RAND CAPITAL CORP

Previous wording

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by us from time to time, and forward-looking statements may be included in documents that are filed with the SEC. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions, including statements related to our investment objectives and strategies and our intention to co-invest with certain of our affiliates; the impact of our election as a RIC for U.S. federal tax purposes on the payment of corporate level U.S. federal income taxes by Rand; statements regarding our liquidity and financial resources; statements regarding any capital gains fee that may be due to RCM upon a hypothetical liquidation of our portfolio and the amount of the capital gains fee that may be payable for 2023; and statements regarding our compliance with the RIC requirements as of December 31, 2023, and future dividend payments 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 the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part I, Item 1A of this Annual Report.

Current wording

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by us from time to time, and forward-looking statements may be included in documents that are filed with the SEC. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions, including statements related to our investment strategies and our intention to co-invest with certain of our affiliates; the impact of our election as a RIC for U.S. federal tax purposes on the payment of corporate level U.S. federal income taxes by Rand; statements regarding our liquidity and financial resources; statements regarding any capital gains fee that may be due to RCM upon a hypothetical liquidation of our portfolio and the amount of the capital gains fee that may be payable to RCM for 2025; and statements regarding our compliance with the RIC requirements as of December 31, 2024; and statements regarding future dividend payments, and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part I, Item 1A of this Annual Report.

Previous wording

We are an externally managed non-diversified investment company that lends to and invests in lower middle market companies. Our investment objective is to generate current income and when also possible, capital appreciation, by targeting investment opportunities with favorable risk-adjusted returns. Our investment activities are managed by our investment adviser, Rand Capital Management, LLC (“RCM”).

Current wording

We are an externally managed non-diversified investment company that lends to and invests in lower middle market companies. Our investment objective is to generate current income and when possible, complement this current income with capital appreciation. As a result, our investments are primarily in higher yielding debt instruments. Our investment activities are managed by our investment adviser, Rand Capital Management, LLC (“RCM”).

Previous wording

We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements specified in the 1940 Act. Prior to 2020, we made the majority of our investments through our wholly owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which operated as a small business investment company (“SBIC”) and had been licensed by the U.S. Small Business Administration (“SBA”) since 2002. In November 2021, Rand SBIC repaid its $11.0 million in outstanding debentures to the SBA. In addition, in November 2021, Rand SBIC received approval from the SBA to surrender its SBA license. In connection with the surrender of its SBA license, Rand SBIC changed its name to Rand Capital Sub, Inc. (“Rand Sub”), withdrew its election to be regulated as a BDC, and merged with and into Rand Capital Sub LLC, a Delaware limited liability company, a wholly owned subsidiary of Rand. All of our investments going forward are expected be made out of Rand Capital Corporation (the “Corporation”, “we” or “Rand”) and our blocker corporation subsidiaries.

Current wording

We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements specified in the 1940 Act.

Previous wording

In November 2019, Rand completed a stock sale transaction (the “Transaction”) with East Asset Management (“East”). The Transaction consisted of a $25 million investment in Rand by East, in exchange for approximately 8.3 million shares of Rand common stock. Concurrent with the closing of the Transaction with East on November 8, 2019, Rand entered into an investment advisory and management agreement (the “Prior Investment Management Agreement”) and an administration agreement (the “Prior Administration Agreement”) with RCM. In connection with retaining RCM as our investment adviser and administrator, Rand’s management and staff became employees of RCM.

Current wording

In November 2019, Rand completed a stock sale transaction (the “Closing”) with East Asset Management (“East”). The transaction consisted of a $25 million investment in Rand by East, in the form of cash and contributed portfolio assets, in exchange for approximately 8.3 million shares of Rand common stock. Concurrent with the Closing, RCM, a registered investment advisor, was retained by Rand as its external investment adviser and administrator (the Closing and the retention of RCM as our investment adviser and administrator are collectively referred to herein as the “Transaction”). The term of the new investment advisory and management agreement (the “Investment Management Agreement”) with RCM was extended after its renewal was approved by our Board of Directors (the “Board”) in October 2024 and will expire on December 31, 2025. In addition, the term of the administration agreement (the “Administration Agreement”) with RCM was extended after its renewal was approved by the Board in October 2024 and will expire on December 31, 2025. The Investment Management Agreement and Administration Agreement can continue for successive annual periods after December 31, 2025 provided that such continuance is specifically approved at least annually by (i)(A) the affirmative vote of a majority of the Board or (B) the affirmative vote of a majority of our outstanding voting securities, and (ii) the affirmative vote of a majority of our directors who are not “interested persons,” as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act"), of us, RCM or our respective affiliates.

Previous wording

We elected U.S federal tax treatment as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended. To maintain our qualification as a RIC, we must, among other things, meet certain source of income and asset diversification requirements. As of December 31, 2023, we believe we were in compliance with the RIC requirements. As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our shareholders as dividends. We must distribute annually to our shareholders at least 90% of our ordinary net income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Accordingly, Rand's Board of Directors (the "Board") has initiated a quarterly cash dividend.

Current wording

We elected U.S federal tax treatment as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To maintain our qualification as a RIC, we must, among other things, meet certain source of income and asset diversification requirements. As of December 31, 2024, we believe we were in compliance with the RIC requirements. As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our shareholders as dividends. In addition, as a RIC, we must distribute annually to our shareholders at least 90% of our ordinary net income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Accordingly, our Board has regularly declared a quarterly cash dividend since our RIC election.

Previous wording

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

Current wording

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

Previous wording

On October 7, 2020, Rand, RCM and certain of their affiliates received an exemptive order from the SEC to permit the Corporation to co-invest in portfolio companies with certain affiliates, including other BDCs and registered investment companies, managed by RCM and certain of its affiliates, in a manner consistent with the Corporation’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements, subject to compliance with certain conditions (the “Order”). On March 29, 2021, the SEC granted Rand, RCM, Callodine, which holds a controlling interest in RCM, and certain of their affiliates a new exemptive order (the “New Order”) that superseded the Order and permits Rand to co-invest with affiliates managed by RCM and Callodine. Pursuant to the New Order, the Corporation is generally permitted to co-invest with affiliates covered by the New Order if a “required majority” (as defined in Section 57(o) of the 1940 Act) of Rand’s independent directors makes certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to Rand and its shareholders and do not involve overreaching in respect of Rand or its shareholders on the part of any person concerned, (2) the transaction is consistent with the interests of the Rand’s shareholders and is consistent with Rand’s investment objective and strategies and (3) the investment by Rand’s affiliates would not disadvantage Rand, and Rand’s participation would not be on a basis different from or less advantageous than that on which Rand’s affiliates are investing. In addition, on September 6, 2022, the SEC granted an amendment to the New Order to permit us to participate in follow-on investments in our existing portfolio companies with certain Affiliated Funds (as defined in the New Order) that do not hold any investments in such existing portfolio companies.

Current wording

On October 7, 2020, Rand, RCM and certain of their affiliates received an exemptive order from the SEC to permit the Corporation to co-invest in portfolio companies with certain affiliates, including other BDCs and registered investment companies, managed by RCM and certain of its affiliates, in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements, subject to compliance with certain conditions (the “Order”). On March 29, 2021, the SEC granted Rand, RCM, Callodine, which holds a controlling interest in RCM, and certain of their affiliates a new exemptive order (the “New Order”) that superseded the Order and permits Rand to co-invest with affiliates managed by RCM and Callodine. Pursuant to the New Order, we are generally permitted to co-invest with affiliates covered by the New Order if a “required majority” (as defined in Section 57(o) of the 1940 Act) of Rand’s independent directors makes certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to Rand and its shareholders and do not involve overreaching in respect of Rand or its shareholders on the part of any person concerned, (2) the transaction is consistent with the interests of Rand’s shareholders and is consistent with Rand’s investment objective and strategies and (3) the investment by Rand’s affiliates would not disadvantage Rand, and Rand’s participation would not be on a basis different from or less advantageous than that on which Rand’s affiliates are investing. In addition, on September 6, 2022, the SEC granted an amendment to the New Order to permit us to participate in follow-on investments in our existing portfolio companies with certain Affiliated Funds (as defined in the New Order) that do not hold any investments in such existing portfolio companies.

Previous wording

Rand’s strategy is to continue to grow and scale its business by focusing on debt and related equity investments in privately-held, lower middle market companies to drive investment income growth in order to increase the dividend paid to our shareholders. During 2023, we paid total dividends of $1.33 per share, which included a $0.38 per share special dividend that was paid in the fourth quarter of 2023. Our aggregate total dividends represented an increase of 60% over our 2022 dividends paid. Given our strong performance during the year, we raised our regular quarterly cash dividend by 20%, or $0.05 per share, to $0.25 per share in the second quarter of 2023.

Current wording

Rand remains committed to expanding and scaling its business by focusing on debt and related equity investments in privately held, lower middle-market companies. This strategy is designed to drive investment income growth and enhance shareholder value through increased dividend distributions. In 2024, we paid total dividends of $5.03 per share, which included a $4.20 per share cash and stock dividend in the fourth quarter of 2024. The amount of our fourth quarter 2024 cash and stock dividend was inclusive of both our regular quarterly dividend and an additional component reflecting our strong performance in 2024, driven by the realized gain that we recognized from the sale of our investment in SciAps. . Our aggregate 2024 dividend represented a 278% increase over 2023. Reflecting our strong financial performance, we raised our regular quarterly cash dividend by 16%, or $0.04 per share, from $0.25 per share to $0.29 per share in the second quarter of 2024.

Previous wording

We entered 2023 with a strong and flexible balance sheet that was supported by multiple sources of capital. During 2023, we monetized some equity investments, exited some of our publicly traded securities and had loan repayments that provided approximately $10 million of cash proceeds. In addition, we drew down approximately $13.7 million from our senior secured revolving credit facility (the "Credit Facility"). In total, we put approximately $20.3 million of available cash to work during 2023, primarily in income producing investments to increase our investment income. At the end of 2023, having put our capital to work and distributing $3.4 million in cash dividends to shareholders, we had $3.3 million in cash on hand and $8.8 million of availability on our Credit Facility for future investments. We also held shares valued at approximately $7.3 million in publicly traded companies, all of which are available for future liquidity and capital for prospective opportunities that will provide higher yields.

Current wording

During 2024, we monetized select equity investments, exited our remaining publicly traded securities, and received loan repayments that generated approximately $27 million in aggregate cash proceeds. We strategically allocated these funds, using approximately $15.7 million to reduce outstanding borrowings under our senior secured revolving credit facility (the "Credit Facility"). Additionally, we invested approximately $13.9 million into income-producing investments as a means to further increase investment income. At December 31, 2024, after capital deployment and distributing an aggregate of $4.3 million in cash dividends to shareholders, we had approximately $835,000 in cash on hand and $24.4 million in available capacity under our Credit Facility to support future investments. Entering 2025, we have a strong and flexible balance sheet supported by multiple sources of capital.

Previous wording

We have been, and will continue to be, subject to market risks relating to changes in interest rates, particularly in periods of rising interest rates. As of December 31, 2023, all of our debt investments had fixed interest rates, whereas borrowings under our 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%. In periods of rising interest rates or periods during which interest rates remain at an elevated level, the rate and amount of interest we earn and collect on our debt investments with fixed interest rates will remain the same, while the interest incurred on our borrowings under the Credit Facility will increase. As a result, during these periods, our business and results of operations can be adversely effected. See “Risk Factors—Risks Related to Our Indebtedness - Because we often borrow money to make our investments, if market interest rates continue to increase, our cost of capital under our Credit Facility is likely to also increase, which could reduce our net investment income.”

Current wording

As a lender, we remain exposed to market risks, particularly in periods of rising interest rates. As of December 31, 2024, all of our debt investments carried fixed interest rates, whereas borrowings under our Credit Facility bear interest at a variable rate equal to 3.50 percentage points above the greater of (i) the applicable daily simple secured overnight financing rate (SOFR) and (ii) 0.25%. In rising interest rate environments, our fixed-rate debt investments generate stable returns, but our cost of capital under the Credit Facility increases. This could impact net investment income and overall returns. See “Risk Factors—Risks Related to Our Indebtedness” for further discussion of interest rate risk.

Previous wording

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

Current wording

Investments are valued at fair value as determined in good faith by RCM and approved by our Board. We generally invest in loan, debt, and equity instruments and there is no single standard for determining fair value of these investments. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio company while employing a consistent valuation process. Due to the inherent uncertainty of determining the fair value of portfolio investments, there may be material risks associated with this determination including that estimated fair values may differ from the values that would have been used had a readily available market value for the investments existed and these differences could be material if our assumptions and judgments differ from results of actual liquidation events. We analyze and value each investment quarterly and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or debt security or realization of the recorded value of an equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that an underlying portfolio company has appreciated in value and, therefore, our equity securities in the underlying portfolio company have also appreciated in value. Additionally, we continue to assess any material risks associated with this fair value determination, including risks associated with material conflicts of interest.

Previous wording

Equity securities may be valued using the “cost approach”, “market approach” or “income approach.” The cost approach uses estimates of the amount that would be required to replace the service capacity of an asset. The market approach uses observable prices and other relevant information generated by similar market transactions. It may include both private and public M&A transactions where the traded price is a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) or another relevant operating metric. It may also include the market value of comparable public companies that are trading in an active market, or the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, we adjust valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor. The income approach employs valuation techniques to convert future benefits or costs, usually in the form of cash flows, into a present value amount. The measurement is based on value indicated by current market expectations about those future amounts.

Current wording

Market approach - The market approach uses observable prices and other relevant information generated by similar market transactions. It may include both private and public M&A transactions where the traded price is a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) or another relevant operating metric. It may also include the market value of comparable public companies that are trading in an active market, or the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, we adjust valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor.

Previous wording

At December 31, 2023, 9% of our investments were Level 1 investments and 91% were Level 3 investments. At December 31, 2022, 10% of our investments were Level 1 investments and 90% were Level 3 investments. There were no Level 2 investments at December 31, 2023 or December 31, 2022.

Current wording

At December 31, 2024, all of our investments were Level 3 investments. At December 31, 2023, 9% of our investments were Level 1 investments and 91% were Level 3 investments. There were no Level 2 investments at December 31, 2024 or 2023.

Previous wording

Interest income is recognized on the accrual basis except where the investment is in default or otherwise presumed to be in doubt. In such cases, interest is recognized at the time of receipt. A reserve for possible losses on interest receivable is maintained when appropriate. Interest income is not recognized if collection is doubtful, and a 100% reserve is established. The collection of interest is presumed to be in doubt when there is substantial doubt about a portfolio company’s ability to continue as a going concern or a loan is in default for more than 120 days. RCM also uses other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

Current wording

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

Previous wording

We hold debt securities in our investment portfolio that contain payment-in-kind (“PIK”) interest provisions. PIK interest, computed at the contractual rate specified in each debt agreement, is added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment.

Current wording

We hold debt securities in our investment portfolio that contain payment-in-kind (“PIK”) interest provisions. PIK interest, computed at the contractual rate specified in each debt agreement, is added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. We stop accruing PIK interest and write off any accrued and uncollected interest when we determine that such PIK interest is no longer collectible.

Previous wording

Net asset value (NAV) was$23.56 per share at December 31, 2023 versus$22.36 per share at December 31, 2022.

Current wording

Net asset value (NAV) was$25.31 per share at December 31, 2024 versus$23.56 per share at December 31, 2023.

Previous wording

Cash approximated 5% of net assets at December 31, 2023 compared to 2% at December 31, 2022.

Current wording

Cash approximated 1.3% of net assets at December 31, 2024, as compared to 5.4% at December 31, 2023.

Previous wording

During the second quarter of 2022, we entered into a $25 million Credit Facility with M&T Bank, as lender (the “Lender”), with the amount that we can borrow thereunder, at any given time, determined based upon a borrowing base formula. The Credit Facility has a 5-year term with a maturity date of June 27, 2027. 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 December 31, 2023, there was $16.25 million drawn on the Credit Facility, and the applicable interest rate was 8.88%. See “Note 5. Senior Secured Revolving Credit Facility” in the Notes to the Consolidated Financial Statements for additional information regarding the terms of our Credit Facility.

Current wording

During 2022, we entered into a $25 million senior secured revolving credit facility (the "Credit Facility") with M&T Bank, as lender (the “Lender”), with the amount that we can borrow thereunder, at any given time, determined based upon a borrowing base formula. The Credit Facility has a 5-year term with a maturity date of June 27, 2027. Our borrowings under the Credit Facility bear interest at a variable rate per annum equal to 3.50 percentage points above the greater of (i) the applicable daily simple secured overnight financing rate (SOFR) or (ii) 0.25%. At December 31, 2024, there was $600,000 drawn on the Credit Facility, and the applicable interest rate was 7.99%. See “Note 5. Senior Secured Revolving Credit Facility” in the Notes to the Consolidated Financial Statements for additional information regarding the terms of our Credit Facility.

Previous wording

Our total investments at fair value, as determined by RCM and approved by our Board of Directors, approximated 127% of net assets at December 31, 2023 and 107% of net assets at December 31, 2022.

Current wording

Our total investments at fair value, as determined by RCM and approved by our Board, approximated 108% of net assets at December 31, 2024 as compared to approximately 127% of net assets at December 31, 2023.

Previous wording

Our investment objective is to generate current income and when possible, capital appreciation, by targeting investment opportunities with favorable risk-adjusted returns. As a result, we are focused on investing in higher yielding debt instruments and related equity investments in privately held, lower middle market companies with a committed and experienced management team in a broad variety of industries. At times when excess cash is available on our balance sheet, we may also invest in publicly traded shares of other business development companies that provide income through dividends and have more liquidity than our private company equity investments.

Current wording

Our investment objective is to generate current income and when possible, complement this current income with capital appreciation. As a result, we are focused on investing in higher yielding debt instruments and related equity investments in privately held, lower middle market companies with a committed and experienced management team in a broad variety of industries. In the past, we have also invested in publicly traded shares of other business development companies that provided income through dividends and had more liquidity than our private company equity investments.

Previous wording

The change in investments, at cost, during the year ended December 31, 2023, is comprised of the following:

Current wording

The change in investments, at cost, during the year ended December 31, 2024, was comprised of the following:

Previous wording

Our top five portfolio companies represented 48% of total assets at December 31, 2022:

Current wording

Our top five portfolio companies represented 50% of total assets at December 31, 2024:

Previous wording

Investment income was received, on a current basis, during the year ended December 31, 2023 from 26 portfolio companies. This is an increase from the 24 portfolio companies generating current investment income for the year ended December 31, 2022.

Current wording

Investment income was received, on a current basis, from 25 portfolio companies during the year ended December 31, 2024 and from 26 portfolio companies during the year ended December 31, 2023.

Previous wording

Interest from portfolio companies - Interest from portfolio companies was approximately 44% higher for the year ended December 31, 2023 versus 2022 due to the fact we originated more interest yielding investments during the last year. At December 31, 2023, our portfolio was comprised of 64% interest yielding debt instruments compared with 56% at the end of 2022. New debt instruments were originated from BMP Food Service Supply Holdco, LLC (FSS), FCM Industries Holdco LLC (First Coast Mulch), Highland All About People Holdings, Inc. (All About People), Inter-National Electronic Alloys LLC (INEA), ITA Acquisition, LLC (ITA), and Pressure Pro, Inc. (Pressure Pro).

Current wording

Interest from portfolio companies - Interest from portfolio companies was approximately 29% higher for the year ended December 31, 2024 versus 2023 due to the fact we originated more interest yielding investments during the last year. At December 31, 2024, 75% of our portfolio was comprised of interest yielding debt instruments compared with 64% at the end of 2023. New debt instruments were originated from ITA, Mattison, Mobile IV Nurses, MRES, and Seybert's during 2024.

Previous wording

Interest from other investments - The increase in interest from other investments is primarily due to higher yields on cash balances as well as higher average cash balances during the year ended December 31, 2023 versus the same period in 2022.

Current wording

Interest from other investments - The increase in interest from other investments is primarily due to higher average idle cash balances during the year ended December 31, 2024 versus the same period in 2023.

Previous wording

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

Current wording

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 or dividends. 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 years ended were:

Previous wording

The income associated with the amortization of financing fees was $205,480 and $120,914 for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, we recognized a one-time early prepayment fee of $61,264 from our investment in DSD, a loan monitoring fee of $20,000 from our investment in BMP Food Service Supply Holdco, LLC (FSS), a loan monitoring fee of $20,000 from our investment in Pressure Pro, Inc. (Pressure Pro), a loan monitoring fee of $12,000 from our investment in FCM Industries Holdco LLC (First Coast Mulch), and a loan modification fee of $2,000 from our investment in Lumious (Tech 2000, Inc.). During the year ended December 31, 2022, we recognized a board attendance fee of $25,000 from our investment in Empire Genomics Corp (Empire Genomics) and a loan monitoring fee of $10,000 from our investment in Seybert’s Billiards Corporations (Seybert's).

Current wording

The income associated with the amortization of financing fees was $209,316 and $205,480 for the years ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, we recognized loan monitoring fees of $92,393, consisting of $28,814 from our investment in Mattison, $20,000 from our investment in FSS, $20,000 from our investment in Pressure Pro, $11,990 from our investment in Filterworks, and $11,589 from our investment in First Coast Mulch. Additionally, we recognized $232,011 in non-recurring fees, consisting of a prepayment fee and loan modification fee totaling $151,229 from our debt investment in SciAps, a dividend consent fee and prepayment fees totaling $75,782 from our investment in Pressure Pro, and a loan modification fee of $5,000 from our investment in Lumious.

Previous wording

Total expenses increased approximately $3.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in expenses was primarily due to an approximately $1,850,000 increase in the capital gains incentive fee expense, an approximately $970,000 increase in interest expense, an approximately $150,000 increase in administrative fees, and an approximately $130,000 increase in Base Management Fees payable to RCM.

Current wording

Total expenses increased by approximately $660,000 for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in expenses was primarily due to an approximately $208,000 increase in the capital gains incentive fee expense, an approximately $178,000 increase in income based incentive fee expense, an approximately $155,000 increase in base management fees payable to RCM, an approximately $53,000 increase in professional fees, and an approximately $45,000 increase in interest expense.

Previous wording

The increase in the capital gains incentive fee accrual during the year ended December 31, 2023 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.

Current wording

The capital gains incentive fee accrual expense during the year ended December 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 realized. The increase in expense during the year ended December 31, 2024 can be attributed to realized capital gains and increases in unrealized appreciation in excess of realized capital losses and increases in unrealized depreciation during the year.

Previous wording

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.

Current wording

The base management fee payable to RCM under the Investment Management Agreement 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 years ended December 31, 2024 and 2023 was $1,212,160 and $1,057,166, respectively.

Previous wording

The excess of investment income over total expenses, including income taxes, represents net investment income. The net investment income for the years ended December 31, 2023 and 2022 was $2,967,733 and $4,430,410, respectively.

Current wording

The excess of investment income over total expenses, including income taxes, represents net investment income. The net investment income for the years ended December 31, 2024 and 2023 was $3,425,077 and $2,967,733, respectively.

Previous wording

During the year ended December 31, 2023, we sold our investment in DSD Operating, LLC (DSD) and recognized a realized gain of approximately $2,460,000. In addition, during the during the year ended December 31, 2023, we sold our investment in Somerset Gas Transmission Company, LLC (Somerset) and recognized a realized loss of approximately ($450,000). We also liquidated our investment in Rheonix, Inc. (Rheonix), which was previously valued at $0, and recognized a realized loss of approximately ($2,800,000).

Current wording

During the year ended December 31, 2023, we sold our investment in DSD and recognized a realized gain of $2,459,819. In addition, during the year ended December 31, 2023, we sold our investment in Somerset Gas Transmission Company, LLC (Somerset) and recognized a realized loss of ($448,717). We also liquidated our investment in Rheonix, Inc. (Rheonix), which was previously valued at $0, and recognized a realized loss of ($2,802,731).

Previous wording

During the year ended December 31, 2023, we recognized a gain of approximately $115,000 from additional proceeds received from Microcision LLC (Microcision), an investment we exited in 2022. We also recognized a realized gain of approximately $10,000 from additional proceeds received from ClearView Social, Inc. (Clearview Social), an investment we exited during 2021. In addition, we recognized a realized loss of approximately ($5,000) on our escrow receivable from SocialFlow, Inc. (Social Flow), an investment we exited in 2022, and an approximately $3,000 realized gain from additional proceeds received from Mercantile Adjustment Bureau, LLC (Mercantile), an investment we exited during 2021.

Current wording

During the year ended December 31, 2023, we recognized a gain of $115,010 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, Inc. (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, and an $3,440 realized gain from additional proceeds received from Mercantile Adjustment Bureau, LLC (Mercantile), an investment we exited during 2021.

Previous wording

We recognized a net realized gain of approximately $1,720,000 on the sale of 125,000 shares of Class A common stock of ACV Auctions, Inc. (ACV), during the year ended December 31, 2023. At December 31, 2023, we owned 194,934 shares of Class A common stock of ACV.

Current wording

In addition, during the year ended December 31, 2023, we recognized a realized gain of $1,718,767 on the sale of 125,000 shares of ACV.

Previous wording

Net Change in Unrealized Appreciation or Depreciation on Investments

Current wording

Net Change in Unrealized Appreciation (Depreciation) on Investments

Previous wording

The change in net unrealized appreciation or depreciation, before income taxes, for the year ended December 31, 2022 was comprised of the following:

Current wording

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

Previous wording

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

Current wording

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

Previous wording

During the year ended December 31, 2022, the valuation of our investments in Open Exchange, ITA, Knoa, Somerset, Post Process, and OnCore decreased after a review of their operations and financial condition.

Current wording

During the year ended December 31, 2024, the valuation of our investments in Caitec, MRES, Filterworks, All About People, First Coast Mulch, Carolina Skiff, FSS, and ITA were each decreased after a review of their operations and financial condition.

Previous wording

ACV, Ares, Barings, Carlyle, FS KKR, and Pennant Park 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.

Current wording

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

Previous wording

All of these 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.

Current wording

All of the valuation adjustments resulted from a determination in good faith by RCM, which was subsequently approved by our Board, using the guidance set forth by ASC 820 and our established valuation policy.