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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended December 31, 2020

 

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.)
1405 Rand Building, Buffalo, NY   14203
(Address of Principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (716) 853-0802

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.10 par value   RAND   Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act.    Yes  ☐        No  ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    ☐        No  ☑

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

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

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

 

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☐

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

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant as of June 30, 2020 was approximately $9,530,000 based upon the closing price as reported on the Nasdaq Capital Market on such date.

As of March 2, 2021, there were 2,582,169 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Corporation’s definitive proxy statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.


Table of Contents

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-K

 

PART I

 

Item 1.

  Business      1  

Item 1A.

  Risk Factors      16  

Item 1B.

  Unresolved Staff Comments      29  

Item 2.

  Properties      29  

Item 3.

  Legal Proceedings      29  

Item 4.

  Mine Safety Disclosures      29  

PART II

 

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      30  

Item 6.

  Selected Financial Data      31  

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      32  

Item 7A.

  Quantitative and Qualitative Disclosures about Market Risk      50  

Item 8.

  Financial Statements and Supplementary Data      51  

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      97  

Item 9A.

  Controls and Procedures      97  

Item 9B.

  Other Information      98  

PART III

 

Item 10.

  Directors, Executive Officers and Corporate Governance      99  

Item 11.

  Executive Compensation      99  

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      99  

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      99  

Item 14.

  Principal Accountant Fees and Services      99  

PART IV

 

Item 15.

  Exhibits and Financial Statement Schedules      100  

Item 16

  Form 10-K Summary      101  


Table of Contents

PART I

Item 1.     Business

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 and operated as an internally managed, closed-end, diversified, management investment company from that time until November 2019.

In November 2019, Rand completed a stock sale transaction (the “Closing”) with East Asset Management (“East”). The transaction consisted of a $25 million investment in Rand by East, in exchange for approximately 8.3 million shares of Rand common stock. The consideration paid by East for the shares of Rand common stock was comprised of approximately $15.5 million of cash and a contribution of $9.5 million of portfolio assets (the “Contributed Assets”). Concurrent with the Closing, Rand’s management and staff became employees of Rand Capital Management, LLC (“RCM”), a registered investment adviser that has been retained by Rand as its external investment adviser. In connection with retaining RCM as our investment adviser, Rand, on November 8, 2019, entered into an investment advisory and management agreement (the “Prior Investment Management Agreement”) and an administration agreement (the “Prior Administration Agreement”) with RCM pursuant to which RCM serves as Rand’s investment adviser and administrator (the Closing and the retention of RCM as our investment adviser and administrator are collectively referred to herein as the “Transactions”).

In late 2020, Rand’s Board of Directors (the “Board”) was advised by RCM that Callodine Group, LLC (“Callodine”), an entity controlled by James Morrow, intended to acquire a controlling interest in RCM, which was then-currently majority owned by East. Section 15(a) of the Investment Company Act of 1940, as amended (the “1940 Act”) provides that any investment management contract, such as the Prior Investment Management Agreement, terminates automatically upon on its “assignment.” Section 2(a)(4) of the 1940 Act provides that the transfer of a controlling interest of an investment adviser, such as was to be caused by East’s transfer of its controlling interest in RCM to Callodine (the “Adviser Change in Control”), constitutes an “assignment.” As a result of the proposed Adviser Change in Control, Rand’s shareholders were asked to approve a new investment advisory and management agreement (the “Investment Management Agreement”) with RCM at a special meeting of shareholders held on December 16, 2020 (the “Special Meeting”). The terms of the Investment Management Agreement are identical to those contained in the Prior Investment Management Agreement, with RCM continuing to provide investment advisory and management services to Rand following the Adviser Change in Control. Following approval by Rand’s shareholders at the Special Meeting, Rand, on December 31, 2020, entered into the Investment Management Agreement and a new administration agreement (the “Administration Agreement”) with RCM and terminated the Prior Administration Agreement. Pursuant to the terms of the Investment Management Agreement, Rand pays RCM a base management fee and may pay an incentive fee, if specified benchmarks are met.

In connection with the Closing, we also entered into a shareholder agreement, by and between Rand and East (the “Shareholder Agreement”). Pursuant to the terms of the Shareholder Agreement, East has the right to designate two or three persons, depending upon the size of the Board, for nomination for election to the Board. East has the right to designate (i) up to two persons if the size of the Board is composed of fewer than seven directors or (ii) up to three persons if the size of the Board is composed of seven or more directors. East’s right to designate persons for nomination for election to the Board under the Shareholder Agreement is the exclusive means by which East may designate or nominate persons for election to the Board. The Board currently consists of five directors, and East has designated Adam S. Gusky and Benjamin E. Godley to the Board.

After the completion of the Transactions, we are an externally managed, closed-end, diversified management investment company that has elected to be treated as a business development company, or “BDC”, under the 1940 Act. As a BDC we are required to comply with certain regulatory requirements as provided for in the 1940 Act and the rules and regulations promulgated thereunder. 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—Regulations, Business Development Company Regulations.”

 

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In 2002, we established our small business investment company (“SBIC”), Rand Capital SBIC, Inc. (“Rand SBIC”), whereby we utilized funds borrowed from the Small Business Administration (“SBA”) combined with our capital to invest in portfolio companies. In this Annual Report on Form 10-K, (“Annual Report”), unless the context otherwise requires, “we”, the “Corporation”, “us”, and “our” refer to Rand Capital Corporation and Rand SBIC. Rand SBIC’s predecessor was organized as a Delaware limited partnership and was converted into a New York corporation in 2008, at which time our operations as a licensed SBIC were continued. Although Rand SBIC had operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the Securities and Exchange Commission (“SEC”) granted an Order of Exemption for Rand with respect to the operations of Rand SBIC and Rand SBIC then 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 Capital Corporation or Rand SBIC.

Since the completion of the Transactions, we have shifted to an investment strategy focused on higher yielding debt investments and intend to elect U.S. federal tax treatment as a regulated investment company (“RIC”) as of January 1, 2020 on our timely filed Federal tax return for the 2020 tax year. As required for the RIC election, Rand paid a special dividend to shareholders to distribute all of its accumulated earnings and profits. The Board declared a special dividend in the aggregate amount of $23.7 million, or approximately $1.62 per share, on March 3, 2020. The cash and shares of Rand’s common stock comprising the special dividend were distributed on May 11, 2020 to shareholders.

In addition, our Board declared a 2020 cash dividend of $1.33 per share on December 21, 2020. The 2020 cash dividend was paid on January 19, 2021 to shareholders of record as of December 31, 2020. The cash dividend is expected to represent over 90% of Rand’s estimated taxable income for 2020.

In order to qualify to make the RIC election, Rand placed several of its investments in newly formed holding companies that facilitate a tax structure that is advantageous to the RIC election. In December 2019, Rand formed Rand Somerset Holdings Corp., Rand BeetNPath Holdings Corp., Rand Carolina Skiff Holdings Corp., Rand Filterworks Holdings Corp. and Rand GTEC Holdings Corp., (“Blocker Corps”) as wholly owned subsidiaries of Rand to hold certain equity investments. These subsidiaries are consolidated using United States generally accepted accounting principles (“GAAP”) for financial reporting purposes. The following discussion describes the operations of Rand and its wholly owned subsidiaries Rand SBIC, Rand Somerset Holdings Corp., Rand BeetNPath Holdings Corp., Rand Carolina Skiff Holdings Corp., Rand Filterworks Holdings Corp. and Rand GTEC Holdings Corp., (collectively, the “Corporation”).

Rand effected a 1-for-9 reverse stock split of its common stock effective May 21, 2020. The reverse stock split affected all issued and outstanding shares of Rand’s common stock, including shares held in treasury. The reverse stock split reduced the number of issued and outstanding shares of Rand’s common stock from 23,845,470 shares and 23,304,424 shares, respectively, to 2,648,916 shares and 2,588,800 shares, respectively. The reverse stock split affected all shareholders uniformly and did not alter any shareholder’s percentage interest in Rand’s outstanding common stock, except for adjustments for fractional shares.

On October 7, 2020, Rand, RCM and certain of their affiliates received exemptive relief from the SEC to permit Rand to co-invest in portfolio companies with certain other funds, including other BDCs and registered investment companies, managed by RCM and certain of its affiliates in a manner consistent with Rand’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements, subject to compliance with certain conditions (the “Order”). Pursuant to the Order, Rand is generally permitted to co-invest with affiliated funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) of Rand’s independent directors makes certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to Rand and its shareholders and do not involve overreaching in respect to Rand or its shareholders on the part of any person concerned and (2) the transaction is consistent with the interests of Rand’s shareholders and is consistent with Rand’s investment objective and strategies.

 

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

Our Investment Objectives and Strategy

Effective with the completion of the Transactions, our investment activities are managed by our external investment adviser, RCM. As a result of the Transactions and our intention to elect RIC status, we have changed our investment objectives and strategy. Our investment objective is to generate current income and, when possible, complement this current income with capital appreciation. As a result, the investments made by Rand since the Closing have been, and the investments to be made by Rand in the future are expected to be, made primarily in debt instruments, as well as high yielding publicly traded equity instruments that provide income through dividends and relatively more liquidity than our private company equity investments.

We expect to co-invest in privately-held, lower middle market companies with committed and experienced managements in a broad variety of industries. We seek to invest in early to later stage businesses that have sustainable, differentiated and market-accepted products and have revenue of more than $2 million and a clear path to free cash flow or are already generating up to $5 million in EBITDA. We provide funding to companies that need growth or expansion capital or are looking to finance an ownership transition. Geographically, we focus in the eastern and southern United States. We typically are a minority investor and work with other lenders, investment partners and sponsors to source and fund investment opportunities.

Our typical investment going forward is expected to be in the range of $2 million to $4 million in any one company. The debt we invest in is not expected to be rated by a rating agency and, if it were, would be below investment grade. Because of the higher risk nature of our investments, we require board observation or informational rights and may require a board seat.

We may engage in various investment strategies to achieve our investment objectives based on the types of opportunities we discover and the competitive landscape. We expect to focus on current cash yields in order to achieve our income producing goals.

Our Investment Process

The investment process is comprised of the sourcing and qualifying of investment opportunities, evaluating and negotiating the investment vehicle, due diligence of the business plan, operations and prospects of the prospective investee and follow through investment monitoring, follow on investments and portfolio management.

RCM’s investment team identifies investment opportunities through a network of investment referral relationships. Investment proposals may come to RCM or us from other sources, including unsolicited proposals from companies and referrals from accountants, bankers, lawyers and other members of the financial community. We believe that RCM’s and our reputation and experience in the investment community provide a competitive advantage in originating quality investments.

In a typical private financing, RCM’s investment team will review, analyze, and confirm, through due diligence, the business plan and operations of the potential portfolio company. Additionally, they will familiarize themselves with the portfolio company’s industry and competition and may conduct reference checks with its customers and suppliers. RCM’s investment committee will then review the deal and if approved, the transaction will be funded by Rand.

Following our initial investment, we may make follow-on investments to take advantage of warrants or other preferential rights granted to us to increase or maintain our position in a promising portfolio company, or provide additional funds to allow a portfolio company to fully implement its business plans, develop a new line of business or recover from unexpected business problems. Follow-on investments in a portfolio company are evaluated individually and may be subject to SBA restrictions.

 

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Disposition of Investments

We may exit investments through the maturation of a debt security or when a liquidity event takes place, such as the sale, recapitalization, or initial public offering of a portfolio company. The method and timing of the disposition of our portfolio investments can be critical to the realization of maximum total return. We generally expect to dispose of our equity securities through private sales of securities to other investors or through the sale or merger of the portfolio company. We anticipate our debt investments will be repaid with interest and may realize further appreciation from warrants or other equity type instruments received in connection with an investment.

Current Portfolio Companies

For a description of our current portfolio company investments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Composition of the Investment Portfolio.”

Competition

We compete for quality investments with other venture capital firms, individual investors, business development companies, and investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks. We believe we are able to compete with these entities primarily on the basis of RCM’s and our referral network, RCM’s and our investing reputation and experience, RCM’s responsive, quick, and efficient investment analysis and decision-making process and the investment terms we offer.

For information concerning the competitive risks we face, see “Item 1A. Risk Factors.”

Employees

We do not have any employees. Our operations are managed by RCM, our investment adviser and administrator, and each of our officers is an employee of RCM. RCM employed a total of four employees at December 31, 2020. We reimburse our administrator, RCM, for the allocable portion of overhead and other expenses incurred by it in performing its obligations, on behalf of Rand, under the Administration Agreement. For a more detailed discussion of the administration agreement with RCM, see “Administration Agreement.”

Investment Advisory and Management Agreement

RCM serves as our investment adviser (the “Adviser”) under the terms of the Investment Management Agreement. The Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Adviser manages the investment and reinvestment of our assets and, without limiting the generality of the foregoing:

(i) determines the composition of Rand’s portfolio, the nature and timing of the changes therein and the manner of implementing such changes;

(ii) identifies, evaluates and negotiates the structure of the investments;

(iii) executes, closes, services and monitors the investments;

(iv) determines the securities and other assets that we will purchase, retain or sell;

(v) performs due diligence on prospective portfolio companies and investments;

(vi) provides us with other investment advisory, research and related services that may, from time to time, be required for the investment of our assets, and

(vii) performs valuation of portfolio investments.

The Adviser’s services under the Investment Management Agreement are not exclusive, and it may furnish similar services to other entities. In addition, subject to compliance with the requirements of the 1940 Act, the

 

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Adviser is authorized to enter into one or more sub-advisory agreements with other investment advisors (each a “Sub-Advisor”), including for purposes of recommending specific securities or other investments based upon our investment objectives and policies, and working, along with the Adviser, in structuring, negotiating, arranging or effecting the acquisition or disposition of our investments and monitoring our investments. Under the terms of the Investment Management Agreement, the Adviser, and not us, will be responsible for any compensation that is payable to any Sub-Advisor.

About the Investment Process of the Adviser

The Adviser’s principal investment portfolio managers are Allen F. Grum and Daniel P. Penberthy, who manage the Corporation’s investment portfolio on a day-to-day basis. All decisions to acquire or dispose of assets on behalf of the Corporation are made by the Adviser’s investment committee (the “Investment Committee”). Each decision must be approved by a majority of Investment Committee members.

The Investment Committee was composed of five individuals during 2020 and increased to six individuals when James Morrow was added to the Investment Committee effective December 31, 2020 in connection with the Adviser Change in Control. As disclosed in our current report on Form 8-K, filed with the SEC on January 4, 2021, Callodine acquired the controlling interest of RCM, from East on December 31, 2020. The Investment Committee currently consists of the following individuals:

 

   

Scott Barfield;

 

   

Brian Collins;

 

   

Allen F. Grum;

 

   

Adam Gusky;

 

   

James Morrow; and

 

   

Daniel P. Penberthy.

All potential investment opportunities undergo an initial informal review by Messrs. Grum and Penberthy, as the Adviser’s investment professionals. Each potential investment opportunity that an investment professional determines merits consideration is presented and evaluated at meetings in which the members of the Investment Committee discuss the merits and risks of each potential investment opportunity and the pricing and structure for the investment.

Fees Paid to Adviser

Under the Investment Management Agreement, we pay the Adviser, as compensation for the investment advisory and management services, fees consisting of two components: (i) the Base Management Fee and (ii) the Incentive Fees.

Base Management Fee

The “Base Management Fee” is calculated at an annual rate of 1.50% of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds), determined according to procedures duly adopted by the Board.

The Base Management Fee is calculated based on the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed calendar quarters.

Incentive Fees

The “Incentive Fees” are comprised of two parts: (1) the Income Based Fee and (2) the Capital Gains Fee.

 

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Income Based Fee

The “Income Based Fee” is calculated and payable quarterly in arrears based on the Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter and is payable promptly following the filing of our financial statements for such quarter.

For purposes of the Investment Management Agreement, “Pre-Incentive Fee Net Investment Income” is defined as interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) we accrue during the relevant calendar quarter, minus the operating expenses for such calendar quarter (including the Base Management Fee, expenses payable under the Administration Agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding any portion of Incentive Fee).

Pre-Incentive Fee Net Investment Income includes any accretion of original issue discount, market discount, payment-in-kind interest, payment-in-kind dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that we have recognized in accordance with United States generally accepted accounting principles, (“GAAP”), but have not yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized and unrealized capital losses or unrealized capital appreciation or depreciation.

Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness) at the end of the immediately preceding calendar quarter, is compared to a “hurdle rate”, expressed as a rate of return on the value of our net assets at the end of the most recently completed calendar quarter, of 1.75% per quarter (7% annualized). We pay the Adviser an Incentive Fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows:

(i) no Income Based Fee in any quarter in which the Pre-Incentive Fee Net Investment Income for such quarter does not exceed the hurdle rate of 1.75% (7.00% annualized);

(ii) 100% of the Pre-Incentive Fee Net Investment Income for any calendar quarter with respect to that portion of the Pre-Incentive Fee Net Investment Income for such calendar quarter, if any, that exceeds the hurdle rate of 1.75% (7.00% annualized) but is less than 2.1875% (8.75% annualized); and

(iii) 20% of the amount of the Pre-Incentive Fee Net Investment Income for any calendar quarter with respect to that portion of the Pre-Incentive Fee Net Investment Income for such calendar quarter, if any, that exceeds 2.1875% (8.75% annualized).

However, the Income Based Fee paid to the Adviser for any calendar quarter that begins more than two years and three months after the effective date of the Prior Investment Management Agreement shall not be in excess of the Incentive Fee Cap. The “Incentive Fee Cap” for any quarter is an amount equal to (1) 20.0% of the Cumulative Net Return (as defined below) during the relevant Income Based Fee Calculation Period (as defined below) minus (2) the aggregate Income Based Fee that was paid in respect of the calendar quarters included in the relevant Income Based Fee Calculation Period.

For purposes of the calculation of the Income Based Fee, “Income Based Fee Calculation Period” is defined as, with reference to a calendar quarter, the period of time consisting of such calendar quarter and the additional quarters that comprise the lesser of (1) the number of quarters immediately preceding such calendar quarter that began more than two years after the effective date of the Prior Investment Management Agreement or (2) the eleven calendar quarters immediately preceding such calendar quarter.

For purposes of the calculation of the Income Based Fee, “Cumulative Net Return” is defined as (1) the aggregate net investment income in respect of the relevant Income Based Fee Calculation Period minus (2) any Net Capital Loss, if any, in respect of the relevant Income Based Fee Calculation Period. If, in any quarter, the Incentive Fee Cap is zero or a negative value, we pay no Income Based Fee to the Adviser for such quarter. If, in

 

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any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the Income Based Fee that is payable to the Adviser for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, we pay an Income Based Fee to the Adviser equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the Income Based Fee that is payable to the Adviser for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, we pay an Income Based Fee to the Adviser equal to the Income Based Fee calculated as described above for such quarter without regard to the Incentive Fee Cap.

For purposes of the calculation of the Income Based Fee, “Net Capital Loss,” in respect of a particular period, means the difference, if positive, between (1) aggregate capital losses, whether realized or unrealized, in such period and (2) aggregate capital gains, whether realized or unrealized, in such period.

Any Income Based Fee otherwise payable under the Investment Management Agreement with respect to Accrued Unpaid Income (such fees being the “Accrued Unpaid Income Based Fees”) shall be deferred, on a security-by-security basis, and shall become payable to the Adviser only if, as, when and to the extent cash is received by us in respect of any Accrued Unpaid Income. Any Accrued Unpaid Income that is subsequently reversed by us in connection with a write-down, write-off, impairment, or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (1) reduce Pre-Incentive Fee Net Investment Income and (2) reduce the amount of Accrued Unpaid Income Based Fees. Subsequent payments of Accrued Unpaid Income Based Fees that are deferred shall not reduce the amounts otherwise payable for any quarter as an Income Based Fee.

Capital Gains Fee

The “Capital Gains Fee” is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement). Under the terms of the Investment Management Agreement, the Capital Gains Fee is calculated at the end of each applicable year by subtracting (1) the sum of our cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our cumulative aggregate realized capital gains, in each case calculated from the effective date of the Prior Investment Management Agreement. If this amount is positive at the end of any calendar year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the cumulative aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee payable for that calendar year. If the Investment Management Agreement is terminated as of a date that is not a calendar year end, the termination date shall be treated as though it were a calendar year end for purposes of calculating and paying the Capital Gains Fee.

For purposes of the Capital Gains Fee:

 

   

The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment.

 

   

The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (a) the net sales price of each investment in our portfolio when sold is less than (b) the accreted or amortized cost basis of such investment.

 

   

The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the valuation of each investment in our portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investment.

The accreted or amortized cost basis of an investment shall mean, with respect to an investment owned by us as of the effective date of the Prior Investment Management Agreement, the fair value of that investment as set forth in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, as filed with the SEC on November 7, 2019, and, with respect to an investment acquired by us subsequent to the effective date of the Prior Investment Management Agreement or the Investment Management Agreement, the accreted or amortized cost basis of such investment as reflected in the our financial statements.

 

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Example 1: Income Based Fee Calculations: *

Alternative 1

Assumptions:

Investment income (including interest, dividends, fees, etc.) = 1.25%

Hurdle rate(1) = 1.75%

Base Management Fee(2) = 0.375%

Other expenses (legal, accounting, transfer agent, etc.) = 0.20%

Pre-Incentive Fee Net Investment Income (investment income – (Base Management Fee + other expenses)) = 0.675%

Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate, therefore there is no Income Based Fee is payable for the calendar quarter.

Alternative 2

Assumptions:

Investment income (including interest, dividends, fees, etc.) = 2.70%

Hurdle rate(1) = 1.75%

Base Management Fee(2) = 0.375%

Other expenses (legal, accounting, transfer agent, etc.) = 0.20%

Pre-Incentive Fee Net Investment Income (investment income – (Base Management Fee + other expenses)) = 2.125%

Income Based Fee (subject to “catch up”)(3) = 100.00% × (2.125% – 1.75%) = 0.375%

Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the Income Based Fee payable for the calendar quarter is 0.375%.

Alternative 3

Assumptions:

Investment income (including interest, dividends, fees, etc.) = 3.50%

Hurdle rate(1) = 1.75%

Base Management Fee(2) = 0.375%

Other expenses (legal, accounting, transfer agent, etc.) = 0.20%

Pre-Incentive Fee Net Investment Income (investment income – (Base Management Fee + other expenses)) = 2.925%

Income Based Fee (subject to “catch up”)(3) = 100.00% × “catch-up” + (20.00% × (Pre-Incentive Fee Net Investment Income above 2.1875%))

Catch-up = 2.1875% – 1.75% = 0.4375%

Income Based Fee = (100.00% × .4375%) + (20.00% × (2.925% – 2.1875%))

= 0.4375% + (20.00% × 0.7375%)

= 0.4375% + 0.1475%

= 0.585%

Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the Income Based Fee payable for the calendar quarter is 0.585%.

 

  *

For ease of review, (i) the hypothetical amounts of Pre-Incentive Fee Net Investment Income, investment income, Base Management Fee, other expenses, and Income Based Fee are each expressed

 

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  as a percentage of total assets, though as described in greater detail above, each of these amounts are calculated as a numerical dollar amount as set forth in the Investment Management Agreement, (ii) the hypothetical amount of the Base Management Fee is assumed to be consistent from quarter to quarter, and (iii) these examples each assume that the Incentive Fee Cap is not yet in effect.

(1) Represents 7.00% annualized hurdle rate.

(2) Represents 1.50% annualized Base Management Fee.

(3) The “catch-up” provision is intended to provide the Adviser with an Income Based Fee of 20.00% on all Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when Rand’s Pre-Incentive Net Investment Income exceeds 1.75% in any calendar quarter.

Example 2: Capital Gains Fee Calculations:

Alternative 1

Assumptions:

 

Year 1:    $20.0 million investment made in Company A (“Investment A”), and $30.0 million investment made in Company B (“Investment B”)
Year 2:    Investment A sold for $50.0 million and fair market value (“FMV”) of Investment B determined to be $32.0 million
Year 3:    FMV of Investment B determined to be $25.0 million
Year 4:    Investment B sold for $31.0 million

The Capital Gains Fees, if any, would be calculated as follows:

 

Year 1:    None
Year 2:    Capital Gains Fee of $6.0 million — ($30.0 million realized capital gains on sale of Investment A multiplied by 20.0%)
Year 3:    None — $5.0 million (20.0% multiplied by ($30.0 million cumulative capital gains less $5.0 million cumulative capital depreciation)) less $6.0 million (previous Capital Gains Fee paid in Year 2)
Year 4:    Capital Gains Fee of $0.2 million — $6.2 million ($31.0 million cumulative realized capital gains multiplied by 20.0%) less $6.0 million (Capital Gains Fee taken in Year 2)

Alternative 2

Assumptions:

 

Year 1:    $20.0 million investment made in Company A (“Investment A”), $30.0 million investment made in Company B (“Investment B”) and $25.0 million investment made in Company C (“Investment C”)
Year 2:    Investment A sold for $50.0 million, FMV of Investment B determined to be $25.0 million and FMV of Investment C determined to be $25.0 million
Year 3:    FMV of Investment B determined to be $27.0 million and Investment C sold for $30.0 million
Year 4:    FMV of Investment B determined to be $35.0 million
Year 5:    Investment B sold for $20.0 million

The Capital Gains Fees, if any, would be calculated as follows:

 

Year 1:    None
Year 2:    $5.0 million Capital Gains Fee - 20.0% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A less $5.0 million unrealized capital depreciation on Investment B)
Year 3:    $1.4 million Capital Gains Fee - $6.4 million (20.0% multiplied by $32.0 million ($35.0 million cumulative realized capital gains less $3.0 million unrealized capital depreciation)) less $5.0 million Capital Gains Fee received in Year 2

 

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Year 4:    $0.6 million Capital Gains Fee - $7.0 million (20.0% multiplied by $35.0 million cumulative realized capital gains) less cumulative $6.4 million Capital Gains Fee received in Year 2 and Year 3
Year 5:    None - $5.0 million (20.0% multiplied by $25.0 million (cumulative realized capital gains of $35.0 million less realized capital losses of $10.0 million)) less $7.0 million cumulative Capital Gains Fee paid in Year 2, Year 3 and Year 4

Payment of Expenses

Under the terms of Investment Management Agreement, all investment professionals of the Adviser and its staff, when and to the extent engaged in providing investment advisory services to us, and the compensation of such personnel and the general office and facilities and overhead expenses incurred by the Adviser in maintaining its place of business allocable to these services, are provided, and paid for by the Adviser and not by us. We will bear all other costs and expenses of its operations and transactions, related to the Corporation, including those relating to:

(i) organization;

(ii) calculating our net asset value (including the cost and expenses of any independent valuation firm);

(iii) expenses incurred by the Adviser payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs and in monitoring our investments and performing due diligence on prospective portfolio companies;

(iv) interest payable on debt, if any, incurred to finance our investments;

(v) offerings of our common stock and other securities;

(vi) investment advisory and management fees payable under the Investment Management Agreement, but excluding any fees payable to any Sub-Adviser;

(vii) administration fees payable under the Administration Agreement;

(viii) transfer agent and custodial fees;

(ix) federal and state registration fees;

(x) all costs of registration and listing our shares on any securities exchange;

(xi) federal, state and local taxes;

(xii) independent directors’ fees and expenses;

(xiii) costs of preparing and filing reports or other documents required by governmental bodies (including the SEC);

(xiv) costs of any reports, proxy statements or other notices to shareholders, including printing costs;

(xv) our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

(xvi) direct costs and expenses of administration, including independent auditors and outside legal costs; and

(xvii) all other expenses incurred by us or the Adviser in connection with administering our business (including payments under the Administration Agreement based upon our allocable portion of the Advisor’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs (including travel expenses)).

 

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Indemnification under the Investment Management Agreement

The Investment Management Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Adviser, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with any of them (collectively, the “Indemnified Parties”), are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of us or our security holders) arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Investment Management Agreement or otherwise as an investment adviser.

Duration and Termination

The Investment Management Agreement was executed on December 31, 2020 and will remain in effect for two years after this date. Our Board approved the Investment Management Agreement on October 29, 2020 and it was approved by our shareholders at the Special Meeting held on December 16, 2020. Thereafter, the Investment Management Agreement will continue to renew automatically for successive annual periods so long as such continuance is specifically approved at least annually by:

(i) the vote of our Board, or by the vote of shareholders holding a majority of the outstanding voting securities of Rand; and

(ii) the vote of a majority of our independent directors, in either case, in accordance with the requirements of the 1940 Act.

The Investment Management Agreement may be terminated at any time, without the payment of any penalty, upon sixty days’ written notice, by: (a) by vote of a majority of the Board or by vote of a majority of the outstanding voting securities of Rand (as defined in the 1940 Act); or (b) the Adviser. Furthermore, the Investment Management Agreement will automatically terminate in the event of its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the 1940 Act). See Part I, Item 1A. “Risk Factors—Our investment adviser and administrator, RCM, has the right to resign on sixty days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.”

Notwithstanding the termination or expiration of the Investment Management Agreement, the Adviser will be entitled to any amounts owed as payment of the Base Management Fees and the Incentive Fees through the date of termination or expiration.

Administration Agreement

In connection with the Closing, we entered into the Prior Administration Agreement with the Adviser, and on December 31, 2020, concurrent with the execution of the Investment Management Agreement, we entered into the Administration Agreement with the Adviser. Under the terms of the Administration Agreement, the Adviser agreed to perform (or oversee, or arrange for, the performance of) the administrative services necessary for our operations, including, but not limited to, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and such other services as the Adviser, subject to review by the Board, will from time to time determine to be necessary or useful to perform its obligations under the Administration Agreement. The Adviser will also, on our behalf, arrange for the services of, and oversee, custodians, depositories, transfer agents, dividend disbursing agents, other shareholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks, and such other persons in any such other capacity deemed to be necessary or desirable. The Adviser makes reports to our Board regarding the performance of its obligations under the Administration Agreement and furnishes advice and recommendations with respect to such other aspects of our business and affairs as it determines to be desirable.

 

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The Adviser is responsible for our financial and other records that are required to be maintained and prepares all reports and other materials required to be filed with the SEC or any other regulatory authority, including reports to shareholders. In addition, the Adviser assists us in determining and publishing our Net Asset Value (“NAV”), overseeing the preparation and filing of our tax returns, and the printing and dissemination of reports to shareholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. The Adviser provides, on our behalf, significant managerial assistance to those portfolio companies to which we are required to provide such assistance.

In full consideration of the provision of the services of the Adviser, we will reimburse the Adviser for the costs and expenses incurred by the Adviser in performing its obligations and providing personnel and facilities. Costs and expenses to be paid by us include those relating to: organization; calculating NAV (including the cost and expenses of any independent valuation firm); expenses incurred by the Adviser payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on its prospective portfolio companies; interest payable on debt, if any, incurred to finance our investments; offerings of our common stock and other securities; investment advisory and management fees (other than fees (if any) payable to a sub-advisor retained by the Adviser under the Investment Management Agreement); administration fees; transfer agent and custodial fees; federal and state registration fees; all costs of registration and listing our common stock on any securities exchange; federal, state, local and other taxes; independent directors’ fees and expenses; costs of preparing and filing reports or other documents required by governmental bodies (including the SEC); costs of any reports, proxy statements or other notices to shareholders, including printing costs; our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; direct costs and expenses of administration, including independent auditors and outside legal costs; and all other expenses incurred by us or the Adviser in connection with administering our business, including payments under the Administration Agreement based upon our allocable portion of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent (if office space is provided by the Adviser) and our allocable portion of the cost of the chief financial officer and chief compliance officer and their respective staffs (including travel expenses).

The Administration Agreement was executed on December 31, 2020, the same date as the Investment Management Agreement, and will remain in effect for two years, and thereafter will continue automatically for successive annual periods so long as such continuance is specifically approved at least annually by the Board, including a majority of the independent directors. The Administration Agreement may be terminated at any time, without the payment of any penalty, by vote of our directors, or by the Adviser, upon 60 days’ written notice to the other party. The Administration Agreement may not be assigned by a party without the consent of the other party.

Regulations

The following discussion is a general summary of the material prohibitions and descriptions governing BDCs and SBA-licensed SBICs. It does not purport to be a complete description of all of the laws and regulations affecting BDCs and SBICs.

Business Development Company Regulations

We have elected to be regulated as a BDC under the 1940 Act. Although the 1940 Act exempts a BDC from registration under the 1940 Act, the 1940 Act contains significant limitations on the operations of BDCs. Among other things, the 1940 Act contains prohibitions and restrictions relating to transactions between a BDC and its affiliates, principal underwriters and affiliates of its affiliates or underwriters. The 1940 Act also prohibits a BDC from changing the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by a vote of the holders of a majority of its outstanding voting securities. BDCs are not required to maintain fundamental investment policies relating to diversification and concentration of investments within a single industry. More specifically, in order to qualify as a BDC, a company must:

(1) be a domestic company;

 

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(2) have registered a class of its equity securities or have filed a registration statement with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”);

(3) operate for the purpose of investing in the securities of certain types of companies, namely immature or emerging companies and businesses suffering or just recovering from financial distress. Generally, a BDC must be primarily engaged in the business of furnishing capital and providing managerial expertise to companies that do not have ready access to capital through conventional financial channels. Such companies are termed “eligible portfolio companies;”

(4) extend significant managerial assistance to such portfolio companies; and

(5) have a majority of “disinterested” directors (as defined in the 1940 Act).

Qualifying Assets

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of their total assets. An eligible portfolio company is, generally, a private domestic operating company, or a public domestic operating company whose securities are not listed on a national securities exchange. In addition, any small business investment company that is licensed by the SBA and is a wholly owned subsidiary of a BDC is an eligible portfolio company.

Qualifying assets include:

(1) securities of companies that were eligible portfolio companies at the time the BDC acquired their securities;

(2) securities of bankrupt or insolvent companies that were eligible at the time of the BDC’s initial acquisition of their securities but are no longer eligible, provided that the BDC has maintained a substantial portion of its initial investment in those companies;

(3) securities received in exchange for or distributed on or with respect to any of the foregoing; and

(4) cash items, government securities and high-quality short-term debt.

The 1940 Act also places restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased in order for the securities to be considered qualifying assets.

A BDC is permitted to invest in the securities of public companies and other investments that are not qualifying assets, but those kinds of investments may not exceed 30% of the BDC’s total asset value at the time of the investment. At December 31, 2020, we were in compliance with this rule.

Managerial Assistance to Portfolio Companies

In order to count portfolio securities as qualifying assets for purposes of the 70% test discussed above, a BDC must either control the issuer of the securities or must offer to make available significant managerial assistance; except that, where the BDC purchases the securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.

Small Business Investment Company Regulations

SBA Lending Restrictions

SBICs are designed to stimulate the flow of private debt and/or equity capital to small businesses. The types and dollar amounts of the loans and other investments we may make are limited by the 1940 Act, the Small

 

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Business Act (the “SBA Act”) and SBA regulations. Rand SBIC uses funds borrowed from the SBA that can be combined with our own capital to provide loans to, and make equity investments in, businesses that meet the following criteria:

(a) have a tangible net worth not in excess of $19.5 million and average net income after U.S. federal income taxes for the preceding two completed fiscal years not in excess of $6.5 million, or

(b) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which the businesses are primarily engaged.

In addition, at the end of each fiscal year, an SBIC must have at least 20% to 25% (depending on what year the investment was made) in total dollars invested in “smaller enterprises.” The SBA defines “smaller enterprises” as businesses that:

(a) do not have a net worth in excess of $6 million and have average net income after U.S. federal income taxes for the preceding two years no greater than $2 million, or

(b) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which the concerns are primarily engaged.

We have complied with these requirements since the inception of Rand SBIC.

The SBA prohibits an SBIC from providing funds to small businesses with specific characteristics, such as businesses with the majority of their employees located outside the United States, or from investing in passive or non-operating businesses, real estate, project financing, farmland, or financial lenders. Without prior SBA approval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory capital in any one company and its affiliates.

The SBA places limitations on the financing terms of investments by SBICs in portfolio companies such as limiting the prepayment options, the financing fees that can be charged to a portfolio company, the allowable interest rate on loan and debt securities that an SBIC can charge a portfolio company, and the maximum term of such financing. An SBIC may exercise control over a small business for a period of up to seven years from the date on which the SBIC initially acquires its control position.

The SBA restricts the ability of an SBIC to lend money to any of its officers, directors, and employees or to invest in associates. The SBA also prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person, or a group of persons acting together, owning 10% or more of a class of capital stock of a licensed SBIC. A “change of control” is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. Rand SBIC received approval from the SBA in October 2019 for purposes of completing the stock sale transaction between Rand Capital Corporation and East.

Rand SBIC may invest directly in a portfolio company’s equity but may not become a general partner of a non-incorporated entity or otherwise become jointly or severally liable for the general obligations of a non-incorporated entity. Rand SBIC may acquire options or warrants in portfolio companies, and the options or warrants may have redemption provisions, subject to certain restrictions. Pursuant to SBA regulations, the maximum cash which may be invested in any one portfolio company by Rand SBIC is currently $4.8 million.

In addition, the SBA regulations require an examination of a licensed SBIC by an SBA examiner to determine the SBIC’s compliance with the relevant SBA regulations. Our annual report, submitted to the SBA, must be audited by an independent public accounting firm.

SBA Leverage

The SBA raises capital to enable it to provide funds to SBICs by guaranteeing certificates or bonds that are pooled and sold to purchasers of the government guaranteed securities. The amount of funds that the SBA may lend to SBICs is determined by annual Congressional appropriations.

SBA debentures are issued with ten-year maturities. Interest only is payable semi-annually until maturity. All of our outstanding SBA debentures may be prepaid without penalty. To reserve the approved SBA debenture

 

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leverage, we paid an upfront 1% commitment fee to the SBA as a partial prepayment of the SBA’s nonrefundable 3% leverage fee. These fees are expensed over the life of the corresponding SBA debenture instruments. The SBA, as a creditor, will have a superior claim to Rand SBIC’s assets over our shareholders in the event we liquidate Rand SBIC, or the SBA exercises its remedies under the SBA-guaranteed debentures issued by Rand SBIC upon an event of default.

At December 31, 2020, we had $11,000,000 in outstanding SBA debenture instruments.

Taxation as a Regulated Investment Company

The Corporation intends to elect U.S. federal tax treatment as a RIC as of January 1, 2020 on our timely filed U.S. Federal tax return for the 2020 tax year. In order to qualify to make the RIC Election, we must, among other things, distribute our previously undistributed “accumulated earnings and profits” to shareholders, which we accomplished through the special dividend paid to shareholders in May 2020. RIC qualification also requires meeting specified source-of-income and asset-diversification requirements. In addition, we must distribute to our shareholders, with respect of each taxable year, dividends for U.S. federal income tax purposes in an amount generally at least equal to 90% of our “investment company taxable income,” which is generally equal to the sum of our net ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses, determined without regard to any deduction for distributions paid (the “Annual Distribution Requirement”). As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our shareholders. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.

In connection with making the RIC election, we expect that Rand SBIC will also make an election to be taxed as a RIC for U.S. federal tax purposes. In order to be eligible to be taxed as a RIC, Rand SBIC must satisfy the source-of-income, asset-diversification, and minimum distribution requirements discussed above. Because a substantial portion of our assets are held in Rand SBIC, we may not be able to satisfy the asset-diversification requirements unless Rand SBIC also qualifies to be taxed as a RIC for U.S. federal tax purposes.

Assuming that we qualify to be taxed as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our “investment company taxable income” and net capital gain (which is defined as net long-term capital gain in excess of net short-term capital loss) that is timely distributed to shareholders. Similarly, assuming that Rand SBIC qualifies to be taxed as a RIC and satisfies the Annual Distribution Requirement, Rand SBIC will also not be subject to U.S. federal income tax on the portion of its “investment company taxable income” and net capital gain that it timely distributes to Rand Capital Corporation. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our shareholders. Rand SBIC will also be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to Rand Capital Corporation. Additionally, we will be subject to U.S. federal income tax at the regular corporate rates on any income earned on certain investments that need to remain in a taxable subsidiary in order to maintain RIC status.

Rand and Rand SBIC, respectively, will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless each distribute in a timely manner an amount at least equal to the sum of:

(1) 98% of its ordinary income for each calendar year,

(2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year, and

(3) any income recognized, but not distributed, in preceding years and on which it paid no U.S. federal income tax.

In order to maintain qualification as a RIC for U.S. federal income tax purposes going forward, Rand and Rand SBIC must each, among other things:

(1) meet the Annual Distribution Requirement;

 

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(2) qualify to be regulated as a BDC or be registered as a management investment company under the 1940 Act;

(3) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or currencies or other income derived with respect to its business of investing in such stock, securities or currencies and net income derived from an interest in a “qualified publicly-traded partnership” (as defined in the Internal Revenue Code); and

(4) diversify its holdings so that at the end of each quarter of the taxable year:

(a) at least 50% of the value of its assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of its assets or more than 10% of the outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly-traded partnership”); and

(b) no more than 25% of the value of its assets is invested in the securities, other than U.S. Government securities or securities of other RICs, (i) of one issuer (ii) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of one or more “qualified publicly-traded partnerships”.

Because a substantial portion of Rand Capital Corporation’s assets consist of its shares in Rand SBIC, we will not be eligible to be taxed as a RIC for U.S. federal income tax purposes unless Rand SBIC is also eligible to be taxed as a RIC for U.S. federal tax purposes.

We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that have original issue discount (OID) or debt instruments with payment-in-kind (“PIK”) interest, we must include in income, each year, a portion of this non-cash income that accrues over the life of the obligation, regardless of whether cash is received by us in that taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any OID income or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our shareholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash.

Even if Rand and Rand SBIC qualify for taxation as RICs, they will be subject to corporate-level U.S. federal income tax on any unrealized net built-in gains in their respective assets as of the first day they qualify as RICs to the extent that such gains are realized by them during the five-year period following the first day that they qualify as RICs. As of December 31, 2020, neither Rand nor Rand SBIC have unrealized net built-in gains.

If Rand and Rand SBIC qualify for taxation as RICs, distributions out of our earnings and profits to shareholders generally will be taxable to shareholders for U.S. federal income tax purposes, either as ordinary income or capital gains, depending upon the nature of the income giving rise to the distribution. The tax consequences to a shareholder attributable to the acquisition, ownership, and disposition of our common stock, are complex and will depend on the facts of the shareholder’s unique circumstances.

Item 1A.     Risk Factors

We have listed below the material risk factors applicable to us grouped into the following categories: Risks related to our Business and Structure, Risks related to our Investments and Risks related to our Common Stock.

 

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Risks related to our Business and Structure

We are dependent upon RCM for our future success.

Our day-to-day investment operations are managed by our investment adviser and administrator, RCM, subject to oversight and supervision by our Board. We no longer have any employees, and, as a result, RCM’s investment team evaluates, negotiates, structures, closes and monitors our investments. We depend on the diligence, skill, investment expertise and network of business contacts of RCM’s investment professionals, including Allen F. “Pete” Grum and Daniel P. Penberthy, and the investment committee of RCM (the “Investment Committee”) to source appropriate investments for us. We also depend on members of RCM’s investment team and the Investment Committee to analyze potential investments for us and on members of the Investment Committee to make investment decisions for us. Our future success depends on the continued availability of the members of RCM’s investment team and the Investment Committee and the other investment professionals available to RCM. Although each of the then-current employees of the Corporation entered into employment arrangements with RCM at the closing of the Transactions, the Corporation does not have any employment agreements with these individuals or other key personnel of RCM, including members of the Investment Committee, and we cannot provide any assurance that unforeseen business, medical, personal or other circumstances would not lead any such individual to terminate his or her relationship with RCM. The loss of a material number of investment professionals to which RCM has access or members of the Investment Committee, could have a material adverse effect on our ability to achieve our investment objectives as well as on our financial condition and results of operations. In addition, we cannot assure you that RCM will remain our investment adviser or that we will continue to have access to RCM’s investment professionals or the Investment Committee or its information and deal flow.

RCM has no prior experience managing or acting as an investment adviser for a BDC.

Prior to its entry into the Investment Management Agreement with Rand, RCM was a newly formed entity that had no prior experience managing or acting as an investment adviser for a BDC. Although the Corporation’s existing employees became employees of RCM after the closing of the Transactions, all of RCM’s investment decisions are made by its Investment Committee, which consists of six persons, of which Allen F. “Pete” Grum and Daniel P. Penberthy are two of its members. The investment philosophy and techniques used by RCM, and in particular its Investment Committee, to manage the Corporation’s investment activities may differ from the investment philosophy and techniques previously employed by RCM’s investment team in identifying and managing other investments and that were previously used by the Corporation when it was internally managed. RCM has focused its investing on behalf of the Corporation on interest-yielding debt securities. In addition, RCM is seeking to source potential investments using its relationships and the business networks of the members of the Investment Committee. However, we can offer no assurance that RCM will be successful with respect to its investment decisions in acting as our investment adviser or that RCM or the Investment Committee will be successful in their attempts to source and originate additional potential transactions that are appropriate for Rand’s investment strategy through the use of existing business networks, and our investment returns could be substantially lower than the returns we have achieved in the past.

Our financial results will depend on RCM’s skill to manage and deploy capital effectively.

Our ability to achieve long-term capital appreciation on our existing equity investments and to maintain a current cash flow from our debt investments while shifting our portfolio to contain a greater percentage of interest-yielding securities depends on RCM’s capability to effectively identify, invest, and manage our capital.

Accomplishing this investment objective effectively will be based on RCM’s handling of the investment process, starting with its ability to find investments that offer favorable terms and meet our investment objective. RCM will also need to monitor our portfolio companies’ performance and may be called upon to provide managerial assistance. These competing demands on their time may slow the rate of investment.

Even if RCM is able to grow and build on our investment portfolio, any failure by RCM to manage the growth of our portfolio effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. If RCM cannot successfully manage our investment portfolio or implement our investment objectives, this could negatively impact our stock price.

 

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RCM, on our behalf, may be unable to invest a significant portion of the net proceeds from the Transactions or other cash on hand on acceptable terms or within a reasonable timeframe.

In connection with the closing of the Transactions, the purchase price was paid through the contribution to the Corporation by East of existing loans and other securities that had a fair value as of the closing date for the Transactions of approximately $9.5 million and a cash payment of approximately $15.5 million. Delays by RCM in investing the net proceeds raised in the Transactions or other cash on hand may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We cannot assure you that RCM will be able to identify investments that meet our investment objective or that any investment that we make using these proceeds will produce a positive return. RCM may be unable to invest the net proceeds from the Transactions or other cash on hand on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

We anticipate that, depending on market conditions, including as a result of the COVID-19 pandemic, it may take RCM a substantial period of time to invest substantially all of the net proceeds from the Transactions or other cash on hand in securities meeting our investment objectives. During this period, we will invest the net proceeds from the Transactions primarily in cash, cash equivalents and U.S. Government securities, which may produce returns that are significantly lower than the returns that we expect to achieve when our portfolio is fully invested in securities meeting our investment objectives. Until such time, the market price for our common stock may decline. Thus, the return on an investment in us may be lower than when, if ever, our portfolio is fully invested in securities meeting our investment objective.

We are subject to risks created by our regulated environment.

We are regulated by the SEC and the SBA. Changes in the laws or regulations that govern BDCs and SBICs could significantly affect our business. Regulations and laws may be changed periodically, and the interpretations of the relevant regulations and laws are also subject to change. Any change in the regulations and laws governing our business could have a material impact on our financial condition and our results of operations. Moreover, the laws and regulations that govern BDCs and SBICs may place conflicting demands on the manner in which we operate, and the resolution of those conflicts may restrict or otherwise adversely affect our operations.

In particular, Rand SBIC has received a license to operate as an SBIC under the Small Business Investment Act of 1958, as amended (the “1958 Act”), and is regulated by the SBA. The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies, regulates the types of financing, prohibits investing in small businesses with certain characteristics or in certain industries and requires capitalization thresholds that limit distributions to the Corporation. Compliance with SBIC requirements may cause Rand SBIC to invest at less competitive rates in order to find investments that qualify under the SBA regulations.

The SBA regulations require, among other things, an annual periodic examination of a licensed SBIC by an SBA examiner to determine the SBIC’s compliance with the relevant SBA regulations, and the performance of a financial audit by an independent auditor. If Rand SBIC fails to comply with applicable regulations, the SBA could, depending on the severity of the violation, limit or prohibit Rand SBIC’s use of the debentures, declare outstanding debentures immediately due and payable, or limit Rand SBIC from making new investments. In addition, the SBA could revoke or suspend Rand SBIC’s license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the 1958 Act or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because Rand SBIC is our wholly-owned direct and indirect subsidiary.

We are subject to risks created by borrowing funds from the SBA.

Our liabilities consist primarily of debt instruments issued through the SBA, which have fixed interest rates. Until and unless we are able to invest substantially all of the proceeds from these SBA debentures at annualized interest or other rates of return that substantially exceed annualized interest rates that Rand SBIC must pay the SBA, our operating results may be adversely affected which may, in turn, depress the market price of our common stock.

 

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In addition, our outstanding $11.0 million in SBA debentures will reach maturity and become payable between 2022 and 2029. In order to repay our outstanding SBA debentures, we will need to identify sources of additional funding if the proceeds received upon the exits of our investments or other cash on hand are insufficient to fund our operations and repay our SBA obligations. We cannot be assured that the proceeds to be received upon the exits from our investments or other cash on hand will be sufficient to meet our funding needs or, if such proceeds or other cash on hand are insufficient, that we will be able to obtain access to the necessary funding on terms that are acceptable to us.

We are subject to risks created by the valuation of our portfolio investments.

At December 31, 2020, 92% of our investments are in private securities that are not publicly traded. There is typically no public market for securities of the small privately held companies in which we typically invest. Investments are valued in accordance with our established valuation policy and are stated at fair value as recommended in good faith by RCM and approved by our Board. The inputs into the determination of fair value of these investments may require significant management judgment or estimation. In the absence of a readily ascertainable market value, the estimated value of our investment portfolio may differ significantly, favorably or unfavorably, from the values that would be placed on the portfolio if a ready market for the securities existed. Any changes in estimated value are recorded in the consolidated statement of operations as “Net change in unrealized depreciation or appreciation on investments.” In addition, the participation of RCM’s investment professionals in our valuation process may result in a conflict of interest as RCM’s Base Management Fee under the Investment Management Agreement is based, in part, on the value of our gross assets, and the Incentive Fees payable under the Investment Management Agreement are based, in part, on realized gains and realized and unrealized losses.

RCM, acting as our investment adviser, operates in a competitive market for investment opportunities.

RCM, acting as our investment adviser, operates in a competitive market for investment opportunities. RCM faces competition in our investing activities from many entities including other SBICs, private venture capital funds, investment affiliates of large companies, wealthy individuals and other domestic or foreign investors. The competition is not limited to entities that operate in the same general geographical areas as we do. Some of our competitors have higher risk tolerances or different risk assessments than we do. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. As a regulated BDC, we are also required to disclose quarterly and annually the name and business description of our portfolio companies and the value of their portfolio securities. Most of our competitors are not subject to this disclosure requirement or similar types of disclosure requirements. This obligation to disclose this information could hinder RCM’s ability to invest in potential portfolio companies on our behalf. Additionally, other regulations, current and future, may make us less attractive as a potential investor to a given portfolio company than a private fund that is not subject to these regulations.

The COVID-19 pandemic has, and may continue to, negatively affect the operating results, financial conditions or liquidity of our portfolio companies, which may negatively affect our operating results and financial condition. In addition, the pandemic may also negatively affect RCM’s ability, on our behalf, to invest a significant portion of the net proceeds from the Transaction and other cash on hand on acceptable terms or within a reasonable timeframe.

The global outbreak of COVID-19 (“coronavirus”) has led to severe disruptions in general economic activities as businesses and federal, state, and local governments take and have taken broad actions to mitigate this public health crisis, including restrictions on travel and the temporary closures of corporate offices, retail stores, and manufacturing facilities and factories across the United States and the wider global community.

As a result, the business, operating results, financial condition and liquidity of our portfolio companies have been, and may continue to be, materially and adversely affected. The cumulative impact to our portfolio

 

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companies’ results from coronavirus will depend to a large extent on the duration and severity of coronavirus and the actions taken by authorities and other entities to contain coronavirus or treat its impact, all of which are beyond our control. Certain of our portfolio companies have had, and may continue to have, their operations temporarily shut down or significantly curtailed, which we believe will further exacerbate the impact of these events on those portfolio companies. In addition, even if our portfolio companies have availed themselves of loans from the SBA under the Paycheck Protection Program or the other assistance provided by U.S. federal or state governmental entities to mitigate the impacts of coronavirus, certain of our portfolio companies have experienced, and may continue to experience, significant liquidity issues, which, in turn, may negatively affect their ability to repay principal and interests on outstanding loans and other debt instruments owed to the Corporation, including resulting in the Corporation having large outstanding interest receivable balances owed to it. In addition, certain portfolio companies may not be able to continue as going concerns. In connection with the coronavirus pandemic, we may be required to restructure certain of our investments on terms that are less favorable to us to avoid potential bankruptcies and other insolvency issues for our portfolio companies. A substantial negative impact to one or more of our portfolio companies resulting from the coronavirus pandemic could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, severe disruptions in general economic activities due to coronavirus may negatively affect RCM’s ability to invest a significant portion of the net proceeds from the Transaction or other cash on hand on acceptable terms or within a reasonable timeframe. Delays by RCM in investing the net proceeds raised in the Transaction or other cash on hand due to coronavirus may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We anticipate that, depending on market conditions, it may take RCM a substantial period of time to invest substantially all of the net proceeds from the Transaction and other cash on hand in securities meeting our investment objectives. This period may be further lengthened due to the impact of the coronavirus.

There are potential conflicts of interest, including the management of other investment funds and accounts by the principals and certain members of the Investment Committee of RCM, which could impact our investment returns.

The principals and certain members of the Investment Committee of RCM manage other funds and accounts, including for entities affiliated with members of the Investment Committee. Accordingly, they have obligations to those investors, the fulfillment of which may not be in the best interests of, or may be adverse to the interests of, us or our shareholders. Although the principals, members of the Investment Committee and other professional staff of RCM are expected to devote as much time to our management as appropriate to enable RCM to perform its duties in accordance with the Investment Management Agreement, the members of the Investment Committee and investment professionals of RCM may have conflicts in allocating their time and services among RCM, on the one hand, and the other managed investment vehicles, on the other hand.

RCM, including members of its Investment Committee, may face conflicts in allocating investment opportunities between us and other investment vehicles affiliated with members of the Investment Committee that have overlapping investment objectives with ours. Although RCM, including members of the Investment Committee, will endeavor to allocate investment opportunities in a fair and equitable manner in accordance with its allocation policies and procedures, it is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by RCM or members of the Investment Committee if such investment is prohibited by law.

Our ability to enter into transactions with our affiliates is restricted.

We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we will generally be prohibited from buying from, or selling to, such affiliate any securities, absent the prior approval of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, including other funds or clients advised by RCM or its affiliates, which in certain

 

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circumstances could include investments in the same portfolio company (whether at the same or different times to the extent the transaction involves a joint investment), without prior approval of our Board and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, or is otherwise deemed to control, be controlled by, or be under common control with us, we will be prohibited from buying from, or selling to, such person or certain of that person’s affiliates any securities, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. For example, given East’s approximately 64% ownership position in our common stock, this prohibition impacts our ability to participate in certain transactions or investments where East is involved, including with respect to certain of the loans and other securities that were contributed to us by East as part of the consideration for East’s purchase of our common stock. To the extent such loans and other securities are also held by East or another one of our affiliates. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates or anyone who is under common control with us. As a result of these restrictions, we may also be prohibited from buying securities from, or selling securities to, any portfolio company that is controlled by a fund managed by either RCM or its affiliates without the prior approval of the SEC, which may limit the scope of investment or disposition opportunities that would otherwise be available to us. The analysis of whether a particular transaction constitutes a joint transaction requires a review of the relevant facts and circumstances then existing.

On October 7, 2020, we, RCM and certain of our affiliates received exemptive relief from the SEC to permit us to co-invest with certain other funds managed by RCM or its affiliates in a manner consistent with the conditions of our exemptive relief. Pursuant to such exemptive relief, we generally are permitted to co-invest with certain of our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our shareholders and do not involve overreaching of us or our shareholders on the part of any person concerned, (2) the transaction is consistent with the interests of our shareholders and is consistent with our investment objective and strategies, and (3) the investment by our affiliates would not disadvantage us, and our participation would not be on a basis different from or less advantageous than that on which our affiliates are investing. We have applied for a new exemptive relief order, which, if granted, would supersede our current exemptive relief and include certain of our new affiliates resulting from the change in control of RCM from East to Callodine. There can be no assurance that we will obtain such new exemptive relief from the SEC.

In situations when co-investment with funds managed by RCM or its affiliates is not permitted under the 1940 Act and related rules, existing or future staff guidance, or the terms and conditions of the exemptive relief granted to us by the SEC, RCM will need to decide which client or clients will proceed with the investment. Generally, we will not be entitled to make a co-investment in these circumstances and, to the extent that another client elects to proceed with the investment, we will not be permitted to participate in the investment we otherwise would have made.

The fee structure under the Investment Management Agreement may induce RCM to pursue speculative investments and incur leverage, which may not be in the best interests of the shareholders.

Under the terms of the Investment Management Agreement, the Base Management Fee is payable even if the value of your investment declines. The Base Management Fee is calculated based on the total assets (other than cash or cash equivalents but including assets purchased with borrowed funds), as determined according to procedures duly adopted by the Board. Accordingly, the Base Management Fee is payable regardless of whether the value of Rand’s total assets or your investment has decreased during the then-current quarter and creates an incentive for RCM to incur leverage, which may not be consistent with our shareholders’ interests.

The Incentive Fee payable to RCM is calculated based on a percentage of our return on invested capital. The terms of the Incentive Fee calculation may create an incentive for RCM to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. Unlike the Base Management Fee, the Income Based Fee is payable only if the hurdle rate is achieved. Because the portfolio earns investment income on gross assets while the hurdle rate is based on net assets, and because the use of leverage increases gross assets without any corresponding increase in net assets, RCM may be incentivized

 

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to incur leverage to grow the portfolio, which will tend to enhance returns where our portfolio has positive returns and increase the chances that the hurdle rate is achieved. Conversely, the use of leverage may increase losses where our portfolio has negative returns, which would impair the value of our common stock.

In addition, RCM receives the Incentive Fees based, in part, upon net capital gains realized on our investments under the Capital Gains Fee. Unlike the Income Based Fee, there is no hurdle rate applicable to the Capital Gains Fee. As a result, RCM may have an incentive to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative equity securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

RCM may be paid incentive compensation even if we incur a net loss, and we cannot recover any portion of the incentive fee previously paid.

RCM is entitled to incentive compensation under our Investment Management Agreement for each fiscal quarter under the Income Based Fee in an amount equal to a percentage of our pre-incentive fee net investment income, subject to a hurdle rate, a catch-up provision, a cap and a deferral mechanism. For purposes of calculating the Income Based Fee, our pre-incentive fee net investment income excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss for that quarter. Thus, we may be required to pay RCM incentive compensation under the Income Based Fee for a fiscal quarter even if we incur a net loss for that quarter. In addition, if we pay the Capital Gains Fee and thereafter experience additional realized capital losses or unrealized capital losses, we will not be able to recover any portion of the incentive fee previously paid.

RCM’s liability will be limited under the Investment Management Agreement and the Administration Agreement, and we will be required to indemnify RCM against certain liabilities, which may lead RCM to act in a riskier manner on our behalf than it would when acting for its own account.

Under the Investment Management Agreement and the Administration Agreement, RCM does not assume any responsibility to us other than to render the services described in the Investment Management Agreement and Administration Agreement, as applicable, and it is not responsible for any action of our Board in declining to follow RCM’s advice or recommendations. Pursuant to the Investment Management Agreement and the Administration Agreement, RCM, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with any of them are not liable to us for their acts under the Investment Management Agreement and Administration Agreement, as applicable, absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect RCM its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with any of them with respect to all damages, liabilities, costs and expenses arising out of or otherwise based upon the performance of any of RCM’s duties or obligations under the Investment Management Agreement or Administration Agreement, as applicable, or otherwise as investment adviser or administrator, as applicable, for us, and not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Investment Management Agreement or the Administration Agreement. These protections may lead RCM to act in a riskier manner when acting on our behalf than it would when acting for its own account.

Our investment adviser and administrator, RCM, has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

Our investment adviser and administrator, RCM, has the right, under both the Investment Management Agreement and the Administration Agreement, to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If RCM resigns, we may not be able to find a new investment adviser or administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations are likely to be

 

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adversely affected and the market price of our common stock may decline. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objectives may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.

In connection with our anticipated RIC election, we may not be able to pay distributions to our shareholders, our distributions may not grow over time and a portion of our distributions may be a return of capital.

In connection with our anticipated RIC election, which is anticipated to commence with our tax year ended December 31, 2020, after our timely filed 2020 tax return, we intend to pay distributions in the form of cash dividends to our shareholders out of assets legally available for distribution. However, we cannot assure shareholders that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC can limit our ability to pay distributions. All distributions will be paid at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and state corporate law requirements and such other factors as our Board may deem relevant from time to time. We cannot assure shareholders that we will pay distributions on our common stock in the future.

When we make distributions, we are required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain. Generally, a non-taxable return of capital will reduce an investor’s basis in our stock for federal tax purposes, which will result in higher tax liability when the stock is sold. Shareholders should read any written disclosure accompanying a distribution carefully and should not assume that the source of any distribution is our ordinary income or gains.

In connection with our anticipated RIC Election, we will be subject to corporate-level income tax if we are unable to satisfy certain RIC qualification requirements under Subchapter M of the Code or do not satisfy the annual distribution requirement.

Although we anticipate to be treated as a RIC commencing with our tax year ended December 31, 2020, no assurance can be given that we will be able to qualify for and maintain our qualification as a RIC. In order to satisfy the requirements for RIC tax treatment, we must meet the following annual distribution, income source and asset diversification requirements to be relieved of federal taxes on income and gains distributed to our shareholders.

 

   

The annual distribution requirement for a RIC will be satisfied if we distribute to our shareholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. If we are unable to obtain cash from sources in order to make these distributions, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

 

   

The income source requirement will only be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

 

   

The asset diversification requirement will only be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities, securities of other regulated investment companies, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. Government securities or securities of other regulated investment companies, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may

 

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result in our having to dispose of certain investments quickly in order to prevent the loss of regulated investment company status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

If we fail to satisfy certain RIC qualification requirements under Subchapter M of the Code or to meet the annual distribution requirement for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions, if any. Such a failure would have a material adverse effect on us and our shareholders.

In connection with our anticipated RIC Election, we may have difficulty paying required distributions to shareholders if we recognize income before or without receiving cash representing such income.

In connection with our anticipated RIC Election commencing with our tax year ended December 31, 2020, we will be required to distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to maintain our eligibility for RIC tax treatment. For U.S. federal income tax purposes, we will include in taxable income certain amounts that we have not yet received in cash, such as contracted payment-in-kind (“PIK”) interest, which represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of contracted PIK arrangements will be included in income in advance of receiving cash payment and will be separately identified on our consolidated statements of cash flows. We also may be required to include in income certain other amounts that we will not receive in cash.

Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants that we receive. This will generally result in our debt instruments having original issue discount (“OID”) for tax purposes, which we must recognize as ordinary income as such original issue discount accrues regardless of whether we have received any corresponding payment of such interest. Other features of debt instruments that we hold may also cause such instruments to generate original issue discount.

Since in certain cases we may recognize income before or without receiving cash representing such income, we could have difficulty meeting the requirement to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to maintain our eligibility for RIC tax treatment. Accordingly, we may have to use cash on hand or sell some of our assets, raise additional equity capital or reduce new investment originations to meet these distribution requirements. If we do not have sufficient cash on hand or are unable to obtain cash from other sources to satisfy such distribution requirements, we may fail to qualify for RIC tax treatment and thus may become subject to corporate-level income tax.

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to maintain our qualification as a BDC or be precluded from investing according to our current business strategy.

As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets.

We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.

Rand SBIC may be unable to make distributions to the Corporation that will allow us to meet or maintain the requirement for our anticipated RIC Election.

In order for us to qualify for tax benefits available to RICs and to minimize corporate-level U.S. federal income tax, we must distribute to our shareholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, including investment company taxable income from Rand SBIC. We will be partially dependent on Rand SBIC for distributions from Rand SBIC to the Corporation, including through “deemed dividends” in which no actual cash distribution is made from Rand SBIC to the Corporation, to enable us to meet the RIC distribution requirements. Rand SBIC may be limited by SBA regulations governing SBICs from making distributions to the Corporation, including “deemed dividends”, which may be necessary to maintain our tax treatment as a RIC. We have in the past had to, and may in the future have to, request a waiver or consent from the SBA in order for Rand SBIC to make certain distributions to maintain our RIC tax treatment. We cannot assure you that the SBA will grant such waiver or consent and if Rand SBIC is unable to obtain a waiver or consent, compliance with the SBA regulations may result in corporate-level U.S. federal income tax.

We may need to raise additional capital to grow.

We may need additional capital to fund new investments and grow. We may access the capital markets periodically to issue equity securities. In addition, we may also issue debt securities or borrow from financial institutions, including from the SBA, in order to obtain such additional capital. Unfavorable economic conditions could increase our funding costs and limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability to grow. In addition, we are required to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our shareholders to maintain our anticipated RIC Election. As a result, these earnings will not be available to fund new investments. If we are unable to access the capital markets or if we are unable to borrow from financial institutions, including from the SBA, we may be unable to grow our business and execute our business strategy fully, and our earnings, if any, could decrease, which could have an adverse effect on the value of our common stock.

We are subject to cybersecurity risks and incidents that may adversely affect our operations, the operations of RCM or the companies in which we invest. A failure in our cybersecurity systems could impair our ability to conduct business and damage our business relationships, compromise or corrupt our confidential information and ultimately negatively impact business, financial condition and operating results.

Ours and RCM’s operations are dependent on secure information technology systems for data processing, storage and reporting. Increased cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-attacks pose a risk to the security of our and RCM’s information and the information of our portfolio companies. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information stored in, or transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our or RCM’s operations, which could result in damage to our or RCM’s reputation, financial losses, litigation, increased costs or regulatory penalties. In addition, these cyber-attacks could affect our and RCM’s computer network, our website or our other service providers (such as, but not limited to, accountants, lawyers, and transfer agents) and could result in operating disruptions or information misappropriation, which could have a material adverse effect on our business operations and the integrity and availability of our financial information. We have attempted to mitigate these cybersecurity risks by employing a number of processes, procedures and internal controls within the Corporation, but we remain potentially vulnerable to additional known and unknown threats.

 

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We may experience fluctuations in our annual and quarterly results.

We could experience fluctuations in our annual and quarterly operating results due to a number of factors, some of which are beyond our control, including RCM’s ability or inability to make investments in companies that meet our investment criteria, RCM’s plans to transition over time Rand’s portfolio to include more interest-yielding securities, the interest rate payable on the debt securities acquired and the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in the markets in which we operate and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future quarters or any future fiscal years.

Risks related to our Investments

We have a limited number of companies in our portfolio of investments, and may be subjected to greater risk if any of these companies default.

Our portfolio investment values are concentrated in a small number of companies and as such, we may experience a significant loss in our net asset value if one or more of these companies performs poorly or goes out of business. The unrealized or realized depreciation in the value of the securities of any one of these companies would negatively impact our net asset value.

The lack of liquidity in our investments may adversely affect our business.

RCM, on our behalf, invests, and we expect that RCM will continue, on our behalf, to invest, in portfolio companies whose securities are not publicly traded and may be subject to restrictions on resale, and as a result will be less liquid than publicly traded securities. Most of our investments are or will be either equity securities or debt securities acquired directly from small, private companies. The illiquidity of most of our portfolio may adversely affect our ability to dispose of the securities at times when it may be advantageous for us to liquidate investments. In addition, we may not realize the full value of these private investments if we have to liquidate all or a part of our portfolio investment quickly, given the lack of available markets for their sale.

Economic downturns or recessions may adversely affect our portfolio companies’ financial performance and therefore harm our operating results.

The United States economy has periodically experienced periods of instability and recessions, including as a result of the COVID-19 pandemic, and the financial results of the small companies in which we invest could be more acutely affected negatively by this instability and suffer deterioration in operational or financial results. This deterioration may have a negative effect on our financial performance.

Investing in private companies involves a high degree of risk.

We typically invest a substantial portion of our assets in small private companies. These private businesses may be thinly capitalized, unproven companies with risky technologies, products or services, may lack management depth, and may not have attained profitability. Because of the speculative nature and the lack of a public market for these investments, there is significantly greater risk of loss than is the case with securities traded on a public exchange. We expect that some of our investments will become worthless and that some will appear likely to become successful but will never realize their potential. We have historically been risk seeking rather than risk averse in our approach to our investments. Given the incentive compensation components of our arrangement with RCM under the Investment Management Agreement, RCM may have similar incentives to be risk seeking rather than risk averse in making its investment decisions.

Even if our portfolio companies are able to develop commercially viable technologies, products or services, the market for those new technologies, products and services is likely to be highly competitive and rapidly changing. Commercial success is difficult to predict and the marketing efforts of the portfolio companies may not be successful.

 

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We may be subject to risks associated with our origination of, or investment in, covenant-lite loans to our portfolio companies.

We have originated or invested in, and may in the future originate or invest in, covenant-lite loans to our portfolio companies, which means the loan agreement or other debt instrument governing these debt obligations contains fewer maintenance covenants than other loan agreements or debt obligations, or no maintenance covenants, and may not include covenants that the Corporation could use to monitor the financial performance of the portfolio company borrower, including covenants based upon compliance with financial ratios, and declare a default under the loan agreement or other debt instrument if the specified covenants are breached. While these loans or other debt obligations to portfolio company borrowers may still contain other collateral protections, a covenant-lite loan may carry more risk than a covenant-heavy loan made by the same portfolio company borrower as it does not require this borrower to provide affirmation that certain specific financial tests have been satisfied on a routine basis, as is generally required under a covenant-heavy loan agreement or other debt instrument. Generally, covenant-lite loans or other debt instruments provide borrowers more freedom, which may negatively impact lenders because these covenants, if any, tend to be incurrence-based, meaning they are only tested and can only be breached following an affirmative action of the borrower, rather than by deterioration in the borrower’s financial condition. Should the financial condition of a portfolio company borrower begin to deteriorate, our investment in or origination of covenant-lite loans or other debt instruments to such portfolio company borrower may potentially reduce our ability to restructure such problematic loan and mitigate potential loss. As a result of our investment in or origination of covenant-lite loans, our exposure to losses may be increased, which could result in an adverse impact on the Corporation’s revenues, net income and NAV per share.

We provide debt and equity capital primarily to small companies, which may present a greater risk of loss than providing debt and equity capital to larger companies.

Our portfolio consists primarily of debt and equity investments in small companies. Compared to larger companies, small companies generally have more limited access to capital and higher funding costs, may be in a weaker financial position and may need more capital to expand, compete and operate their business. They also typically have fewer administrative resources, which can lead to greater uncertainty in their ability to generate accurate and reliable financial data, including their ability to deliver audited financial statements. In addition, many small companies may be unable to obtain financing from the public capital markets or other traditional sources, such as commercial banks, in part because loans made to these types of companies entail higher risks than loans made to companies that have larger businesses, greater financial resources or are otherwise able to access traditional credit sources on more attractive terms.

A variety of factors may affect the ability of borrowers to make scheduled payments on debt securities or loans, including failure to satisfy financial targets and covenants, a downturn in a borrower’s industry or changes in the economy in general. In addition, investing in small companies in general involves a number of significant risks, including that small companies:

 

   

may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;

 

   

typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render small companies more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

 

   

are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;

 

   

generally have less predictable operating results, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;

 

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may from time to time be parties to litigation, and our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies;

 

   

may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity; and

 

   

may be particularly vulnerable to changes in customer preferences and market conditions, depend on a limited number of customers, and face intense competition, including from companies with greater financial, technical, managerial and marketing resources.

Any of these factors or changes thereto could impair a small company’s financial condition, results of operation, cash flow or result in other adverse events, such as bankruptcy, any of which could limit a borrower’s ability to make scheduled payments on our debt securities. This, in turn, could result in losses in our investments and a decrease in our net interest income and net asset value.

Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our returns on equity.

We are subject to the risk that investments intended to be held over long periods are, instead, repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments that will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed by them. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.

We generally do not control our portfolio companies.

We do not have an expectation to control the decision making in our portfolio companies, even though we may have a board seat or board observation rights. Because of this, we are subject to the risk that our portfolio companies will make business decisions with which we disagree or will incur risks or otherwise act in ways that do not maximize their value and serve our interests as minority debt and equity holders. Due to the lack of liquidity in our investments in these private companies, we may not be able to dispose of our investment in these portfolio companies as freely as we would like or at a valuation that is appropriate. As a result, a portfolio company may make decisions that would decrease the value of our portfolio holdings.

We typically are a minority shareholder in our portfolio companies.

We typically invest as a minority shareholder in our portfolio companies. As a minority shareholder, we are unable to require the company to seek or entertain liquidity events as a way to exit our investments. This may cause us to hold investments longer than planned or to seek a sale that may not reflect the full value of our investment.

We may not have the funds or ability to make follow-on investments in our portfolio companies.

We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a company, we may be asked to participate in another round of financing by the company. There is no assurance that we will make, or have sufficient funds to make, these follow-on investments. Any decision to not make an additional investment in a portfolio company may have a negative impact on the portfolio company in need of the capital and have a negative impact on our ownership in the company.

Risks related to our Common Stock

East exercises significant influence over us in connection with its ownership of our common stock.

East beneficially owns approximately 64% of Rand’s outstanding common stock. As a result, East is able to direct the outcome of any matters submitted for shareholder action, including approval of significant corporate

 

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transactions, such as amendments to our governing documents, business combinations, consolidations, and mergers. East has substantial influence on us and could exercise its influence in a manner that conflicts with the interests of other shareholders. The presence of a significant shareholder may also have the effect of making it more difficult for a third party to acquire us or for the Board to discourage a third party from seeking to acquire us.

In addition, pursuant to the terms of the Shareholder Agreement, East has the right to designate two or three persons, depending upon the size of the Board, for nomination for election to the Board. East has the right to designate (i) up to two persons if the size of the Board is composed of fewer than seven directors or (ii) up to three persons if the size of the Board is composed of seven or more directors. Under the terms of the Shareholder Agreement, East has designated Adam S. Gusky and Benjamin E. Godley for nomination for election to the Board. The designation right provided to East under the terms of the Shareholder Agreement provides East with a significant presence on the Board and direct influence on matters presented to the Board, although all directors, whether or not nominated by East, owe fiduciary duties to all shareholders.

Investing in our shares may be inappropriate for an investor’s risk tolerance.

Our investments, in accordance with our investment objective and principal strategies, result in a greater than average amount of risk and volatility and may result in loss of principal. Our investments in portfolio companies are highly speculative and aggressive and, therefore, an investment in our shares may not be suitable for investors for whom such risk is inappropriate. Neither our investments nor an investment in our shares constitutes a balanced investment program.

Sales of substantial amounts of our common stock may have an adverse effect on the market price of our securities.

Sales of substantial amounts of our common stock, or the availability of such securities for sale, could adversely affect the prevailing market prices for our common stock.

Our shares often trade at a discount to our net asset value.

Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares and our shares have often traded at such a discount. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict if, or when, our shares will trade at, above, or below net asset value.

Item 1B.    Unresolved Staff Comments

Not applicable.

Item 2.    Properties

We do not own any real estate or other physical properties. Our corporate headquarters is located at 14 Lafayette Square, Suite 1405, Buffalo NY.

Item 3.    Legal Proceedings

None.

Item 4.    Mine Safety Disclosures

Not applicable.

 

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Part II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock (“Common Stock”) is traded on the Nasdaq Capital Market (“Nasdaq”) under the symbol “RAND.”

Rand’s Board declared a special dividend of $23.7 million, or approximately $1.62 per share, on March 3, 2020. The cash and shares of Rand’s common stock comprising the special dividend were distributed on May 11, 2020 to shareholders.

In addition, our Board declared a 2020 cash dividend of $1.33 per share on December 21, 2020. The 2020 cash dividend was paid on January 19, 2021 to shareholders of record as of December 31, 2020. The cash dividend is expected to represent over 90% of estimated taxable income for 2020.

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 dollar amount
of  shares that may yet be
purchased under the share
repurchase program (3)
 

10/1/2020 – 10/31/2020

     1,631      $ 11.38        1,631      $ 1,443,451  

11/1/2020 – 11/30/2020

     583      $ 12.59        583      $ 1,436,113  

12/1/2020 – 12/31/2020

     1,020      $ 12.59        1,020      $ 1,423,271  
  

 

 

    

 

 

    

 

 

    

Total

     3,234      $ 11.98        3,234     
  

 

 

    

 

 

    

 

 

    

 

(1)

There were 3,234 shares repurchased, in open market transactions, during the fourth quarter of 2020.

 

(2)

The average price paid per share is calculated on a settlement basis and includes commission.

 

(3)

On April 22, 2020, the Board of Directors approved a new share repurchase plan, which authorizes the Corporation to repurchase shares of the Corporation’s outstanding Common Stock with an aggregate cost of up to $1,500,000 at prices per share of Common Stock of no greater than the then current net asset value. This new share repurchase authorization lasts for a period of 12 months from the authorization date, until April 22, 2021 and was publicly announced on May 11, 2020. This new share repurchase plan supplanted and replaced the share repurchase authorization that was previously approved by the Board in October 2019.

Shareholders of Record

On March 1, 2021, we had a total of approximately 1,250 shareholders, which included 63 record holders of our Common Stock, and an estimated 1,187 holders with shares beneficially owned in nominee name or under clearinghouse positions of brokerage firms or banks.

Corporation Performance Graph

The following graph shows a five-year comparison of cumulative total shareholder returns for our Common Stock, the Nasdaq Market Index, and our peer group, assuming a base index of $100 at the end of 2014. The cumulative total return for each annual period within the five years presented is measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between share prices at the end and at the beginning of the measurement period by (2) the share price at the beginning of the measurement period.

 

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Comparison of 5 Year Cumulative Total Return

Assumes Initial Investment of $100

December 2020

 

LOGO

Comparison of cumulative total return of one or more companies, peer groups, industry indexes and/or broad markets

YEAR ENDED DECEMBER 31,

 

Company/Index/Market    2015      2016      2017      2018      2019      2020  

Rand Capital Corporation

   $ 100.00      $ 83.82      $ 80.11      $ 66.34      $ 71.19      $ 101.71  

NASDAQ Market Index

   $ 100.00      $ 108.87      $ 141.13      $ 137.12      $ 187.44      $ 271.64  

Peer Group Index

   $ 100.00      $ 114.93      $ 109.31      $ 108.14      $ 104.13      $ 90.20  

Our peer group is comprised of the following companies:

Harvest Capital Credit Corporation (NasdaqGM: HCAP)

Great Elm Capital Corp. (NasdaqGM: GECC)

Portman Ridge Financial Corp (NasdaqGS: PTMN)

Investcorp Credit Management BDC Inc. (NasdaqGS: ICMB)

We selected the peer group because we believe that the issuers included in this group are organized and have investment objectives that are similar to ours, as they are each an externally managed BDC that pays a regular cash dividend, and among the publicly traded companies, they are relatively similar in size to us.

The performance graph information provided above will not be deemed to be “soliciting material” or “filed” with the SEC or subject to Regulations 14A or 14C, or to the liabilities of section 18 of the Securities Exchange Act, unless in the future we specifically request that the information be treated as soliciting material or specifically incorporate it by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.

Item 6.     Selected Financial Data

The following table provides selected consolidated financial data for the periods indicated. You should read the selected financial data set forth below in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with the consolidated financial statements and related notes appearing within Item 8 of this Annual Report.

 

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Balance Sheet Data as of December 31:

 

     2020      2019      2018      2017      2016  

Total assets

   $ 60,966,942      $ 64,791,449      $ 40,521,724      $ 40,133,913      $ 42,418,530  

Total liabilities

   $ 14,862,112      $ 11,162,933      $ 8,997,537      $ 8,215,228      $ 9,789,167  

Net assets

   $ 46,104,830      $ 53,628,516      $ 31,524,187      $ 31,918,685      $ 32,629,363  

Net asset value per outstanding share*

   $ 17.86      $ 32.93      $ 44.88      $ 45.44      $ 46.45  

Shares of common stock outstanding

     2,582,169        1,628,369        702,443        702,443        702,443  

Operating Data for the Years Ended December 31:

 

     2020      2019      2018      2017      2016  

Investment income

   $ 3,102,919      $ 2,724,696      $ 2,106,954      $ 1,454,782      $ 1,031,858  

Total expenses

   $ 1,974,978      $ 2,770,716      $ 2,193,672      $ 2,010,977      $ 3,401,037  

Net investment income (loss), net of tax

   $ 1,756,128      ($ 85,697    ($ 68,406    ($ 19,298    ($ 1,553,268

Net realized (loss) gain on sales and dispositions of investments, net of tax

   ($ 5,983,279    $ 861,838      ($ 994,295    $ 88,684      $ 8,864,653  

Net change in unrealized depreciation or appreciation on investments, net of tax

   $ 4,970,917      ($ 3,065,811    $ 668,203      ($ 780,064    ($ 8,514,068

Net increase (decrease) in net assets from operations

   $ 743,766      ($ 2,289,670    ($ 394,498    ($ 710,678    ($ 1,202,683

 

*

Restated for 1-for-9 stock split that occurred in May 2020

Item 7.     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 within Item 8 of this Annual Report.

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 SEC. 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, including statements related to our investment strategies, the impact of COVID-19 on our portfolio companies, our intention to elect U.S. federal tax treatment as a RIC for the 2020 tax year and the associated impact of such election on payment of corporate level taxes by Rand, statements regarding our liquidity and financial resources; and statements regarding future dividend payments, 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

 

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statements are based are assumptions concerning the scope of the impact of the COVID-19 pandemic and its specific impact on our portfolio companies, 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 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 I, Item 1A of this Annual Report.

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 externally managed, diversified investment company that lends to and invests in lower middle market companies. Our investment objective is to generate current income and when also possible, complement this current income with capital appreciation, by targeting investment opportunities with favorable risk-adjusted returns.

We have elected to be regulated 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 specified in the 1940 Act. Historically, we made 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. With the capital raised in 2019, we now also have liquidity at Rand Capital Corporation, the parent company, with which to make investments.

In November 2019, Rand completed a stock sale transaction (the “Transaction”) with East Asset Management (“East”). The Transaction consisted of a $25 million investment in Rand by East, in exchange for approximately 8.3 million shares of Rand common stock. The consideration paid by East for the shares of Rand common stock was comprised of $15.5 million of cash and $9.5 million of portfolio assets. Concurrent with the closing of the transaction with East on November 8, 2019, Rand entered into an investment advisory and management agreement (the “Prior Investment Management Agreement”) and an administration agreement (the “Prior Administration Agreement”) with RCM.

In late 2020, Rand Capital Corporation’s (the “Company” or “Rand”) Board of Directors (the “Board”) was advised by RCM that Callodine Group, LLC (“Callodine”), an entity controlled by James Morrow, intended to acquire a controlling interest in RCM, which was then-currently majority owned by East Asset Management (“East”). Section 15(a) of the 1940 Act provides that any investment management contract, such as the Prior Investment Management Agreement, terminates automatically upon on its “assignment.” Section 2(a)(4) of the 1940 Act provides that the transfer of a controlling interest of an investment adviser, such as was to be caused by East’s transfer of its controlling interest in RCM to Callodine (the “Adviser Change in Control”), constitutes an “assignment.” As a result of the proposed Adviser Change in Control, Rand’s shareholders were asked to approve a new investment advisory and management agreement (the “Investment Management Agreement”) with RCM at a special meeting of shareholders held on December 16, 2020 (the “Special Meeting”). The terms of the Investment Management Agreement are identical to those contained in the Prior Investment Management Agreement, with RCM continuing to provide investment advisory and management services to Rand following the Adviser Change in Control. Following approval by Rand’s shareholders at the Special Meeting, Rand, on December 31, 2020, entered into the Investment Management Agreement and a new administration agreement (the “Administration Agreement”) with RCM and terminated the Prior Administration Agreement.

Pursuant to the terms of the Investment Management Agreement, Rand pays RCM a base management fee and may pay an incentive fee if specified benchmarks are met. In connection with retaining RCM as our

 

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investment adviser and administrator, Rand’s management and staff became employees of Rand Capital Management, LLC (“RCM”), a registered investment adviser that has been retained by Rand as its external investment adviser.

We intend to elect U.S federal tax treatment as a regulated investment company (“RIC”) as of January 1, 2020, under subchapter M of the Internal Revenue Code of 1986, as amended, on our timely filed U.S. Federal tax return for the 2020 tax year. With the election, we generally will not be subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our shareholders as dividends.

In connection with the preparation for our RIC election, we paid a special dividend of $23.7 million, or approximately $1.62 per share on the Corporation’s common stock, par value $0.10 per shares (the “Common Stock”), in cash and stock to shareholders on May 11, 2020, which distributed all of our accumulated earnings and profits since our inception through 2019. The total amount of cash distributed to all shareholders, as part of the special dividend, was limited to $4.8 million, or 20% of the total special dividend that was paid. The remaining 80% of the special dividend was paid using approximately 8.6 million shares of Common Stock.

In addition, our Board of Directors declared a 2020 cash dividend of $1.33 per share on December 21, 2020. The 2020 cash dividend was paid on January 19, 2021 to shareholders of record as of December 31, 2020. The cash dividend is expected to represent over 90% of our estimated taxable income for 2020.

To maintain our RIC status, we will need to meet specified source-of-income and asset diversification requirements and distribute annually to our shareholders at least 90% of our ordinary net income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.

We intend to co-invest, subject to the conditions included in the exemptive relief order we received from the SEC, with certain of our affiliates. See “SEC Exemptive Order” below. We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification.

Outlook

At the end of the 2020, we had $20.4 million in cash and cash equivalents available for future investments and expenses, a decrease of $5.4 million from the end of 2019. The decrease was primarily due to approximately $11.3 million in additional portfolio investments and approximately $4.8 million in cash distributed to our shareholders as part of the special dividend. This was partially offset by approximately $9.7 million of cash proceeds received during the year ended December 31, 2020 from portfolio exits.

Since the outbreak of the COVID-19 pandemic, our investment adviser, RCM, continues to engage in active discussions with the management teams of the companies within our portfolio regarding actions taken by them for the safety and welfare of their employees and their processes for phasing back to pre-COVID work environments. We also have been informed by RCM on the impact of the COVID-19 induced recession on the businesses of the portfolio companies and the actions the portfolio companies have taken, and are taking, to adapt to changes in demand, both increased and decreased, depending upon the portfolio company. Most of our portfolio companies that qualified, have applied for, and received federal loans under the Paycheck Protection Program and, where applicable, are also applying for other federal support programs. While we do not know what the ultimate impact of the COVID -19 pandemic and the economic downturn will be on our portfolio companies, RCM is actively monitoring our portfolio companies, their liquidity and operational status.

Trends and Opportunities

We believe the combination of cash on hand, proceeds from portfolio exits, SBA leverage, and prospective investment income provide us the liquidity that enables us to add new investments to our portfolio and reinvest in existing portfolio companies that demonstrate continued growth potential. We are actively building a pipeline of investment opportunities in order to put our capital to work.

 

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The following short and long-term trends provide us confidence in our ability to grow the Corporation:

 

   

We have sufficient cash to both invest in new opportunities and to repurchase shares. On April 22, 2020, our Board of Directors approved a new share repurchase plan, which authorizes the purchase of up to $1.5 million of our Common Stock through April 22, 2021 at prices per share of common stock no greater than the then current net asset value. During the year ended December 31, 2020, we purchased 6,631 shares at an average price of $11.57 per share.

 

   

We expect that well run businesses will require capital to grow and should be able to compete effectively given eager reception of new technologies and service concepts, regardless of the macroeconomic environment.

 

   

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

 

   

RCM, on our behalf, is involved with the governance and management of a majority of our portfolio companies, which enables us to support their operating and marketing efforts and facilitate their growth.

 

   

As our portfolio expands, we are able to better leverage our externalized management structure.

 

   

We believe that the establishment of RCM as our external investment adviser and its ownership by Callodine, as well as our relationship with East, broadens our potential pipeline of investment opportunities to build our portfolio, facilitate growth and reduce operating expenses as a percentage of portfolio assets. Strategically, we expect to advance our efforts to increase our income-producing investments to support a regular cash dividend for shareholders and complement these securities with equity investments that drive capital appreciation.

 

   

We believe an opportunity for lending to lower middle market companies exists because of the consolidation among commercial banks that has reduced their focus on the lower middle market business. Heightened regulatory requirements for commercial banks has also resulted in less participation by banks in the lower middle market lending arena, opening up opportunities for alternative lenders such as us.

 

   

Lower middle market companies are increasingly seeking lenders with long-term capital to provide flexible solutions for their debt and equity financing needs. We believe that many lower middle market companies prefer to execute transactions with alternative lenders such as us because we can address their capital requirements quickly and in the “check size” that is best suited for their businesses.

SEC Exemptive Order

On October 7, 2020, the Corporation, RCM and certain of their affiliates received exemptive relief from the SEC to permit the Corporation to co-invest in portfolio companies with certain other funds, including other BDCs and registered investment companies, managed by RCM and certain of its affiliates in a manner consistent with the Corporation’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements, subject to compliance with certain conditions (the “Order”). Pursuant to the Order, the Corporation is generally permitted to co-invest with affiliated funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Corporation’s independent directors makes certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to the Corporation and its shareholders and do not involve overreaching in respect of the Corporation or its shareholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Corporation’s shareholders and is consistent with the Corporation’s investment objective and strategies.

In addition, Callodine and the Adviser are seeking a new exemptive relief order from the SEC that would supersede the Order and would permit the Corporation to co-invest with affiliates of Callodine (the “New Order”). Under the Order, the Corporation is permitted to co-invest with funds managed by the Adviser and its affiliates under the Adviser’s current ownership structure. The New Order, if and when granted by the SEC, would replace East with Callodine. There can be no assurance that the Corporation will be able to obtain such new exemptive relief from the SEC.

 

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Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, or GAAP, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. For a summary of all significant accounting policies, including critical accounting policies, see Note 1 to the consolidated financial statements in Item 8 of this Annual Report.

The increasing complexity of the business environment and applicable authoritative accounting guidance requires us to monitor our accounting policies and procedures. We have two critical accounting policies that require the use of significant judgment. The following summary of critical accounting policies is intended to enhance a reader’s ability to assess our financial condition and results of operations and the potential volatility due to changes in estimates.

Valuation of Investments

Investments are valued at fair value as determined in good faith by RCM and approved by our Board. We invest in loan, debt, and equity instruments and there is no single standard for determining fair value of these investments. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio company while employing a consistent valuation process. We analyze and value each investment quarterly and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of the recorded value of an equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that an underlying portfolio company has appreciated in value and, therefore, its equity security has 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 our assumptions and judgments differ from results of actual liquidation events.

Our 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 accordance with GAAP, and expands disclosures about fair value measurements.

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

We utilize several approaches to determine the fair value of an investment. The main approaches are:

 

   

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

 

   

Equity securities may be valued using the “asset approach”, “market approach” or “income approach.” The asset approach involves estimating the liquidation value of the portfolio company’s assets. This approach values the equity at the value remaining after the portfolio company pays of its debt and loan balances and its outstanding liabilities. 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, we adjust 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 our valuation at the measurement date.

 

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

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

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

Any appreciation or depreciation in value that result in estimating fair value are recorded net on the Statement of Operations as “Net change in unrealized (depreciation) on investments.”

Under the valuation policy, we value 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. At December 31, 2020, 92% of the Corporation’s investments were Level 3 investments and 8% was held in Level 1 investments.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Pending debt or capital restructuring of the portfolio company;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Qualitative assessment of key management;

 

   

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

 

   

Other factors deemed relevant to assess valuation.

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

Equity Securities

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

The significant unobservable inputs used in the fair value measurement of our equity investments are earnings before interest, taxes 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, our 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

 

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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 us, 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, we generally rely on the cost basis, which is deemed to represent fair value, unless other fair market value inputs are identified causing us to depart from this basis.

Loans and Debt Securities

The significant unobservable inputs used in the fair value measurement of our loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, current market rates for underlying risks associated with the particular company, as well as the market acceptance of the portfolio company’s products or services and its future performance. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. Our 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, we generally rely on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing us to depart from this basis.

Revenue Recognition

Interest income generally is recognized on the accrual basis except where the investment is in default or otherwise presumed to be in doubt. In such cases, interest income is recognized at the time of receipt. A reserve for possible losses on interest receivable is maintained when appropriate.

Our 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 the loan is in default more than 120 days. RCM also uses other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

We hold debt securities in our 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.

We may receive distributions from portfolio companies that are limited liability companies or corporations. 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.

We hold preferred equity securities that may contain cumulative dividend provisions. Cumulative dividends are recorded as dividend income when they are declared and deemed a contractual obligation. 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 security is redeemed.

 

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Financial Condition

Overview:

 

     12/31/20      12/31/19      (Decrease)
Increase
     % (Decrease)
Increase
 

Total assets

   $ 60,966,942      $ 64,791,449      ($ 3,824,507      (5.9 %) 

Total liabilities

     14,862,112        11,162,933        3,699,179        33.1
  

 

 

    

 

 

    

 

 

    

Net assets

   $ 46,104,830      $ 53,628,516      ($ 7,523,686      (14.0 %) 
  

 

 

    

 

 

    

 

 

    

Net asset value (NAV) was $17.86 per share at December 31, 2020 versus $32.93 per share at December 31, 2019. The NAV at December 31, 2019 was retroactively adjusted for the 1-for-9 reverse stock split effected in May 2020.

Our gross outstanding SBA debentures at December 31, 2020 and 2019 were each $11,000,000. These debentures mature at various dates between 2022 through 2029. Cash approximated 44% of net assets at December 31, 2020 compared to 48% at December 31, 2019.

Composition of the Investment Portfolio

Our financial condition is dependent on the success of our portfolio holdings, which are investments in small companies. The following summarizes our investment portfolio at the year ends indicated.

 

     12/31/20      12/31/19      Change      % Change  

Investments, at cost

   $ 40,720,313      $ 44,619,463      ($ 3,899,150      (8.7 %) 

Unrealized depreciation, net

     (671,812      (7,598,671      6,926,859        (91.2 %) 
  

 

 

    

 

 

    

 

 

    

Investments, at fair value

   $ 40,048,501      $ 37,020,792      $ 3,027,709        8.2
  

 

 

    

 

 

    

 

 

    

Number of Active Portfolio Companies

     36        32        

Our total investments at fair value, as estimated by RCM, and approved by the Board of Directors, approximated 87% of net assets at December 31, 2020 and 69% of net assets at December 31, 2019.

With the completion of the Transaction, we changed our investment objectives and strategy. Our new investment objective is to generate current income and, when possible, complement this current income with capital appreciation. As a result, the investments made by Rand since the closing of the Transaction have been, and the investments to be made by Rand in the future are expected to be primarily in higher yielding debt investments and may include public equity in other business development companies that provide income through dividends and relatively more liquidity than our private company investments.

 

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The change in investments, at cost, during the year ended December 31, 2020, is comprised of the following:

 

     Cost Increase
(Decrease)
 

New investments:

  

Caitec Acquisition, Inc. (Caitec)

   $ 3,800,000  

Science and Medicine Group, Inc. (SMG)

     1,900,000  

SciAps Inc. (Sciaps)

     1,500,000  

Tilson Technology Management, Inc. (Tilson)

     750,003  

Centivo Corporation (Centivo)

     500,000  

Golub Capital BDC, Inc. (Golub)

     403,910  

TCG BDC, Inc. (TCG)

     376,996  

PennantPark Investment Corporation (Pennantpark)

     370,130  

Apollo Investment Corporation (Apollo)

     364,084  

Owl Rock Capital Corporation (Owl Rock)

     347,067  

Ares Capital Corporation (Ares)

     343,460  

FS KKR Capital Corp. (FS KKR)

     338,980  

Barings BDC, Inc. (Barings)

     333,352  
  

 

 

 

Total of new investments

     11,327,982  

Other changes to investments:

  

AIKG LLC (Andretti) interest conversion

     177,574  

Mattison Avenue Holdings LLC (Mattison) interest conversion

     85,526  

Filterworks Acquisition USA, LLC (Filterworks) interest conversion

     47,178  

HDI Acquisition LLC (Hilton Displays) interest conversion

     25,601  

Microcision LLC (Microcision) OID amortization

     21,997  

Genicon Inc. (Genicon) OID amortization

     15,804  

GoNoodle, Inc. (GoNoodle) interest conversion

     15,082  

Caitec interest conversion

     10,701  

Sciaps OID amortization

     10,000  
  

 

 

 

Total of other changes to investments

     409,463  

Investments repaid, sold, liquidated or converted:

  

Genicon liquidation

     (5,125,561

Andretti loan repayment

     (4,575,699

Outmatch Holdings, LLC (Outmatch) stock sale

     (2,145,496

Teleservices Solutions Holdings, LLC (Teleservices) liquidation

     (1,636,078

BeetNPath LLC (Beetnpath) liquidation

     (882,904

Open Exchange Inc. (Open Exchange) loan repayment

     (450,000

G-TEC Natural Gas Systems (G-Tec) liquidation

     (400,000

Dataview, LLC (Dataview) liquidation

     (310,357

UStec liquidation

     (100,500

Advantage 24/7 LLC (Advantage 24/7) loan repayment

     (10,000
  

 

 

 

Total of investments repaid, sold, liquidated, or converted

     (15,636,595
  

 

 

 

Net change in investments, at cost

   ($ 3,899,150
  

 

 

 

 

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Our top five portfolio companies represented 33% of total assets at December 31, 2020:

 

Company

  

Industry

   Fair Value at
December 31, 2020
     % of Total Assets
at December 31,
2020
 

ACV Auctions, Inc.

   Software    $ 6,531,815        11

Tilson

   Professional Services    $ 4,710,015        8

Caitec

   Consumer Product    $ 3,810,702        6

Filterworks

   Automotive    $ 2,912,331        5

SMG

   Health Care    $ 1,900,000        3

Our top five portfolio companies represented 31% of total assets at December 31, 2019:

 

Company

  

Industry

   Fair Value at
December 31, 2019
     % of Total Assets
at December 31,
2019
 

ACV Auctions, Inc.

   Software    $ 6,531,815        10

Andretti

   Entertainment    $ 4,398,125        7

Tilson

   Professional Services    $ 3,960,012        6

Filterworks

   Automotive    $ 2,865,153        5

Outmatch

   Software    $ 2,145,498        3

Below is the geographic breakdown of our investments using fair value as of December 31, 2020 and 2019:

 

Geographic Region

   % of Net Asset Value
at December 31,
2020
    % of Net Asset Value
at December 31,
2019
 

USA – East

     69     41

USA – South

     18     28
  

 

 

   

 

 

 

Total investments as a % of net asset value

     87     69
  

 

 

   

 

 

 

As of December 31, 2020, and 2019, the investment portfolio consisted of the following types of investments:

 

     Cost      Percentage of
Total Portfolio
    Fair Value      Percentage of
Total Portfolio
 

December 31, 2020:

          

Subordinated Debt and Promissory Notes

   $ 17,262,145        42   $ 16,413,105        41

Convertible Debt

     1,308,675        3       157,654        1  

Equity and Membership Interests

     19,018,826        47       20,086,342        50  

Equity Warrants

     252,688        1       95,063        0  

Public BDC stock

     2,877,979        7       3,296,337        8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 40,720,313        100   $ 40,048,501        100
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2019:

          

Subordinated Debt and Promissory Notes

   $ 19,148,942        43   $ 15,060,145        41

Convertible Debt

     1,571,302        3       157,654        0  

Equity and Membership Interests

     23,119,031        52       21,802,930        59  

Equity Warrants

     780,188        2       63        0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 44,619,463        100   $ 37,020,792        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Results of Operations

Investment Income

Comparison of the years ended December 31, 2020 and 2019

 

     December 31,
2020
     December 31,
2019
     Increase
(Decrease)
     % Increase
(Decrease)
 

Interest from portfolio companies

   $ 2,461,943      $ 1,520,540      $ 941,403        61.9

Interest from other investments

     87,784        166,556        (78,772      (47.3 %) 

Dividend and other investment income

     428,081        579,848        (151,767      (26.2 %) 

Fee income

     125,111        457,752        (332,641      (72.7 %) 
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 3,102,919      $ 2,724,696      $ 378,223        13.9
  

 

 

    

 

 

    

 

 

    

Investment income was received, on a current basis, during the year ended December 31, 2020 from 23 portfolio companies. This is an increase from the 17 portfolio companies generating current investment income for the year ended December 31, 2019.

Interest from portfolio companies — Interest from portfolio companies was approximately 62% higher during the year ended December 31, 2020 versus the same period in 2019 due to the fact that we have more income-producing debt investments in the current year. As part of the contributed assets received from East at the completion of the Transaction in November 2019, we received debt instruments from Andretti, Filterworks, Hilton Displays and Mattison. In addition, during the current year we originated three loan instruments totaling $7.2 million from Caitec, Sciaps, and SMG.

A portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance is on non-accrual status.

Interest from other investments — The decrease in interest from other investments is due to lower interest rates during the year ended December 31, 2020 versus the same period in 2019. This was partially offset by higher average cash balances during the year ended December 31, 2020 versus the same period in 2019.

 

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Dividend and other investment income — Dividend income is comprised of cash 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. The dividend distributions for the respective year-ends were:

 

     December 31,
2020
     December 31,
2019
 

Carolina Skiff LLC (Carolina Skiff)

   $ 66,230      $ 76,914  

FSKKR

     64,000         

Apollo

     56,700         

Tilson Technology Management, Inc. (Tilson)

     52,500        49,958  

Owl Rock

     46,800         

Ares

     32,400         

TCB

     29,200         

Golub

     27,189         

Pennant Park

     24,000         

Somerset Gas Transmission Company, LLC (Somerset)

     15,862        256,542  

Barings

     13,200         

Knoa Software, Inc. (Knoa)

            193,934  

Advantage 24/7 LLC (Advantage 24/7)

            2,500  
  

 

 

    

 

 

 

Total dividend and other investment income

   $ 428,081      $ 579,848  
  

 

 

    

 

 

 

Fee income — Fee income generally consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of SBIC financings, income from portfolio company board attendance fees and other miscellaneous 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 $29,188 and $69,252 for the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, we recognized a one-time pre-payment fee of $91,423 on the repayment of the Andretti debt instrument and a one-time pre-payment fee of $4,500 on the repayment of the Open Exchange debt instrument. During the year ended December 31, 2019, we recognized a one-time fee of $225,000 in conjunction with the repayment of the eHealth Global Technologies, Inc. (eHealth) loan instrument, a one-time $112,500 change of control fee from Open Exchange and a one-time loan modification fee of $50,000 from GoNoodle, Inc. (GoNoodle).

The board fees were $0 and $1,000 for the years ended December 31, 2020 and 2019 respectively.

Comparison of the years ended December 31, 2019 and 2018

 

     December 31,
2019
     December 31,
2018
     Increase      % Increase  

Interest from portfolio companies

   $ 1,520,540      $ 1,498,740      $ 21,800        1.5

Interest from other investments

     166,556        37,614        128,942        342.8

Dividend and other investment income

     579,848        384,382        195,466        50.9

Fee income

     457,752        186,218        271,534        145.8
  

 

 

    

 

 

    

 

 

    

Total investment income

   $ 2,724,696      $ 2,106,954      $ 617,742        29.3
  

 

 

    

 

 

    

 

 

    

 

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Investment income was received, on a current basis, during the year ended December 31, 2019 from 17 portfolio companies. This is an increase from the 9 portfolio companies generating current investment income for the year ended December 31, 2018.

Interest from portfolio companies — Interest from portfolio companies was substantially unchanged during the year ended December 31, 2019 compared to the year ended December 31, 2018.

The following investments were on non-accrual status at December 31, 2019: BeetNPath, LLC (Beetnpath), G-TEC Natural Gas Systems (G-Tec) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balances.

Interest from other investments — The increase in interest from other investments is primarily due to higher interest rates and higher average cash balance during the year ended December 31, 2019 versus the year ended December 31, 2018.

Dividend and other investment income — Dividend income is comprised of cash 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. The dividend distributions for the respective periods were:

 

     December 31,
2019
     December 31,
2018
 

Somerset Gas Transmission Company, LLC (Somerset)

   $ 256,542      $  

Knoa Software, Inc. (Knoa)

     193,934         

Carolina Skiff LLC (Carolina Skiff)

     76,914        251,913  

Tilson Technology Management, Inc. (Tilson)

     49,958        39,002  

Advantage 24/7 LLC (Advantage 24/7)

     2,500        60,000  

New Monarch Machine Tool, Inc. (New Monarch)

            27,409  

Empire Genomics LLC (Empire Genomics)

            6,058  
  

 

 

    

 

 

 

Total dividend and other investment income

   $ 579,848      $ 384,382  
  

 

 

    

 

 

 

Fee income — Fee income generally consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of SBIC financings, income from portfolio company board attendance fees and other miscellaneous 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 $69,252 and $41,872 for the years ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, we recognized a one-time fee of $225,000 in conjunction with the repayment of the eHealth Global Technologies, Inc. (eHealth) loan instrument, a one-time $112,500 change of control fee from Open Exchange, Inc. (Open Exchange) and a one-time loan modification fee of $50,000 from GoNoodle, Inc. (GoNoodle). During the year ended December 31, 2018, we recorded a one-time debt modification fee approximately $142,000 from Empire Genomics, which was capitalized into the Empire Genomics loan balance as part of the debt modification.

The board fees were $1,000 and $2,000 for the years ended December 31, 2019 and 2018, respectively.

Expenses

Comparison of the years ended December 31, 2020 and 2019

 

     December 31,
2020
     December 31,
2019
     Decrease      % Decrease  

Total expenses

   $ 1,974,978      $ 2,770,716      ($ 795,738      (28.7 %) 

 

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Expenses decreased approximately $796,000 or 29% during the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease in operating expenses was primarily due to an approximately $299,000 or 54% decrease in shareholders and office operating expenses. Shareholders and office operating expenses were higher during the year ended December 31, 2019 due to the fact that we held a special meeting of shareholders to approve all proposals related to the Transaction during this period. The decrease in expense can also be attributed to the absence of salary, bonus and benefits expense during the year ended December 31, 2020. The salary, bonus and benefit expense for the year ended December 31, 2019 was approximately $925,000. These decreases were offset by the $504,000 increase in the base management fee payable to RCM, under the Investment Management Agreement, during the year ended December 31, 2020 compared to the year ended December 31, 2019. There were no incentive fees earned by RCM during the year ended December 31, 2020.

Because of our intention to elect RIC status as of January 1, 2020, a net deferred tax asset of $1,451,658 was eliminated in accordance with GAAP, resulting in deferred tax expense for the year ended December 31, 2020. In addition, certain portfolio investments, that generate non-qualifying income for a RIC, and their related deferred tax liabilities of $247,460, were contributed to blocker corporations in December 2019. These blocker corporations will be subject to federal and state income taxes.

Comparison of the years ended December 31, 2019 and 2018

 

     December 31,
2019
     December 31,
2018
     Increase      % Increase  

Total expenses

   $ 2,770,716      $ 2,193,672      $ 577,044        26.3

The increase in expenses during the year ended December 31, 2019 versus the same period in 2018 was primarily caused by the additional shareholder and professional fees required to close the Transaction in November 2019. Shareholder expense was $557,546 and $230,050 for the years ended December 31, 2019 and 2018, respectively, a 142% increase. Professional fees were $548,041 and $407,159 for the years ended December 31, 2019 and 2018, respectively, a 35% increase.

Base management fees payable to RCM, under the Prior Investment Management Agreement, for the year ended December 31, 2019 was $85,483. This represents base management fees for the period November 8, 2019 through December 31, 2019. There were no base management fees earned for the year ended December 31, 2018. There were no incentive fees earned, under the Prior Investment Management Agreement, for the years ended December 31, 2019 or 2018, respectively, by RCM.

Net Realized Gains and Losses on Investments

 

     December 31,
2020
     December 31,
2019
     December 31,
2018
 

Net realized (loss) gain on sales and dispositions, before income taxes

   ($ 5,983,279    $ 1,117,761      ($ 1,464,142

During year ended December 31, 2020, we realized a $2.3 million gain when we exited our investment in Outmatch as part of a strategic majority investment from Rubicon Technology Partners. We also received additional proceeds of approximately $117,000 from Microcision LLC (Microcision) related to the 2019 sale of our equity interest in Microcision and approximately $37,000 in additional gain from Advantage 24/7. We recognized a realized loss of $5.1 million on Genicon, Inc. following its senior creditor liquidation. In addition, we recognized a $1.6 million loss in Teleservices Solutions Holdings, LLC, a $0.9 million loss in BeetNPath, LLC, a $0.4 million loss in G-TEC Natural Gas Systems, and a $0.3 million loss in Dataview, Inc. following the sale and/or liquidation of the investment securities.

During the year ended December 31, 2019, we sold our equity interest in Microcision LLC (Microcision) and recognized a gain of $1,510,000. In addition, we realized a loss of $472,632 on our investment in SOMS Technologies, LLC after the company ceased doing business. We also recognized a $40,500 gain on our investment in Advantage 24/7 LLC after the Corporation converted its equity into a debt instrument, and we received a final distribution of proceeds of $39,893 from Gemcor II, LLC, a portfolio company we exited in 2016.

 

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During the year ended December 31, 2018, we recognized a realized loss of $1,125,673 on our investment in Intrinsiq Material, Inc. (Intrinsiq) when the company was sold, and we did not receive any proceeds. In addition, we restructured our notes in First Wave Technologies, Inc. (First Wave) and converted the notes into equity. As part of that restructuring, we recognized a realized loss of $338,469 on the junior note and the warrants.

Net Change in Unrealized Depreciation on Investments

The change in net unrealized depreciation, before income taxes, for the year ended December 31, 2020 was comprised of the following:

 

     Year ended
December 31,
2020
 

SciAps, Inc. (Sciaps)

   ($ 869,274

SocialFlow, Inc. (Socialflow)

     (426,513

Carolina Skiff, LLC (Carolina Skiff)

     (250,000

Knoa Software, Inc. (Knoa)

     (205,140

Microcision LLC (Microcision) realized gain

     (15,000

Apollo

     7,616  

Golub

     31,610  

Barings

     33,581  

Owl Rock

     33,833  

TCG BDC

     41,404  

FS KKR

     73,437  

Pennant Park

     88,537  

USTec realized loss

     100,500  

Ares

     108,340  

Dataview, LLC (Dataview) realized loss

     310,357  

G-Tec Natural Gas Systems (G-tec) realized loss

     400,000  

Centivo Corporation (Centivo)

     584,832  

BeetNPath, LLC (Beetnpath) realized loss

     882,904  

Teleservices Solutions Holdings, LLC (Teleservices) realized loss

     1,636,078  

Genicon, Inc. (Genicon) realized loss

     4,359,757  
  

 

 

 

Total net change in unrealized depreciation on investments before income taxes

   $ 6,926,859  
  

 

 

 

The valuations of our investments in Carolina Skiff, Knoa, Sciaps, and Socialflow were decreased after we reviewed each portfolio company and its current and projected financial condition and determined that a valuation adjustment was appropriate.

In accordance with our valuation policy, we increased the value of our investment in Centivo based on a significant equity financing during 2020 with sophisticated new non-strategic outside investors at a higher valuation than their prior financing round valuation.

Beetnpath, Dataview, G-tec, Teleservices and USTec investments, previously deemed to have a zero value, were sold and we did not receive any proceeds.

Apollo, Ares, Barings, FS KKR, Golub, Owl Rock, Pennant Park and TCG are all publicly traded stocks, and as such, are marked to market at the end of each quarter.

 

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The change in net unrealized depreciation, before income taxes, for the year ended December 31, 2019 was comprised of the following:

 

     Year ended
December 31, 2019
 

Genicon, Inc. (Genicon)

   ($ 4,277,257

Rheonix, Inc. (Rheonix)

     (1,500,000

SocialFlow, Inc. (Socialflow)

     (1,321,300

SciAps, Inc. (Sciaps)

     (950,000

Microcision LLC (Microcision) realized gain

     (610,000

BeetNPath, LLC (Beetnpath)

     (523,904

Mezmeriz, Inc. (Mezmeriz)

     (351,477

Empire Genomics, LLC (Empire Genomics)

     (249,661

Open Exchange, Inc. (Open Exchange) (formerly KnowledgeVision)

     (200,001

Mercantile Adjustment Bureau, LLC (Mercantile)

     (200,000

PostProcess Technologies, Inc. (PostProcess)

     122,728  

SOMS Technologies, LLC (SOMS) realized loss

     472,632  

Tilson Technology Management, Inc. (Tilson)

     1,860,000  

ACV Auctions, Inc. (ACV)

     3,754,908  
  

 

 

 

Total net change in unrealized depreciation on investments before income taxes

   ($ 3,973,332
  

 

 

 

The valuations of our investments in Beetnpath, Empire Genomics, Mercantile, Mezmeriz, Open Exchange, Rheonix, Sciaps, and Socialflow were decreased after each of the portfolio company’s operations, commercial progress against their business plan, and past and projected financial condition were reviewed, and it was determined that a valuation adjustment was appropriate.

Our valuation of Genicon was decreased due to a recent round of financing and after a review of their financial condition.

In accordance with our valuation policy, we increased the value of our holdings in ACV, Post Process and Tilson based on significant equity financings for each of these companies, during 2019 with sophisticated new non-strategic outside investors at a higher valuation than their prior financing round valuation.

We recognized a realized gain on the sale of the Microcision equity during 2019 and reversed the previously recorded unrealized appreciation. We recognized a realized loss on our investment in SOMS during the year ended December 31, 2019.

 

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The change in unrealized depreciation, before income taxes, for the year ended December 31, 2018 was comprised of the following:

 

     Year ended
December 31,
2018
 

Empire Genomics, LLC (Empire Genomics)

   ($ 901,360

Rheonix, Inc. (Rheonix)

     (735,999

SOMS Technologies, LLC (SOMS)

     (528,348

BeetNPath, LLC (Beetnpath)

     (388,723

KnowledgeVision Systems, Inc. (Knowledgevision)

     (300,000

Mercantile Adjustment Bureau, LLC (Mercantile)

     (249,040

G-Tec Natural Gas Systems (Gtec)

     (100,000

Genicon, Inc. (Genicon)

     (82,500

OnCore Golf Technology, Inc. (Oncore)

     (77,712

First Wave Products Group (First Wave)

     121,469  

GiveGab, Inc. (Givegab)

     191,907  

Microcision LLC (Microcision)

     610,000  

Intrinsiq Material, Inc. (Intrinsiq) reclassed to a realized loss

     725,673  

ACV Auctions, Inc. (ACV)

     2,494,551  
  

 

 

 

Total net change in unrealized depreciation on investments before income taxes

   $ 779,918  
  

 

 

 

The valuations of our investments in Beetnpath, Empire Genomics, Gtec, Mercantile, Oncore, Rheonix, and SOMS were decreased after we reviewed each of the portfolio company’s operations, commercial progress against their business plan, and past and projected financial condition and determined that a valuation adjustment was appropriate.

Our valuation of First Wave was changed to reflect a conversion from debt instruments to equity holdings. As part of this restructure we recognized a realized loss on the junior note and the warrants.

Givegab’s value was increased to the cost basis of the investment after a financial analysis of the portfolio company indicating continued improved performance.

Our valuation of Knowledgevision and Genicon were decreased during the year ended December 31, 2018 to revalue our holdings based upon liquidation preferences of our securities and on a recent round of financing.

In accordance with our valuation policy, we increased the value of our holdings in ACV and Microcision. ACV was increased based on a significant equity financing during 2018 with sophisticated new non-strategic outside investors at a higher valuation than their prior financing round valuation. Microcision was increased based on a financial analysis of the company indicating positive cash flow from operations for the past two years.

The Intrinsiq investment was written off after the company was sold during 2018 and we did not receive any proceeds.

All of the valuation adjustments resulted from a review by RCM at December 31, 2020 and 2019, respectively, and management for the year ending December 31, 2018, using the guidance set forth by ASC 820 and our established valuation policy.

Net Increase (Decrease) in Net Assets from Operations

We account for our operations under GAAP for investment companies. The principal measure of our financial performance is “Net increase (decrease) in net assets from operations” on our consolidated statements of operations. During the year ended December 31, 2020, the net increase in net assets from operations was $743,766 as compared with net decreases of $2,289,670 in 2019 and $394,498 in 2018.

 

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Liquidity and Capital Resources

With the completion of the Transaction with East we changed our investment objectives and strategy. Previously, our principal investment objective was to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from debenture and pass-through equity instruments to fund expenses. With our plan to elect U.S. federal tax treatment as a RIC, our new investment objective is to generate current income and, when possible, complement this current income with capital appreciation. As a result, our recent and future investments will be made primarily in yield generating investments and may include related equity options, such as warrants or preferred equity.

As of December 31, 2020, our total liquidity consisted of approximately $20,365,000 in cash and cash equivalents. In addition, we had an outstanding SBA leverage commitment of $3,000,000 at December 31, 2020.

Net cash provided by operating activities has averaged approximately $408,000 over the last three years. The cash used for investments in portfolio companies has averaged approximately $5,500,000 over the last three years. Our cash flow will fluctuate based on the timing of the receipt of dividend income, realized exits and the associated income taxes paid. We will generally use cash to fund our operating expenses and to invest in companies as we build our portfolio. We anticipate that we will continue to exit investments. However, the timing of liquidation events within the portfolio is difficult to project. Starting in 2022 (See Note 5 in the Notes to the Consolidated Financial Statements), our outstanding SBA debt begins to mature and this will require us to identify sources of future funding if liquidation of investments is not sufficient to fund operations and repay the SBA debt obligation.

The following table summarizes the SBA leverage at the year ends indicated:

 

     December 31,
2020
     December 31,
2019
 

Outstanding SBA leverage

   $ 11,000,000      $ 11,000,000  

Undrawn SBA commitment

   $ 3,000,000      $ 3,000,000  

The following table summarizes the cash estimated to be received over the next five years from existing portfolio companies based on contractual obligations as of December 31, 2020. These payments represent scheduled principal and interest payments that are due under the terms of the investment securities we own in each portfolio company and are subject to change based on factors such as conversions and restructurings. It does not include any equity investments, which may provide additional proceeds upon exit of the investment.

 

     Cash Receipts due by year  
     2021      2022      2023      2024      2025 and
beyond
 

Scheduled cash receipts from portfolio companies

   $ 4,802,000      $ 4,502,000      $ 8,925,000      $ 1,135,000      $ 6,101,000  

Number of companies contributing to the scheduled cash receipts

     12        9        7        3        2  

We believe that the cash and cash equivalents on hand at December 31, 2020, the undrawn SBA leverage commitment and the scheduled interest payments on our portfolio investments will be sufficient to meet our cash needs throughout 2021. We continue to pursue current income and distributions from portfolio companies to increase the liquidity available for new investments, operating expenses, dividends and future SBA debenture obligations.

Our ongoing liquidity is tied to the performance of our portfolio companies and, as such, it may be affected going forward based on the impact of the COVID-19 pandemic and its lasting impact on the capital markets, our portfolio companies, and the U.S. economy in general.

 

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Contractual Obligations

The following table shows our specified contractual obligations at December 31, 2020. We do not have any capital lease obligations or other long-term liabilities reflected on our consolidated statement of financial position.

 

     Payments due by period  
     Total      Less than
1 year
     1-3 years      4-5 years      More than
5 yrs
 

SBA debentures

   $ 11,000,000      $ 0      $ 7,000,000      $ 1,000,000      $ 3,000,000  

SBA interest expense

   $ 1,638,000      $ 379,000      $ 810,000      $ 209,000      $ 240,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,638,000      $ 379,000      $ 7,810,000      $ 1,209,000      $ 3,240,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Item 7A.     Quantitative and Qualitative Disclosures about Market Risk

Our investment activities contain elements of risk. The portion of our investment portfolio consisting of debt and equity securities in private companies is subject to valuation risk. Because there is typically no public market for the debt and equity securities in which we invest, the valuations of the debt and equity interests in the portfolio are stated at “fair value” as determined in good faith by RCM and approved by our Board. This is in accordance with our investment valuation policy. (The discussion of valuation policy contained in “Note 1- Summary of Significant Accounting Policies—Investments” in the consolidated financial statements contained in Item 8 of this report is 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 on investments.”

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

As of December 31, 2020, we did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments.

 

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Item 8.     Financial Statements and Supplementary Data

The following consolidated financial statements and consolidated supplemental schedule of the Corporation and report of Independent Registered Public Accounting Firm thereon are set forth below:

 

Consolidated Statements of Financial Position as of December 31, 2020 and 2019

     52  

Consolidated Statements of Operations for the three years in the period ended December 31, 2020

     53  

Consolidated Statements of Changes in Net Assets for the three years in the period ended December 31, 2020

     54  

Consolidated Statements of Cash Flows for the three years in the period ended December 31, 2020

     55  

Consolidated Schedule of Portfolio Investments as of December 31, 2020

     56  

Consolidated Schedule of Portfolio Investments as of December 31, 2019

     64  

Financial Highlights Schedule for the five years in the period ended December 31, 2020

     72  

Notes to the Consolidated Financial Statements

     73  

Supplemental Schedule of Consolidated Changes in Investments at Cost and Realized Loss for the year ended December 31, 2020

     95  

Report of Independent Registered Public Accounting Firm

     96  

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31,

 

     2020      2019  

ASSETS

     

Investments at fair value:

     

Affiliate investments (cost of $14,835,885 and $19,035,446, respectively)

   $ 13,891,199      $ 12,151,435  

Non- Control/Non-Affiliate investments (cost of $25,884,428 and $25,584,017, respectively)

     26,157,302        24,869,357  
  

 

 

    

 

 

 

Total investments, at fair value (cost of $40,720,313 and $44,619,463, respectively)

     40,048,501        37,020,792  

Cash and cash equivalents

     20,365,415        25,815,720  

Interest receivable (net of allowance of $15,000 and $166,413, respectively)

     258,186        142,265  

Deferred tax asset

            1,204,198  

Prepaid income taxes

     220,740        343,096  

Other assets

     74,100        265,378  
  

 

 

    

 

 

 

Total assets

   $ 60,966,942      $ 64,791,449  
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

     

Liabilities:

 

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

   $ 10,824,587      $ 10,786,913  

Dividend payable

     3,434,117         

Accounts payable and accrued expenses

     171,373        207,873  

Due to investment adviser

     156,999        50,564  

Deferred revenue

     153,895        37,583  

Deferred tax payable

     121,141         

Bonus payable

            80,000  
  

 

 

    

 

 

 

Total liabilities

     14,862,112        11,162,933  

Commitments and contingencies (See Note 8)

     

Stockholders’ equity (net assets):

     

Common stock, $0.10 par; shares authorized 100,000,000; shares issued: 2,648,916 at 12/31/20 and 1,688,485 at 12/31/19; shares outstanding: 2,582,169 at 12/31/20 and 1,628,369 at 12/31/19

     2,384,547        1,519,637  

Capital in excess of par value

     49,883,890        34,142,455  

Treasury stock, at cost: 66,747 shares at 12/31/20 and 60,116 shares at 12/31/19

     (1,545,834      (1,469,105

Total distributable earnings

     (4,617,773      19,435,529  
  

 

 

    

 

 

 

Total stockholders’ equity (net assets) (per share - 2020: $17.86, 2019: $32.93)

     46,104,830        53,628,516  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity (net assets)

   $ 60,966,942      $ 64,791,449  
  

 

 

    

 

 

 

See accompanying notes

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Years Ended December 31, 2020, 2019 and 2018

 

     2020      2019      2018  

Investment income:

        

Interest from portfolio companies:

        

Affiliate investments

   $ 666,969      $ 823,565      $ 741,432  

Non-Control/Non-Affiliate investments

     1,794,974        696,975        757,308  
  

 

 

    

 

 

    

 

 

 

Total interest from portfolio companies

     2,461,943        1,520,540        1,498,740  

Interest from other investments:

        

Non-Control/Non-Affiliate investments

     87,784        166,556        37,614  
  

 

 

    

 

 

    

 

 

 

Total interest from other investments

     87,784        166,556        37,614  

Dividend and other investment income:

        

Control investments

                   60,000  

Affiliate investments

     118,730        320,806        318,324  

Non-Control/Non-Affiliate investments

     309,351        259,042        6,058  
  

 

 

    

 

 

    

 

 

 

Total dividend and other investment income

     428,081        579,848        384,382  
  

 

 

    

 

 

    

 

 

 

Fee income:

        

Affiliate investments

     15,417        27,639        15,667  

Non-Control/Non-Affiliate investments

     109,694        430,113        170,551  
  

 

 

    

 

 

    

 

 

 

Total fee income

     125,111        457,752        186,218  
  

 

 

    

 

 

    

 

 

 

Total investment income

     3,102,919        2,724,696        2,106,954  
  

 

 

    

 

 

    

 

 

 

Expenses:

        

Base management fee (see Note 11)

     589,519        85,483         

Interest on SBA obligations

     416,760        408,039        311,000  

Professional fees

     568,857        548,041        407,159  

Shareholders and office operating

     258,266        557,546        230,050  

Directors’ fees

     116,500        117,500        128,750  

Insurance

     33,868        38,302        34,187  

Corporate development

     14,546        67,441        62,117  

Other operating

     662        17,504        21,092  

Salaries

            621,290        679,499  

Bonuses

            115,000        125,000  

Employee benefits

            189,157        194,818  

Bad debt (recovery) expense

     (24,000      5,413         
  

 

 

    

 

 

    

 

 

 

Total expenses

     1,974,978        2,770,716        2,193,672  
  

 

 

    

 

 

    

 

 

 

Net investment income (loss) before income taxes

     1,127,941        (46,020      (86,718

Income tax (benefit) expense

     (628,187      39,677        (18,312
  

 

 

    

 

 

    

 

 

 

Net investment income (loss)

     1,756,128        (85,697      (68,406
  

 

 

    

 

 

    

 

 

 

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

        

Control investments

            80,393         

Affiliate investments

     (7,927,552      (472,632      (1,464,142

Non-Control/Non-Affiliate investments

     1,944,273        1,510,000         
  

 

 

    

 

 

    

 

 

 

Net realized (loss) gain on sales and dispositions, before income taxes

     (5,983,279      1,117,761        (1,464,142

Income tax expense (benefit)

            255,923        (469,847
  

 

 

    

 

 

    

 

 

 

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

     (5,983,279      861,838        (994,295

Net change in unrealized depreciation on investments:

        

Affiliate investments

     5,939,325        (3,970,007      608,207  

Non-Control/Non-Affiliate investments

     987,534        (3,325      171,711  
  

 

 

    

 

 

    

 

 

 

Change in unrealized depreciation before income taxes

     6,926,859        (3,973,332      779,918  

Deferred income tax expense (benefit)

     1,955,942        (907,521      111,715  
  

 

 

    

 

 

    

 

 

 

Net change in unrealized depreciation on investments

     4,970,917        (3,065,811      668,203  
  

 

 

    

 

 

    

 

 

 

Net realized and unrealized (loss) on investments

     (1,012,362      (2,203,973      (326,092
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in net assets from operations

   $ 743,766      ($ 2,289,670    ($ 394,498
  

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     2,268,356        836,893        702,443  

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

     0.33        (2.74      (0.56

See accompanying notes

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

For The Years Ended December 31, 2020, 2019 and 2018

 

     2020      2019      2018  

Net assets at beginning of year

   $ 53,628,516      $ 31,524,187      $ 31,918,685  

Net investment income (loss)

     1,756,128        (85,697      (68,406

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

     (5,983,279      861,838        (994,295

Net change in unrealized depreciation on investments

     4,970,917        (3,065,811      668,203  
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in net assets from operations

     743,766        (2,289,670      (394,498
  

 

 

    

 

 

    

 

 

 

Declaration of dividends

     (8,190,723              

Issuance of capital stock, net

            24,393,999         

Purchase of treasury shares

     (76,729              
  

 

 

    

 

 

    

 

 

 

Net assets at end of year

   $ 46,104,830      $ 53,628,516      $ 31,524,187  
  

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes.

 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 2020, 2019 and 2018

 

     2020      2019      2018  

Cash flows from operating activities:

        

Net increase (decrease) in net assets from operations

   $ 743,766      ($ 2,289,670    ($ 394,498

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

        

Investments originated

     (11,327,982      (2,650,049      (2,487,627

Proceeds from sale of portfolio investments

     4,617,617        1,549,893         

Proceeds from loan repayments

     5,035,699        6,076,142        70,131  

Net realized loss (gain) on portfolio investments

     5,983,279        (1,117,761      1,464,142  

Change in unrealized depreciation on investments

     (6,926,859      3,973,332        (779,918

Deferred tax expense (benefit)

     1,325,339        (679,000      26,665  

Depreciation and amortization

     37,675        37,295        29,686  

Original issue discount accretion

     (47,801      (40,767      (39,653

Change in interest receivable allowance

     (151,413      5,413         

Non-cash conversion of debenture interest

     (361,662      (595,286      (609,817

Changes in operating assets and liabilities:

        

Decrease (increase) in interest receivable

     35,492        (2,146      85,516  

Decrease (increase) in other assets

     191,276        (253,949      28,936  

Decrease (increase) in prepaid income taxes

     122,356        795,612        (376,661

Decrease in bonus payable

     (80,000      (45,000      (19,000

(Decrease) increase in accounts payable and accrued liabilities

     (36,500      (37,885      67,410  

Increase in due to investment adviser

     106,435        50,564         

Increase (decrease) in deferred revenue

     116,313        (34,751      34,629  
  

 

 

    

 

 

    

 

 

 

Total adjustments

     (1,360,736      7,031,657        (2,505,561
  

 

 

    

 

 

    

 

 

 

Net cash (used in) provided by operating activities

     (616,970      4,741,987        (2,900,059

Cash flows from financing activities:

        

Payment of cash dividend

     (4,756,606              

Purchase of treasury shares

     (76,729              

Issue capital stock (net)

            14,844,504         

Proceeds from SBA debentures

            2,250,000        750,000  

Origination costs to SBA

            (54,563      (78,188
  

 

 

    

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (4,833,335      17,039,941        671,812  
  

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (5,450,305      21,781,928        (2,228,247
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents:

        

Beginning of year

     25,815,720        4,033,792        6,262,039  
  

 

 

    

 

 

    

 

 

 

End of year

   $ 20,365,415      $ 25,815,720      $ 4,033,792  
  

 

 

    

 

 

    

 

 

 

Supplemental disclosure of non-cash financing activities

        

Fair value of common stock dividend paid

   $ 19,028,027      $      $  
  

 

 

    

 

 

    

 

 

 

Receipt of contributed assets in exchange for issuance of common stock (see Note 1)

   $      $ 9,549,543      $  
  

 

 

    

 

 

    

 

 

 

See accompanying notes

 

55


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2020

 

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

 

(a)

Type of Investment

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

Non-Control/Non-Affiliate Investments — 56.7% of net assets: (j)

           

ACV Auctions, Inc.(e)(g)

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

  1,181,160 Series A Preferred.     8/12/16       <1   $ 163,000     $ 6,531,815       14.2

Advantage 24/7 LLC(g)

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

www.advantage24-7.com

  $140,000 Term Note at 7% due January 1, 2022.     1/1/19       0  

 

55,000

 

 

 

55,000

 

    0.1

Apollo Investment Corporation NASDAQ: AINV (n) Public BDC

New York, NY.

  35,000 shares.     3/16/20       <1     364,084       371,700       0.8

Ares Capital Corporation NASDAQ: ARCC (n) Public BDC

New York, NY.

  27,000 shares.     3/16/20       <1     343,460       451,800       1.0

Barings BDC, Inc. NYSE: BBDC (n) Public BDC

New York, NY.

  40,000 shares.     8/13/20       <1     333,352       366,933       0.8

Caitec Acquisition, Inc.

Halethorpe, MD. Pet product manufacturer.

(Manufacturing)

www.caitec.com

 

$1,750,000 Subordinated Secured
Promissory Note at 12% (+2% PIK) due June 1, 2026.

150 Class A Units

(g) $1,750,000 Subordinated Secured

Promissory Note at 12% (+2% PIK) due June 1, 2026

(g) 150 Class A Units

   

 

11/6/20

 

11/6/20

11/6/20


11/6/20

 

 

 

 

 

   

 

 

2

 

 

2

 

 

 

 

 

 

1,755,351

150,000


1,755,351

150,000

 

 

 

 

 

 

 

 

 

1,755,351

150,000


1,755,351

150,000

 

 

 

 

 

    8.3
       

 

 

   

 

 

   
  Total Caitec         3,810,702       3,810,702    
       

 

 

   

 

 

   

Centivo Corporation(e)(g)

New York, NY. Tech-enabled health solutions company that helps self-insured employers and their employees save money and have a better experience. (Health Care)

www.centivo.com

 

190,967 Series A-1 Preferred.

337,808 Series A-2 Preferred.

298,347 Series B Preferred.

   

3/19/18

3/19/18

11/9/20

 

 

 

    <1    

200,000

101,342

500,000

 

 

 

   

320,042

566,132

500,000

 

 

 

    3.0
       

 

 

   

 

 

   
  Total Centivo         801,342       1,386,174    
       

 

 

   

 

 

   
           
           

Empire Genomics, LLC(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

 

$1,209,014 Senior Secured Convertible Term Notes at 10% due

February 28, 2021.

$444,915 Promissory Note at 9% due
February 28, 2021.

   

 

6/13/14

 

10/1/18

 

 

 

    0    

    

1,308,675

    

444,915

 

 

 

 

   

    

157,654

    

444,915

 

 

 

 

    1.3
       

 

 

   

 

 

   
  Total Empire         1,753,590       602,569    
       

 

 

   

 

 

   

First Wave Technologies, Inc.(e)(g)

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

www.firstwavetechnologies.com

  670,443.2 Class A Common.     4/19/12       2     661,563       33,000       0.1

FS KKR Capital Corp. NYSE: FSK (n) Public BDC

Philadelphia, PA.

  25,000 shares.     3/16/20       <1     338,980       412,417       0.9

GiveGab, Inc.(e)(g)

Ithaca, NY. Nonprofit giving platform that provides an easy and effective way for fundraising professionals to raise money online. (Software)

www.givegab.com

  5,084,329 Series Seed Preferred.     1/14/15       4     616,221       616,221       1.3

 

56


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2020 (Continued)

 

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

 

(a)

Type of Investment

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

Golub Capital BDC, Inc. NASDAQ: GBDC (n) Public BDC

New York, NY.

  31,250 shares.     3/16/20       <1%       403,910       435,520       0.9%  

GoNoodle, Inc.(g)(l)

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

www.gonoodle.com

 

$1,500,000 Secured Note at 12% (1% PIK)

due September 30, 2024.

Warrant for 47,324 Series C Preferred.

Warrant for 21,948 Series D Preferred.

   

 

11/1/19

 

3/1/15

11/1/19

 

 

 

 

    <1%    

 

 

 

1,517,539

25

38

 

 

 

 

 

 

 

 

1,517,539

25

38

 

 

 

 

    3.3%  
       

 

 

   

 

 

   
  Total GoNoodle         1,517,602       1,517,602    
       

 

 

   

 

 

   

HDI Acquisition LLC (Hilton Displays)(l)

Greenville, NC. HDI is engaged in manufacturing, installation and maintenance of signage and brands. (Manufacturing)

www.hiltondisplays.com

  $1,245,119 Term Loan at 12% (+2% PIK) due June 20, 2023.     11/8/19       0%    

 


1,275,140

 

 

 


1,275,140

 

    2.8%  

Lumious (Tech 2000, Inc.)(g)

Herndon, VA. Develops and delivers IT training.

(Software)

www.t2000inc.com

  $850,000 Replacement Term Note at 14% due November 15, 2021.     11/16/18       0%    

 

 

 

860,777

 

 

 

 

 

 

860,777

 

 

    1.9%  

Mattison Avenue Holdings LLC(l)

Dallas, TX. Provider of upscale salon spaces for lease. (Professional Services)

www.mattisonsalonsuites.com

  $1,031,406 Second Amended, Restated and Consolidated Promissory Note at 14% (2% PIK) due June 9, 2022.     11/8/19       0%    

 

 

 

1,122,204

 

 

 

 

 

 

1,122,204

 

 

    2.5%  

Mercantile Adjustment Bureau, LLC(g)

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

 

$1,199,039 Subordinated Secured Note at 13% (8% effective August 2020) due January 31, 2022.

(e) $150,000 Subordinated Debenture at 8% due January 31, 2022.

Warrant for 3.29% Membership Interests. Option for 1.5% Membership Interests.

   

 

 

10/22/12

 

6/30/14

 

10/22/12

 

 

 

 

 

    4%    

 

 

 

 

1,199,040

150,000

 

97,625

 

 

 

 

 

 

 

 

 

 

500,000

 

 

 

 

 

 

    1.1%  
       

 

 

   

 

 

   
  Total Mercantile         1,446,665       500,000    
       

 

 

   

 

 

   
           

Open Exchange, Inc.(e)(g)

(Formerly KnowledgeVision Systems, Inc.)

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

www.openexc.com

 

397,899 Series C Preferred.

397,899 Common.

   

11/13/13

10/22/19

 

 

    4%      

1,193,697

208,243

 

 

   

543,283

108,656

 

 

    1.4%  
       

 

 

   

 

 

   
  Total Open Exchange         1,401,940       651,939    
       

 

 

   

 

 

   
           

Owl Rock Capital Corporation NYSE: ORRC (n) Public BDC

New York, NY.

  30,000 shares.     3/16/20       <1%       347,067       380,900       0.8%  

PennantPark Investment Corporation NASDAQ: PNNT (n) Public BDC

New York, NY.

  100,000 shares.     8/13/20       <1%       370,130       458,667       1.0%  

PostProcess Technologies, Inc.(e)(g)

Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing) www.postprocess.com

  360,002 Series A1 Preferred.     11/1/19       <1%       348,875       471,603       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.

(g) 1,839,422 Series A Preferred.

(g) 50,593 Common.

(g) 589,420 Series B Preferred.

   

10/29/09

12/12/13

10/24/09

9/29/15

 

 

 

 

    4%      


2,099,999

702,732

 

 

 

 

   


702,732

 

 

 

 

    1.5%  
       

 

 

   

 

 

   
  Total Rheonix         2,802,731       702,732    
       

 

 

   

 

 

   

 

57


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2020 (Continued)

 

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

 

(a)

Type of Investment

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

Science and Medicine Group, Inc. (SMG)(g)

Arlington, VA. Research and advisory firm serving the life science, analytical instrument, diagnostic, healthcare, radiology, and dental industries.

(Health Care)

www.scienceandmedicinegroup.com

  $1,900,000 Participation Agreement of $5,000,000 Promissory Note at 12% due March 5, 2023.     7/31/20       0%    

 

 

 

1,900,000

 

 

 

 

 

 

1,900,000

 

 

    4.1

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.

1,204,819 Series B-1 Preferred.

717,772 Series C Preferred.

   

4/5/13

4/8/14

6/26/15

 

 

 

    4%      

500,000

750,000

500,000

 

 

 

   

92,425

138,637

92,425

 

 

 

    0.7
       

 

 

   

 

 

   
  Total SocialFlow         1,750,000       323,487    
       

 

 

   

 

 

   

Somerset Gas Transmission Company, LLC(e)(m)

Columbus, OH. Natural gas transportation.

(Oil and Gas) www.somersetgas.com

  26.5337 Units.     4/1/05       3%       719,097       500,000       1.1

TCG BDC, Inc. NASDAQ: CGBD (n) Public BDC

New York, NY.

  40,000 shares.     8/13/20       <1%       376,996       418,400       0.9
       

 

 

   

 

 

   
Subtotal Non-Control/Non-Affiliate Investments         $ 25,884,428     $ 26,157,302    
       

 

 

   

 

 

   

Affiliate Investments – 30.1% of net assets (k)
Carolina Skiff LLC(g)(m)

Waycross, GA. Manufacturer of ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com

  6.0825% Class A Common Membership Interest.     1/30/04       7%     $ 15,000     $ 1,500,000       3.2

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.     1/4/16       6%       200,000       200,000       0.4

Filterworks Acquisition USA, LLC(l)(m)

Deerfield Beach, FL. Provides spray booth equipment, frame repair machines and paint booth filter services for collision shops. (Automotive)

www.filterworksusa.com

 

$2,283,702 Term Note at 12% (+2% PIK) due December 4, 2023.

562.5 Class A Units.

    11/8/19       9%    

 

 

 

2,349,831

562,500

 

 

 

 

 

 

 

2,349,831

562,500

 

 

 

    6.3
       

 

 

   

 

 

   
  Total Filterworks         2,912,331       2,912,331    
       

 

 

   

 

 

   

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.

1,876,922 Series B Preferred.

   

11/20/12

6/9/14

 

 

    7%      

750,000

479,155

 

 

   

544,860

479,155

 

 

    2.2
       

 

 

   

 

 

   
  Total Knoa         1,229,155       1,024,015    
       

 

 

   

 

 

   

Mezmeriz, Inc.(e)(g)

Ithaca, NY. Technology company developing novel reality capture tools for 3D mapping, reality modeling, object tracking and classification. (Electronics Developer) www.mezmeriz.com

  1,554,565 Series Seed Preferred.     5/14/15       12%       742,850             0.0

 

58


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2020 (Continued)

 

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

 

(a)

Type of Investment

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

Microcision LLC (g)

Pennsauken Township, NJ. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing)

www.microcision.com

 

$1,500,000 Subordinated Promissory Note at 11% due January 10, 2025.

Membership Interest Purchase Warrant for 5%.

   

 

1/10/20

 

1/10/20

 

 

 

    5  

 

 

 

1,411,997

110,000

 

 

 

 

 

 

 

1,411,997

95,000

 

 

 

    3.3
       

 

 

   

 

 

   
  Total Microcision         1,521,997       1,506,997    
       

 

 

   

 

 

   

New Monarch Machine Tool, Inc. (e)(g)

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

www.monarchmt.com

  22.84 Common.     1/17/08       15     22,841       22,841       0.1

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

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

(Consumer Product)

www.oncoregolf.com

  300,483 Preferred AA.     11/30/18       5     752,712       300,000       0.7

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 Preferred.

274,299 Series A1 Convertible Preferred.

117,371 Series B Convertible Preferred.

113,636 Series C Convertible Preferred.

369,698 Series C1 Convertible Preferred.

147,059 Series D Convertible Preferred.

Warrant to purchase Series D-1 Preferred.

$1,500,000 Secured Subordinated Promissory Note at 12% due April 23, 2023.

   

7/12/13

4/4/14

8/31/15

4/7/16

4/7/16

5/9/17

5/9/17

4/23/20

 

 

 

 

 

 

 

 

    6    

 

1,500,000

504,710

250,000

175,000

399,274

250,000

45,000

 

1,465,000

 

 

 

 

 

 

 

 

 

   

 


250,000

 

1,465,000

 

 

 

 

 

 

 

 

 

    3.7
       

 

 

   

 

 

   
  Total SciAps         4,588,984       1,715,000    
       

 

 

   

 

 

   
    (i) Interest receivable $123,500.                                        

Tilson Technology Management, Inc. (g)

Portland, ME. Provides network deployment construction and information system services management for cellular, fiber optic and wireless systems providers. Its affiliated entity, SQF, LLC is a CLEC supporting small cell 5G deployment. (Professional Services)

www.tilsontech.com

 

*120,000 Series B Preferred.

*21,391 Series C Preferred.

*70,176 Series D Preferred.

*15,385 Series E Preferred.

211,567 SQF Hold Co. Common.

23,077 Series F Preferred.

   

1/20/15

9/28/16

9/29/17

3/15/19

3/15/19

6/15/20

 

 

 

 

 

 

    9    

600,000

200,000

800,000

500,012

750,003

 

 

 

 

 

 

   

1,950,000

347,604

1,140,360

500,012

22,036

750,003

 

 

 

 

 

 

    10.2
       

 

 

   

 

 

   
  Total Tilson         2,850,015       4,710,015    
       

 

 

   

 

 

   
  *2.5% dividend payable quarterly.          
       

 

 

   

 

 

   

Subtotal Affiliate Investments

        $ 14,835,885     $ 13,891,199    
       

 

 

   

 

 

   

TOTAL INVESTMENTS – 86.9%

        $ 40,720,313     $ 40,048,501    

OTHER ASSETS IN EXCESS OF LIABILITIES – 13.1%

          $ 6,056,329    
         

 

 

   

NET ASSETS – 100%

          $ 46,104,830    
         

 

 

   

 

59


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2020 (Continued)

 

Notes to the Consolidated Schedule of Portfolio Investments

 

(a)

At December 31, 2020, restricted securities represented 92% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable. Type of investment for equity position is in the form of shares unless otherwise noted as units or interests, i.e., preferred shares, common shares.

 

(b)

The Date Acquired column indicates the date on which the Corporation first acquired an investment.

 

(c)

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

 

(d)

The Corporation’s investments are carried at fair value in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At December 31, 2020, ASC 820 designates 92% of the Corporation’s investments as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly traded securities are valued at the average closing price for these securities for the last three trading days of the reporting period. Restricted securities are subject to restrictions on resale and are valued at fair value as determined by our external investment advisor Rand Capital Management, LLC (“RCM”) and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3. “Investments” to the Consolidated Financial Statements).

 

(e)

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

 

(f)

As of December 31, 2020, the total cost of investment securities was approximately $40.7 million. Net unrealized depreciation was approximately ($672) thousand, which was comprised of $10.6 million of unrealized appreciation of investment securities and ($11.3) million of unrealized depreciation of investment securities. At December 31, 2020, the aggregate gross unrealized gain for federal income tax purposes was $10.1 million and the aggregate gross unrealized loss for federal income tax purposes was ($11.3) million. The net unrealized loss for federal income tax purposes was ($1.2) million based on a tax cost of $40.9 million.

 

(g)

Rand Capital SBIC, Inc. investment.

 

(h)

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

 

(i)

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

 

(j)

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

 

(k)

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

 

(l)

Payment in kind (PIK) represents earned interest that is added to the cost basis of the investment and due at maturity. The amount of PIK earned is included in the interest rate detailed in the “Type of Investment” column, unless it has been noted with a (+), in which case the PIK is in addition to the face amount of interest due on the security.

 

(m)

Equity holdings are held in a wholly owned (100%) “blocker corporation” of Rand Capital Corporation or Rand Capital SBIC, Inc. for federal income tax and Regulated Investment Company (RIC) compliance.

 

(n)

Publicly traded company.

 

60


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2020 (Continued)

 

Investments in and Advances to Affiliates

 

Company

 

Type of Investment

  December 31,
2019 Fair
Value
    Net
Change  in
Unrealized
Appreciation
(Depreciation)
    Gross
Additions
(1)
    Gross
Reductions
(2)
    December 31,
2020 Fair
Value
    Net
Realized
(Losses)
Gains
    Amount  of
Interest/

Dividend/
Fee
Income
(3)
 

Control Investments:

               
  Total Control Investments   $     $     $     $     $     $     $  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Affiliate Investments:                

BeetNPath, LLC

 

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

1,032,918 Series B Preferred Membership Units.

$262,626.64 Convertible Secured Notes at 8%.

  $