RAND CAPITAL CORP

Comparison of the three months ended March 31, 2024 to the three months ended March 31, 2023

Investment Income

NM - Not meaningful

The total investment income during the three months ended March 31, 2024 was received from 24 portfolio companies. For the three months ended March 31, 2023, total investment income was received from 23 portfolio companies.

Interest from portfolio companies – Interest from portfolio companies was approximately 40% higher during the three months ended March 31, 2024 versus the same period in 2023 due to the fact that we originated more interest yielding investments during the last year. The new debt instruments were originated from BMP Food Service Supply Holdco, LLC (FSS), First Coast Mulch, All About People, INEA, ITA, Mattison, MRES, and Seybert's.

Interest from other investments - The increase in interest from other investments is primarily due to higher yields on cash balances during the three months ended March 31, 2024 versus the same period in 2023.

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

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

The income associated with the amortization of financing fees was $49,031 and $37,720 for the three months ended March 31, 2024 and 2023, respectively. During the three months ended March 31, 2024, we recognized a loan monitoring fee of $20,000 from our investment in Pressure Pro, a prepayment fee of $10,982 from our investment in Pressure Pro, a loan monitoring fee of $8,814 from our investment in Mattison, a loan monitoring fee of $5,995 from our investment in Filterworks, and a loan modification fee of $5,000 from our investment in Lumious. During the three months ended March 31, 2023, we recognized a loan monitoring fee of $20,000 from our investment in FSS, a loan monitoring fee of $20,000 from our investment in Pressure Pro, and a loan modification fee of $2,000 from our investment in Lumious.

Expenses

The increase in total expenses during the three months ended March 31, 2024 versus the same period in 2023 was primarily due to a $231,620 increase in interest expense, a $61,332 increase in professional fees, and a $57,202 increase in Base Management Fees payable to RCM. These increases were offset by a $178,700 decrease in the capital gains incentive fee expense.

The increase in interest expense resulted from higher average outstanding debt balances during the three months ended March 31, 2024 versus the same period in 2023 under the Credit Facility. Interest expense for the three months ended March 31, 2024 and 2023 was $390,020 and $158,400, respectively.

Professional fees expense increased by $61,332 during the three months ended March 31, 2024, versus the same period in 2023, as we incurred increased fees associated with the complex regulatory environment in which we operate.

The base management fee payable to RCM is calculated based upon total assets less cash, and, as we deploy more capital into investments, the base management fee payable to RCM will increase accordingly. The base management fee for the three months ended March 31, 2024 and 2023 was $302,595 and $245,393, respectively.

The capital gains incentive fee accrual during the three months ended March 31, 2024 is due to the calculation of the capital gains fee as required by GAAP. We are required under GAAP to accrue capital gains incentive fees on the basis of net realized capital gains and losses and net unrealized gains and losses. Our capital gains incentive fee accrual reflects the capital gains incentive fees that would be payable to RCM if our entire investment portfolio was liquidated at its fair value as of the balance sheet date, even though RCM is not entitled to this capital gains incentive fee under the Investment Management Agreement with respect to unrealized gains unless and until such gains are actually realized.

Net Investment Income

The excess of investment income over total expenses, including income taxes, represents net investment income. The net investment income for the three months ended March 31, 2024 and 2023 was $839,585 and $714,916, respectively.

Realized Gain on Investments

During the three months ended March 31, 2024, we recognized a net realized gain of $3,450,092 on the sale of 194,934 shares of Class A common stock of ACV. As of March 31, 2024, we no longer hold any shares of ACV.

During the three months ended March 31, 2023, we recognized a gain of $58,329 from additional proceeds received from Microcision LLC (Microcision), an investment we exited in 2022. In addition, during the during the three months ended March 31, 2023, we recognized a realized loss of ($4,941) on our escrow receivable from SocialFlow, Inc. (Social Flow), an investment we exited in 2022.

Change in Unrealized Appreciation (Depreciation) of Investments

The change in net unrealized appreciation (depreciation), before income taxes, for the three months ended March 31, 2024, was comprised of the following:

Ares, Barings, Carlyle, FS KKR, and Pennantpark are all publicly traded stocks, and as such, are marked to market at the end of each quarter, using the closing price on the last trading day of the quarter.

We sold our investment in ACV during the three months ended March 31, 2024.

The valuation of our investment in Knoa, during the three months ended March 31, 2024, was decreased after a review of their commercial and financial operations.

The change in net unrealized appreciation (depreciation), before income taxes, for the three months ended March 31, 2023, was comprised of the following:

ACV, Ares, Barings, Carlyle, FS KKR, and Pennantpark are all publicly traded stocks, and as such, were marked to market at the end of the quarter, using the closing price on the last trading day of the quarter.

All of the valuation adjustments resulted from a review by RCM management, which was subsequently approved by our Board of Directors, using the guidance set forth by ASC 820 and our established valuation policy.

Net Increase in Net Assets from Operations

We account for our operations under GAAP for investment companies. The principal measure of our financial performance is "Net increase in net assets from operations" on our consolidated statements of operations. The net increase in net assets from operations for the three months ended March 31, 2024 and 2023 was $1,399,381 and $2,170,277, respectively.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet anticipated cash requirements, fund new and follow-on portfolio investments, pay distributions to our shareholders and respond to other general business demands. As of March 31, 2024, our total liquidity consisted of approximately $759,000 in cash and $5,800,000 remaining availability on our Credit Facility. In addition, we hold publicly traded equity securities of several BDCs, which are available for future liquidity requirements.

During 2022, we entered into a $25 million Credit Facility. The amount we can borrow, at any given time, under the Credit Facility is tied to a borrowing base, which is measured as (i) 75% of the aggregate sum of the fair market values of the publicly traded equity securities we hold (other than shares of ACV Auctions) plus (ii) the least of (a) 75% of the fair market value of the shares of ACV Auctions we hold, (b) $6.25 million and (c) 25% of the aggregate borrowing base availability for the Credit Facility at any date of determination plus (iii) 50% of the aggregate sum of the fair market values of eligible private loans we hold that meet specified criteria plus (iv) the lesser of (a) 50% of the aggregate sum of the fair market values of unsecured private loans we hold that meet specified criteria and (b) $1.25 million minus (v) such reserves as the Lender may establish from time to time in its sole discretion. The Credit Facility has a maturity date of June 27, 2027. The outstanding balance drawn on the Credit Facility at March 31, 2024 was $19,200,000. Under the borrowing base formula described above, the unused line of credit balance for the Credit Facility was $5,800,000 at March 31, 2024.

Our borrowings under the Credit Facility bear interest at a variable rate determined as a rate per annum equal to 3.50 percentage points above the greater of (i) the applicable daily simple secured overnight financing rate (SOFR) and (ii) 0.25%. At March 31, 2024, our applicable interest rate was 8.84%.

The Credit Agreement contains representations and warranties and affirmative, negative and financial covenants usual and customary for agreements of this type, including among others covenants that prohibit, subject to certain specified exceptions, our ability to merge or consolidate with other companies, sell any material part of our assets, incur other indebtedness, incur liens on our assets, make investments or loans to third parties other than permitted investments and permitted loans, and declare any distribution or dividend other than certain permitted distributions. The Credit Agreement includes the following financial covenants: (i) a tangible net worth covenant that requires us to maintain a Tangible Net Worth (defined in the Credit Agreement as our aggregate assets, excluding intangible assets, less all of our liabilities) of not less than $50.0 million, which is measured quarterly at the end of each fiscal quarter, (ii) an asset coverage ratio covenant that requires us to maintain an Asset Coverage Ratio (defined in the Credit Agreement as the ratio of the fair market value of all of our assets to the sum of all of our obligations for borrowed money plus all capital lease obligations) of not less than 3:1, which is measured quarterly at the end of each fiscal quarter and (iii) an interest coverage ratio covenant that requires us to maintain an Interest Coverage Ratio (defined in the Credit Agreement as the ratio of Cash Flow (as defined in the Credit

Agreement) to Interest Expense (as defined in the Credit Agreement)) of not less than 2.5:1, which is measured quarterly on a trailing twelve-months basis. We believe we were in compliance with these covenants at March 31, 2024. See “Note 6. Senior Secured Revolving Credit Facility” on our Notes to the Consolidated Financial Statements for additional information regarding the terms of our Credit Facility.

For the three months ended March 31, 2024, we experienced a net decrease in cash of approximately $2,536,000, which is a net effect of approximately $4,841,000 of cash used in our operating activities and approximately $2,305,000 provided by our financing activities.

The $4,841,000 of cash used in our operating activities during the three months ended March 31, 2024, resulted primarily from approximately $10,838,000 to fund new or follow-on portfolio company investments, approximately $329,000 in non-cash interest income, approximately $200,000 net increase in operating assets and an approximately $371,000 net decrease in operating liabilities. This was partially offset by net investment income of approximately $840,000 and approximately $6,085,000 from the sales of equity investments and repayments of debt investments.

Net cash flow provided by financing activities during the three months ended March 31, 2024 was approximately $2,305,000. This is comprised of $2,950,000 borrowed on the Credit Facility and approximately $645,000 in dividends paid to shareholders.

We anticipate that we will continue to fund our investment activities through cash generated through our ongoing operating activities, the sale of our publicly traded liquid investments, and through borrowings under the $25 million Credit Facility. We anticipate that we will continue to exit investments. However, the timing of liquidation events with respect to our privately held investments is difficult to project.