RAND CAPITAL CORP

Comparison of the three months ended June 30, 2024 to the three months ended June 30, 2023

Investment Income

The total investment income during the three months ended June 30, 2024 and 2023 was received from 22 portfolio companies.

Interest from portfolio companies – Interest from portfolio companies was approximately 35% higher during the three months ended June 30, 2024 versus the same period in 2023 due to the fact that we originated additional interest yielding investments during the last year. The new debt instruments were originated from FSS, First Coast Mulch, All About People, 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 June 30, 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 $52,803 and $87,927 for the three months ended June 30, 2024 and 2023, respectively. During the three months ended June 30, 2024, we recognized a prepayment fee of $14,800 from our investment in Pressure Pro. During the three months ended June 30, 2023, we recognized an early repayment fee of $61,264 from our investment in DSD.

Expenses

The increase in total expenses during the three months ended June 30, 2024 versus the same period in 2023 was primarily due to a $1,150,000 increase in the capital gains incentive fee expense, a $134,260 increase in interest expense, and a $66,805 increase in Base Management Fees payable to RCM.

The capital gains incentive fee accrual expense during the three months ended June 30, 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 realized. The increase in expense during the three months ended June 30, 2024 can be attributed to realized gains and increases in unrealized appreciation during the quarter.

The increase in interest expense resulted from higher average outstanding debt balances during the three months ended June 30, 2024 versus the same period in 2023 under the Credit Facility. Interest expense for the three months ended June 30, 2024 and 2023 was $393,172 and $258,912, respectively.

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 June 30, 2024 and 2023 was $322,672 and $255,867, respectively.

Net Investment (Loss) Income

The excess of investment income over total expenses, including income taxes, represents net investment income (or loss). The net investment (loss) income for the three months ended June 30, 2024 and 2023 was ($517,195) and $492,630, respectively.

Realized Gain on Investments

During the three months ended June 30, 2024, we recognized a net realized gain of $598,371 on the sale of 86,000 shares of Carlyle, a net realized gain of $484,834 on the sale of 195,000 shares of Pennantpark, and a net realized gain of $176,794 on the sale of 21,000 shares of Ares. In addition, we recognized a realized gain of $397,264 from proceeds received from Tilson following a partial sale of certain SQF assets.

During the three months ended June 30, 2024, we liquidated our investment in Knoa, which was previously valued at $0, and recognized a realized loss of ($1,229,155).

During the three months ended June 30, 2023, we sold our investment in DSD and recognized a realized gain of $2,537,765. In addition, during the three months ended June 30, 2023, we sold our investment in Somerset Gas Transmission Company, LLC (Somerset) and recognized a realized loss of ($448,717). We also recognized a realized gain of $10,432 from additional proceeds received from ClearView Social, Inc. (Clearview Social), an investment we exited during 2021.

In addition, we recognized a net realized gain of $1,718,767 on the sale of 125,000 shares of Class A common stock of ACV Auctions, Inc. (ACV), during the three months ended June 30, 2023.

Change in Unrealized Appreciation (Depreciation) of Investments

The change in net unrealized appreciation (depreciation), before income taxes, for the three months ended June 30, 2024, was comprised of the following:

Barings and FS KKR are 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 investments in Ares, Carlyle, Knoa and Pennantpark during the three months ended June 30, 2024.

In accordance with the Corporation’s valuation policy, we increased the value of our investments in SciAps, Tilson and Pressure Pro after a financial analysis of each of the portfolio companies indicating continued improved performance.

Following the end of the quarter, SciAps announced that it had entered into a definitive purchase agreement to be acquired by a United Kingdom based buyer for total consideration of up to $260 million, comprising of an up-front consideration payable at closing of $200 million, less standard closing adjustments, and the transaction is subject to customary closing conditions and regulatory approvals, with closing expected later in calendar year 2024, and a deferred element of up to $60 million payable on the achievement of agreed upon financial metrics. The amount of the deferred earnout consideration that may become payable in the future is uncertain and not determinable as of June 30, 2024.

The valuation of our investment in Filterworks, during the three months ended June 30, 2024, was decreased after a review of their operations and financial condition.

The change in net unrealized appreciation (depreciation), before income taxes, for the three months ended June 30, 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.

We sold our investments in Somerset and DSD during the three months ended June 30, 2023.

The valuation of our investment in Open Exchange, during the three months ended June 30, 2023, was decreased after a review of their operations and financial condition.

All of the valuation adjustments resulted from a review by RCM management, which was subsequently approved by our Board, 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 June 30, 2024 and 2023 was $7,737,773 and $2,671,890, respectively.

Comparison of the six months ended June 30, 2024 to the six months ended June 30, 2023

Investment Income

NM - Not meaningful

The total investment income during the six months ended June 30, 2024 and 2023 was received from 24 portfolio companies.

Interest from portfolio companies – Interest from portfolio companies was approximately 38% higher during the six months ended June 30, 2024 versus the same period in 2023 due to the fact that we originated additional interest yielding investments during the last year. The new debt instruments were originated from FSS, First Coast Mulch, All About People, 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 six months ended June 30, 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 $101,834 and $125,647 for the six months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, we recognized prepayment fees totaling $25,782 from our investment in Pressure Pro, a loan monitoring fee of $20,000 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 six months ended June 30, 2023, we recognized an early repayment fee of $61,264 from our investment in DSD, 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 six months ended June 30, 2024 versus the same period in 2023 was primarily due to a $971,300 increase in the capital gains fee expense, $365,880 increase in interest expense, a $124,007 increase in Base Management Fees payable to RCM, and a $52,485 increase in professional fees.

The capital gains incentive fee accrual expense during the six months ended June 30, 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 realized. The increase in expense during the six months ended June 30, 2024 can be attributed to realized gains and increases in unrealized appreciation during the year.

The increase in interest expense resulted from higher average outstanding debt balances during the six months ended June 30, 2024 versus the same period in 2023 under the Credit Facility. Interest expense for the six months ended June 30, 2024 and 2023 was $783,192 and $417,312, respectively.

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 six months ended June 30, 2024 and 2023 was $625,267 and $501,260, respectively.

Professional fees expense increased by $52,485 during the six months ended June 30, 2024, versus the same period in 2023, as we incurred increased fees associated with the complex regulatory environment in which we operate.

Net Investment Income

The excess of investment income over total expenses, including income taxes, represents net investment income. The net investment income for the six months ended June 30, 2024 and 2023 was $322,390 and $1,207,546, respectively.

Realized Gain on Investments

During the six months ended June 30, 2024, we recognized a net realized gain of $3,450,092 on the sale of 194,934 shares of ACV, a net realized gain of $598,371 on the sale of 86,000 shares of Carlyle, a net realized gain of $484,834 on the sale of 195,000 shares of Pennantpark, and a net realized gain of $176,794 on the sale of 21,000 shares of Ares. In addition, we recognized a realized gain of $397,264 from proceeds received from Tilson following a partial sale of certain SQF assets.

During the six months ended June 30, 2024, we liquidated our investment in Knoa, which was previously valued at $0, and recognized a realized loss of ($1,229,155).

During the six months ended June 30, 2023, we sold our investment in DSD and recognized a realized gain of $2,537,765. In addition, during the six months ended June 30, 2023, we sold our investment in Somerset and recognized a realized loss of ($448,717).

During the six months ended June 30, 2023 we recognized a gain of $58,329 from additional proceeds received from Microcision LLC (Microcision), an investment we exited in 2022. We also recognized a realized gain of $10,432 from additional proceeds received from Clearview Social, an investment we exited during 2021. In addition, we recognized a realized loss of ($4,941) on our escrow receivable from SocialFlow, Inc. (Social Flow), an investment we exited in 2022.

In addition, we recognized a net realized gain of $1,718,767 on the sale of 125,000 shares of Class A common stock of ACV during the six months ended June 30, 2023.

Change in Unrealized Appreciation (Depreciation) of Investments

The change in net unrealized appreciation (depreciation), before income taxes, for the six months ended June 30, 2024, was comprised of the following:

Barings and FS KKR are 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 investments in ACV, Ares, Carlyle, Knoa and Pennantpark during the six months ended June 30, 2024.

In accordance with the Corporation’s valuation policy, we increased the value of our investments in SciAps, Tilson and Pressure Pro after a financial analysis of each of the portfolio companies indicating continued improved performance.

Following the end of the quarter, SciAps announced that it had entered into a definitive purchase agreement to be acquired by a United Kingdom based buyer for total consideration of up to $260 million, comprising of an up-front consideration payable at closing of $200 million, less standard closing adjustments, and the transaction is subject to customary closing conditions and regulatory approvals, with closing expected later in calendar year 2024, and a deferred element of up to $60 million payable on the achievement of agreed upon financial metrics. The amount of the deferred earnout consideration that may become payable in the future is uncertain and not determinable as of June 30, 2024.

The valuation of our investment in Filterworks, during the six months ended June 30, 2024, was decreased after a review of their operations and financial condition.

The change in net unrealized appreciation (depreciation), before income taxes, for the six months ended June 30, 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.

We sold our investments in Somerset and DSD during the six months ended June 30, 2023.

The valuation of our investment in Open Exchange, during the six months ended June 30, 2023, was decreased after a review of their operations and financial condition.

All of the valuation adjustments resulted from a review by RCM management, which was subsequently approved by our Board, 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 six months ended June 30, 2024 and 2023 was $9,137,154 and $4,842,167, 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 June 30, 2024, our total liquidity consisted of approximately $2,293,000 in cash and $7,800,000 of remaining availability on our Credit Facility. In addition, we hold publicly traded equity securities of two other 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, if any) plus (ii) the least of (a) 75% of the fair market value of the shares of ACV Auctions we hold, if any, (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 June 30, 2024 was $17,200,000. Under the borrowing base formula described above, the unused line of credit balance for the Credit Facility was $7,800,000 at June 30, 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 June 30, 2024, our applicable interest rate was 8.83%.

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 June 30, 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 six months ended June 30, 2024, we experienced a net decrease in cash of approximately $1,002,000, which is a net effect of approximately $558,000 of net cash used in our operating activities and approximately $444,000 of net cash used in our financing activities.

The $558,000 of net cash used in our operating activities during the six months ended June 30, 2024 resulted primarily from approximately $10,945,000 used to fund new or follow-on portfolio company investments, approximately $795,000 in non-cash interest income and an approximately $702,000 net increase in operating assets. This was partially offset by net investment income of approximately $322,000, approximately $10,576,000 from the sales of equity investments and repayments of debt investments and an approximately $1,074,000 net increase in operating liabilities.

Net cash used in financing activities during the six months ended June 30, 2024 was approximately $444,000. This is comprised of $950,000 borrowed on the Credit Facility and approximately $1,394,000 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.