        18,262,401   

Net unrealized (depreciation) appreciation on investments

     (1,750,823     5,795,237   

Treasury stock, at cost; 534,496 shares as of 6/30/16 and 12/31/15

     (1,447,491     (1,447,491
  

 

 

   

 

 

 

Total stockholders’ equity (net assets) (per share 6/30/16: $5.28, 12/31/15: $5.35)

     33,438,048        33,853,660   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 44,573,181      $ 44,562,060   
  

 

 

   

 

 

 

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, 2016 and 2015

(Unaudited)

 

     Three months
ended

June 30, 2016
    Three months
ended
June 30, 2015
    Six months
ended
June 30, 2016
    Six months
ended
June 30, 2015
 

Investment income:

      

Interest from portfolio companies:

      

Control investments

   $ —        $ 20,275      $ 11,828      $ 42,420   

Affiliate investments

     94,614        96,522        159,575        211,651   

Non-Control/Non-Affiliate investments

     68,527        66,422        129,632        115,222   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from portfolio companies

     163,141        183,219        301,035        369,293   

Interest from other investments:

      

Non-Control/Non-Affiliate investments

     18,648        8,369        21,709        15,190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from other investments

     18,648        8,369        21,709        15,190   

Dividend and other investment income:

      

Control investments

     —          491,208        —          903,359   

Affiliate investments

     33,232        29,061        80,797        58,429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other investment income

     33,232        520,269        80,797        961,788   

Fee income:

      

Control investments

     —          2,000        2,000        4,000   

Affiliate investments

     1,167        416        1,862        1,833   

Non-Control/Non-Affiliate investments

     4,318        4,251        7,234        8,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     5,485        6,667        11,096        14,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     220,506        718,524        414,637        1,360,271   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Salaries

     155,437        149,555        310,875        299,110   

Bonus and profit sharing

     —          —          1,411,659        —     

Employee benefits

     36,711        29,394        126,222        59,801   

Directors’ fees

     47,380        29,300        94,755        51,050   

Professional fees

     86,288        20,433        151,048        93,502   

Stockholders and office operating

     61,542        55,717        124,036        115,114   

Insurance

     6,258        6,300        17,518        17,554   

Corporate development

     16,055        14,400        31,525        31,381   

Other operating

     2,375        2,224        5,975        5,874   
  

 

 

   

 

 

   

 

 

   

 

 

 
     412,046        307,323        2,273,613        673,386   

Interest on SBA obligations

     77,570        77,569        155,139        151,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     489,616        384,892        2,428,752        825,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment (loss) income before income taxes

     (269,110     333,632        (2,014,115     534,994   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense

     (114,564 )      101,920        (777,591     173,987   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment (loss) income

     (154,546     231,712        (1,236,524     361,007   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain on investments:

      

Control investments

     —          —          13,176,313        —     

Non-Control/Non-Affiliate investments

     168,140        131,181        168,140        262,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain before income taxes

     168,140        131,181        13,344,453        262,925   

Income tax expense

     34,520        42,591        4,977,481        89,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain on investments

     133,620        88,590        8,366,972        173,183   

Net change in unrealized depreciation or appreciation on investments:

      

Control investments

     —          —          (11,362,500     —     

Affiliate investments

     (325,000     (193,436     (747,800     (193,436

Non-Control/Non-Affiliate investments

     69,444        (73,219     69,444        (127,728
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized depreciation or appreciation before income taxes

     (255,556     (266,655     (12,040,856     (321,164

Deferred income tax benefit

     (78,390     (89,449     (4,494,796     (109,618
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in unrealized depreciation or appreciation on investments

     (177,166 )      (177,206     (7,546,060     (211,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain on investments

     (43,546     (88,616     820,912        (38,363
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

   ($ 198,092   $ 143,096      ($ 415,612   $ 322,644   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     6,328,538        6,328,538        6,328,538        6,328,538   

Basic and diluted net (decrease) increase in net assets per share from operations

   ($ 0.03   $ 0.02      ($ 0.07   $ 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, 2016 and 2015

(Unaudited)

 

     Three months
ended

June 30, 2016
    Three months
ended

June 30, 2015
    Six months
ended

June 30, 2016
    Six months
ended

June 30, 2015
 

Net assets at beginning of period

   $ 33,636,140      $ 32,532,989      $ 33,853,660      $ 32,353,441   

Net investment (loss) income

     (154,546     231,712        (1,236,524     361,007   

Net realized gain on investments

     133,620        88,590        8,366,972        173,183   

Net change in unrealized depreciation or appreciation on investments

     (177,166     (177,206     (7,546,060     (211,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

     (198,092     143,096        (415,612     322,644   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (decrease) increase in net assets

     (198,092     143,096        (415,612     322,644   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 33,438,048      $ 32,676,085      $ 33,438,048      $ 32,676,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated net investment loss

   ($ 1,261,104   ($ 506,475   ($ 1,261,104   ($ 506,475
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2016 and 2015

(Unaudited)

 

     Six months
ended
June 30, 2016
    Six months
ended
June 30, 2015
 

Cash flows from operating activities:

    

Net (decrease) increase in net assets from operations

   ($ 415,612   $ 322,644   

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

    

Investments in portfolio companies

     (3,898,466     (4,719,008

Proceeds from sale of investments

     13,969,453        648,605   

Proceeds from loan repayments

     416,972        99,080   

Change in unrealized depreciation or appreciation on investments

     12,040,856        321,164   

Deferred tax (benefit) expense

     (2,994,272     24,113   

Realized gain on portfolio investments

     (13,344,453     (262,925

Depreciation and amortization

     16,692        16,448   

Original issue discount amortization

     (4,998     (7,746

Change in interest receivable allowance

     —          (6,311

Non-cash conversion of debenture interest

     (5,051     (32,669

Changes in operating assets and liabilities:

    

Increase in interest receivable

     (39,577     (36,036

Increase in other assets

     (49,113     (8,925

Decrease (increase) in prepaid income taxes

     65,228        (148,807

Increase (decrease) in income taxes payable

     1,417,888        (2,065,795

Increase (decrease) in accounts payable and accrued expenses

     10,266        (106,629

Increase (decrease) in profit sharing and bonus payable

     1,311,659        (758,750

Increase in deferred revenue

     34,406        11,000   
  

 

 

   

 

 

 

Total adjustments

     8,947,490        (7,033,191
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     8,531,878        (6,710,547
  

 

 

   

 

 

 

Net increase (decrease) in cash

     8,531,878        (6,710,547

Cash:

    

Beginning of period

     5,844,795        13,230,717   
  

 

 

   

 

 

 

End of period

   $ 14,376,673      $ 6,520,170   
  

 

 

   

 

 

 

See accompanying notes

 

6


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016

(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 – 39.8% of

net assets: (j)

                

Athenex, Inc. (e)(g)

(Formerly Kinex Pharmaceuticals, Inc.)

Buffalo, NY. Specialty pharmaceutical and drug

development. (Health Care)

www.athenex.com

   46,296 common shares.      9/8/14         <1%        $143,285         $416,664       1.2%

City Dining Cards, Inc. (Loupe) (e)(g)

Buffalo, NY. Customer loyalty technology company

that helps businesses attract and retain customers.

(Software)

www.loupeapp.io

   9,525.25 Series B preferred shares.      9/1/15         4%        500,000         500,000       1.5%

eHealth Global Technologies, Inc. (g)

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

(Health Care)

www.ehealthtechnologies.com

   $1,500,000 senior subordinated
secured term loan at 9% due
September 2, 2019.
     6/28/16         0%        1,500,000         1,500,000       4.5%

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

  

$900,000 senior secured
convertible term notes at 10% due
April 1, 2017.

$250,000 promissory note at 12%
due December 31, 2019.

(i) Interest receivable $140,182.

     6/13/14         <1%     

 

 

 

 

 

 

 

900,000

 

250,000

 

 

  

 

  

  

 

 

 

 

 

 

 

900,000

 

250,000

 

 

  

 

  

   3.4%
   Total Empire           1,150,000         1,150,000      

GoNoodle, Inc. (g)

(Formerly HealthTeacher, Inc.)

Nashville, TN. Student engagement education

software providing core aligned physical activity

breaks. (Software)

www.gonoodle.com

  

$1,000,000 secured note at 12%
due January 31, 2020, (1%
Payment in Kind (PIK)).

Warrant for 47,324 Series C
Preferred shares.

     2/6/15         <1%     

 

 

 

 

 

 

 

1,014,025

 

            25

 

 

  

 

  

  

 

 

 

 

 

 

 

1,014,025

 

            25

 

 

  

 

  

   3.0%
   Total GoNoodle           1,014,050         1,014,050      

Mercantile Adjustment Bureau, LLC (g)

Williamsville, NY. Full service accounts receivable

management and collections company.

(Contact Center)

www.mercantilesolutions.com

  

$1,099,039 subordinated secured
note at 13% (3% for the calendar
year 2016) due October 30, 2017.
(e) $150,000 subordinated
debenture at 8% due June 30,
2018.

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

(i) Interest receivable $66,610.

     10/22/12         4%     

 

 

 

 

 

 

 

 

 

 

1,085,692

 

150,000

 

 

  97,625

 

 

  

 

  

 

 

  

  

 

 

 

 

 

 

 

 

 

 

1,085,692

 

0

 

 

              0

 

 

  

 

  

 

 

  

   3.2%
   Total Mercantile           1,333,317         1,085,692      

Outmatch (e)(g)

(Chequed Holdings, LLC)

Saratoga Springs, NY. Web based predictive employee

selection and reference checking. (Software)

www.outmatch.com

  

2,353,854 Class P1 Units.

109,788 Class C1 Units.

Total Outmatch

     11/18/10         4%       

 

 

2,140,007

        5,489

2,145,496

  

  

  

    

 

 

2,140,007

        5,489

2,145,496

  

  

  

   6.4%

Rheonix, Inc. (e)

Ithaca, NY. Developer of fully automated microfluidic

based molecular assay and diagnostic testing devices.

(Health Care)

www.rheonix.com

  

9,676 common shares.

(g) 1,839,422 Series A preferred
shares. (g) 50,593 common
shares.

(g) 589,420 Series B preferred
shares.

     10/29/09         4%       

 

 

 

 

 

-

2,099,999

-

 

 

   702,732

  

  

  

 

 

  

    

 

 

 

 

 

11,000

2,165,999

59,000

 

 

   702,732

  

  

  

 

 

  

   8.8%
   Total Rheonix           2,802,731         2,938,731      

 

7


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (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

SocialFlow, Inc. (e)(g)

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

  

1,049,538 Series B preferred shares.

1,204,819 Series B-1 preferred shares.

717,772 Series C preferred shares.

Total Social Flow

   4/5/13    4%    

 

 

 

500,000

750,000

   500,000

1,750,000

  

  

  

  

    

 

 

 

731,431  

839,648  

   500,221  

2,071,300  

  

  

  

  

   6.2%

Somerset Gas Transmission Company, LLC (e)

Columbus, OH. Natural gas transportation.

(Oil and Gas)

www.somersetgas.com

   26.5337 units.    7/10/02    3%     719,097         500,000         1.5%
Other Non-Control/Non-Affiliate Investments:                 
DataView, LLC (Software) (e)    Membership Interest    -    -     310,357         -         0.0%
UStec/Wi3 (Manufacturing) (e)    Common Stock.    -    -     100,500         -         0.0%
          

 

 

    
Subtotal Non-Control/Non-Affiliate Investments             $ 13,468,833       $ 13,321,933        
          

 

 

    
Affiliate Investments – 38.4% of net assets (k)                 

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

Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product)

www.grainful.com

  

1,119,024 Series A-2 Preferred
Membership Units.

$150,000 convertible promissory note
at 8% due September 1, 2017.

Total BeetNPath

   10/20/14    9%  

 

 

 

 

 

 

$359,000

 

150,000

509,000

 

  

 

  

  

  

 

 

 

 

 

 

$359,000  

 

150,000  

509,000  

 

  

 

  

  

   1.5%

Carolina Skiff LLC (g)

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

(Manufacturing)

www.carolinaskiff.com

   6.0825% Class A common
membership interest.
   1/30/04    7%     15,000         600,000         1.8%

ClearView Social, Inc. (e)(g)

Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software)

www.clearviewsocial.com

   312,500 Series seed plus preferred shares.    1/4/16    6%     200,000         200,000         0.6%

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

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

www.firstwaveproducts.com

  

$500,000 senior term notes at 10% due
December 31, 2016.

$280,000 junior term notes at 10% due
December 31, 2016.

Warrant for 41,619 capital securities.

Total First Wave

   4/19/12    7%  

 

 

 

 

 

 

 

661,563

 

316,469

     22,000

1,000,032

 

  

 

  

  

  

  

 

 

 

 

 

 

 

250,000  

 

0  

           0  

250,000  

 

  

 

  

  

  

   0.7%

Genicon, Inc. (g)

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

www.geniconendo.com

  

1,586,902 Series B preferred shares.

$1,100,000 senior term loans at 12%
due April 1, 2019.

Total Genicon

   4/10/15    6%    

 

 

 

1,000,000

 

1,100,000

2,100,000

  

 

  

  

    

 

 

 

1,000,000  

 

1,100,000  

2,100,000  

  

 

  

  

   6.3%

GiveGab, Inc. (e)(g)

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

www.givegab.com

   5,084,329 Series Seed preferred shares.    3/13/13    9%     616,221         424,314         1.3%

G-TEC Natural Gas Systems (e)

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

www.gas-tec.com

   17.845% Class A membership interest.
8% cumulative dividend.
   8/31/99    18%     400,000         100,000         0.3%

 

8


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (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

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 March 31, 2016.

Total Intrinsiq

   9/19/13    7%    

 

 

 

600,002

 

  95,000

695,002

  

 

  

  

    

 

 

 

0

 

95,000

95,000

  

 

  

  

   0.3%

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.

$48,466 convertible promissory note at
8% due May 9, 2018.

Total Knoa

   11/20/12    7%  

 

 

 

 

 

 

 

750,000

479,155

 

     48,466

1,277,621

 

  

  

 

  

  

  

 

 

 

 

 

 

 

0

449,455

 

  48,466

497,921

 

  

  

 

  

  

   1.5%

KnowledgeVision Systems, Inc. (e)(g)

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

www.knowledgevision.com

  

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

129,033 Series A-3 preferred shares.

Warrant for 46,743 Series A-3 shares.

Total KnowledgeVision

   11/13/13    7%    

 

 

 

 

250,000

300,000

165,001

  35,000

750,001

  

  

  

  

  

    

 

 

 

 

0

300,000

165,001

  35,000

500,001

  

  

  

  

  

   1.5%

Mezmeriz, Inc. (e)(g)

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

www.mezmeriz.com

   1,554,565 Series Seed preferred shares.    1/9/08    15%     742,850         351,477       1.1%

Microcision LLC (g)

Philadelphia, PA. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing)

www.microcision.com

  

$1,500,000 subordinated promissory
note at 11% due January 31, 2017.

15% Class A common membership
interest.

Total Microcision

   9/24/09    15%  

 

 

 

 

 

 

1,891,964

 

              -

1,891,964

 

  

 

  

  

  

 

 

 

 

 

 

1,891,964

 

              -

1,891,964

 

  

 

  

  

   5.7%

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.

$300,000 subordinated convertible promissory notes at 6% due January 24, 2017.

Total OnCore

   12/31/14    7%    

 

 

 

 

375,000

 

 

300,000

675,000

  

 

 

  

  

    

 

 

 

 

187,500

 

 

300,000

487,500

  

 

 

  

  

   1.5%

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing)

www.sciaps.com

  

187,500 Series A convertible preferred shares.

274,299 Series A-1 convertible
preferred shares.

117,371 Series B preferred shares.

$200,000 subordinated convertible note
at 10% due April 8, 2017

Total SciAps

   7/12/13    9%  

 

 

 

 

 

 

 

 

 

1,500,000

 

504,710

250,000

 

   200,000

2,454,710

 

  

 

  

  

 

  

  

  

 

 

 

 

 

 

 

 

 

1,000,000

 

504,710

250,000

 

   200,000

1,954,710

 

  

 

  

  

 

  

  

   5.8%

SOMS Technologies, LLC (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%

Statisfy, Inc. (e)(g)

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

www.statisfy.co

  

65,000 Series seed preferred shares.

Warrant for 1,950,000 Series seed preferred shares.

Total Statisfy

   8/18/14    10%    

 

 

 

20,968

 

629,032

650,000

  

 

  

  

    

 

 

 

10,484

 

314,516

325,000

  

 

  

  

   1.0%

 

9


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (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

Teleservices Solutions Holdings, LLC (g)(m)

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

www.ipacesetters.com

 

250,000 Class B preferred units.

1,000,000 Class C preferred units.

80,000 Class D preferred units.

104,198 Class E preferred units.

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

Total Teleservices

   5/30/14    6%    

 

 

 

 

 

 

250,000

1,190,680

91,200

   104,198

 

 

1,636,078

  

  

  

  

 

 

  

    

 

 

 

 

 

 

0  

1,190,680  

91,200  

   104,198  

 

 

1,386,078  

  

  

  

  

 

 

  

   4.1%

Tilson Technology Management, Inc.(g)

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

www.tilsontech.com

  12 Series B preferred shares.    1/20/15    8%     600,000         600,000         1.8%
         

 

 

    
Subtotal Affiliate Investments                 $16,708,952         $12,824,154        
         

 

 

    
Control Investments – 4.5% of net assets (l)                

Advantage 24/7 LLC (e)(g)

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

www.advantage24-7.com

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

Gemcor II, LLC (e)(g)

West Seneca, NY. Holding company following sale of business in March 2016. (Manufacturing)

www.gemcor.com

  Escrow receivable due from sale of business in March 2016.    6/28/04    31%     0         1,412,500         4.2%
         

 

 

    
Subtotal Control Investments             $99,500         $1,512,000        
         

 

 

    
TOTAL INVESTMENTS – 82.7%             $30,277,285         $27,658,087        

OTHER ASSETS IN EXCESS OF

LIABILITIES – 17.3%

               5,779,961        
            

 

 

    
NET ASSETS – 100%                    $33,438,048        
            

 

 

    

 

10


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (Continued)

(Unaudited)

 

Notes to the Consolidated Schedule of Portfolio Investments

 

(a) At June 30, 2016, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable.
(b) The Date Acquired column indicates the year in which the Corporation first acquired an investment in the company or a predecessor company.
(c) Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.
(d) The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At June 30, 2016, 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 that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).
(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.
(f) As of June 30, 2016, the total cost of investment securities was approximately $30.3 million. Net unrealized depreciation was approximately $2.6 million, which was comprised of $2.8 million of unrealized appreciation of investment securities and ($5.4) million of unrealized depreciation of investment securities. At June 30, 2016, the aggregate gross unrealized gain for federal income tax purposes was $3.0 million and the aggregate gross unrealized loss for federal income tax purposes was ($5.1) million. The net unrealized loss for federal income tax purposes was $2.1 million based on a tax cost of $29.8 million.
(g) Rand Capital SBIC, Inc. investment.
(h) Reduction in cost and value from previously reported balances reflects current principal repayment. There were no principal repayments during the three months ended June 30, 2016.
(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) Payment in kind (PIK) represents earned interest that is added to the cost basis of the investment.

 

11


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (Continued)

(Unaudited)

 

  Investments in and Advances to Affiliates

 

Company

 

  

Type of Investment

 

   December 31,
2015 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
     June 30, 2016
Fair Value
    

Amount of
Interest/

Dividend/

Fee Income
(3)

 

Control Investments:

                 

Advantage 24/7 LLC

   53% Membership interest.      $99,500         $              -         $                -         $99,500         $              -   

Gemcor II, LLC

  

$1,000,000 subordinated promissory note at 15%.

31.25 membership units.

Escrow receivable due from sale of business.

    

 

 

416,972

13,400,000

                -

  

  

  

    

 

 

-

-

1,412,500

  

  

  

    

 

 

(416,972)

(13,400,00)

                -

  

  

  

    

 

 

-

-

1,412,500

  

  

  

    

 

 

11,828

2,000

                -

  

  

  

   Total Gemcor        13,816,972         1,412,500         (13,816,972)         1,412,500         13,828   
   Total Control Investments        $13,916,472         $1,412,500         ($13,816,972)         $1,512,000         $13,828   

Affiliate Investments:

                 

BeetNPath, LLC

  

1,119,024 Series A-2 Preferred Membership Units.

$150,000 convertible promissory note at 8%.

    

 

$359,000

              -

  

  

    

 

$             -

150,000

  

  

    

 

$                -

                -

  

  

    

 

$359,000

  150,000

  

  

    

 

$            -

            -

  

  

   Total BeetNPath        $359,000         $150,000         $              -         $509,000                     -   

Carolina Skiff LLC

   6.0825% Class A common membership interest.      600,000         -         -         600,000         63,583   

ClearView Social, Inc.

   312,500 Series seed plus preferred shares.      -         200,000         -         200,000         -   

First Wave Products Group, LLC

  

$500,000 senior term notes at 10%.

$280,000 junior term notes at 10%.

Warrant for 41,619 capital securities.

    

 

 

250,000

-

            -

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

250,000

-

            -

  

  

  

    

 

 

666

-

      -

  

  

  

   Total First Wave        250,000         -         -         250,000           666   

Genicon, Inc.

  

1,586,902 Series B preferred shares.

$1,100,000 senior term loans at 12%.

    

 

1,000,000

              -

  

  

    

 

-

1,100,000

  

  

     -        

 

1,000,000

1,100,000

  

  

    

 

1,196

42,234

  

  

   Total Genicon        1,000,000         1,100,000         -         2,100,000         43,430   

GiveGab, Inc.

   5,084,329 Series Seed preferred shares.      424,314         -         -         424,314         -   

G-TEC Natural Gas Systems

   17.845% Class A membership interest. 8% cumulative dividend.      100,000         -         -         100,000         -   

Intrinsiq Materials, Inc.

  

599,055 Series 2 preferred shares.

$95,000 convertible promissory note at 8%.

    

 

-

95,000

  

  

    

 

-

-

  

  

    

 

-

-

  

  

    

 

-

95,000

  

  

    

 

-

-

  

  

   Total Intrinsiq        95,000         -         -         95,000         -   

Knoa Software, Inc.

  

973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares.

$48,466 convertible promissory note at 8%.

    

 

 

381,503

490,752

            -

  

  

  

    

 

 

-

-

48,466

  

  

  

    

 

 

(381,503)

(41,297)

            -

  

  

  

    

 

 

-

449,455

  48,466

  

  

  

    

 

 

-

-

560

  

  

  

   Total Knoa        872,255         48,466         (422,800)         497,921         560   

KnowledgeVision
Systems, Inc.

  

200,000 Series A-1 preferred shares.

214,285 Series A-2 preferred shares.

129,033 Series A-3 preferred shares.

Warrant for 46,743 Series A-3 shares.

    

 

 

 

-

300,000

165,001

  35,000

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

    

 

 

 

-

300,000

165,001

  35,000

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

   Total Knowledge Vision        500,001         -         -         500,001         -   

Mezmeriz, Inc.

   1,554,565 Series seed preferred shares.      351,477         -         -         351,477         -   

Microcision LLC

  

$1,500,000 subordinated promissory note at 11%.

15% Class A common membership interest.

    

 

1,891,964

              -

  

  

    

 

-

-

  

  

    

 

-

-

  

  

    

 

1,891,964

              -

  

  

    

 

104,059

            -

  

  

   Total Microcision        1,891,964         -         -         1,891,964         104,059   

New Monarch Machine Tool, Inc.

   22.84 common shares.      22,841         -         -         22,841         -   

OnCore Golf
Technology, Inc.

  

150,000 Series AA preferred shares.

$300,000 subordinated convertible promissory notes at 6%.

    

 

187,500

150,000

  

  

    

 

-

150,000

  

  

    

 

-

-

  

  

    

 

187,500

300,000

  

  

    

 

-

12,723

  

  

   Total OnCore        337,500         150,000         -         487,500         12,723   

 

12


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (Continued)

(Unaudited)

 

  Investments in and Advances to Affiliates

 

Company    Type of Investment    December 31,
2015 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
    June 30, 2016
Fair Value
    

Amount of
Interest/

Dividend/

Fee
Income (3)

 

Rheonix, Inc.

  

9,676 common shares.

1,839,422 Series A preferred shares.

50,593 common shares.

589,420 Series B preferred shares.

    

 

 

 

11,000

2,165,999

59,000

   702,732

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

    

 

 

 

(11,000

(2,165,999

(59,000

(702,732


   

 

 

 

-

-

-

-

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

   Total Rheonix        2,938,731         -         (2,938,731     -         -   

SciAps, Inc.

  

187,500 Series A convertible preferred shares.

274,299 Series A-1 convertible preferred shares.

117,371 Series B preferred shares.

$200,000 subordinated promissory note at 10%.

    

 

 

 

1,000,000

504,710

250,000

               -

  

  

  

  

    

 

 

 

-

-

-

200,000

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

   

 

 

 

1,000,000

504,710

250,000

200,000

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

   Total SciAps        1,754,710         200,000         -        1,954,710         -   

SOMS Technologies, LLC

   5,959,490 Series B membership interests.      528,348         -         -        528,348         13,464   

Statisfy, Inc.

  

65,000 Series seed preferred shares.

Warrant for 1,950,000 Series seed preferred shares.

    

 

20,968

629,032

  

  

    

 

-

-

  

  

    

 

-

(325,000

  

   

 

20,968

304,032

  

  

    

 

-

-

  

  

   Total Statisfy        650,000         -         (325,000     325,000         -   

Teleservices Solutions Holdings, LLC

  

250,000 Class B shares.

1,000,000 Class C shares.

80,000 Class D preferred units.

104,198 Class E preferred units.  

    

 

 

 

-

1,190,680

91,200

    104,198

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

   

 

 

 

-

1,190,680

91,200

   104,198

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

   Total Teleservices      1,386,078         -         -        1,386,078      

Tilson Technology Management, Inc.

   12 Series B preferred shares.      600,000         -         -        600,000         3,750   
   Total Affiliate Investments        $14,662,219         $1,848,466         ($3,686,531     $12,824,154         $242,235   
   Total Control and Affiliate Investments        $28,578,691         $3,260,966         ($17,503,503     $14,336,154         $256,063   
                                              

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, and the movement of an existing portfolio company into this category and out of another category.
(2) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement of an existing portfolio company out of this category and into another category.
(3) Represents the total amount of interest, fees or dividends credited to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.

 

13


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

June 30, 2016 (Continued)

(Unaudited)

 

Industry Classification   

Percentage of Total
    Investments (at fair value)    

as of June 30, 2016

Healthcare

   30.2%

Software

   27.8%

Manufacturing

   22.0%

Contact Center

   8.9%

Consumer Product

   5.5%

Professional Services

   2.2%

Oil and Gas

   1.8%

Electronics

   1.2%

Marketing

   0.4%
  

 

Total Investments

   100%
  

 

 

14


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015

 

(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 – 24.4% of net assets: (j)                 

Athenex, Inc. (e)(g)

(Formerly Kinex Pharmaceuticals, Inc.)

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

www.athenex.com

   46,296 common shares.    9/8/14    <1%     $143,285         $347,220       1.0%

City Dining Cards, Inc. (Loupe) (e)(g)

Buffalo, NY. Customer loyalty technology company that helps businesses attract and retain customers. (Software)

www.citydiningcards.com

   9,525.25 Series B preferred shares.    9/1/15    4%     500,000         500,000       1.5%

Empire Genomics, LLC (e)(g)

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

www.empiregenomics.com

  

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

(i) Interest receivable $92,833.

   6/13/14    -     600,000         600,000       1.8%

GoNoodle, Inc. (g)

(Formerly HealthTeacher, Inc.)

Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software)

www.gonoodle.com

  

$1,000,000 secured note at 12% due January 31, 2020, (1% Payment in Kind (PIK)).

Warrant for 47,324 Series C Preferred shares.

   2/6/15    <1%    

 

 

1,008,974

 

           25

  

 

  

    

 

 

1,008,974

 

           25

  

 

  

   3.0%
  

Total GoNoodle

 

         

 

1,008,999

 

  

 

    

 

1,008,999

 

  

 

  

Mercantile Adjustment Bureau, LLC (g)

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

(Contact Center)

www.mercantilesolutions.com

  

$1,099,039 subordinated secured note at 13% (3% for the calendar year 2015) due October 30, 2017.
(e) $150,000 subordinated debenture at 8% due June 30, 2018.

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

(i) Interest receivable $93,455.

   10/22/12    4%  

 

 

 

 

 

 

 

 

 

 

1,080,694

 

150,000

 

    97,625

 

 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

1,080,694

 

0

 

    0

 

 

 

  

 

  

 

  

 

   3.2%
   Total Mercantile           1,328,319         1,080,694      

Outmatch (e)(g)

(Formerly Chequed Holdings, LLC)

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

www.outmatch.com

  

2,264,995 Class P1 Units.

109,788 Class C1 Units.

Total Outmatch

   11/18/10    4%    

 

 

2,140,007

        5,489

2,145,496

  

  

  

    

 

 

2,140,007

        5,489

2,145,496

  

  

  

   6.3%

SocialFlow, Inc. (e)(g)

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

www.socialflow.com

  

1,049,538 Series B preferred shares.

1,204,819 Series B-1 preferred shares.

717,772 Series C preferred

Total Social Flow

   4/5/13    4%    

 

 

 

500,000

750,000

   500,000

1,750,000

  

  

  

  

    

 

 

 

731,431

839,648

   500,221

2,071,300

  

  

  

  

   6.1%

Somerset Gas Transmission Company, LLC (e)

Columbus, OH. Natural gas transportation.

(Oil and Gas)

www.somersetgas.com

   26.5337 units.    7/10/02    3%     719,097         500,000       1.5%

Other Non-Control/Non-Affiliate Investments:

                
DataView, LLC (Software) (e)    Membership Interest    -    -     310,357         -       0.0%

 

15


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (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

UStec/Wi3 (Manufacturing) (e)

   Common Stock.    -    -     100,500           -       0.0%
          

 

 

    

Subtotal Non-Control/Non-Affiliate Investments

             $8,606,053           $8,253,709        
          

 

 

    

Affiliate Investments – 43.3% of net assets (k)

                

BeetNPath, LLC (e)(g)

Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product)

www.grainful.com

   1,119,024 Series A-2 Preferred Membership Units.    10/20/14    9%     $359,000         $359,000       1.0%

Carolina Skiff LLC (g)

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

(Manufacturing)

www.carolinaskiff.com

   6.0825% Class A common membership interest.    1/30/04    7%     15,000         600,000       1.8%

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

Batavia, NY. Sells First Crush automated pill

crusher that crushes and grinds medical pills for

nursing homes and medical institutions. (Health Care)

www.firstwaveproducts.com

  

$500,000 senior term notes at 10% due

December 31, 2016.

$280,000 junior term notes at 10% due

December 31, 2016.

Warrant for 41,619 capital securities.

   4/19/12    7%  

 

 

 

 

 

 

661,563

 

316,469

  22,000

 

  

 

  

  

  

 

 

 

 

 

 

250,000

 

0

           0

 

  

 

  

  

   0.7%
   Total First Wave           1,000,032         250,000      

Genicon, Inc. (e)(g)

Winter Park, FL. Designs, produces and

distributes patented surgical instrumentation.

(Health Care)

www.geniconendo.com

   1,586,902 Series B preferred shares.    4/10/15    6%     1,000,000         1,000,000       3.0%

GiveGab, Inc. (e)(g)

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

www.givegab.com

   5,084,329 Series Seed preferred shares.    3/13/13    9%     616,221         424,314       1.2%

G-TEC Natural Gas Systems (e)

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

www.gas-tec.com

  

17.845% Class A membership interest.

8% cumulative dividend.

   8/31/99    18%     400,000         100,000       0.3%

Intrinsiq Materials, Inc. (e)(g)

Rochester, NY. Produces printable electronics

utilizing a unique process of nanomaterial based

ink in a room-temperature environment.

(Manufacturing)

www.intrinsiqmaterials.com

  

599,055 Series 2 preferred shares.

$95,000 convertible promissory note at

8% due March 31, 2016.

Total Intrinsiq    

   9/19/13    7%    

 

 
 

600,002

 

  95,000
695,002

  

 

  
  

    

 

 
 

0

 

95,000
95,000

  

 

  
  

   0.3%

Knoa Software, Inc. (e)(g)

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

www.knoa.com

  

973,533 Series A-1 convertible preferred shares.

1,876,922 Series B preferred shares.

   11/20/12    7%  

 

 

 

 

 

750,000

479,155

1,229,155

 

  

  

  

  

 

 

 

 

 

381,503

490,752

872,255

 

  

  

  

   2.6%

KnowledgeVision Systems, Inc. (e)(g)

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

www.knowledgevision.com

  

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

129,033 Series A-3 preferred shares.

Warrant for 46,743 Series A-3 shares.

   11/13/13    7%    

 

 

 

250,000

300,000

165,001

  35,000

  

  

  

  

    

 

 

 

0

300,000

165,001

  35,000

  

  

  

  

   1.5%
   Total KnowledgeVision           750,001         500,001      

 

16


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (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

  1,554,565 Series Seed preferred shares.   1/9/08    15%     742,850         351,477         1.0%

Microcision LLC (g)

Philadelphia, PA. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing)

www.microcision.com

 

$1,500,000 subordinated promissory

note at 11% due January 31, 2017.

15% Class A common membership interest.

Total Microcision

  9/24/09    15%  

 

 

 
 

 

1,891,964

              -
1,891,964

 

  

  
  

  

 

 

 
 

 

1,891,964  

              -  
1,891,964  

 

  

  
  

   5.6%

New Monarch Machine Tool, Inc. (g)

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

www.monarchmt.com

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

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

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

www.oncoregolf.com

 

150,000 Series AA preferred shares.

$150,000 subordinated convertible promissory note at 6% due January 24, 2017.

Total OnCore

  12/31/14    7%    

 

 
 

375,000

 

150,000
525,000

  

 

  
  

    

 

 
 

187,500  

 

150,000  
337,500  

  

 

  
  

   1.0%

Rheonix, Inc. (e)

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

www.rheonix.com

 

9,676 common shares.

(g) 1,839,422 Series A preferred shares.

(g) 50,593 common shares.

(g) 589,420 Series B preferred shares.

Total Rheonix

  10/29/09    5%    

 

 

 
 

-

2,099,999

-

    702,732
2,802,731

  

  

  

  
  

    

 

 

 
 

11,000  

2,165,999  

59,000  

    702,732  
2,938,731  

  

  

  

  
  

   8.7%

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing)

www.sciaps.com

 

187,500 Series A convertible preferred shares.

274,299 Series A-1 convertible preferred shares.

117,371 Series B preferred shares.

Total SciAps

  7/12/13    9%    

 

 
 

1,500,000

504,710

    250,000
2,254,710

  

  

  
  

    

 

 
 

1,000,000  

504,710  

    250,000  
1,754,710  

  

  

  
  

   5.2%

SOMS Technologies, LLC (e)(g)

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

www.microgreenfilter.com

  5,959,490 Series B membership interests.   12/2/08    9%     472,632         528,348         1.5%

Statisfy, Inc. (e)(g)

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

www.statisfy.co

 

65,000 Series seed preferred shares.

Warrant for 1,950,000 Series seed preferred shares.

Total Statisfy

  8/18/14    10%    

 
 

20,968

629,032
650,000

  

  
  

    

 
 

20,968  

629,032  
650,000  

  

  
  

   1.9%

Teleservices Solutions Holdings, LLC (g)(n)

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. 1,000,000 Class C preferred units. 80,000 Class D preferred units.

104,198 Class E preferred units.

PIK dividend for Series C and D at 12%

and 14%, respectively.

Total Teleservices

  5/30/14    6%    

 

 

 

 

 

250,000

1,190,680

91,200

    104,198

 

 1,636,078

  

  

  

  

 

  

    

 

 

 

 

 

0  

1,190,680  

91,200  

    104,198  

 

 1,386,078  

  

  

  

  

 

  

   4.1%

Tilson Technology Management, Inc.(g)

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

www.tilsontech.com

  12 Series B preferred shares.   1/20/15    8%     600,000         600,000         1.8%
        

 

 

    

Subtotal Affiliate Investments

               $17,663,217             $14,662,219        
        

 

 

    

 

17


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (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
Control Investments – 41.1% of net assets (l)                 

Advantage 24/7 LLC (e)(g)

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

www.advantage24-7.com

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

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

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

www.gemcor.com

  

$1,000,000 subordinated promissory note at 15% due September 1, 2017. 31.25 membership units.

Total Gemcor

     6/28/04         31%       

 
 

416,972

  625,000
1,041,972

  

  
  

    

 
 

416,972  

13,400,000  
13,816,972  

  

  
  

   40.8%
          

 

 

    
Subtotal Control Investments              $1,141,472         $13,916,472        
          

 

 

    
TOTAL INVESTMENTS – 108.8%              $27,410,742         $36,832,400        

LIABILITIES IN EXCESS OF OTHER

ASSETS – (8.8%)

                (2,978,740)        
             

 

 

    

NET ASSETS – 100%

                    $33,853,660        
             

 

 

    

 

18


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (Continued)

 

Notes to the Consolidated Schedule of Portfolio Investments

 

(a) At December 31, 2015, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable. 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.
(c) Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.
(d) The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At December 31, 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 that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 “Investments” to the Consolidated Financial Statements).
(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.
(f) As of December 31, 2015, the total cost of investment securities was approximately $27.5 million. Net unrealized appreciation was approximately $9.4 million, which was comprised of $14.1 million of unrealized appreciation of investment securities and ($4.7) million related to unrealized depreciation of investment securities. At December 31, 2015, the aggregate gross unrealized gain for federal income tax purposes was $10.2 million and the aggregate gross unrealized loss for federal income tax purposes was ($4.4) million. The net unrealized gain for federal income tax purposes was $5.8 million based on a tax cost of $31.0 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 (PIK) represents earned interest that is added to the cost basis of the investment.

 

19


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (Continued)

 

  Investments in and Advances to Affiliates  

Company

 

 

Type of Investment

 

   December 31,
2014 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
     December 31,
2015 Fair
Value
    

Amount of
Interest/

Dividend/

Fee Income
(3)

 

Control Investments:

                

Advantage 24/7 LLC

  53% Membership interest.      $99,500         $              -         $              -         $99,500         $              -   

Gemcor II, LLC

 

$1,000,000 subordinated promissory note at 15%.

31.25 membership units.

Total Gemcor  

    

 

 

622,800

9,300,000

9,922,800

  

  

  

    

 

 

-

4,100,000

4,100,000

  

  

  

    

 

 

(205,828)

              -

(205,828)

  

  

  

    

 

 

416,972

13,400,000

13,816,972

  

  

  

    

 

 

77,077

1,743,934

1,821,011

  

  

  

  Total Control Investments        $10,022,300         $4,100,000         ($205,828)         $13,916,472         $1,821,011   

Affiliate Investments:

                

BeetNPath, LLC

  1,119,024 Series A-2 Preferred Membership Units.      -         $359,000         -         $359,000         7,250   

Carolina Skiff LLC

 

$985,000 Class A preferred membership interest at 9.8%.

$250,000 subordinated promissory note at 14%.

6.0825% Class A common membership interest.

Total Carolina Skiff  

    

 

 

 

985,000

125,000

   600,000

1,710,000

  

  

  

  

    

 

 

 

-

-

-

-

  

  

  

  

    

 

 

 

(985,000)

(125,000)

                 -

(1,110,000)

  

  

  

  

    

 

 

 

-

-

600,000

600,000

  

  

  

  

    

 

 

 

81,782

14,778

116,052

212,612

  

  

  

  

Chequed.com, Inc.

 

408,476 Series A preferred shares.

$250,000 convertible promissory note at 8%.

Total Chequed  

    

 

 

1,383,222

   250,000

1,633,222

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

(1,383,222)

(250,000)

(1,633,222)

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

-

11,507

11,507

  

  

  

CrowdBouncer, Inc.

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

First Wave Products Group, LLC

 

$500,000 senior term notes at 10%.

$280,000 junior term notes at 10%.

Warrant for 41,619 capital securities.

Total First Wave  

    

 

 

 

637,992

308,687

  22,000

968,679

  

  

  

  

    

 

 

 

23,571

7,782

          -

31,353

  

  

  

  

    

 

 

 

(411,563)

(316,469)

  (22,000)

(750,032)

  

  

  

  

    

 

 

 

250,000

-

            -

250,000

  

  

  

  

    

 

 

 

24,571

8,447

          -

33,018

  

  

  

  

Genicon, Inc.

  1,586,902 Series B preferred shares.      -         1,000,000         -         1,000,000         -   

GiveGab, Inc.

  5,084,329 Series Seed preferred shares.      403,388         212,833         (191,907)         424,314         -   

G-TEC Natural Gas Systems

  17.8% Class A membership interest. 8% cumulative dividend.      100,000         -         -         100,000         -   

Intrinsiq Materials, Inc.

 

599,055 Series 2 preferred shares.

$95,000 convertible promissory note at 8%.

Total Intrinsiq  

    

 

 

600,002

            -

600,002

  

  

  

    

 

 

-

95,000

95,000

  

  

  

    

 

 

(600,002)

              -

(600,002)

  

  

  

    

 

 

-

95,000

95,000

  

  

  

    

 

 

-

2,436

2,436

  

  

  

Knoa Software, Inc.

  973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares.     

 

 

381,503

490,752

872,255

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

381,503

490,752

872,255

  

  

  

    

 

 

-

-

-

  

  

  

KnowledgeVision Systems, Inc.

 

200,000 Series A-1 preferred shares.

214,285 Series A-2 preferred shares.

129,033 Series A-3 preferred shares.

Warrant for 46,743 Series A-3 shares.

Total Knowledge Vision  

    

 

 

 

 

250,000

300,000

-

            -

550,000

  

  

  

  

  

    

 

 

 

 

-

-

165,001

  35,000

200,001

  

  

  

  

  

    

 

 

 

 

(250,000)

-

-

              -

(250,000)

  

  

  

  

  

    

 

 

 

 

-

300,000

165,001

  35,000

500,001

  

  

  

  

  

    

 

 

 

 

-

-

-

-

-

  

  

  

  

  

Mezmeriz, Inc.

 

1,554,565 Series seed preferred shares.

$200,000 convertible notes at 8%.

Total Mezmeriz  

    

 

 

-

200,000

200,000

  

  

  

    

 

 

351,477

            -

351,477

  

  

  

    

 

 

-

(200,000)

(200,000)

  

  

  

    

 

 

351,477

            -

351,477

  

  

  

    

 

 

-

-

-

  

  

  

Microcision LLC

 

$1,500,000 subordinated promissory note at 11%.

15% Class A common membership interest.

Total Microcision  

    

 

 

1,891,964

              -

1,891,964

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

1,891,964

               -

1,891,964

  

  

  

    

 

 

208,116

            -

208,116

  

  

  

New Monarch Machine Tool, Inc.

  22.84 common shares.      22,841         -         -         22,841         30,409   

OnCore Golf

Technology, Inc.

 

150,000 Series AA preferred shares.

$150,000 subordinated convertible promissory note at 6%.

Total OnCore  

    

 

 

-

-

-

  

  

  

    

 

 

375,000

150,000

525,000

  

  

  

    

 

 

(187,500)

              -

(187,500)

  

  

  

    

 

 

187,500

150,000

337,500

  

  

  

    

 

 

-

3,945

3,945

  

  

  

 

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Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (Continued)

 

  Investments in and Advances to Affiliates  

Company

 

 

Type of Investment

 

   December 31,
2014 Fair
Value
     Gross
Additions
(1)
     Gross
Reductions
(2)
     December 31,
2015 Fair
Value
    

Amount of
Interest/

Dividend/

Fee Income (3)

 

Rheonix, Inc.

 

9,676 common shares.

1,839,422 Series A preferred shares.

50,593 common shares.

589,420 Series B preferred shares.

$680,475 convertible promissory notes at 8%.

Total Rheonix  

    

 

 

 

 

 

11,000

2,165,999

59,000

-

               -

2,235,999

  

  

  

  

  

  

    

 

 

 

 

 

-

-

-

702,732

   702,732

1,405,464

  

  

  

  

  

  

    

 

 

 

 

 

-

-

-

-

(702,732)

(702,732)

  

  

  

  

  

  

    

 

 

 

 

 

11,000

2,165,999

59,000

702,732

               -

2,938,731

  

  

  

  

  

  

    

 

 

 

 

 

-

-

-

-

22,258

22,258

  

  

  

  

  

  

SciAps, Inc.

 

187,500 Series A convertible preferred shares.

274,299 Series A-1 convertible preferred shares.

117,371 Series B preferred shares.

Total SciAps  

    

 

 

 

1,500,000

-

               -

1,500,000

  

  

  

  

    

 

 

 

-

504,710

250,000

754,710

  

  

  

  

    

 

 

 

(500,000)

-

              -

(500,000)

  

  

  

  

    

 

 

 

1,000,000

504,710

   250,000

1,754,710

  

  

  

  

    

 

 

 

-

4,711

        -

4,711

  

  

  

  

SOMS Technologies, LLC

  5,959,490 Series B membership interests.      528,348         -         -         528,348         4,355   

Statisfy, Inc.

 

65,000 Series seed preferred shares.

Warrant for 1,950,000 Series seed preferred shares.

Total Statisfy  

    

 

 

-

-

-

  

  

  

    

 

 

20,968

629,032

650,000

  

  

  

    

 

 

-

-

-

  

  

  

    

 

 

20,968

629,032

650,000

  

  

  

    

 

 

-

-

-

  

  

  

Teleservices Solutions

Holdings, LLC

 

250,000 Class B shares.

1,000,000 Class C shares.

80,000 Class D preferred units.

104,198 Class E preferred units.

Total Teleservices  

    

 

 

 

 

250,000

1,070,680

80,000

               -

1,400,680

  

  

  

  

  

    

 

 

 

 

-

120,000

11,200

104,198

235,398

  

  

  

  

  

    

 

 

 

 

(250,000)

-

-

               -

(250,000)

  

  

  

  

  

    

 

 

 

 

-

1,190,680

91,200

   104,198

1,386,078

  

  

  

  

  

    

 

 

 

 

-

168,000

15,680

           -

183,680

  

  

  

  

  

Tilson Technology Management, Inc.

  12 Series B preferred shares.      -         600,000         -         600,000         14,417   
  Total Affiliate Investments        $14,617,378         $6,420,236         ($6,375,395)         $14,662,219         $738,714   
  Total Control and Affiliate Investments        $24,639,678         $10,520,236         ($6,581,223)         $28,578,691         $2,559,725   
                                              

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, and the movement of an existing portfolio company into this category and out of another category.
(2) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement of an existing portfolio company out of this category and into another category.
(3) Represents the total amount of interest, fees or dividends credited to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (Continued)

 

 

 

Industry Classification   

Percentage of Total
    Investments (at fair value)    

as of December 31, 2015

Manufacturing

   49.6%

Software

   22.2%

Healthcare

   13.9%

Contact Center

   6.7%

Consumer Product

   3.3%

Professional Services

   1.6%

Oil and Gas

   1.4%

Electronics

   1.0%

Marketing

   0.3%
  

 

Total Investments

   100%
  

 

 

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Table of Contents

Rand Capital Corporation and Subsidiary

Notes to the Consolidated Financial Statements

For the Six Months Ended June 30, 2016 and 2015

(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, 2015.

The majority of our venture capital investments are completed 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. In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC, and then Rand SBIC filed an election to be regulated as a BDC under the 1940 Act. Rand SBIC’s board of directors is comprised of the directors of Rand, a majority of whom are not “interested persons” of Rand or Rand SBIC.

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 SBIC.

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

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – It is our opinion that the accompanying consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation in accordance with United States generally accepted accounting principles (“GAAP”) of the consolidated financial position, results of operations, cash flows and statement of changes in net assets for the interim periods presented. Certain information and note disclosures normally included in audited annual consolidated financial statements prepared in accordance with GAAP have been omitted; however, we believe that the disclosures made are adequate to make the information presented herein not misleading. Our interim results for the six months ended June 30, 2016 are not necessarily indicative of the results for the 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, 2015. 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    2016 Definitive Proxy Statement submitted to shareholders
Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2015
Form 10-Q    Quarterly Report on Form 10-Q for the quarter ended March 31, 2016

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.

Fair Value of SBA Debentures—In March 2016, the SBIC Funding Corporation completed a pooling of SBA debentures that have a coupon rate of 2.507%, excluding a mandatory SBA annual charge estimated to be 0.804%, resulting in a total estimated fixed rate for ten years of 3.311%. The carrying value of Rand’s 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.

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

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

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

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.

 

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Table of Contents

Rand SBIC’s interest accrual is also regulated by the SBA’s “Accounting Standards and Financial Reporting Requirements for Small Business Investment Companies.” Under these rules, interest income cannot be recognized if collection is doubtful, and a 100% reserve must be established. The collection of interest is presumed to be in doubt when there is substantial doubt about a portfolio company’s ability to continue as a going concern or a loan is in default for more than 120 days. Management also uses other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

After reviewing each of our portfolio companies’ performance and the circumstances surrounding each investment, the Corporation ceased accruing interest income on First Wave Products Group, LLC (First Wave), Intrinsiq Materials Inc. (Intrinsiq) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loans 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 $9,096 and $9,000 for the six months ended June 30, 2016 and 2015, respectively. The board fees were $2,000 and $5,000 for the six months ended June 30, 2016 and 2015, respectively.

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

Original Issue Discount – Investments may include “original issue discount” or OID income. This occurs when the Corporation purchases a warrant and a note from a portfolio company simultaneously, which requires an allocation of a portion of the purchase price to the warrant and reduces the note or debt instrument by an equal amount in the form of a note discount or OID. The note is reported net of the OID and the OID is accreted into interest income over the life of the loan. The Corporation recognized $4,998 and $7,746 in OID income for the six months ended June 30, 2016 and 2015, respectively. OID income is estimated to be approximately $5,000 for the remainder of 2016 and $8,350 for 2017.

Deferred Debenture Costs - The Financial Accounting Standards Board (FASB) issued an Accounting Standard Update 2015-03 (ASU) that required the debt issuance costs be presented as a direct deduction from the related debt liability. Therefore, the SBA debenture origination and commitment costs are presented as a direct deduction from the debt liability (see Note 6). As a result $199,627 was reclassified from other assets to debentures guaranteed by the SBA in the accompanying consolidated statement of financial position as of December 31, 2015. As of June 30, 2016, the balance in debt issuance costs was $185,927.

 

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Table of Contents

These costs are amortized ratably over the terms of the SBA debentures and are expensed when the debt is repaid early. Amortization expense was $13,700 for each of the six months ended June 30, 2016 and 2015. 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, 2016 and December 31, 2015 with a weighted average interest rate of 3.54% as of June 30, 2016. The debentures are presented net of deferred debenture costs (see Note 6). 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.

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 during the six months ended June 30, 2016 and 2015 was $1,216,250 and $2,344,600, respectively. Interest paid during the six months ended June 30, 2016 and 2015 was $141,050 and $128,650, respectively. The Corporation converted $5,051 and $32,669 of interest receivable into investments during the six months ended June 30, 2016 and 2015, 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, 2016 and December 31, 2015, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

On October 22, 2015, the Board of Directors authorized the repurchase of up to 1,000,000 shares of the Corporation’s outstanding common stock on the open market through October 22, 2016 at prices that are no greater than the then current net asset value. No shares were repurchased during the six months ended June 30, 2016 and the total treasury shares held was 534,496 shares with a total cost of $1,447,491 at June 30, 2016. Therefore, at June 30, 2016, 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, 2016, no stock options had been awarded under the Option Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any option, warrant or right is outstanding under an executive compensation plan, no 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.

 

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Table of Contents

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.

The Corporation accrued $1,411,659 under the Plan for the six months ended June 30, 2016. There were no amounts earned pursuant to the Plan for the six months ended June 30, 2015. Estimated payroll taxes and benefits on the profit sharing under the Plan have been accrued at June 30, 2016. The amounts accrued do not exceed the defined limits under the Plan. 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.

Income Taxes - The Corporation reviews the tax positions it has taken to determine if they meet a “more likely than not threshold” for the benefit of the tax position to be recognized in the consolidated financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in either a reduction of a current or deferred tax asset or receivable, or the recording of a current or deferred tax liability. There was $10,000 in new uncertain tax positions at June 30, 2016. There were no new uncertain tax positions at December 31, 2015.

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, 2016 or 2015.

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, 2016, Rheonix, Inc. (Rheonix), Outmatch (formerly Chequed Holdings, LLC) (Outmatch), Genicon, Inc. (Genicon), Social Flow, Inc. (Social Flow) and SciAps, Inc. (Sciaps) represented 11%, 8%, 8%, 7% and 7%, respectively, of the fair value of the Corporation’s investment portfolio.

Reclassification – Certain balances in prior years were reclassified to conform to presentations adopted in 2016.

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.

 

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Table of Contents

The loan and debt securities may also be valued at an amount other than the price the security would command given the rate and related inherent portfolio risk of the investment.

A loan or debt instrument may be reduced in value if it is judged to be of poor quality, collection is in doubt or insufficient liquidation proceeds exist.

 

    Equity securities may be valued using the “asset approach”, “market approach” or “income approach.” The asset approach involves estimating the liquidation value of the portfolio company’s assets. To the extent the value exceeds the remaining principal amount of the debt or loan and all other debt securities of the portfolio company, the fair value of such securities is generally estimated to be their cost. However, where value is less than the remaining principal amount of the loan and all other debt securities, the Corporation may discount the value of such securities. 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.

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

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

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

Any changes in estimated fair value are recorded in the statement of operations as “Net increase (decrease) 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. There were no such Level 1 investments as of June 30, 2016.

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

 

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

 

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

 

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

 

    Pending debt or capital restructuring of the portfolio company;

 

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

 

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

 

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

 

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    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 Earnings before interest, tax and depreciation and amortization (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. Significant changes in any of these unobservable inputs may result in a significantly higher or lower fair value estimate.

Another key factor used in valuing equity investments is a significant recent arms-length equity transaction with a sophisticated 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.

 

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The following table provides a summary of the significant unobservable inputs used to determine the fair value of the Corporation’s Level 3 portfolio investments as of June 30, 2016:

 

Investment Type

   Market
Approach
EBITDA
Multiple
     Market
Approach

Liquidation
Seniority
     Market
Approach

Revenue
Multiple
     Market
Approach
Transaction
Pricing
     Asset
Approach
Liquidation
Method
     Totals  

Non-Control/Non-Affiliate Equity

   $ 1,085,692       $ —         $ —         $ 8,072,216       $ 500,000       $ 9,657,908   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Control/Non-Affiliate Debt

     —           —           —           —           3,664,025         3,664,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate

   $ 1,085,692       $ —         $ —         $ 8,072,216       $ 4,164,025       $ 13,321,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Equity

   $ 1,128,348       $ 22,841       $ 600,001       $ 7,037,534       $ —         $ 8,788,724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Affiliate Debt

     —           —           —           300,000         3,735,430         4,035,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate

   $ 1,128,348       $ 22,841       $ 600,001       $ 7,337,534       $ 3,735,430       $ 12,824,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Control Equity

   $ —         $ —         $ 99,500       $ —         $ 1,412,500       $ 1,512,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Control Debt

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Control

   $ —         $ —         $ 99,500       $ —         $ 1,412,500       $ 1,512,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Level 3 Investments

   $ 2,214,040       $ 22,841       $ 699,501       $ 15,409,750       $ 9,311,955       $ 27,658,087   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Range

     3.6X-7.5X         1X         0.75X-2.5X         0.0X – 1.0X         Not Applicable      

Unobservable Input

     EBITDA Multiple         Asset Value        
 
Revenue
Multiple
  
  
     Discount         Asset Value      

Weighted Average

     5.74X         1X         2X         0 .89X         Not Applicable      

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, 2016:

 

       Fair Value Measurements at Reported Date Using  

Description

   June 30,
2016
     Quoted Prices in
Active Markets for
Identical Assets

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

Loan investments

   $ 2,600,000       $ —         $ —         $ 2,600,000   

Debt investments

     6,185,147         —           —           6,185,147   

Equity investments

     18,872,940         —           —           18,872,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,658,087       $ —         $ —         $ 27,658,087   
  

 

 

          

 

 

 

 

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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 December 31, 2015:

 

       Fair Value Measurements at Reported Date Using  

Description

   December 31,
2015
     Quoted Prices in
Active Markets
for Identical Assets

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

Loan investments

   $ 416,972       $ —         $ —         $ 416,972   

Debt investments

     5,076,632         —           —           5,076,632   

Equity investments

     31,338,796         —           —           31,338,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,832,400       $ —         $ —         $ 36,832,400   
  

 

 

          

 

 

 

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, 2016:

 

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

Description

   Loan
Investments
     Debt
Investments
     Equity
Investments
     Total  

Ending Balance, December 31, 2015, of Level 3 Assets

   $ 416,972       $ 5,076,632       $ 31,338,796       $ 36,832,400   

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

           

Gemcor II, LLC (Gemcor)

     —           —           13,176,313         13,176,313   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Realized Gains

     —           —           13,176,313         13,176,313   

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

           

Athenex, Inc. (Athenex)

     —           —           69,444         69,444   

Gemcor II, LLC (Gemcor)

     —           —           (11,362,500      (11,362,500

Knoa Software, Inc. (Knoa)

     —           —           (422,800      (422,800

Statisfy, Inc. (Statisfy)

     —           —           (325,000      (325,000
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Unrealized Gains and Losses

     —           —           (12,040,856      (12,040,856

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

           

BeetNPath, LLC (Beetnpath)

     —           150,000         —           150,000   

ClearView Social, Inc. (Clearview Social)

     —           —           200,000         200,000   

eHealth Global Technologies, Inc. (eHealth)

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

Empire Genomics, LLC (Empire Genomics)

     —           550,000         —           550,000   

Genicon, Inc. (Genicon)

     1,100,000         —           —           1,100,000   

GoNoodle, Inc. (GoNoodle)

     —           5,051         —           5,051   

Knoa Software, Inc. (Knoa)

     —           48,466         —           48,466   

Mercantile Adjustment Bureau, LLC (Mercantile)

     —           4,998         —           4,998   

OnCore Golf Technology, Inc. (Oncore Golf)

     —           150,000         —           150,000   

SciAps, Inc. (Sciaps)

     —           200,000         —           200,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     2,600,000         1,108,515         200,000         3,908,515   

Repayments and Sale of Securities:

           

Gemcor

     (416,972      —           (13,801,313      (14,218,285
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Repayments and Sale of Securities

     (416,972      —           (13,801,313      (14,218,285
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, June 30, 2016, of Level 3 Assets

   $ 2,600,000       $ 6,185,147       $ 18,872,940       $ 27,658,087   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  

   ($ 12,040,856

Net realized gain on investments for the period included in changes in net assets

  

   $ 13,344,453   

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:

 

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     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. (Intrinsiq)

     —           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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  

   $ —     

 

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NOTE 4.—OTHER ASSETS

At June 30, 2016 and December 31, 2015 other assets was comprised of the following:

 

     June 30,
2016
     December 31,
2015
 

Escrow receivable from BinOptics Corporation

   $ 1,504,854       $ 1,504,854   

Prepaid expenses

     52,601         —     

Dividend receivable

     —           86,724   

Equipment (net)

     8,684         11,676   

Operating receivables

     84,395         1,159   
  

 

 

    

 

 

 

Total other assets

   $ 1,650,534       $ 1,604,413   
  

 

 

    

 

 

 

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.

Note 5. COMMITMENTS AND CONTINGENCIES

The Corporation did not have any commitments to fund any investments as of June 30, 2016.

Note 6. SBA DEBENTURES

Pursuant to Accounting Standard Update 2015-03 (ASU), the debt origination costs directly associated with the SBA debt obligations are presented as a direct deduction for the related debt liability.

 

     June 30,
2016
     December 31,
2015
 

Debentures guaranteed by the SBA

   $ 8,000,000       $ 8,000,000   

Less unamortized issue costs

     (185,927      (199,627
  

 

 

    

 

 

 

Debentures guaranteed by the SBA, net

   $ 7,814,073       $ 7,800,373   
  

 

 

    

 

 

 

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, 2016 and the year ended December 31, 2015:

 

     Six months ended
June 30, 2016
(Unaudited)
    Year ended
December 31,
2015
 

Income from investment operations (1):

    

Investment income

   $ 0.06      $ 0.45   

Operating expenses

     0.38        0.29   
  

 

 

   

 

 

 

Investment (loss) income before income taxes

     (0.32     0.16   

Income tax (benefit) expense

     (0.12     0.02   
  

 

 

   

 

 

 

Net investment (loss) income

     (0.20     0.14   

Net realized and unrealized gain on investments

     0.13        0.10   
  

 

 

   

 

 

 

(Decrease) increase in net asset value

     (0.07     0.24   

Net asset value, beginning of period

     5.35        5.11   
  

 

 

   

 

 

 

Net asset value, end of period

   $ 5.28      $ 5.35   
  

 

 

   

 

 

 

Per share market price, end of period

   $ 3.77      $ 3.77   
  

 

 

   

 

 

 

Total return based on market value

     0.0     (7.82 %) 

Total return based on net asset value

     (1.23 %)      4.64

Supplemental data:

    

Ratio of operating expenses before income taxes to average net assets

     7.22     5.49

Ratio of operating expenses including income taxes to average net assets

     6.34     7.89

Ratio of net investment (loss) income to average net assets

     (3.68 %)      2.55

Portfolio turnover

     12.1     21.4

Net assets, end of period

   $ 33,438,048      $ 33,853,660   

Weighted shares outstanding, end of period

     6,328,538        6,328,538   

 

(1) Per share data are based on weighted average shares outstanding and the results are rounded to the nearest cent.

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, 2015.

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 invests in and lends to 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 2016, we had approximately $14.4 million in cash on hand, which is available for future investment and operating needs. 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 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:

 

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    We expect that well run U.S. businesses will require capital to continue to grow given the low cost of capital, strong business and consumer spending, and eager reception of new technologies and service concepts. We believe Rand will be able to participate in financing these businesses.

 

    We have sufficient cash on hand to invest in new opportunities.

 

    Given our available cash on hand, we are able to invest larger amounts in companies, which, we believe, will provide an opportunity to accelerate our rate of growth.

 

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

 

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

 

    As our portfolio continues to expand, we are able to better leverage our infrastructure.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (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, 2015 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Table of Contents

Financial Condition

 

Overview:    6/30/16      12/31/15      Increase
(Decrease)
     % Increase
(Decrease)
 

Total assets

   $ 44,573,181       $ 44,562,060       $ 11,121         0.0

Total liabilities

     11,135,133         10,708,400         426,733         4.0
  

 

 

    

 

 

    

 

 

    

Net assets

   $ 33,438,048       $ 33,853,660       ($ 415,612      (1.2 %) 
  

 

 

    

 

 

    

 

 

    

Net asset value per share (NAV) was $5.28 at June 30, 2016 and $5.35 at December 31, 2015.

Our outstanding SBA debentures at June 30, 2016 were $8,000,000 and will mature from 2022 through 2025. Cash approximated 43% of net assets at June 30, 2016 as compared to 17% at December 31, 2015. The change is primarily due to the proceeds from the asset sale of one of our investments, Gemcor II, LLC, in March 2016.

Composition of 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.

 

     6/30/16      12/31/15      Increase
(Decrease)
     % Increase
(Decrease)
 

Investments, at cost

   $ 30,277,284       $ 27,410,742       $ 2,866,542         10.5

Unrealized (depreciation) appreciation, net

     (2,619,197      9,421,658         (12,040,855      (127.8 %) 
  

 

 

    

 

 

    

 

 

    

Investments at fair value

   $ 27,658,087       $ 36,832,400       ($ 9,174,313      (24.9 %) 
  

 

 

    

 

 

    

 

 

    

Our total investments at fair value, as estimated by management and approved by our Board of Directors, approximated 83% of net assets at June 30, 2016 versus 109% of net assets at December 31, 2015 with the change primarily due to the asset sale of one of our investments, Gemcor II, LLC.

The change in investments during the six months ended June 30, 2016, at cost, is comprised of the following:

 

     Cost
Increase
(Decrease)
 

New investments:

  

eHealth Global Technologies, Inc. (eHealth)

   $ 1,500,000   

Genicon, Inc. (Genicon)

     1,100,000   

Empire Genomics, LLC (Empire Genomics)

     550,000   

ClearView Social, Inc. (Clearview Social)

     200,000   

SciAps, Inc. (Sciaps)

     200,000   

BeetNPath, LLC (Beetnpath)

     150,000   

OnCore Golf Technology, Inc. (Oncore Golf)

     150,000   

Knoa Software, Inc. (Knoa)

     48,466   
  

 

 

 

Total of new investments

     3,898,466   

Other changes to investments:

  

GoNoodle, Inc. (GoNoodle) interest conversion

     5,050   

Mercantile Adjustment Bureau, LLC (Mercantile) OID amortization

     4,998   
  

 

 

 

Total of other changes to investments

     10,048   

Investments repaid, sold or liquidated:

  

Gemcor II, LLC (Gemcor) repayment

     (1,041,972
  

 

 

 

Total investments repaid, sold or liquidated

     (1,041,972
  

 

 

 

Net change in investments, at cost

   $ 2,866,542   
  

 

 

 

 

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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 loan, debenture and equity instruments, which may provide a current return on a portion of the investment portfolio. The equity investments contained in our investment portfolio are structured to realize capital appreciation over the long-term.

Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015

 

     June 30,
2016
     June 30,
2015
     (Decrease)
Increase
     %
(Decrease)
Increase
 

Interest from portfolio companies

   $ 301,035       $ 369,293       ($ 68,258      (18.5 %) 

Interest from other investments

     21,709         15,190         6,519         42.9

Dividend and other investment income

     80,797         961,788         (880,991      (91.6 %) 

Fee income

     11,096         14,000         (2,904      (20.7 %) 
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 414,637       $ 1,360,271       ($ 945,634      (69.5 %) 
  

 

 

    

 

 

    

 

 

    

Interest from portfolio companies – Interest income from portfolio companies decreased during the six months ended June 30, 2016 versus the six months ended June 30, 2015 due to decreases in the principal balances on loan and debt investments with Gemcor, II, LLC (Gemcor) and Carolina Skiff, LLC (Carolina Skiff), respectively, and the timing of new debt investments in the second quarter of 2016 which should help offset these repayments.

After reviewing their performance and the circumstances surrounding our investments, we ceased accruing interest income on First Wave Products Group, LLC (First Wave), Intrinsiq Materials, Inc. (Intrinsiq), and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balances 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, 2016 versus the same period in 2015.

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 or the impact of new investments or divestitures. Dividend and other investment income decreased in 2016 due to the asset sale of Gemcor II, LLC during March 2016. The dividend distributions for the respective periods were:

 

     June 30,
2016
     June 30,
2015
 

Carolina Skiff LLC (Carolina Skiff)

   $ 63,583       $ 51,512   

SOMS Technologies, LLC (SOMS)

     13,464         —     

Tilson Technology Management, Inc. (Tilson)

     3,750         6,917   

Gemcor, II, LLC (Gemcor)

     —           903,359   
  

 

 

    

 

 

 

Total dividend and other investment income

   $ 80,797       $ 961,788   
  

 

 

    

 

 

 

 

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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 from portfolio company board attendance fees. The financing fees are amortized ratably over the life of the instrument associated with the fees. The unamortized fees are carried on the balance sheet under the line item “Deferred revenue.”

The income associated with the amortization of financing fees was $9,096 and $9,000 for the six months ended June 30, 2016 and 2015, respectively. The income from board fees was $2,000 and $5,000 for the six months ended June 30, 2016 and 2015, respectively.

Operating Expenses

Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015

 

     June 30,
2016
     June 30,
2015
     Increase      % Increase  

Total operating expenses

   $ 2,428,752       $ 825,277       $ 1,603,475         194.3

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 increase in operating expenses during the six months ended June 30, 2016 was comprised primarily of a $1,411,659 increase in bonus and profit sharing expense, a 111%, or $66,421, increase in employee benefits and a 62%, or $57,546, increase in professional fees.

Our largest portfolio company, in terms of fair value, Gemcor II, LLC (Gemcor) sold its assets during March 2016 and based on our ownership percentage, we received gross cash proceeds of approximately $13.8 million, excluding amounts that continue to be held in escrow, and recognized a realized gain, before income taxes, of approximately $13.2 million from the sale. Related to this asset sale, we accrued $1,411,659 under our Profit Sharing Plan for the six months ended June 30, 2016, that is payable to our executive officers. There were no amounts earned pursuant to the Profit Sharing Plan for the six months ended June 30, 2015. Estimated payroll taxes and benefits on the profit sharing amounts under our Profit Sharing Plan, in the amount of $36,000, have been accrued at June 30, 2016 and account for the increase in the employee benefit line.

Professional fees were also higher during the six months ended June 30, 2016 versus the same period in 2015 because we incurred additional expenses in connection with implementing our long-term growth strategy. These expenses included external legal, tax consulting and other advisory expenses to support refinement of our strategy which involved assessing options relative to the complex regulatory environment in which we operate.

Realized Gains and Losses on Investments

Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015

 

     June 30,
2016
     June 30,
2015
     Increase  

Realized gain on investments before income taxes

   $ 13,344,453       $ 262,925       $ 13,081,528   

During the first quarter of 2016, our portfolio company Gemcor II, LLC sold its assets, and accordingly, we received gross cash proceeds of $13,801,313, excluding amounts that continue to be held in escrow, and recognized a realized gain, before income taxes, of $13,176,313.

 

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In addition, we recorded a realized gain of $168,140 during the second quarter of 2016 from the earn out provision in connection with the 2014 sale of QuaDPharma, LLC to Athenex Inc.

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). We sold our remaining shares of Synacor during the six months ended June 30, 2015.

Change in Unrealized Appreciation of Investments

Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015

 

     June 30,
2016
     June 30,
2015
     Decrease  

Change in unrealized appreciation before income taxes

   ($ 12,040,856    ($ 321,164    ($ 11,719,692

The decrease in unrealized appreciation before income taxes for the six months ended June 30, 2016 was comprised of the following:

 

     June 30,
2016
 

Reclassify Gemcor II, LLC (Gemcor) to a realized gain

   ($ 11,362,500

Knoa Software, Inc. (Knoa)

     (422,800

Statisfy, Inc. (Statisfy)

     (325,000

Athenex, Inc. (Athenex)

     69,444   
  

 

 

 

Total change in net unrealized appreciation of investments before income taxes during the six months ended June 30, 2016

   ($ 12,040,856
  

 

 

 

During March of 2016, our portfolio company, Gemcor II, LLC sold its assets and accordingly, we received gross cash proceeds of approximately $13.8 million and recognized a realized gain, before income taxes, of approximately $13.2 million. As of June 30, 2016, we continue to own 31% of Gemcor II, LLC, which is the entity that sold substantially all of its assets. After the asset sale, a contingent escrow remains on the books of Gemcor, which we valued at $1,412,500. Once a plan of liquidation of Gemcor II, LLC is agreed to by all members of the limited liability company, this escrowed amount will be released and a gain will be realized.

The valuation of our investment in Knoa was decreased during the six months ended June 30, 2016 to value our equity holdings at a value consistent with the anticipated pricing for Knoa’s future equity financing.

The valuation of our investment in Statisfy was decreased after our management reviewed the portfolio company and its financial condition and determined that a valuation adjustment was necessary.

In accordance with our valuation policy, we increased the value of our investment in Athenex based on a significant equity financing by a new non-strategic outside entity. This new financing used a higher valuation for Athenex than had been used for its prior financing rounds.

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

 

     June 30,
2015
 

Athenex, Inc. (Athenex) (formerly Kinex Pharmaceuticals, Inc.)

   $ 92,592   

First Wave Products Group, LLC (First Wave)

     (193,436

Synacor, Inc. (Synacor) reclassify 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
  

 

 

 

 

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In accordance with our valuation policy, we increased the value of our investment in Athenex based on a significant equity financing during 2015 by a new non-strategic outside investor, and the financing used a higher valuation for Athenex than had been used for 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.

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

Net (Decrease) 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 (decrease) increase in net assets from operations” on our consolidated statements of operations. For the six months ended June 30, 2016 and 2015, the net (decrease) increase in net assets from operations was ($415,612) and $322,644, 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, 2016, our total liquidity was approximately $14.4 million in cash on hand.

Management expects that the cash on hand at June 30, 2016, coupled with the scheduled interest payments from our portfolio investments, will be sufficient to meet our liquidity needs through the next twelve months. As a result of the reduction of investment income related to the Gemcor asset sale, we will continue to look for new investments that provide interest and dividend payments so as to provide cash flow to cover operating costs. 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. Our investment portfolio consists of equity and debt securities in private companies and 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 change in unrealized depreciation of 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.

 

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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, 2016, 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, 2016. 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, 2016.

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, 2015.

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
 

4/1/2016 – 4/30/2016

     —           —           —           465,504   

5/1/2016 – 5/31/2016

     —           —           —           465,504   

6/1/2016 – 6/30/2016

     —           —           —           465,504   

 

(1) There were no shares repurchased during the second quarter of 2016.
(2) The average price paid per share is calculated on a settlement basis and includes commission.
(3) On October 22, 2015, 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 22, 2016.

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 2, 2016

 

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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