Notes
to the Consolidated Financial Statements
(Unaudited)
Note
1. ORGANIZATION
Rand
Capital Corporation (“Rand”, “we”, “us” and “our”) was incorporated under the
laws of New York in February 1969. We completed our initial public offering in 1971 as an internally managed, closed-end, diversified,
investment management company. We have elected to be treated 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.
For instance, we generally have to invest at least 70% of our total assets in “qualifying assets” and provide managerial
assistance to the portfolio companies in which we invest. See Item 1. Business – Regulations - Business Development Company
Regulations in our Annual Report on Form 10-K for the year ended December 31, 2019.
In
2002, Rand formed a wholly-owned subsidiary for the purpose of operating it as a small business investment company (“SBIC”)
licensed by the U.S. Small Business Administration (“SBA”). The subsidiary received an SBA license to operate as an
SBIC in 2002. The subsidiary, which had been organized as a Delaware limited partnership, 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 the
name of Rand Capital SBIC, Inc. (“Rand SBIC”). In 2012, the SEC (as defined herein) granted an Order of Exemption
for Rand with respect to the operations of Rand SBIC. 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 Rand’s receipt of the order granting the exemptions, Rand SBIC
filed an election to be regulated as a BDC under the 1940 Act.
In
November 2019, Rand completed a stock sale transaction (the “Closing”) with East Asset Management (“East”).
The transaction consisted of a $25 million investment in Rand by East, in exchange for approximately 8.3 million shares of Rand
common stock. The consideration paid by East for the shares of Rand common stock was comprised of approximately $15.5 million
of cash and a contribution of $9.5 million of portfolio assets (the “Contributed Assets”). Concurrent with the Closing,
Rand’s management and staff became employees of Rand Capital Management, LLC (“RCM”), a registered investment
adviser that has been retained by Rand as its external investment adviser. In connection with retaining RCM as our investment
adviser, Rand entered into an investment advisory and management agreement (the “Investment Management Agreement”)
and an administration agreement (the “Administration Agreement”) with RCM pursuant to which RCM will serve as Rand’s
investment adviser and administrator (the Closing and the retention of RCM as our investment adviser and administrator are collectively
referred to herein as the “Transactions”). Pursuant to the terms of the Investment Management Agreement, Rand will
pay RCM a base management fee and may pay an incentive fee.
In
connection with the completion of the Transactions, Rand expects to accelerate its shift to an investment strategy focused on
higher yielding debt investments and intends to elect U.S. federal tax treatment as a regulated investment company (“RIC”)
as of January 1, 2020 on its timely filed Federal tax return for the 2020 tax year. As required for the RIC election, Rand will
pay a special dividend to shareholders to distribute all accumulated earnings and profits. Rand’s Board of Directors declared
a special dividend of $23.7 million, or approximately $1.62 per share, which was announced on March 3, 2020. Rand intends to adopt
a new dividend policy going forward that may include regular cash dividends to shareholders. In order to qualify to make the RIC
election, Rand placed several of its investments in newly formed holding companies that facilitate a tax structure that is advantageous
to the RIC election. In December 2019, Rand formed Rand Somerset Holdings Corp., Rand BeetNPath Holdings Corp., Rand Carolina
Skiff Holdings Corp., Rand Filterworks Holdings Corp. and Rand GTEC Holdings Corp., (“Blocker Corps”) as wholly owned
subsidiaries of Rand to hold certain equity investments. These subsidiaries are consolidated for GAAP financial reporting purposes.
The
following discussion describes the operations of Rand and its wholly-owned subsidiaries Rand SBIC, Rand Somerset Holdings Corp.,
Rand BeetNPath Holdings Corp., Rand Carolina Skiff Holdings Corp., Rand Filterworks Holdings Corp. and Rand GTEC Holdings Corp.,
(collectively, the “Corporation”).
Our
corporate office is located in Buffalo, NY and our website address is www.randcapital.com. We make available free of charge on
our website our annual and periodic reports, proxy statements and other information as soon as reasonably practicable after such
material is filed with the Securities and Exchange Commission (“SEC”). Our shares are traded on the Nasdaq Capital
Market under the ticker symbol “RAND”.
Recent
Developments
On
April 22, 2020, the Board of Directors approved a 1-for-9 reverse stock split, such that every holder of Common Stock shall receive
one (1) share of Common Stock for every nine (9) shares of Common Stock held (the “Reverse Stock Split”) and an amendment
to the Certificate of Incorporation to effect the Reverse Stock Split. The reverse split will be effective at 5:00 p.m. Eastern
Time on May 21, 2020
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation – It is our opinion that the accompanying consolidated financial statements include all adjustments
of a normal recurring nature necessary for a fair presentation in accordance with United States generally accepted accounting
principles (“GAAP”) of the consolidated financial position, results of operations, cash flows and statement of changes
in net assets for the interim periods presented. Certain information and note disclosures normally included in audited annual
consolidated financial statements prepared in accordance with GAAP have been omitted; however, we believe that the disclosures
made are adequate to make the information presented herein not misleading. Our interim results for the three months ended March
31, 2020 are not necessarily indicative of the results to be expected for the full year.
These
statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report
on Form 10-K for the year ended December 31, 2019. Information contained in this filing should also be reviewed in conjunction
with our related filings with the SEC prior to the date of this report. Those filings include, but are not limited to, the following:
N-54A Election
to Adopt Business Development Company status
Principles
of Consolidation - The consolidated financial statements include the accounts of Rand and its wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation.
Fair
Value of Financial Instruments – The carrying amounts reported in the consolidated statement of financial position
of cash, interest receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term
nature of these financial instruments.
Fair
Value of SBA Debentures - In March 2020, the SBIC Funding Corporation completed a pooling of SBA debentures that have
a coupon rate of 2.078%, excluding a mandatory SBA annual charge estimated to be 0.275%, resulting in a total estimated fixed
rate for ten years of 2.353%. The carrying value of Rand’s SBA debentures is a reasonable estimate of fair value because
their stated interest rates approximate current interest rates that are available for debt with similar terms.
Investment
Classification – In accordance with the provisions of the 1940 Act, the Corporation classifies its investments by
level of control. Under the 1940 Act, “Control Investments” are investments in companies that the Corporation is deemed
to “Control” because it owns more than 25% of the voting securities of the company or has greater than 50% representation
on the company’s board. “Affiliate Investments” are companies in which the Corporation owns between 5% and 25%
of the voting securities. “Non-Control/Non-Affiliate Investments” are those companies that are neither Control Investments
nor Affiliate Investments.
Investments
- Investments are valued at fair value as determined in good faith by RCM and approved by our Board of Directors. The
Corporation invests in loan instruments, debt instruments, and equity instruments. There is no single standard for determining
fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances
of each portfolio investment while employing a consistent valuation process. The Corporation analyzes and values each investment
quarterly, and records unrealized depreciation for an investment that it believes 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, the Corporation
will record unrealized appreciation if it believes that an underlying portfolio company has appreciated in value and, therefore,
its equity securities have 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 RCM’s assumptions and judgments
differ from results of actual liquidation events.
Qualifying
Assets - More than 70% of the Corporation’s investments are in privately held small business enterprises, that were
not investment companies, are principally based in the United States, and represent qualifying assets as defined by Section 55(a)
of the 1940 Act.
Cash
and Cash Equivalents - Temporary cash investments having a maturity of less than a year when purchased are considered
to be cash equivalents.
Revenue
Recognition - Interest Income - 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.
Rand
SBIC’s interest accrual is also regulated by the SBA’s “Accounting Standards and Financial Reporting Requirements
for Small Business Investment Companies.” Under these rules, interest income cannot be recognized if collection is doubtful,
and a 100% reserve must be established. The collection of interest is presumed to be in doubt when there is substantial doubt
about a portfolio company’s ability to continue as a going concern or a 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.
The
following investments are on non-accrual status: BeetNPath, LLC (Beetnpath), G-TEC Natural Gas Systems (G-Tec) and a portion of
the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.
The
Corporation holds debt securities in its investment portfolio that contain payment-in-kind (“PIK”) interest provisions.
PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance
of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of
debt principal repayment.
Revenue
Recognition - Dividend Income – The Corporation may receive cash distributions from portfolio companies that are
limited liability companies or corporations and these distributions are classified as dividend income on the consolidated statement
of operations. Dividend income is recognized on an accrual basis when it can be reasonably estimated.
The
Corporation may hold preferred equity securities that contain cumulative dividend provisions. Cumulative dividends are recorded
as dividend income, if declared and deemed collectible, and any dividends in arrears are recognized into income and added to the
balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time
as the preferred equity is redeemed.
Revenue
Recognition - Fee Income - Consists of the revenue associated with the amortization of financing fees charged to the portfolio
companies upon successful closing of SBIC financings and income associated with portfolio company board attendance fees. The income
associated with the amortization of financing fees was $3,750 and $35,969 for the three months ended March 31, 2020 and 2019,
respectively. During the three months ended March 31, 2019, the Corporation recognized a one-time fee of $225,000 in conjunction
with the repayment of the eHealth loan instrument.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of Investments - Amounts reported as realized gains and losses
are measured by the difference between the proceeds from the sale or exchange and the cost basis of the investment without regard
to unrealized gains or losses recorded in prior periods. The cost of securities that have, in management’s judgment, become
worthless are written off and reported as realized losses when appropriate. Unrealized appreciation or depreciation reflects the
difference between the fair value of the investments and the cost basis of the investments.
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 $15,691 and $10,191 in OID income for the three months ended March 31, 2020 and 2019, respectively. OID income is estimated
to be approximately $22,000 for the remainder of 2020.
Deferred
Debenture Costs - SBA debenture origination and commitment costs, which are netted against the debenture obligation (See
Note 6 “SBA Debentures”), will be amortized ratably over the terms of the SBA debentures. Amortization expense was
$9,418 and $8,777 for the three months ended March 31, 2020 and 2019, respectively. Amortization expense on currently outstanding
debentures for the next five years is estimated to average approximately $27,000 per year.
SBA
Debentures - The Corporation had $11,000,000 in outstanding SBA debentures at March 31, 2020 and December 31, 2019, respectively,
with a weighted average interest rate, including the SBA annual fee, of 3.45% at March 31, 2020. The debentures are presented
net of deferred debenture costs (See Note 6 “SBA Debentures”). The $11,000,000 in outstanding SBA leverage matures
from 2022 through 2029.
In
the event of a future default of such SBA obligations, the Corporation has consented to the exercise, by the SBA, of all rights
of the SBA under 13 C.F.R. 107.1810(i) “SBA remedies for automatic events of default” and has agreed to take all actions
that the SBA may so require. These actions may include the Corporation’s automatic consent to the appointment of the SBA,
or its designee, as receiver under Section 311(c) of the Small Business Investment Act of 1958.
Net
Assets per Share - Net assets per share are based on the number of shares of common stock outstanding. The Corporation
does not have any common stock equivalents outstanding.
Supplemental
Cash Flow Information - Income taxes refunded during the three months ended March 31, 2020 and 2019 were $380,890 and
$255,308, respectively. Interest paid during each of the three months ended March 31, 2020 and 2019 was $189,023 and $153,513,
respectively. The Corporation converted $71,425 and $101,398 of interest receivable into investments during the three months ended
March 31, 2020 and 2019, 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 March 31, 2020 and December 31, 2019, there were 500,000 shares of $10.00 par value preferred
stock authorized and unissued.
On
April 22, 2020, the Board of Directors approved a new share repurchase plan, which authorizes the Corporation to repurchase shares
of the Corporation’s outstanding common stock with an aggregate cost of up to $1,500,000 at prices per share of common stock
of no greater than the then current net asset value. This new share repurchase authorization lasts for a period of 12 months from
the authorization date, until April 22, 2021. This new share repurchase plan supplants and replaces the share repurchase authorization
that was previously approved by the Board of Directors in October 2019. Prior to the April 22, 2020 new share repurchase plan,
in October 2019 the Board of Directors extended the repurchase authorization of up to 1,541,046 shares of the Common Stock on
the open market at prices no greater than the then current net asset value.
Income
Taxes – The Corporation intends to elect U.S. federal tax treatment as a regulated investment company (“RIC”)
as of January 1, 2020 on its timely filed Federal tax return for the 2020 tax year. In order to qualify as a RIC, among other
things, the Corporation will be required to meet certain source of income and asset diversification requirements and timely distribute
to its shareholders at least 90% of investment company taxable income, as defined by the Code, for each tax year. The Corporation
intends to make the requisite distributions to its shareholders, which will generally relieve the Corporation from U.S. federal
income taxes with respect to all income distributed to its shareholders.
In
accordance with GAAP, a net deferred tax asset of $1,451,658 was eliminated as of the RIC election date. This asset related to
book/tax differences that are no longer applicable now that the Corporation intends to elect RIC status for income tax purposes.
Certain
investments that generate non-qualifying income for a RIC were placed in blocker corporation in December 2019. These blocker corporations
will be subject to federal and state income taxes and the deferred liability related to these investments of $247,460 was also
contributed.
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 either a reduction of a current or deferred tax asset or receivable,
or the recording of a current or deferred tax liability. There were no uncertain tax positions recorded at March 31, 2020 or December
31, 2019.
Under
the provisions of Section 382 the Code, net operating loss and credit carryforwards and other tax attributes may be subject to
limitations if there has been a significant change in ownership in the Corporation, as defined by the Code. Prior to the completion
of the Transactions, the Corporation was able to utilize the remaining federal net operating losses(NOL). The Coronavirus Aid,
Relief, and Economic Security Act (CARES Act), signed into law by President Trump on March 27, 2020, made changes to the NOL carryback
rules for businesses. The Corporation was able to carryback a NOL under this new act and received a benefit of $90,141.
The
Corporation is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December
31, 2016 through 2019. In general, the Corporation’s state income tax returns are open to audit under the statute of limitations
for the years ended December 31, 2016 through 2019.
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 for the three months ended March 31, 2020 or 2019.
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. RCM does not anticipate non-performance
by such banks.
The
following are the concentrations of the top five portfolio company values to the fair value of the Corporation’s total investment
portfolio:
|
|
|
March 31, 2020
|
|
|
ACV Auctions, Inc. (ACV)
|
|
|
18
|
%
|
|
AIKG, LLC (Andretti)
|
|
|
12
|
%
|
|
Tilson Technology Management, Inc. (Tilson)
|
|
|
11
|
%
|
|
Filterworks Acquisition USA, LLC (Filterworks)
|
|
|
8
|
%
|
|
Carolina Skiff LLC (Carolina Skiff)
|
|
|
5
|
%
|
|
|
|
December 31, 2019
|
|
|
ACV Auctions, Inc. (ACV)
|
|
|
18
|
%
|
|
AIKG, LLC (Andretti)
|
|
|
12
|
%
|
|
Tilson Technology Management, Inc. (Tilson)
|
|
|
11
|
%
|
|
Filterworks Acquisition USA, LLC (Filterworks)
|
|
|
8
|
%
|
|
Outmatch (Outmatch)
|
|
|
6
|
%
|
Note
3. INVESTMENTS
The
Corporation’s investments are carried at fair value in accordance with FASB Accounting Standards Codification (ASC) 820,
“Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value
in accordance with GAAP, and expands disclosures about fair value measurements.
Loan
investments are defined as traditional loan financings with no equity features. Debt investments are defined as debt financings
that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. A
financing may also be categorized as a debt financing if it is accompanied by the direct purchase of an equity interest in the
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
the investment or sufficient assets or liquidation proceeds are expected to exist from
a sale of a portfolio company at its estimated fair value. However, they may be valued
at an amount other than cost given the carrying interest rate versus the related inherent
portfolio risk of the investment. A loan or debt instrument may be reduced in value if
it is judged to be of poor quality, collection is in doubt or insufficient liquidation
proceeds exist.
|
|
|
|
|
|
|
●
|
Equity
securities may be valued using the “asset approach”, “market approach”
or “income approach.” The asset approach involves estimating the liquidation
value of the portfolio company’s assets. To the extent the value exceeds the remaining
principal amount of the debt or loan securities of the portfolio company, the fair value
of such securities is generally estimated to be their cost. However, where value is less
than the remaining principal amount of the loan and debt securities, the Corporation
may discount the value of an equity security. 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. Under the valuation policy, the Corporation values unrestricted publicly traded companies, categorized as Level 1 investments,
at the average closing bid price for the last three trading days of the reporting period.
Level
2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities
in markets that are not active, or other observable inputs other than quoted prices.
Level
3: Unobservable and significant inputs to determining the fair value.
Financial
assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Any changes
in estimated fair value are recorded in the statement of operations.
There
were 96% of assets that were Level 3 at March 31, 2020 and 100% that were Level 3 at December 31, 2019.
Under
the valuation policy of the Corporation, unrestricted publicly traded securities are valued at the average closing bid price for
these securities for the last three trading days of the reporting period.
In
the valuation process, the Corporation values restricted securities, categorized as Level 3 investments, using information from
these portfolio companies, which may include:
|
|
●
|
Audited
and unaudited statements of operations, balance sheets and operating budgets;
|
|
|
●
|
Current
and projected financial, operational and technological developments of the portfolio
company;
|
|
|
●
|
Current
and projected ability of the portfolio company to service its debt obligations;
|
|
|
●
|
The
current capital structure of the business and the seniority of the various classes of
equity if a deemed liquidation event were to occur;
|
|
|
●
|
Pending
debt or capital restructuring of the portfolio company;
|
|
|
●
|
Current
information regarding any offers to purchase the investment, or recent fundraising transactions;
|
|
|
●
|
Current
ability of the portfolio company to raise additional financing if needed;
|
|
|
●
|
Changes
in the economic environment which may have a material impact on the operating results
of the portfolio company;
|
|
|
●
|
Internal
circumstances and events that may have an impact (both positive and negative) on the
operating performance of the portfolio company;
|
|
|
●
|
Qualitative
assessment of key management;
|
|
|
●
|
Contractual
rights, obligations or restrictions associated with the investment; and
|
|
|
●
|
Other
factors deemed relevant to assess valuation.
|
The
valuation may be reduced if a portfolio company’s performance and potential have deteriorated significantly. If the factors
that led to a reduction in valuation are overcome, the valuation may be readjusted.
Equity
Securities
Equity
securities may include preferred stock, common stock, warrants and limited liability company membership interests.
The
significant unobservable inputs used in the fair value measurement of the Corporation’s equity investments are earnings
before interest, tax and depreciation and amortization (EBITDA) and revenue multiples, where applicable, the financial and operational
performance of the business, and the debt and senior equity preferences that 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 in any of these unobservable inputs may result in a significantly
higher or lower fair value estimate.
Another
key factor used in valuing equity investments is a significant recent arms-length equity transaction entered into by the portfolio
company with a sophisticated, non-strategic, unrelated, new investor. 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 accounting purposes. This model
requires the use of highly subjective inputs including expected volatility and expected life, in addition to variables for the
valuation of minority equity positions in small private and early stage companies. Significant changes in any of these unobservable
inputs may result in a significantly higher or lower fair value estimate.
For
recent investments of less than one year old, the Corporation generally relies on the cost basis, which is deemed to represent
the fair value, unless other fair 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 loan and 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 likely provide an indicator
as to the probability of principal recovery of the investment. The Corporation’s loan and debt investments are often junior
secured or unsecured securities. Fair value may also be determined based on other criteria where appropriate. Significant changes
to the unobservable inputs may result in a change in fair value. For recent investments, the Corporation generally relies on the
cost basis, which is deemed to represent the fair value, unless other fair value inputs are identified causing the Corporation
to depart from this basis.
The
following table provides a summary of the significant unobservable inputs used to determine the fair value of the Corporation’s
Level 3 portfolio investments as of March 31, 2020:
|
Investment
Type
|
|
Market
Approach
EBITDA
Multiple
|
|
|
Market
Approach
Liquidation
Seniority
|
|
|
Market
Approach
Revenue
Multiple
|
|
|
Market
Approach Transaction Pricing
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate Equity
|
|
$
|
-
|
|
|
$
|
1,452,732
|
|
|
$
|
500,000
|
|
|
$
|
8,605,983
|
|
|
$
|
10,558,715
|
|
|
Non-Control/Non-Affiliate Loan and Debt
|
|
|
500,000
|
|
|
|
2,366,991
|
|
|
|
602,569
|
|
|
|
7,255,370
|
|
|
|
10,724,930
|
|
|
Total Non-Control/Non-Affiliate
|
|
$
|
500,000
|
|
|
$
|
3,819,723
|
|
|
$
|
1,102,569
|
|
|
$
|
15,861,353
|
|
|
$
|
21,283,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Equity
|
|
$
|
1,750,000
|
|
|
$
|
22,841
|
|
|
$
|
2,503,429
|
|
|
$
|
4,932,512
|
|
|
$
|
9,208,782
|
|
|
Affiliate Loan and Debt
|
|
|
-
|
|
|
|
250,000
|
|
|
|
-
|
|
|
|
3,709,794
|
|
|
|
3,959,794
|
|
|
Total Affiliate
|
|
$
|
1,750,000
|
|
|
$
|
272,841
|
|
|
$
|
2,503,429
|
|
|
$
|
8,642,306
|
|
|
$
|
13,168,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 Investments
|
|
$
|
2,250,000
|
|
|
$
|
4,092,564
|
|
|
$
|
3,605,998
|
|
|
$
|
24,503,659
|
|
|
$
|
34,452,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
4.5-5X
|
|
|
|
1X
|
|
|
|
1X-3X
|
|
|
|
Not
Applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unobservable Input
|
|
|
EBITDA
Multiple
|
|
|
|
Asset
Value
|
|
|
|
Revenue
Multiple
|
|
|
|
Transaction
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
4.6X
|
|
|
|
1X
|
|
|
|
2.5X
|
|
|
|
Not
Applicable
|
|
|
|
|
|
The
following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at March 31, 2020:
|
|
|
Fair Value Measurements at Reported Date Using
|
|
|
Description
|
|
March 31, 2020
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
Other Significant
Unobservable
Inputs
(Level 3)
|
|
|
Loan investments
|
|
$
|
1,678,346
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,678,346
|
|
|
Debt investments
|
|
|
13,006,378
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,006,378
|
|
|
Equity investments
|
|
|
21,289,553
|
|
|
|
1,522,056
|
|
|
|
-
|
|
|
|
19,767,497
|
|
|
Total
|
|
$
|
35,974,277
|
|
|
$
|
1,522,056
|
|
|
$
|
-
|
|
|
$
|
34,452,221
|
|
The
following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at December 31, 2019:
|
|
|
Fair Value Measurements at Reported Date Using
|
|
|
Description
|
|
December 31, 2019
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
Other Significant
Unobservable
Inputs
(Level 3)
|
|
|
Loan investments
|
|
$
|
1,570,692
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,570,692
|
|
|
Debt investments
|
|
|
13,647,107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,647,107
|
|
|
Equity investments
|
|
|
21,802,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,802,993
|
|
|
Total
|
|
$
|
37,020,792
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,020,792
|
|
The
following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
for the three months ended March 31, 2020:
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Venture Capital Investments
|
|
|
Description
|
|
Loan Investments
|
|
|
Debt
Investments
|
|
|
Equity
Investments
|
|
|
Total
|
|
|
Ending Balance, December 31, 2019, of Level 3 Assets
|
|
$
|
1,570,692
|
|
|
$
|
13,647,107
|
|
|
$
|
21,802,993
|
|
|
$
|
37,020,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain included in net change in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage 24/7 LLC (Advantage 24/7)
|
|
|
39,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,000
|
|
|
Microcision LLC (Microcision)
|
|
|
-
|
|
|
|
56,916
|
|
|
|
-
|
|
|
|
56,916
|
|
|
Outmatch Holdings, LLC (Outmatch)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,297,535
|
|
|
|
2,297,535
|
|
|
Total Realized
Gains and Losses
|
|
|
39,000
|
|
|
|
56,916
|
|
|
|
2,297,535
|
|
|
|
2,393,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses included in net change in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Genicon, Inc. (Genicon)
|
|
|
-
|
|
|
|
(510,191
|
)
|
|
|
-
|
|
|
|
(510,191
|
)
|
|
Total Unrealized
Gains and Losses
|
|
|
-
|
|
|
|
(510,191
|
)
|
|
|
-
|
|
|
|
(510,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Securities/Changes to Securities/Non-cash conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIKG LLC (Andretti)
|
|
|
-
|
|
|
|
44,470
|
|
|
|
-
|
|
|
|
44,470
|
|
|
Filterworks Acquisition USA, LLC
|
|
|
-
|
|
|
|
11,641
|
|
|
|
-
|
|
|
|
11,641
|
|
|
Genicon
|
|
|
-
|
|
|
|
10,192
|
|
|
|
-
|
|
|
|
10,192
|
|
|
GoNoodle, Inc. (GoNoodle)
|
|
|
-
|
|
|
|
3,757
|
|
|
|
-
|
|
|
|
3,757
|
|
|
HDI Acquisition LLC (Hilton Displays)
|
|
|
-
|
|
|
|
6,315
|
|
|
|
-
|
|
|
|
6,315
|
|
|
Mattison Avenue Holdings LLC (Mattison)
|
|
|
-
|
|
|
|
5,241
|
|
|
|
-
|
|
|
|
5,241
|
|
|
Microcision
|
|
|
-
|
|
|
|
(104,500
|
)
|
|
|
110,000
|
|
|
|
5,500
|
|
|
Total Purchases of Securities/Changes to Securities/Non-cash conversions
|
|
|
-
|
|
|
|
(22,884
|
)
|
|
|
110,000
|
|
|
|
87,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments and Sale of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage 24/7
|
|
|
(39,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,000
|
)
|
|
Microcision LLC (Microcision)
|
|
|
-
|
|
|
|
(56,916
|
)
|
|
|
-
|
|
|
|
(56,916
|
)
|
|
Outmatch Holdings, LLC (Outmatch)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,443,031
|
)
|
|
|
(4,443,031
|
)
|
|
Total Repayments and Sale of Securities
|
|
|
(39,000
|
)
|
|
|
(56,916
|
)
|
|
|
(4,443,031
|
)
|
|
|
(4,538,947
|
)
|
|
Transfers within Level 3
|
|
|
107,654
|
|
|
|
(107,654
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Ending Balance, March 31, 2020, of Level 3 Assets
|
|
$
|
1,678,346
|
|
|
$
|
13,006,378
|
|
|
$
|
19,767,497
|
|
|
$
|
34,452,221
|
|
|
Change in unrealized depreciation on investments for the period included in changes in net assets
|
|
$
|
(728,323
|
)
|
|
Net realized gain on investments for the period included in changes in net assets
|
|
$
|
2,393,451
|
|
The
following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
for the three months ended March 31, 2019:
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Venture Capital Investments
|
|
|
Description
|
|
Loan Investments
|
|
|
Debt
Investments
|
|
|
Equity
Investments
|
|
|
Total
|
|
|
Ending Balance, December 31, 2018, of Level 3 Assets
|
|
$
|
4,935,777
|
|
|
$
|
9,397,979
|
|
|
$
|
20,333,048
|
|
|
$
|
34,666,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain included in net change in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage 24/7 LLC (Advantage 24/7)
|
|
|
-
|
|
|
|
-
|
|
|
|
(99,500
|
)
|
|
|
(99,500
|
)
|
|
Total Realized
Gains and Losses
|
|
|
|
|
|
|
|
|
|
|
(99,500
|
)
|
|
|
(99,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses included in net change in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BeetNPath, LLC (Beetnpath)
|
|
|
-
|
|
|
|
(132,627
|
)
|
|
|
(261,277
|
)
|
|
|
(393,904
|
)
|
|
Genicon, Inc. (Genicon)
|
|
|
-
|
|
|
|
-
|
|
|
|
(37,500
|
)
|
|
|
(37,500
|
)
|
|
Mercantile Adjustment Bureau, LLC (Mercantile)
|
|
|
-
|
|
|
|
(200,000
|
)
|
|
|
-
|
|
|
|
(200,000
|
)
|
|
SciAps, Inc. (Sciaps)
|
|
|
-
|
|
|
|
-
|
|
|
|
(385,000
|
)
|
|
|
(385,000
|
)
|
|
SocialFlow, Inc. (Socialflow)
|
|
|
-
|
|
|
|
-
|
|
|
|
(321,300
|
)
|
|
|
(321,300
|
)
|
|
Tilson Technology Management, Inc. (Tilson)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,860,000
|
|
|
|
1,860,000
|
|
|
Total Unrealized
Gains and Losses
|
|
|
-
|
|
|
|
(332,627
|
)
|
|
|
854,923
|
|
|
|
522,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Securities/Changes to Securities/Non-cash conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage 24/7
|
|
|
140,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,000
|
|
|
Empire Genomics, LLC (Empire Genomics)
|
|
|
-
|
|
|
|
24,664
|
|
|
|
-
|
|
|
|
24,664
|
|
|
Genicon
|
|
|
-
|
|
|
|
79,493
|
|
|
|
-
|
|
|
|
79,493
|
|
|
GoNoodle, Inc. (GoNoodle)
|
|
|
-
|
|
|
|
2,599
|
|
|
|
-
|
|
|
|
2,599
|
|
|
KnowledgeVision Systems, Inc. (Knowledge Vision)
|
|
|
150,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
Microcision LLC (Microcision)
|
|
|
-
|
|
|
|
4,833
|
|
|
|
-
|
|
|
|
4,833
|
|
|
Tilson
|
|
|
-
|
|
|
|
-
|
|
|
|
500,012
|
|
|
|
500,012
|
|
|
Total Purchases of Securities/Changes to Securities/Non-cash conversions
|
|
|
290,000
|
|
|
|
111,589
|
|
|
|
500,012
|
|
|
|
901,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments and Sale of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eHealth Global Technologies, Inc. (eHealth)
|
|
|
(3,500,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,500,000
|
)
|
|
Total Repayments and Sale of Securities
|
|
|
(3,500,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,500,000
|
)
|
|
Transfers within Level 3
|
|
|
444,915
|
|
|
|
(444,915
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Ending Balance, March 31, 2019, of Level 3 Assets
|
|
$
|
2,170,692
|
|
|
$
|
8,732,026
|
|
|
$
|
21,588,483
|
|
|
$
|
32,491,201
|
|
|
Change in unrealized depreciation on investments for the period included in changes in net assets
|
|
$
|
522,296
|
|
|
|
|
|
|
|
|
Net realized gain on investments for the period included in changes in net assets
|
|
$
|
40,500
|
|
Note
4. OTHER ASSETS
At
March 31, 2020 and December 31, 2019, other assets was comprised of the following:
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Operating receivables
|
|
$
|
95,916
|
|
|
$
|
546
|
|
|
Prepaid expenses
|
|
|
33,355
|
|
|
|
8,290
|
|
|
Dividend receivable
|
|
|
-
|
|
|
|
256,542
|
|
|
Total other assets
|
|
$
|
129,271
|
|
|
$
|
265,378
|
|
Note
5. COMMITMENTS AND CONTINGENCIES
The
Corporation had no commitments at March 31, 2020.
Note
6. SBA DEBENTURES
Pursuant
to FASB Accounting Standard Update (ASU) 2015-03, the debt origination costs associated with the SBA debt obligations are presented
as a direct deduction of the related debt obligation.
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Debentures guaranteed by the SBA
|
|
$
|
11,000,000
|
|
|
$
|
11,000,000
|
|
|
Less unamortized issue costs
|
|
|
(203,668
|
)
|
|
|
(213,087
|
)
|
|
Debentures guaranteed by the SBA, net
|
|
$
|
10,796,332
|
|
|
$
|
10,786,913
|
|
The
weighted average interest rate, including the SBA annual fee, at March 31, 2020 was 3.45%.
The
debenture terms require semiannual payments of interest at annual interest rates ranging from 2.245% to 3.644%, plus an annual
charge ranging from 0.804% to 0.94%. The debentures have fixed interest rates and a 10 year maturity date. As of March 31, 2020,
the Corporation had $3,000,000 in additional leverage available from the SBA.
The
debentures outstanding at March 31, 2020 will mature as follows:
|
Maturity Date
|
|
Leverage
|
|
|
2022
|
|
$
|
3,000,000
|
|
|
2023
|
|
|
2,500,000
|
|
|
2024
|
|
|
1,500,000
|
|
|
2025
|
|
|
1,000,000
|
|
|
2029
|
|
|
3,000,000
|
|
|
Total Outstanding
|
|
$
|
11,000,000
|
|
Note
7. CHANGES IN STOCKHOLDERS’ EQUITY (NET ASSETS)
The
following schedule analyzes the changes in stockholders’ equity (net assets) section of the Consolidated Statement of Financial
Position for the three months ended March 31, 2020 and 2019, respectively:
|
|
|
Common
Stock
|
|
|
Capital
in excess of par value
|
|
|
Accumulated
Net
Investment
Loss
|
|
|
Undistributed
Net Realized Gain on
Investments
|
|
|
Net
Unrealized Depreciation on Investments
|
|
|
Treasury
Stock, at cost
|
|
|
Total
Stockholders’
Equity
(Net Assets)
|
|
|
January 1, 2020
|
|
$
|
1,519,637
|
|
|
$
|
34,142,455
|
|
|
$
|
(1,751,249
|
)
|
|
$
|
27,083,281
|
|
|
$
|
(5,896,503
|
)
|
|
$
|
(1,469,105
|
)
|
|
$
|
53,628,516
|
|
|
Net investment gain
|
|
|
-
|
|
|
|
-
|
|
|
|
538,421
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
538,421
|
|
|
Net realized gain on sales and dispositions of investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,393,451
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,393,451
|
|
|
Net change in unrealized depreciation on
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,501,735
|
)
|
|
|
-
|
|
|
|
(2,501,735
|
)
|
|
March 31, 2020
|
|
$
|
1,519,637
|
|
|
$
|
34,142,455
|
|
|
$
|
(1,212,828
|
)
|
|
$
|
29,476,732
|
|
|
$
|
(8,398,238
|
)
|
|
$
|
(1,469,105
|
)
|
|
$
|
54,058,653
|
|
|
|
|
Common
Stock
|
|
|
Capital
in excess of par value
|
|
|
Accumulated
Net
Investment
Loss
|
|
|
Undistributed
Net Realized Gain on
Investments
|
|
|
Net
Unrealized Depreciation on Investments
|
|
|
Treasury
Stock, at cost
|
|
|
Total
Stockholders’
Equity
(Net Assets)
|
|
|
January 1, 2019
|
|
$
|
686,304
|
|
|
$
|
10,581,789
|
|
|
$
|
(1,665,552
|
)
|
|
$
|
26,221,443
|
|
|
$
|
(2,830,692
|
)
|
|
$
|
(1,469,105
|
)
|
|
$
|
31,524,187
|
|
|
Net investment gain
|
|
|
-
|
|
|
|
-
|
|
|
|
22,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,767
|
|
|
Net realized gain on sales and dispositions of investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,131
|
|
|
Change in unrealized depreciation on investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
401,517
|
|
|
|
-
|
|
|
|
401,517
|
|
|
March 31, 2019
|
|
$
|
686,304
|
|
|
$
|
10,581,789
|
|
|
$
|
(1,642,785
|
)
|
|
$
|
26,252,574
|
|
|
$
|
(2,429,175
|
)
|
|
$
|
(1,469,105
|
)
|
|
$
|
31,979,602
|
|
Note
8. RELATED PARTY TRANSACTIONS
Investment
Management Agreement
Effective
with the Closing, RCM, a registered investment adviser, has been retained by the Corporation as its external investment adviser
and administrator. Under the Investment Management Agreement, the Corporation will pay RCM, as compensation for the investment
advisory and management services, fees consisting of two components: (i) the Base Management Fee and (ii) the Incentive Fee.
The
“Base Management Fee” is calculated at an annual rate of 1.50% of the Corporation’s total assets (other than
cash or cash equivalents but including assets purchased with borrowed funds). For the three months ended March 31, 2020, the Base
Management Fee was $140,377. For the year ended December 31, 2019, $85,483 in Base Management Fees was earned by RCM. As of March
31, 2020 and December 31, 2019, the Corporation had $140,377 and $49,359 payable, respectively, for the Base Management Fees on
its Consolidated Statement of Financial Position. In addition, the Corporation had $25 payable to RCM at March 31, 2020 and $1,205
payable at December 31, 2019 to RCM for the expenses associated with the Administration Agreement.
The
“Incentive Fee” is comprised of two parts: (1) the “Income Based Fee” and (2) the “Capital Gains
Fee”. The Income Based Fee is calculated and payable quarterly in arrears based on the “Pre-Incentive Fee Net Investment
Income” (as defined in the agreement) for the immediately preceding calendar quarter, subject to a hurdle rate of 1.75%
per quarter (7% annualized) and is payable promptly following the filing of the Corporation’s financial statements for such
quarter.
The
Corporation pays RCM an Income Based Fee with respect to its Pre-Incentive Fee Net Investment Income in each calendar quarter
as follows:
|
|
(i)
|
no
Income Based Fee in any quarter in which the Pre-Incentive Fee Net Investment Income for such quarter does not exceed the
hurdle rate of 1.75% (7.00% annualized);
|
|
|
(ii)
|
100%
of the Pre-Incentive Fee Net Investment Income for any calendar quarter with respect to that portion of the Pre-Incentive
Fee Net Investment Income for such calendar quarter, if any, that exceeds the hurdle rate of 1.75% (7.00% annualized) but
is less than 2.1875% (8.75% annualized); and
|
|
|
(iii)
|
20%
of the amount of the Pre-Incentive Fee Net Investment Income for any calendar quarter with respect to that portion of the
Pre-Incentive Fee Net Investment Income for such calendar quarter, if any, that exceeds 2.1875% (8.75% annualized).
|
The
Income Based Fee paid to RCM for any calendar quarter that begins more than two years and three months after the effective date
of the Investment Management Agreement shall not be in excess of the Incentive Fee Cap. The “Incentive Fee Cap” for
any quarter is an amount equal to (1) 20.0% of the Cumulative Net Return (as defined below) during the relevant Income Based Fee
Calculation Period (as defined below) minus (2) the aggregate Income Based Fee that was paid in respect of the calendar quarters
included in the relevant Income Based Fee Calculation Period.
For
purposes of the calculation of the Income Based Fee, “Income Based Fee Calculation Period” is defined as, with reference
to a calendar quarter, the period of time consisting of such calendar quarter and the additional quarters that comprise the lesser
of (1) the number of quarters immediately preceding such calendar quarter that began more than two years after the effective date
of the Investment Management Agreement or (2) the eleven calendar quarters immediately preceding such calendar quarter.
For
purposes of the calculation of the Income Based Fee, “Cumulative Net Return” is defined as (1) the aggregate net investment
income in respect of the relevant Income Based Fee Calculation Period minus (2) any Net Capital Loss, if any, in respect of the
relevant Income Based Fee Calculation Period. If, in any quarter, the Incentive Fee Cap is zero or a negative value, we will pay
no Income Based Fee to RCM for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but
is less than the Income Based Fee that is payable to RCM for such quarter (before giving effect to the Incentive Fee Cap) calculated
as described above, we will pay an Income Based Fee to RCM equal to the Incentive Fee Cap for such quarter. If, in any quarter,
the Incentive Fee Cap for such quarter is equal to or greater than the Income Based Fee that is payable to RCM for such quarter
(before giving effect to the Incentive Fee Cap) calculated as described above, we will pay an Income Based Fee to the Adviser
equal to the Income Based Fee calculated as described above for such quarter without regard to the Incentive Fee Cap.
For
purposes of the calculation of the Income Based Fee, “Net Capital Loss,” in respect of a particular period, means
the difference, if positive, between (1) aggregate capital losses, whether realized or unrealized, in such period and (2) aggregate
capital gains, whether realized or unrealized, in such period.
Any
Income Based Fee otherwise payable under the Investment Management Agreement with respect to Accrued Unpaid Income (such fees
being the “Accrued Unpaid Income Based Fees”) shall be deferred, on a security by security basis, and shall become
payable to RCM only if, as, when and to the extent cash is received by us in respect of any Accrued Unpaid Income. Any Accrued
Unpaid Income that is subsequently reversed by us in connection with a write-down, write-off, impairment or similar treatment
of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (1) reduce Pre-Incentive
Fee Net Investment Income and (2) reduce the amount of Accrued Unpaid Income Based Fees. Subsequent payments of Accrued Unpaid
Income Based Fees deferred pursuant to this paragraph shall not reduce the amounts otherwise payable for any quarter as an Income
Based Fee.
For
the three months ended March 31, 2020 there were no Income Based Fees earned under the Investment Management Agreement.
The
second part of the Incentive Fee is the “Capital Gains Fee”. This fee will be determined and payable in arrears as
of the end of each calendar year, commencing with the calendar year ended on December 31, 2019. Under the terms of the Investment
Management Agreement, the Capital Gains Fee is calculated at the end of each applicable year by subtracting (1) the sum of the
cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) the cumulative aggregate realized
capital gains, in each case calculated from the effective date of the Investment Management Agreement. If this amount is positive
at the end of any calendar year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the cumulative
aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee
payable for that calendar year. If the Investment Management Agreement is terminated as of a date that is not a calendar year
end, the termination date shall be treated as though it were a calendar year end for purposes of calculating and paying the Capital
Gains Fee.
For
purposes of the Capital Gains Fee:
|
|
●
|
The
cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net
sales price of each investment in the Corporations portfolio when sold and (b) the accreted or amortized cost basis of such
investment.
|
|
|
|
|
|
|
●
|
The
cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (a) the net sales price of
each investment in the portfolio when sold is less than (b) the accreted or amortized cost basis of such investment.
|
|
|
|
|
|
|
●
|
The
aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the valuation
of each investment in the portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized
cost basis of such investment.
|
As
of March 31, 2020, there were no Capital Gains Fees earned or payable to RCM under the Investment Management Agreement because
unrealized losses on the portfolio exceed realized gains. If the entire portfolio were to be liquidated as of March 31, 2020,
there would be a capital gains incentive fee liability of approximately $740,000 based on those values. However, given the unlikely
and remote nature of such a transaction, the amount has not been recorded.
Administration
Agreement
In
connection with the Closing, the Corporation entered into an Administration Agreement with RCM. Under the terms of the Administration
Agreement, RCM agreed to perform (or oversee, or arrange for, the performance of) the administrative services necessary for the
Corporation’s operations, including, but not limited to, office facilities, equipment, clerical, bookkeeping, finance, accounting,
compliance and record keeping services at such office facilities and such other services as RCM, subject to review by the Corporation’s
Board of Directors, will from time to time determine to be necessary or useful to perform its obligations under the Administration
Agreement. RCM shall also, arrange for the services of, and oversee, custodians, depositories, transfer agents, dividend disbursing
agents, other shareholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries,
insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable.
RCM
is responsible for our financial and other records that are required to be maintained and prepares all reports and other materials
required to be filed with the SEC or any other regulatory authority, including reports to shareholders. In addition, RCM assists
us in determining and publishing the Corporation’s net asset value (NAV), overseeing the preparation and filing of our tax
returns, and the printing and dissemination of reports to shareholders, and generally overseeing the payment of our expenses and
the performance of administrative and professional services rendered by others. RCM provides, on the Corporation’s behalf,
managerial assistance to those portfolio companies that have accepted its offer to provide such assistance.
As
of March 31, 2020 and December 31, 2019, the Corporation recorded $25 and $1,205, respectively, in accrued expenses and other
liabilities on its Consolidated Statement of Financial Position for reimbursement of expenses owed to RCM under the Administration
Agreement.
Note
9. FINANCIAL HIGHLIGHTS
The
following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the three months
ended March 31, 2020 and 2019:
|
|
|
Three months ended
March 31, 2020 (Unaudited)
|
|
|
Three months ended
March 31, 2019 (Unaudited)
|
|
|
Income from investment operations (1):
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
Operating expenses
|
|
|
0.03
|
|
|
|
0.11
|
|
|
Investment gain before income taxes
|
|
|
0.01
|
|
|
|
0.00
|
|
|
Income tax benefit
|
|
|
(0.03
|
)
|
|
|
0.00
|
|
|
Net investment gain
|
|
|
0.04
|
|
|
|
0.00
|
|
|
Net realized and unrealized (loss) gain on investments
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
|
Increase in net asset value
|
|
|
0.03
|
|
|
|
0.07
|
|
|
Net asset value, beginning of period
|
|
|
3.66
|
|
|
|
4.99
|
|
|
Net asset value, end of period
|
|
$
|
3.69
|
|
|
$
|
5.06
|
|
|
Per share market price, end of period
|
|
$
|
2.24
|
|
|
$
|
2.84
|
|
|
Total return based on market value
|
|
|
(16.42
|
)%
|
|
|
13.60
|
%
|
|
Total return based on net asset value
|
|
|
0.80
|
%
|
|
|
1.44
|
%
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
|
Ratio of operating expenses before income taxes to average net assets
|
|
|
0.96
|
%
|
|
|
2.17
|
%
|
|
Ratio of operating expenses including income taxes to average net assets
|
|
|
3.47
|
%
|
|
|
2.60
|
%
|
|
Ratio of net investment loss to average net assets
|
|
|
1.00
|
%
|
|
|
0.07
|
%
|
|
Portfolio turnover
|
|
|
4.8
|
%
|
|
|
2.4
|
%
|
|
Net assets, end of period
|
|
$
|
54,058,653
|
|
|
$
|
31,979,602
|
|
|
Weighted shares outstanding, end of period
|
|
|
14,655,321
|
|
|
|
6,321,988
|
|
|
|
(1)
|
Per share data are based on weighted average shares outstanding and the results are rounded to the nearest cent.
|
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 for the full year or in future periods.