FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarter ended September 30, 2013

 

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

For the Transition Period from                      to                     

Commission File Number: 814-00235

 

 

Rand Capital Corporation

(Exact Name of Registrant as specified in its Charter)

 

 

 

New York   16-0961359

(State or Other Jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification No.)

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

(716) 853-0802

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

As of November 1, 2013 there were 6,424,918 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-Q

 

 

  PART I. – FINANCIAL INFORMATION   

Item 1.

  Financial Statements and Supplementary Data    3
  Condensed Consolidated Statements of Financial Position as of September 30, 2013 (Unaudited) and December 31, 2012    3
  Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012 (Unaudited)    4
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)    5
  Condensed Consolidated Statements of Changes in Net Assets for the Three Months and Nine Months Ended September 30, 2013 and 2012 (Unaudited)    6
  Condensed Consolidated Schedule of Portfolio Investments as of September 30, 2013 (Unaudited)    7
  Notes to the Consolidated Financial Statements (Unaudited)    11

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    21

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    28

Item 4.

  Controls and Procedures    28
  PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings    29

Item 1A.

  Risk Factors    29

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    29

Item 3.

  Defaults upon Senior Securities    29

Item 4.

  Mine Safety Disclosures    29

Item 5.

  Other Information    29

Item 6.

  Exhibits    30

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Supplementary Data

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As of September 30, 2013 and December 31, 2012

 

     September 30,
2013 (Unaudited)
    December 31,
2012
 

ASSETS

  

Investments at fair value:

  

Control investments (cost of $1,715,432 and $1,920,831, respectively)

   $ 10,380,951      $ 10,571,317   

Affiliate investments (cost of $11,054,897 and $9,374,343, respectively)

     10,403,360        8,099,815   

Non-Control/Non-Affiliate investments (cost of $6,272,992 and $7,196,885, respectively)

     7,385,241        11,108,654   
  

 

 

   

 

 

 

Total investments, at fair value (cost of $19,043,321 and $18,492,059, respectively)

     28,169,552        29,779,786   

Cash and cash equivalents

     3,946,504        4,224,763   

Interest receivable (net of allowance: 9/30/13—$122,000 and 12/31/12—$196,795)

     26,973        33,025   

Prepaid income taxes

     125,623        —     

Other assets

     412,358        214,839   
  

 

 

   

 

 

 

Total assets

   $ 32,681,010      $ 34,252,413   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)

    

Liabilities:

    

Debentures guaranteed by the SBA

   $ 5,500,000      $ 4,900,000   

Deferred tax liability

     1,963,891        2,946,614   

Income tax payable

     —          27,695   

Accounts payable and accrued expenses

     119,332        561,940   

Deferred revenue

     28,313        33,864   
  

 

 

   

 

 

 

Total liabilities

     7,611,536        8,470,113   

Stockholders’ equity (net assets):

    

Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,424,918 as of 9/30/13 and 6,610,236 as of 12/31/12

     686,304        686,304   

Capital in excess of par value

     10,581,789        10,581,789   

Accumulated net investment (loss)

     (357,043     (1,043,795

Undistributed net realized gain on investments

     9,636,003        9,148,536   

Net unrealized appreciation on investments

     5,672,756        7,013,260   

Treasury stock, at cost; 438,116 shares as of 9/30/13 and 252,798 shares at 12/31/12

     (1,150,335     (603,794
  

 

 

   

 

 

 

Total stockholders’ equity (net assets), (per share at 9/30/13 and 12/31/12—$3.90)

     25,069,474        25,782,300   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 32,681,010      $ 34,252,413   
  

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months Ended September 30, 2013 and 2012

(Unaudited)

 

     Three months
ended

September 30,
2013
    Three months
ended
September 30,
2012
    Nine months
ended

September 30,
2013
    Nine months
ended

September 30,
2012
 

Investment income:

      

Interest from portfolio companies:

      

Control investments

   $ 37,669      $ 9,818      $ 119,662      $ 32,259   

Affiliate investments

     110,189        123,269        370,007        355,316   

Non-Control/Non-Affiliate investments

     38,213        22,957        108,572        38,824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from portfolio companies

     186,071        156,044        598,241        426,399   

Interest from other investments

     2,110        1,845        7,452        6,483   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from other investments

     2,110        1,845        7,452        6,483   

Dividend and other investment income:

      

Control investments

     234,727        1,246,825        1,247,652        1,560,606   

Affiliate investments

     79,964        44,030        124,761        178,186   

Non-Control/Non-Affiliate investments

     —          —          16,670        6,950   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other investment income

     314,691        1,290,855        1,389,083        1,745,742   

Other income:

      

Control investments

     5,500        2,000        10,500        4,000   

Affiliate investments

     600        —          3,800        2,000   

Non-Control/Non-Affiliate investments

     1,250        668        3,750        668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     7,350        2,668        18,050        6,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     510,222        1,451,412        2,012,826        2,185,292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Salaries

     135,375        122,478        406,125        365,683   

Bonus and profit sharing

     —          —          —          144,000   

Employee benefits

     27,297        31,350        114,792        105,387   

Directors’ fees

     14,250        12,750        86,250        82,500   

Professional fees

     27,595        30,793        102,957        113,250   

Stockholders and office operating

     25,457        24,046        104,824        99,848   

Insurance

     7,500        12,228        27,004        31,470   

Corporate development

     19,730        20,988        57,743        53,846   

Other operating

     1,360        3,500        3,863        10,402   
  

 

 

   

 

 

   

 

 

   

 

 

 
     258,564        258,133        903,558        1,006,386   

Interest on SBA obligations

     33,806        20,681        129,730        131,012   

Bad debt expense (recovery)

     —          64,654        (64,654     64,654   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     292,370        343,468        968,634        1,202,052   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment gain before income tax expense

     217,852        1,107,944        1,044,192        983,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     74,324        281,017        357,440        215,320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gain

     143,528        826,927        686,752        767,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized gain (loss) on investments:

      

Affiliate investments

     —          —          (1,063,698     —     

Non-Control/Non-Affiliate investments

     —          379,612        1,842,265        415,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized gain on investments before income taxes

     —          379,612        778,567        415,097   

Income tax expense

     —          144,087        291,100        156,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain on investments

     —          235,525        487,467        258,590   

Net increase (decrease) in unrealized appreciation on investments:

      

Control investments

     8,381        —          15,033        —     

Affiliate investments

     (440,707     (337,546     622,991        (337,546

Non-Control/Non-Affiliate investments

     (205,650     (3,501,050     (2,799,520     1,473,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized appreciation before income taxes

     (637,976     (3,838,596     (2,161,496     1,135,790   

Deferred income tax (benefit) expense

     (250,156     (1,378,868     (820,992     475,511   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in unrealized appreciation on investments

     (387,820     (2,459,728     (1,340,504     660,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain on investments

     (387,820     (2,224,203     (853,037     918,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

     ($244,292     ($1,397,276     ($166,285     $1,686,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     6,481,172        6,808,607        6,551,116        6,812,457   

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

     ($0.04     ($0.21     ($0.03     $0.25   

See accompanying notes

 

4


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2013 and 2012

(Unaudited)

 

     Nine months
ended
September 30,
2013
    Nine months
ended
September 30,
2012
 

Cash flows from operating activities:

    

Net (decrease) increase in net assets from operations

     ($166,285   $ 1,686,789   

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

    

Depreciation and amortization

     32,238        59,902   

Original issue discount accretion

     (11,619     (15,988

Change in interest receivable allowance

     (74,795     64,654   

Decrease (increase) in unrealized appreciation of investments

     2,161,496        (1,135,790

Deferred tax (benefit) expense

     (982,723     662,397   

Realized gain on portfolio investments, net

     (778,567     (415,097

Non-cash conversion of debenture interest

     (245,501     (84,655

Changes in operating assets and liabilities:

    

Decrease (increase) in interest receivable

     80,847        (40,611

(Increase) decrease in other assets

     (185,835     1,119,074   

(Increase) decrease in prepaid income taxes

     (125,623     169,645   

(Decrease) increase in accounts payable and accrued expenses

     (442,608     3,392   

Decrease in income taxes payable

     (27,695     —     

(Decrease) increase in deferred revenue

     (5,550     8,333   
  

 

 

   

 

 

 

Total adjustments

     (605,935     395,256   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (772,220     2,082,045   

Cash flows from investing activities:

    

Investments originated

     (2,875,002     (3,130,728

Proceeds from sale of investments

     2,977,145        823,669   

Proceeds from loan repayments

     382,282        79,918   

Capital expenditures

     (7,547     —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     476,878        (2,227,141

Cash flows from financing activities:

    

Repayment of SBA debentures

     (900,000     (3,100,000

Proceeds from SBA debentures

     1,500,000        3,000,000   

Origination costs to SBA

     (36,376     (72,750

Purchase of treasury stock

     (546,541     (157,158
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     17,083        (329,908
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (278,259     (475,004

Cash and cash equivalents:

    

Beginning of period

     4,224,763        4,517,985   
  

 

 

   

 

 

 

End of period

   $ 3,946,504      $ 4,042,981   
  

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

For the Three Months and Nine Months Ended September 30, 2013 and 2012

(Unaudited)

 

     Three months
ended

September 30,
2013
    Three months
ended

September 30,
2012
    Nine months
ended
September 30,
2013
    Nine months
ended
September 30,
2012
 

Net assets at beginning of period

   $ 25,521,216      $ 27,483,186      $ 25,782,300      $ 24,399,121   

Net investment gain

     143,528        826,927        686,752        767,920   

Net realized gain on sales and dispositions of investments

     —          235,525        487,467        258,590   

Net (decrease) increase in unrealized appreciation

     (387,820     (2,459,728     (1,340,504     660,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

     (244,292     (1,397,276     (166,285     1,686,789   

Purchase of treasury stock

     (207,450     (157,158     (546,541     (157,158
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (decrease) increase in net assets

     (451,742     (1,554,434     (712,826     1,529,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 25,069,474      $ 25,928,752      $ 25,069,474      $ 25,928,752   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

6


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2013

(Unaudited)

 

(a)       (b)     (c)           (d)(f)     Per  

Company, Geographic Location, Business

Description, (Industry) and Website

 

Type of Investment

  Date
Acquired
    Equity     Cost     Fair
Value
    Share
of Rand
 
Non-Control/Non-Affiliate Investments: (j)            

BinOptics Corporation (e)(g)

Ithaca, NY. Design and manufacture of semiconductor FP and DFB lasers. (Electronics Developer)

www.binoptics.com

  20,891,357 Series 2 preferred shares.     11/8/11        4   $ 1,799,999      $ 1,799,999      $ .28   

Liazon Corporation (e)(g)

Buffalo, NY. Private health benefits exchange. (Health Benefits Provider)

www.liazon.com

 

120,000 Series C-1 preferred shares.

546,667 Series C-2 preferred shares.

100,000 Series D preferred shares.

    11/9/10        3     1,133,199        2,108,331        .33   

Mercantile Adjustment Bureau, LLC (g)

Williamsville, NY. Full service accounts receivable management and collections company. (Accounts Receivable)

www.mercantilesolutions.com

  $1,075,000 note at 13% due October 30, 2017. Warrant for 2.47% membership interests.     10/22/12        2     1,084,163        1,084,163        .17   

SocialFlow, Inc. (e)(g)

New York, NY. Provides instant analysis of current opportunities on social networks using proprietary, predictive analytic algorithm to determine best time for its customers to publish or advertise. (Software)

www.socialflow.com

  1,049,538 Series B preferred shares.     4/5/13        2     500,000        500,000        .08   

Somerset Gas Transmission Company, LLC

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

www.somersetgas.com

  26.5337 units.     7/10/02        3     719,097        786,748        .12   

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

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

www.synacor.com

  428,643 unrestricted common shares valued at $2.58 per share.     11/18/02        3     625,677        1,106,000        .17   
Other Non-Control/Non-Affiliate Investments           410,857        0        .00   
       

 

 

   

 

 

   

 

 

 
Subtotal Non-Control/Non-Affiliate Investments         $ 6,272,992      $ 7,385,241      $ 1.15   
       

 

 

   

 

 

   

 

 

 
Affiliate Investments: (k)            

Carolina Skiff LLC (g)

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

www.carolinaskiff.com

  $985,000 Class A preferred membership interest at 9.8%. $250,000 subordinated promissory note at 14% due December 31, 2016. 6.0825% Class A common membership interest.     1/30/04        7   $ 1,250,000      $ 1,485,000      $ .23   

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

Saratoga Springs, NY. Predictive employee selection and development software. (Software)

www.chequed.com

  305,118 Series A preferred shares.     11/18/10        12     1,033,222        1,033,222        .16   

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

New York, NY. Cancer clinical trial matching and referral service. (Software)

www.emergingmed.com

  $778,253 senior subordinated note at 8% due March 27, 2015. 1,955,967 common equity shares.     12/19/05        8     778,253        0        .00   

 

7


Table of Contents

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2013 (Continued)

(Unaudited)

 

(a)       (b)     (c)           (d)(f)     Per  

Company, Geographic Location, Business

Description, (Industry) and Website

 

Type of Investment

  Date
Acquired
    Equity     Cost     Fair
Value
    Share
of Rand
 

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

Batavia, NY. Develops medical devices including First Crush, a dual action pill crusher that crushes and grinds medical pills. (Manufacturing)

www.firstwaveproducts.com

  $500,000 senior term notes at 10% due April 19, 2016. Warrant for 24,288 capital securities.     4/19/12        5     577,556        577,556        .09   

GiveGab, Inc. (e)(g)

Ithaca, NY. GiveGab is a social network dedicated to helping volunteers and nonprofit organizations interact, on a local level, in their communities. (Software)

www.givegab.com

  1,397,428 Series A preferred shares.     3/13/13        6     250,000        250,000        .04   

G-TEC Natural Gas Systems (e)

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

www.gas-tec.com

  19.081% Class A membership interest. 8% cumulative dividend.     8/31/99        19     400,000        100,000        .02   

Intrinsiq Materials, Inc. (e)(g)

Rochester, NY. Produces a variety of electronic ink, including screen-printable, inkjetable copper ink, silicon ink jet, and nickel ink jet utilizing a unique process of making nanomaterial based ink used in a room-temperature manufacturing environment on paper, plastics and metals. (Manufacturing)

www.intrinsiqmaterials.com

  599,055 Series 2 Preferred shares.     9/19/13        7     600,002        600,002        .09   

Knoa Software, Inc. (e)(g)

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

www.knoa.com

  973,533 Series A-1 convertible preferred shares.     11/20/12        6     750,000        750,000        .12   

Mezmeriz, Inc. (e)(g)

Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer enabling efficient, wide-angle, Pico projectors to be embedded in mobile devices. (Electronics Developer)

www.mezmeriz.com

  360,526 Series A preferred shares. $100,000 convertible note at 8% due December 31, 2013.     1/9/08        10     491,373        491,373        .07   

Microcision LLC (g)

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

www.microcision.com

  $1,500,000 subordinated promissory note at 5%, 6% deferred interest due January 31, 2014. 15% Class A common membership interest.     9/24/09        15     1,864,005        1,864,005        .29   

QuaDPharma, LLC (g)(h)

Clarence, NY. Small scale pre-commercial and commercial manufacturing for the Pharmaceutical industry. (Manufacturing)

www.quadpharmainc.com

  $340,648 senior subordinated term note at 10% due November 1, 2017. 141.75 Class A units of membership interest.     6/26/12        14     656,285        656,285        .10   

Rheonix, Inc. (e)(g)

Ithaca, NY. Developer of microfluidic testing devices including channels, pumps, reaction vessels, & diagnostic chambers, for testing of small volumes of chemicals and biological fluids. (Manufacturing)

www.rheonix.com

 

9,676 common shares.

(g) 1,081,539 Series A preferred shares. 50,593 common shares.

    10/29/09        5     1,208,728        1,344,728        .21   

SciAps, Inc. (e)(g)

Woburn, MA. Instrumentation company specializing in portable analytical instruments. Provides durable, field-tested, portable instruments to identify any compound, any mineral, any element, anyplace on the planet. (Manufacturing)

www.sciaps.com

  87,500 Class B common shares.     7/12/13        5     700,000        700,000        .11   

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2013 (Continued)

(Unaudited)

 

(a)       (b)     (c)           (d)(f)     Per  

Company, Geographic Location, Business

Description, (Industry) and Website

 

Type of Investment

  Date
Acquired
    Equity     Cost     Fair
Value
    Share
of Rand
 

SOMS Technologies, LLC (e)(g)

Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Auto Parts Developer)

www.microgreenfilter.com

  5,959,490 Series B membership units.     12/2/08        10     472,632        528,348        .08   
Other Affiliate Investments           22,841        22,841        .00   
       

 

 

   

 

 

   

 

 

 
Subtotal Affiliate Investments         $ 11,054,897      $ 10,403,360      $ 1.61   
       

 

 

   

 

 

   

 

 

 
Control Investments (l)            

Gemcor II, LLC (g)(h)

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

www.gemcor.com

  $500,000 subordinated promissory note at 15% due December 1, 2014. $1,000,000 subordinated promissory note at 15% due September 1, 2017. 31.25 membership units.     6/28/04        31   $ 1,606,451      $ 10,281,451      $ 1.60   
Other Control Investments           108,981        99,500        .02   
       

 

 

   

 

 

   

 

 

 
Subtotal Control Investments         $ 1,715,432      $ 10,380,951      $ 1.62   
       

 

 

   

 

 

   

 

 

 
Total portfolio investments         $ 19,043,321      $ 28,169,552      $ 4.38   
       

 

 

   

 

 

   

 

 

 

 

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RAND CAPITAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2013 (Continued)

(Unaudited)

 

Notes to Consolidated Schedule of Portfolio Investments

(a) At September 30, 2013 restricted securities represented approximately 96% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable. Freed Maxick CPAs, P.C. has not audited the business descriptions of the portfolio companies. Individual securities with a fair value less than $100,000 are included in “Other Investments.”

(b) The Date Acquired column indicates the year in which the Corporation acquired its first investment in the company or a predecessor company. Freed Maxick CPAs, P.C. has not audited the date acquired of the portfolio companies.

(c) Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. Freed Maxick CPAs, P.C. has not audited the equity percentages of the portfolio companies. The symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent. As of September 30, 2013, the Corporation held no equity interests of less than one percent.

(d) The investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements” which defines fair value and establishes guidelines for measuring fair value. At September 30, 2013, ASC 820 designates 4% of the Corporation’s investments as “Level 1” and 96% as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the month. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount which the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (also see Note 3 “Investments” to the consolidated financial statements).

(e) These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax related distributions within the last twelve months, or are not expected to do so going forward.

(f) As of September 30, 2013, the total cost of investment securities approximated $19 million. Net unrealized appreciation was approximately $9.1 million, which was comprised of $10.6 million of unrealized appreciation of investment securities and ($1.5) million related to unrealized depreciation of investment securities.

(g) Rand Capital SBIC, Inc. investment.

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

(i) Represents interest due (amounts over $50,000 net of reserves) from investment included as interest receivable on the Corporation’s Balance Sheet. As of September 30, 2013 there were no amounts exceeding $50,000.

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

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

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

(m) Publicly owned company.

(n) On September 30, 2013, the Corporation’s shares of Synacor were valued at $2.58 per share in accordance with the Corporation’s valuation policy for unrestricted publicly held securities (Level 1).

 

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Rand Capital Corporation and Subsidiary

Notes to the Consolidated Financial Statements

For the Nine Months Ended September 30, 2013 and 2012

(Unaudited)

Note 1. ORGANIZATION

Rand Capital Corporation (“Rand”) was incorporated under the laws of New York in February 1969. Rand operates as a publicly traded, closed-end, diversified management company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Rand Capital SBIC, Inc. (“Rand SBIC”) is a wholly-owned subsidiary of Rand, operating as a small business investment company (“SBIC”) and licensed by the U.S. Small Business Administration (“SBA”). The predecessor of Rand SBIC had originally been organized as a Delaware limited partnership, and was converted into a New York corporation on December 31, 2008, at which time its operations as a licensed SBIC were continued by the newly formed corporation under its current name. Rand SBIC’s board of directors is comprised of the directors of Rand, a majority of whom are not “interested persons” of Rand or Rand SBIC. Rand and its wholly-owned subsidiary Rand SBIC are referred to herein, collectively, as the “Corporation”.

The Corporation is listed on the NASDAQ Capital Market under the symbol “Rand”.

Rand operates Rand SBIC for the same investment purposes and with investments in similar loan and equity securities as Rand. The operations of Rand SBIC are consolidated with those of Rand for both financial reporting and tax purposes.

On February 28, 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC to permit certain joint transactions that would otherwise be prohibited by the 1940 Act, but which would not be prohibited if Rand and Rand SBIC were a single entity and to permit an exemption from separate reporting requirements for Rand SBIC under Section 13(a) of the Securities Exchange Act of 1934 Act (the “Exchange Act”). At that time, although Rand SBIC was operated as if it were a BDC, it was registered as an investment company under the 1940 Act. Upon the Corporation’s receipt of the order granting the exemption, on March 28, 2012, Rand SBIC filed an election to be regulated as a BDC under the 1940 Act pursuant to which it may now engage in certain transactions which would be permitted if Rand and Rand SBIC were operated as a single entity, but which are not permitted between a parent BDC and a wholly-owned subsidiary BDC without specific exemptions.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—In Management’s opinion, the accompanying consolidated financial statements include all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the interim periods presented. Certain information and note disclosures normally included in audited annual financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been omitted; however, the Corporation believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the nine months ended September 30, 2013 are not necessarily indicative of the results for the full year.

These statements should be read in conjunction with the consolidated financial statements and the notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012. Information contained in this filing should also be reviewed in conjunction with the Corporation’s related filings with the SEC prior to the date of this report. Those filings include, but are not limited to, the following:

 

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N-54A    Election to Adopt Business Development Company status
DEF-14A    Definitive Proxy Statement submitted to shareholders
Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2012
Form 10-Q    Quarterly Report on Form 10-Q for the quarters ended June 30, 2013, March 31, 2013 and September 30, 2012

The Corporation’s website is www.randcapital.com. The Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, charters for the Corporation’s Board committees and other reports filed with the Securities and Exchange Commission (“SEC”) are available through the Corporation’s website.

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

Cash and Cash Equivalents—Temporary cash investments having an original maturity of three months or less when purchased are considered to be cash equivalents.

Financial Instruments—The carrying value of cash and cash equivalents, accrued interest receivable and payable and other receivables and payables, approximates fair value due to the relative short maturities of these financial instruments. The Company’s investments, including loan and debt securities and equity securities, are carried at their estimated fair value (See Note 3). The carrying amount of the SBA debentures approximates fair value because stated interest rates approximate current interest rates that are available for debt with similar terms.

Revenue Recognition—Interest Income—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, the loan is placed on non-accrual status and interest income is recognized at the time of receipt. A reserve for possible losses on interest receivables is maintained when appropriate.

The Rand SBIC 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 for more than 120 days. Management also uses other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

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

Original Issue Discount—Investments may include “original issue discount” or OID income. This occurs when the Corporation purchases a warrant and a note from a portfolio company simultaneously, which requires an allocation of a portion of the purchase price to the warrant and reduces the note or debt instrument by an equal amount in the form of a note discount or OID. The note is reported net of the OID and the OID is accreted into interest income over the life of the loan. The Corporation recognized $11,619 and $15,988 in OID income for the nine months ended September 30, 2013 and 2012, respectively.

Deferred Debenture Costs—SBA debenture origination and commitment costs, which are included in other assets, are amortized ratably over the terms of the SBA debentures and are expensed when the debt is repaid. Amortization expense for the nine months ended September 30, 2013 and 2012 was $32,238 and $59,902, respectively.

 

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SBA Leverage—The Corporation had $5,500,000 and $4,900,000 in outstanding SBA leverage at September 30, 2013 and December 31, 2012, respectively. The Corporation repaid $900,000 in SBA leverage during the nine months ended September 30, 2013. The $5,500,000 in outstanding leverage at September 30, 2013 matures in 2022 and 2023. The remaining undrawn SBA commitment at September 30, 2013 is $2,500,000 and expires on September 30, 2016. Subsequent to September 30, 2013, the Corporation received proceeds from SBA debentures in the amount of $1,500,000.

Net Assets per Share—Net assets per share are based on the number of shares of common stock outstanding. There are no common stock equivalents.

Supplemental Cash Flow Information—Income taxes paid, net of refunds, during the nine months ended September 30, 2013 and 2012 were $963,589 and $15,296, respectively. Interest paid during the nine months ended September 30, 2013 and 2012 was $128,083 and $135,870, respectively. The Corporation converted $245,501 and $84,655 of interest receivable into investments during the nine months ended September 30, 2013 and 2012, respectively.

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

Stockholders’ Equity (Net Assets)—At September 30, 2013 and December 31, 2012, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

On November 1, 2012, the Board of Directors authorized the repurchase of up to 500,000 shares of the Corporation’s outstanding common stock on the open market at prices no greater than the then current net asset value through November 1, 2013. The Corporation repurchased 185,318 shares during the nine months ended September 30, 2013 for a total cost of $546,541 and an average cost of $2.95/share. The Corporation had previously purchased 208,698 shares during 2012 and 44,100 during 2003 and 2002. At September 30, 2013, the total shares held in treasury were 438,116 with a total cost of $1,150,335. On October 24, 2013, the Corporation extended the stock buyback program through October 24, 2014 to accumulate up to an aggregate of 1,000,000 shares of its common stock on the open market at prices no greater than the then current net asset value.

Profit Sharing and Stock Option PlanIn 2001 the stockholders of the Corporation authorized the establishment of an Employee Stock Option Plan (the “Option Plan”), that provides for the award of options to purchase up to 200,000 common shares to eligible employees. In 2002, the Corporation placed the Option Plan on inactive status as it developed a new profit sharing plan for the Corporation’s employees in connection with the formation of its SBIC subsidiary. As of September 30, 2013, no stock options had been awarded under the Option Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any option, warrant or right is outstanding under an executive compensation plan, no options will be granted under the Option Plan while any profit sharing plan is in effect with respect to the Corporation.

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

 

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Table of Contents

There were no amounts earned pursuant to the Plan for the nine months ended September 30, 2013 and $144,000 was earned and accrued pursuant to the Plan for the nine months ended September 30, 2012. During the year ended December 31, 2012, the Corporation approved and accrued $246,000 under the Plan, which was paid during the nine months ended September 30, 2013.

Income Taxes—The Corporation reviews the tax positions it has taken to determine if they meet a “more likely than not threshold” for the benefit of the tax position to be recognized in the consolidated financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in the recording of either a reduction of an income tax receivable or a deferred tax asset, or an income tax payable or a deferred tax liability.

It is the Corporation’s policy to include interest and penalties related to income tax liabilities in income tax expense. There were no amounts recognized for interest or penalties related to tax expense for the nine months ended September 30, 2013 or 2012.

The Corporation is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2011 and 2012. In general, the Corporation’s state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2009 through 2012. The Corporation does not expect that the amounts of uncertain tax positions will change significantly within the next 12 months.

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

At September 30, 2013 Gemcor II, LLC (Gemcor), Liazon Corporation (Liazon), Microcision, LLC (Microcision), BinOptics Corporation (Binoptics) and Carolina Skiff LLC (Carolina Skiff) represented 36%, 7%, 7%, 6% and 5%, respectively, of the fair value of the Corporation’s investment portfolio.

Note 3. INVESTMENTS

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

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

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

 

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

 

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The loan and debt securities may also be valued at an amount other than the price the security would command in order to provide a yield to maturity equivalent to the current yield of similar debt securities. A loan or debt instrument may be reduced in value if it is judged to be of poor quality, collection is in doubt or insufficient liquidation proceeds exist.

 

    Equity securities may be valued using the “market approach” or “income approach.” The market approach uses observable prices and other relevant information generated by similar market transactions. It may include the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, the Corporation adjusts valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor. The income approach employs a cash flow and discounting methodology to value an investment.

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

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

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 and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement, which is not necessarily an indication of risks associated with the investment.

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

Under the valuation policy, the Corporation values unrestricted publicly held securities at the average closing bid price for the last three trading days of the month.

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

 

    Financial information obtained from each portfolio company, including unaudited statements of operations, balance sheets and operating budgets;

 

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

 

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

 

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

 

    Pending debt or capital restructuring of the portfolio company;

 

    Current information regarding any offers to purchase the investment; or past sales transactions;

 

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

 

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

 

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

 

    Qualitative assessment of key management;

 

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

 

    Other factors deemed relevant to assess valuation.

 

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Table of Contents

This information is used to determine financial condition, performance, and valuation of the portfolio companies. The valuation may be reduced if a portfolio company’s performance and potential have deteriorated significantly. If the factors which 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 Interests.

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

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

When appropriate the Black-Scholes pricing model is used to estimate the fair value of warrants for GAAP 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 increases or decreases in any of these unobservable inputs would result in a significantly higher or lower fair value measurement.

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

Loan and Debt Securities

The significant unobservable inputs used in the fair value measurement of the Corporation’s debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, as well as the market acceptance for the portfolio company’s products or services. These inputs will provide an indicator as to the probability of principal recovery of the investment. The Corporation’s debt investments will often be 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 significantly higher or lower fair value measurement. For recent investments, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair market value inputs are identified causing the Corporation to depart from this level.

 

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Table of Contents

The following table provides a summary of the significant unobservable inputs used to fair value the Corporation’s Level 3 portfolio investments as of September 30, 2013:

 

Investment Type

   Fair Value at
September 30, 2013
     Valuation
Technique
   Significant Unobservable
Inputs
   Range

Equity Investments

   $ 11,321,748       Market Approach    EBITDA Multiple    5X-12X
     414,214       Market Approach    Liquidation Seniority    1X
     99,500       Market Approach    Revenue Multiple    1X
     10,064,630       Market Approach    Transaction Pricing    Not applicable
     72,000       Black Scholes

Pricing Model

   Stock pricing and volatility    $1.13

Loan and Debt Investments

     5,091,460       Face Value    Liquidation Seniority    Not applicable
  

 

 

          

Total

   $ 27,063,552            
  

 

 

          

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value on a Recurring Basis at September 30, 2013:

 

            Fair Value Measurements at Reported Date Using  

Description

   September 30,
2013
     Quoted Prices in
Active Markets for
Identical Assets

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

Loan investments

   $ 1,287,736       $ —         $ —         $ 1,287,736   

Debt investments

     3,803,724         —           —           3,803,724   

Equity investments

     23,078,092         1,106,000         —           21,972,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Venture Capital Investments

   $ 28,169,552       $ 1,106,000       $ 0       $ 27,063,552   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value on a Recurring Basis at December 31, 2012:

 

            Fair Value Measurements at Reported Date Using  

Description

   December 31,
2012
     Quoted Prices in
Active Markets for
Identical Assets

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

Loan investments

   $ 1,504,986       $ —         $ —         $ 1,504,986   

Debt investments

     4,082,174         —           —           4,082,174   

Equity investments

     24,192,626         3,540,400         —           20,652,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Venture Capital Investments

   $ 29,779,786       $ 3,540,400       $ 0       $ 26,239,386   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2013:

 

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

Description

   Loan
Investments
    Debt
Investments
    Equity
Investments
    Total  

Ending Balance, December 31, 2012, of Level 3 Assets

   $ 1,504,986      $ 4,082,174      $ 20,652,226      $ 26,239,386   

Realized Losses included in net

change in net assets from operations

        

Mid America Brick & Structural Clay

        

Products, LLC (Mid America Brick)

     —          (126,698     (937,000     (1,063,698
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Realized Losses

     —          (126,698     (937,000     (1,063,698

Unrealized Gains or Losses included in net

change in net assets from operations

        

EmergingMed.com, Inc. (Emerging Med)

     —          (440,707     —          (440,707

Mid America Brick

     —          126,698        937,000        1,063,698   

NDT Acquisitions, LLC (NDT)

     —          —          15,033        15,033   

Ultra-Scan Corporation (UltraScan)

     —          —          (561,836     (561,836
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Gains and Losses

     —          (314,009     390,197        76,188   

Purchases of Securities/Changes to

Securities/Non-cash conversions:

        

Chequed.com, Inc. (Chequed)

     —          —          500,000        500,000   

Emerging Med

     —          103,207        —          103,207   

First Wave Products Group, LLC (First Wave)

     —          45,126        —          45,126   

GiveGab, Inc

     —          —          250,000        250,000   

Intrinsiq Material, Inc. (Intrinsiq)

     —          —          600,002        600,002   

Mercantile Adjustment Bureau, LLC (Mercantile)

     —          82,497        —          82,497   

Mezmeriz, Inc. (Mezmeriz)

     —          100,000        19,864        119,864   

Microcision LLC (Microcision)

     —          81,426        —          81,426   

Mid America Brick

     150,000        —          —          150,000   

SciAps, Inc. (Sciaps)

     —          —          700,000        700,000   

SocialFlow, Inc. (Social Flow)

     —          —          500,000        500,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     150,000        412,256        2,569,866        3,132,122   

Repayments of Securities

        

Gemcor II, LLC (Gemcor)

     (190,365     —          —          (190,365

Mid America Brick

     (150,000     —          —          (150,000

NDT

     —          —          (15,033     (15,033

QuaDPharma, LLC (Quadpharma)

     (26,885     —          —          (26,885

UltraScan

     —          —          (938,164     (938,164
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Repayments of Securities

     (367,250     —          (953,197     (1,320,447

Transfers within Level 3

     —          (249,999     250,000        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, September 30, 2013, of Level 3 Assets

   $ 1,287,736      $ 3,803,724      $ 21,972,092      $ 27,063,552   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains (losses) for the period included in changes in net assets

         $ 76,188   

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

           ($385,978

 

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The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2012:

 

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

Description

   Loan
Investments
    Debt
Investments
    Equity
Investments
    Total  

Beginning Balance, December 31, 2011, of Level 3 Assets

   $ 327,111      $ 2,854,564      $ 20,750,186      $ 23,931,861   

Unrealized gains or losses included in net

change in net assets from operations

        

Liazon Corporation (Liazon)

     —          —          833,332        833,332   

Ultra-Scan Corporation (UltraScan)

     —          —          (513,246     (513,246

EmergingMed.com, Inc. (Emerging Med)

     —          (337,546     —          (337,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Gains and Losses

     —          (337,546     320,086        (17,460

Purchases of Securities/Changes to

Securities/Non-cash conversions

        

Gemcor II, LLC (Gemcor)

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

QuaDPharma, LLC (Quadpharma)

     250,000        —          250,000        500,000   

Rheonix, Inc. (Rheonix)

     —          —          455,728        455,728   

First Wave Products Group, LLC (First Wave)

     —          388,227        22,000        410,227   

Liazon

     —          —          275,000        275,000   

Mezmeriz, Inc. (Mezmeriz)

     —          250,000        —          250,000   

Mid America Brick & Structural Clay

        

Products, LLC (Mid America Brick)

     —          126,698        137,000        263,698   

Microcision LLC (Microcision)

     —          76,718        —          76,718   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1,250,000        841,643        1,139,728        3,231,371   

Repayments of Securities

        

Gemcor

     (73,872     —          —          (73,872

QuaDPharma

     (6,047     —          —          (6,047

NDT Acquisitions, LLC (NDT)

     —          —          (15,271     (15,271
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Repayments of Securities

     (79,919     —          (15,271     (95,190

Transfers within Level 3

     —          —          —          —     

Transfers in or out of Level 3 (A) (B)

     —          —          (5,700,000     (5,700,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, September 30, 2012, of Level 3 Assets

   $ 1,497,192      $ 3,358,661      $ 16,494,729      $ 21,350,582   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains or losses for the period included in changes in net assets

           ($17,460
Total gains or losses for the period included in changes in net assets            —     

 

(A) The reporting entity’s policy is to recognize transfers into and transfers out of level 3 as of the date of the event or change in circumstances that caused the transfer.
(B) Transfer from level 3 to level 2 during the first quarter of 2012 because observable market data became available for the restricted security. The Synacor, Inc. shares became freely tradable during August 2012 and were transferred from Level 2 to Level 1 at September 30, 2012.

 

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Note 4. FINANCIAL HIGHLIGHTS

The following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the nine months ended September 30, 2013 and the year ended December 31, 2012:

 

    Nine months ended
September 30,
2013 (Unaudited)
    Year ended
December 31,
2012
 

Income from investment operations (1):

   

Investment income

  $ 0.31      $ 0.39   

Expenses

    0.15        0.27   
 

 

 

   

 

 

 

Investment gain before income taxes

    0.16        0.12   

Income tax expense

    0.06        0.02   
 

 

 

   

 

 

 

Net investment gain

    0.10        0.10   

Purchase of treasury stock (2)

    0.03        0.04   

Net realized and unrealized (loss) gain on investments

    (0.13     0.18   
 

 

 

   

 

 

 

Increase in net asset value

    0.00        0.32   

Net asset value, beginning of period

    3.90        3.58   
 

 

 

   

 

 

 

Net asset value, end of period

  $ 3.90      $ 3.90   
 

 

 

   

 

 

 

Per share market price, end of period

  $ 2.95      $ 2.34   
 

 

 

   

 

 

 

Total return based on market value

    26.1     (24.5 )% 

Total return based on net asset value

    (2.76 )%      9.01

Supplemental data:

   

Ratio of expenses before income taxes to average net assets

    3.81     7.16

Ratio of expenses including taxes to average net assets

    5.22     7.65

Ratio of net investment gain to average net assets

    2.70     2.73

Portfolio turnover

    10.81     22.60

Net assets, end of period

  $ 25,069,474      $ 25,782,300   

Shares outstanding, end of period

    6,424,918        6,610,236   

 

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

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

 

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

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

FORWARD LOOKING STATEMENTS

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

There may be other factors not identified that affect the accuracy of the Corporation’s forward-looking statements. Further, any forward-looking statement speaks only as of the date it is made and, except as required by law, the Corporation undertakes 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 the Corporation’s business not to develop as we expect, and we cannot predict all of them.

Overview

The following discussion describes the financial position and operations of Rand Capital Corporation (Rand) and its wholly-owned subsidiary Rand SBIC, Inc. (Rand SBIC) (collectively, the “Corporation”).

Rand is incorporated in New York and has elected to operate as a business development company (“BDC”) under the 1940 Act. Its wholly-owned subsidiary, Rand SBIC, operates as a small business investment company (“SBIC”) regulated by the Small Business Administration (“SBA”). On February 28, 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC under which Rand SBIC was permitted to elect BDC status. On March 28, 2012, Rand SBIC elected BDC status with the SEC pursuant to which it may now engage in certain transactions which would be permitted if Rand and Rand SBIC were operated as a single entity, but which are not permitted between a parent BDC and a wholly-owned subsidiary BDC without specific exemption.

The Corporation anticipates that most, if not all, of its investments in the next year will be originated through the SBIC subsidiary.

 

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Table of Contents

Business Developments

The United States and global economic conditions continued to improve throughout the first nine months of 2013 although a full economic recovery may take longer than expected due to various national and international issues which may have an adverse economic impact on all businesses, particularly small businesses. To the extent the financial market conditions continue to improve, the Corporation believes its financial condition and the financial condition of the portfolio companies will improve. It remains difficult to forecast when future investment exits will happen.

Critical Accounting Policies

The Corporation prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. A summary of the Corporation’s critical accounting policies can be found in the Corporation’s 2012 Form 10-K under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Financial Condition

Overview:

 

     9/30/13      12/31/12      Decrease     %
Decrease
 

Total assets

   $ 32,681,010       $ 34,252,413         ($1,571,403     (4.6 %) 

Total liabilities

     7,611,536         8,470,113         (858,577     (10.1 %) 
  

 

 

    

 

 

    

 

 

   

Net assets

   $ 25,069,474       $ 25,782,300         ($712,826     (2.8 %) 
  

 

 

    

 

 

    

 

 

   

Net asset value per share (NAV) was $3.90 at September 30, 2013 and December 31, 2012.

During the first nine months of 2013, the Corporation paid off $900,000 in SBA leverage with interest rates at 4.1%. The outstanding SBA leverage at September 30, 2013 is $5,500,000 and will mature in 2022 and 2023.

Cash and cash equivalents approximated 16% of net assets at September 30, 2013 and December 31, 2012.

Composition of the Corporation’s Investment Portfolio

The Corporation’s financial condition is dependent on the success of its portfolio holdings. It has invested substantially all of its assets in small to medium-sized companies. The following summarizes the Corporation’s investment portfolio at the period-ends indicated.

 

     9/30/13      12/31/12      Increase
(Decrease)
    % Increase
(Decrease)
 

Investments, at cost

   $ 19,043,321       $ 18,492,059         $551,262        3.0

Unrealized appreciation, net

     9,126,231         11,287,727         (2,161,496     (19.1 %) 
  

 

 

    

 

 

    

 

 

   

Investments at fair value

   $ 28,169,552       $ 29,779,786         ($1,610,234     (5.4 %) 
  

 

 

    

 

 

    

 

 

   

The Corporation’s total investments at fair value, as estimated by management and approved by the Board of Directors, approximated 112% of net assets at September 30, 2013 and 116% of net assets at December 31, 2012.

The change in investments during the nine months ended September 30, 2013, at cost, is comprised of the following:

 

     Cost
Increase
(Decrease)
 

New investments:

  

SciAps, Inc. (Sciaps)

   $ 700,000   

Intrinsiq Materials, Inc. (Intrinsiq)

     600,002   

Chequed.com, Inc. (Chequed)

     500,000   

SocialFlow, Inc. (Social Flow)

     500,000   

GiveGab, Inc. (GiveGab)

     250,000   

Mid America Brick & Structural Clay Products, LLC (Mid America Brick)

     150,000   

Mezmeriz, Inc. (Mezmeriz)

     100,000   

Mercantile Adjustment Bureau, LLC (Mercantile)

     75,000   
  

 

 

 

Total of new investments

     2,875,002   

Other changes to investments:

  

EmergingMed.com, Inc. (Emerging Med) interest conversion

     103,207   

Microcision LLC (Microcision) interest conversion

     81,426   

Mezmeriz interest conversion

     19,864   

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

     45,126   

Mercantile OID amortization

     7,497   
  

 

 

 

Total of other changes to investments

     257,120   

Investments repaid, sold or liquidated

  

Mid America Brick loss and repayment

     (1,213,698

Ultra-Scan Corporation (Ultra-Scan) sale

     (938,164

Synacor, Inc. sale

     (196,716

Gemcor II, LLC (Gemcor) repayment

     (190,365

QuaDPharma, LLC (Quadpharma) repayment

     (26,884

NDT Acquisitions, LLC (NDT) repayment

     (15,033
  

 

 

 

Total of investments repaid, sold or liquidated

     (2,580,860
  

 

 

 

Net change in investments

   $ 551,262   
  

 

 

 

 

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Table of Contents

Results of Operations

Investment Income

The Corporation’s investment objective is to achieve long-term capital appreciation on its equity investments while maintaining a current cash flow from its debenture and pass through equity instruments. Therefore, the Corporation invests in a mixture of debenture and equity instruments, which will provide a current return on a portion of the investment portfolio. The equity features contained in the Corporation’s investment portfolio are structured to realize capital appreciation over the long-term and may not generate current income in the form of dividends or interest. In addition, the Corporation earns interest income from investing its idle funds in money market instruments held at well capitalized financial institutions.

Comparison of the nine months ended September 30, 2013 to the nine months ended September 30, 2012

 

     September
30, 2013
     September
30, 2012
     Increase
(Decrease)
    %
Increase

(Decrease)
 

Interest from portfolio companies

   $ 598,241       $ 426,399       $ 171,842        40.3

Interest from other investments

     7,452         6,483         969        14.9

Dividend and other investment income

     1,389,083         1,745,742         (356,659     (20.4 %) 

Other income

     18,050         6,668         11,382        170.7
  

 

 

    

 

 

    

 

 

   

Total investment income

   $ 2,012,826       $ 2,185,292         ($172,466     (7.9 %) 
  

 

 

    

 

 

    

 

 

   

Interest from portfolio companies—The portfolio interest income increase is due to the fact the Corporation originated over $3.0 million in new debt instruments during the previous 18 months with interest rates ranging from 8% to 15%.

The Corporation ceased accruing interest income on the Emerging Med investment in 2013 and the G-Tec Natural Gas Systems (G-Tec) investment in 2004.

Interest from other investments—The minor increase in interest from other investments is primarily due to higher average cash balances during the nine months ending September 30, 2013 versus the nine months ending September 30, 2012.

Dividend and other investment income—Dividend income is comprised of distributions from Limited Liability Companies (LLCs) in which the Corporation has invested. The Corporation’s investment agreements with certain LLCs require the LLCs to distribute funds to the Corporation for payment of income taxes on its allocable share of the LLC’s profits. These portfolio companies may also elect to distribute additional discretionary distributions. These dividends will fluctuate based upon the profitability of the LLCs and the timing of the distributions. In addition, in the current year the Corporation received dividends from a non-LLC portfolio company.

 

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Dividend income for the nine months ended September 30, 2013 consisted of a distribution from Gemcor II, LLC (Gemcor) for $1,247,300, New Monarch Machine Tool, Inc. (Monarch) for $68,522, Carolina Skiff LLC (Carolina Skiff) for $56,239, Somerset Gas Transmission Company, LLC (Somerset) for $16,670 and NDT Acquisitions LLC (NDT) for $352 .. Dividend income for the nine months ended September 30, 2012 consisted of a distribution from Gemcor for $1,559,964, Monarch for $169,023, Carolina Skiff for $9,163, Somerset for $6,950 and NDT for $642. The Corporation exited its debt investment in Monarch in 2008 and continues to hold a small ownership in the company.

Other income—Other income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $5,550 and $668 for the nine months ended September 30, 2013 and 2012, respectively. The board fees were $12,500 and $6,000 for the nine months ended September 30, 2013 and 2012, respectively.

Operating Expenses

Comparison of the nine months ended September 30, 2013 to the nine months ended September 30, 2012

 

     September 30,
2013
     September 30,
2012
     Decrease     % Decrease  

Total Expenses

   $ 968,634       $ 1,202,052         ($233,418     (19.4 %) 

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

The 19% or $233,418 decrease in operating expenses for the nine months ended September 30, 2013 as compared to the same nine month period in 2012 is due primarily to the fact that the Corporation accrued $144,000 in bonus expense attributed to realized gains during the nine months ended September 30, 2012 and did not accrue any bonus expense for the nine months ended September 30, 2013. In addition, operating expenses are less in the current period due to a bad debt recovery of $64,654 during the nine months ended September 30, 2013.

Net Realized Gains and Losses on Investments

Comparison of the nine months ended September 30, 2013 to the nine months ended September 30, 2012

 

     September 30,
2013
     September 30,
2012
     Increase  

Net realized gain

   $ 778,567       $ 415,097       $ 363,470   

During the nine months ended September 30, 2013, the Corporation recognized a net realized gain of $1,164,545 on the sale of 252,200 shares of Synacor, Inc. (Synacor). Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. As of September 30, 2013, the Corporation owned 428,643 shares of Synacor.

The Corporation also recognized a realized gain of $670,808 on the sale of its shares in Ultra-Scan to a strategic acquirer during the nine months ended September 30, 2013.

 

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Table of Contents

During the nine months ended September 30, 2013, the Corporation recognized a realized loss of $1,063,698 on its investment in Mid-America Brick when the company announced in February 2013 that it had filed for bankruptcy. Due to the subordinated nature of the Corporation’s investment holdings there was no recovery.

During the nine months ended September 30, 2012, the Corporation recognized a realized gain of $415,097 on the sale of 133,825 shares of Synacor, Inc. (Synacor). Synacor completed an Initial Public Offering (IPO) at $5.00 on February 10, 2012 and currently trades on the NASDAQ Global Market under the symbol “SYNC”. The Corporation owned 986,187 shares prior to the IPO.

Net Change in Unrealized Appreciation of Investments

The Corporation recorded a net decrease in unrealized appreciation on investments of ($2,161,496) during the nine months ended September 30, 2013 and a net increase of $1,135,790 during the nine months ended September 30, 2012.

The decrease in unrealized appreciation for the nine months ended September 30, 2013 was comprised of the following:

 

     September 30,
2013
 

Reclass Mid America Brick & Structural Clay Products, LLC (Mid America Brick) to a realized loss

   $ 1,063,698   

NDT Acquisition, LLC (NDT)

     15,033   

EmergingMed.com, Inc. (Emerging Med)

     (440,707

Reclass Ultra-Scan Corporation (Ultra-Scan) to realized gain

     (561,836

Synacor, Inc. (Synacor)

     (2,237,684
  

 

 

 

Total change in net unrealized appreciation during the nine months ended September 30, 2013

     ($2,161,496
  

 

 

 

Synacor, as a publicly traded stock, is marked to market at the end of each quarter. The Corporation valued its 428,643 shares of Synacor at a three day average bid price of $2.58 as of September 30, 2013.

The Emerging Med investment was written down based on a financial analysis of the company and to reflect anticipated liquidation proceeds. The NDT investment value was adjusted for royalties received.

The Mid America Brick investment was written off after the company filed for bankruptcy protection in the first quarter of 2013.

The increase in unrealized appreciation for the nine months ended September 30, 2012 was comprised of the following:

 

     September 30,
2012
 

Synacor, Inc. (Synacor)

   $ 1,153,250   

Liazon Corporation (Liazon)

     833,332   

EmergingMed.com, Inc. (Emerging Med)

     (337,546

Ultra-Scan Corporation (Ultra-Scan)

     (513,246
  

 

 

 

Total change in net unrealized appreciation during the nine months ended September 30, 2012

   $ 1,135,790   
  

 

 

 

 

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Synacor, as a publicly traded stock, is marked to market at the end of each quarter. The stock had restrictions on its sale that expired on August 11, 2012. The Corporation valued its 852,362 shares of Synacor at a three day average bid price of $7.58 for the nine months ended September 30, 2012.

Liazon completed another significant equity financing, with a higher valuation, during the second quarter of 2012 and it was led by a new non-strategic outside investor. The Corporation, therefore, in accordance with its valuation policy, increased the value of its holdings in Liazon based on this financing.

The Ultra-Scan investment was written down during the nine months ended September 30, 2012 after a review by the Corporation’s management of Ultra-Scan’s financials and an analysis of the liquidation preferences of senior securities. The Emerging Med investment was written down based on a financial analysis of the company.

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

Net (Decrease) Increase in Net Assets from Operations

The Corporation accounts for its operations under GAAP for investment companies. The principal measure of its financial performance is “net (decrease) increase in net assets from operations” on its consolidated statements of operations. For the nine months ended September 30, 2013, the net decrease in net assets from operations was ($166,285) as compared to a net increase in net assets from operations of $1,686,789 for the same nine month period in 2012.

Liquidity and Capital Resources

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

As of September 30, 2013, the Corporation’s total liquidity, consisting of cash and cash equivalents, was $3,946,504.

Management expects that the cash and cash equivalents at September 30, 2013, coupled with the $2,500,000 of available SBA leverage and the scheduled interest and dividend payments on its portfolio investments, will be sufficient to meet the Corporation’s cash needs throughout the next twelve months. The Corporation is also evaluating potential exits from portfolio companies to increase the amount of liquidity available for new investments, operating activities and future SBA debenture obligations.

Subsequent Events

Subsequent to September 30, 2013, the Corporation received proceeds from SBA debentures in the amount of $1,500,000. Additionally, subsequent to quarter end, the Corporation extended the stock buyback program through October 24, 2014 to accumulate up to an aggregate of 1,000,000 shares of its common stock.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Corporation’s investment activities contain elements of risk. The portion of the Corporation’s investment portfolio consisting of equity and debt securities in private companies is subject to valuation risk. Because there is typically no public market for the equity and equity-linked debt securities in which it invests, the valuation of the equity interests in the portfolio is stated at “fair value” as determined in good faith by the management of the Corporation and submitted to the Board of Directors for approval. This is in accordance with the Corporation’s investment valuation policy (see the discussion of valuation policy contained in “Note 3.-Investments” in the consolidated financial statements contained in Item 1 of this report, which is hereby incorporated herein by reference.) In the absence of readily ascertainable market values, the estimated value of the Corporation’s 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 in the Corporation’s consolidated statement of operations as “Net unrealized appreciation on investments.”

At times the Corporation’s portfolio may include marketable securities, including marketable securities traded in the over-the-counter market. In addition, there may be securities in the Corporation’s 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, the Corporation may not be able to realize the fair value of its marketable investments or other investments in a timely manner.

As of September 30, 2013, the Corporation did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of September 30, 2013. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s controls and procedures were effective as of September 30, 2013.

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

 

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PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

See Part I, Item 1A, “Risk Factors,” of the Annual Report on Form 10-K for the year ended December 31, 2012. The Risk Factors from our 2012 report on Form 10-K remain applicable with the exception of the following addition:

Fluctuations of Quarterly Results

The Corporation’s quarterly operating results could fluctuate as a result of a number of factors. These factors include, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which portfolio companies encounter competition in their markets and general economic conditions and the market value of publicly traded securities. As a result of these factors, results for any one quarter should not be relied upon as being indicative of performance in future quarters.

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

Issuer Purchases of Equity Securities

 

Period

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

7/1/2013—7/31/2013

     3,760       $ 2.94         3,760         128,267   

8/1/2013—8/31/2013

     —           —           —           128,267   

9/1/2013—9/30/2013

     66,383       $ 2.96         66,383         61,884   

 

(1) The total number of shares purchased was 70,143 for the third quarter of 2013. All transactions were made in the open market.
(2) The average price paid per share is calculated on a settlement basis and includes commission.
(3) On November 1, 2012, the Board of Directors authorized the repurchase of up to 500,000 shares of the Corporation’s outstanding Common Stock on the open market at prices no greater than the then current net asset value through November 1, 2013. Subsequent to September 30, 2013, the Corporation extended the stock buyback program through October 24, 2014 to accumulate up to an aggregate of 1,000,000 shares of its common stock.

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

 

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Item 6. Exhibits

 

  (a) Exhibits

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

 

(3)(i)   Certificate of Incorporation of the Corporation, incorporated by reference to Exhibit (a) (1) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. (File No. 814-00235).
(3)(ii)   By-laws of the Corporation incorporated by reference to Exhibit (b) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. (File No. 814-00235).
(4)   Specimen certificate of common stock certificate, incorporated by reference to Exhibit (b) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. (File No. 814-00235).
(31.1)   Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, filed herewith
(31.2)   Certification of Chief Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, filed herewith
(32.1)   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Rand Capital Corporation – furnished herewith

 

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Signatures

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

Dated: November 1, 2013

 

RAND CAPITAL CORPORATION
By:   /s/ Allen F. Grum
  Allen F. Grum, President
By:   /s/ Daniel P. Penberthy
  Daniel P. Penberthy, Treasurer

 

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