This schedule should be read in conjunction with the Corporations Consolidated Financial Statements, including the
Consolidated Schedule of Portfolio Investments and Notes to the Consolidated Financial Statements.
(1) Gross additions include increases in the cost basis
of investments resulting from new portfolio investments, follow on investments, capitalized interest and the accretion of discounts. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation,
and the movement of an existing portfolio company into this category and out of another category.
(2) Gross reductions include decreases in the cost basis
of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement of an existing
portfolio company out of this category and into another category.
(3) Represents the total amount of interest, fees or dividends credited to income for the
portion of the period an investment was included in Control or Affiliate categories, respectively.
(a) At December 31, 2017, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one
or more restrictions on resale and are not freely marketable.
(b) The Date Acquired column indicates the date in which the Corporation first acquired an
investment in the company or a predecessor company.
(c) Each equity percentage estimates the Corporations ownership interest in the applicable
portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or
conversion of debentures, or other available data. If applicable, the symbol <1% indicates that the Corporation holds an equity interest of less than one percent.
(d) The Corporations investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 Fair Value Measurements
and Disclosures, which defines fair value and establishes guidelines for measuring fair value. At December 31, 2017, ASC 820 designates 100% of the Corporations investments as Level 3 assets. Under the valuation
policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the reporting period. Restricted securities are subject to restrictions on resale,
and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio
securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable
or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the
investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 3 Investments to the Consolidated
Financial Statements).
(f) As of December 31, 2017, the total cost of investment securities was approximately
$36.7 million. Net unrealized depreciation was approximately ($4.4) million, which was comprised of $2.4 million of unrealized appreciation of investment securities and ($6.8) million of unrealized depreciation of investment securities. At
December 31, 2017, the aggregate gross unrealized gain for federal income tax purposes was $2.8 million and the aggregate gross unrealized loss for federal income tax purposes was ($4.4) million. The net unrealized loss for federal income
tax purposes was ($1.6) million based on a tax cost of $33.9 million.
(g) Rand Capital SBIC, Inc. investment.
(h) Reduction in cost and value from previously reported balances reflects current principal repayment. There were no principal repayments during the year
ended December 31, 2017.
(i) Represents interest due (amounts over $50,000) from investments included as interest receivable on the
Corporations Statement of Financial Position.
(k) Affiliate Investments are defined by the Investment Company Act of 1940, as amended (1940 Act), as those
Non-Control
investments in companies in which between 5% and 25% of the voting securities are owned by the Corporation.
(l) Control Investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned by the Corporation
or where greater than 50% of the board representation is maintained.
(m) Payment in kind (PIK) represents earned interest that is added to the cost basis
of the investment.
(n) Rand Capital SBIC II, L.P. investment.
This schedule should be read in conjunction with the Corporations Consolidated Financial Statements, including the
Consolidated Schedule of Portfolio Investments and Notes to the Consolidated Financial Statements.
(1) Gross additions include increases in the cost
basis of investments resulting from new portfolio investments, follow on investments, capitalized interest and the accretion of discounts. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized
depreciation, and the movement of an existing portfolio company into this category and out of another category.
(2) Gross reductions include decreases in
the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement
of an existing portfolio company out of this category and into another category.
(3) Represents the total amount of interest, fees or dividends credited
to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.
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, management investment 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 Regulation, Regulation as a Business Development Company in our Annual Report on Form
10-K
for the year ended December 31, 2017.
Throughout our history, our principal business has been
to make venture capital investments in early or expansion stage companies, often in upstate New York and regions in close proximity. In accordance with our strategic growth plan, we look for companies with strong leadership that are bringing to
market new or unique products, technologies or services and have a high potential for growth. We invest in a mixture of debt and equity instruments. The debt securities typically have an equity component in the form of warrants or options to acquire
stock or the right to convert the debt securities into stock.
We established our first small business investment company
(SBIC) in 2002, Rand Capital SBIC, Inc. (Rand SBIC), whereby we utilized funds borrowed from the Small Business Administration (SBA) combined with our capital to invest in our portfolio companies. We historically
made the majority of our venture capital investments through Rand SBIC. Rand SBICs predecessor was organized as a Delaware limited partnership and was converted into a New York corporation on December 31, 2008, at which time our
operations as a licensed SBIC were continued. Although Rand SBIC was operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations
of Rand SBIC, and then Rand SBIC filed an election to be regulated as a BDC under the 1940 Act. Rand SBICs board of directors is comprised of the directors of Rand, a majority of whom are not interested persons of Rand or Rand
SBIC.
During 2017 we established a second SBIC subsidiary, Rand Capital SBIC II, L.P. (Rand SBIC II), and began making investments
through this SBIC subsidiary. During the first quarter of 2018, together with the SBA, we determined that the optimal structure was to revert back to investing in small businesses through our original SBIC, Rand SBIC, and the assets of Rand SBIC II
were transferred to Rand SBIC. Rand SBIC can now apply for $6 million in new SBA leverage commitment.
We operate as an
internally managed investment company whereby our officers and employees conduct the business of the Corporation under the general supervision of our Board of Directors. We have not elected to qualify to be taxed as a regulated investment company as
defined under Subchapter M of the Internal Revenue Code.
In this Quarterly Report on Form
10-Q,
unless the context otherwise requires, we, the Corporation, us, and our refer to Rand Capital Corporation and Rand SBIC.
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.
23
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, 2018 are not necessarily indicative of the results for the full year.
These statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form
10-K
for the year ended December 31, 2017. 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
DEF-14A 2018
Definitive Proxy Statement submitted to shareholders
Form 10-K Annual
Report on Form
10-K
for the year ended December 31, 2017
Principles of Consolidation
The consolidated financial statements include the accounts of Rand and its two 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 2018, the SBIC Funding Corporation completed a pooling of SBA debentures that have
a coupon rate of 3.187%, excluding a mandatory SBA annual charge estimated to be 0.804%, resulting in a total estimated fixed rate for ten years of 3.991%. The carrying value of Rands 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 companys 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 the management of the
Corporation and approved by the 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 the Corporations assumptions and judgments differ from results of actual liquidation events.
24
Qualifying Assets
- All of the Corporations investments were made in
privately held small business enterprises, that were not investment companies, were principally based in the United States, and represent qualifying assets as defined by Section 55(a) of the 1940 Act.
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 SBICs interest accrual is also regulated by the SBAs 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 companys 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:
G-TEC
Natural Gas Systems
(G-Tec),
First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and a portion of the Empire Genomics, LLC (Empire
Genomics) and 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 RecognitionDividend 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 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 RecognitionFee 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 $5,186 and $6,686 for
the three months ended March 31, 2018 and 2017, respectively. The board fees were $1,000 and $0 for the three months ended March 31, 2018 and 2017, respectively.
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 managements
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 $9,080 and $2,499 in OID income for three months ended March 31, 2018 and 2017,
respectively. OID income is estimated to be approximately $31,000 for the remainder of 2018.
25
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 $6,850 for each of the three months ended March 31, 2018 and 2017.
Amortization expense on currently outstanding debentures for the next five years is estimated to average approximately $23,000 per year.
SBA Debentures
The Corporation had $8,000,000 in outstanding SBA debentures at March 31, 2018 and December 31,
2017 with a weighted average interest rate of 3.54%. The debentures are presented net of deferred debenture costs (See Note 6 SBA Debentures). The $8,000,000 in outstanding SBA leverage matures from 2022 through 2025.
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 Corporations 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, 2018 and 2017 were
$17,051 and $7,960, respectively. Interest paid during each the three months ended March 31, 2018 and 2017 was $140,275. The Corporation converted $8,701 and $10,439 of interest receivable into investments during the three months ended
March 31, 2018 and 2017, 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, 2018 and December 31, 2017, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.
On October 26, 2017, the Board of Directors extended the repurchase authorization for up to 1,000,000 shares of the Corporations
outstanding common stock on the open market through October 26, 2018 at prices no greater than the then current net asset value. No shares were repurchased during the three months ended March 31, 2018. At March 31, 2018, the total
treasury shares held was 541,046 shares with a total cost of $1,469,105.
Profit Sharing and Stock Option Plan
In 2001, the stockholders of the Corporation authorized the establishment of an Employee Stock Option Plan (the Option Plan), that provides for the award of stock options to purchase up to 200,000 common shares to eligible
employees. In 2002, the Corporation placed the Option Plan on inactive status as it developed a new profit sharing plan for the Corporations employees in connection with the formation of its SBIC subsidiary. As of March 31, 2018, no stock
options had been awarded under the Option Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any option, warrant or right is outstanding under an executive
compensation plan, no stock options will be granted under the Option Plan while any profit sharing plan is in effect with respect to the Corporation.
26
In 2002, the Corporation established a Profit Sharing Plan (the Plan) for its
executive officers in accordance with Section 57(n) of the 1940 Act. Under the Plan, the Corporation will pay its executive officers aggregate profit sharing payments equal to 12% of the net realized capital gains of its SBIC subsidiary, net of
all realized capital losses and unrealized depreciation of the SBIC subsidiary, for the fiscal year, computed in accordance with the Plan and the Corporations interpretation of the Plan. Any profit sharing paid or accrued cannot exceed 20% of
the Corporations net income, as defined in the Plan. For purposes of the 20% profit sharing test, the Corporation interprets net income to be the total of the Corporations net investment gain (loss) and its net realized gain
(loss) on investments, prior to inclusion of the estimated profit sharing obligation. The profit sharing payments are split equally between the Corporations two executive officers, each of whom is fully vested in the Plan.
The Corporation did not record any expense pursuant to the Plan for the three months ended March 31, 2018 and 2017, respectively.
Included in the profit sharing and bonus payable line on the Consolidated Statement of Financial Position at December 31, 2017 was $132,000 that was paid during the first quarter of 2018.
Income Taxes
The Corporation reviews the tax positions it has taken to determine if they meet a more likely than not
threshold for the benefit of the tax position to be recognized in the consolidated financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in 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, 2018.
It is the Corporations 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, 2018 or 2017.
Concentration of Credit and
Market Risk
The Corporations financial instruments potentially subject it to concentrations of credit risk. Cash is invested with banks in amounts which, at times, exceed insurable limits. Management does not anticipate
non-performance
by such banks.
At March 31, 2018, Genicon, Inc. (Genicon), eHealth Global
Technologies, Inc. (eHealth), Rheonix, Inc. (Rheonix), Tilson Technology Management, Inc. (Tilson), and Outmatch (Outmatch) represented 13%, 11%, 9%, 8% and 7%, respectively, of the fair value of the Corporations investment portfolio.
At December 31, 2017, Genicon, Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Rheonix, Inc. (Rheonix), Tilson Technology
Management, Inc. (Tilson), and Outmatch (Outmatch) represented 12%, 11%, 9%, 8% and 7%, respectively, of the fair value of the Corporations investment portfolio.
Note 3. INVESTMENTS
The
Corporations investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value
in GAAP, and expands disclosures about fair value measurements.
Loan investments are defined as traditional loan financings with no
equity features. Debt investments are defined as debt financings that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. A financing may also be categorized as a debt financing if
it is accompanied by the direct purchase of an equity interest in the company.
27
The Corporation uses several approaches to determine the fair value of an investment. The main
approaches are:
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|
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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.
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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
companys 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 Corporations valuation at the measurement
date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or
liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable and
significant inputs to determining the fair value.
Financial assets 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 as Net
decrease in unrealized depreciation on investments.
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. There were no Level 1 or 2 investments as of March 31, 2018.
In the valuation process, the Corporation values restricted securities, categorized as Level 3 investments, using information from these
portfolio companies, which may include:
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Audited and unaudited statements of operations, balance sheets and operating budgets;
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Current and projected financial, operational and technological developments of the portfolio company;
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Current and projected ability of the portfolio company to service its debt obligations;
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The current capital structure of the business and the seniority of the various classes of equity if a deemed liquidation event were to occur;
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Pending debt or capital restructuring of the portfolio company;
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Current information regarding any offers to purchase the investment, or recent fundraising transactions;
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28
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Current ability of the portfolio company to raise additional financing if needed;
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Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
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Internal circumstances and events that may have an impact (both positive and negative) on the operating performance of the portfolio company;
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Qualitative assessment of key management;
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Contractual rights, obligations or restrictions associated with the investment; and
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Other factors deemed relevant by the Corporations management to assess valuation.
|
The
valuation may be reduced if a portfolio companys 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 Corporations 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 Corporations 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 Corporations 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 companys products or services. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. The Corporations loan and debt investments are often
junior secured or unsecured debt securities. Fair value may also be determined based on other criteria where appropriate. Significant changes to the unobservable inputs may result in a 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.
29
The following table provides a summary of the significant unobservable inputs used to determine
the fair value of the Corporations Level 3 portfolio investments as of March 31, 2018:
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Investment Type
|
|
Market
Approach
EBITDA
Multiple
|
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Market
Approach
Liquidation
Seniority
|
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Market
Approach
Revenue
Multiple
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Market
Approach
Transaction
Pricing
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Totals
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Non-Control/Non-Affiliate
Equity
|
|
$
|
|
|
|
$
|
25
|
|
|
$
|
2,145,496
|
|
|
$
|
6,093,729
|
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$
|
8,239,250
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Non-Control/Non-Affiliate
Debt
|
|
$
|
949,040
|
|
|
|
2,160,238
|
|
|
|
3,500,000
|
|
|
|
300,000
|
|
|
|
6,909,278
|
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Total
Non-Control/Non-Affiliate
|
|
$
|
949,040
|
|
|
$
|
2,160,263
|
|
|
$
|
5,645,496
|
|
|
$
|
6,393,729
|
|
|
$
|
15,148,528
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|
|
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Affiliate Equity
|
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$
|
4,420,000
|
|
|
$
|
22,841
|
|
|
$
|
5,406,092
|
|
|
$
|
1,001,477
|
|
|
$
|
10,850,410
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Affiliate Debt
|
|
|
5,781,785
|
|
|
|
|
|
|
|
50,000
|
|
|
|
300,000
|
|
|
|
6,131,785
|
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Total Affiliate
|
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$
|
10,201,785
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|
|
$
|
22,841
|
|
|
$
|
5,456,092
|
|
|
$
|
1,301,477
|
|
|
$
|
16,982,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
99,500
|
|
|
$
|
|
|
|
$
|
99,500
|
|
Control Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control
|
|
$
|
|
|
|
$
|
|
|
|
$
|
99,500
|
|
|
$
|
|
|
|
$
|
99,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 Investments
|
|
$
|
11,150,825
|
|
|
$
|
2,183,104
|
|
|
$
|
11,201,088
|
|
|
$
|
7,695,206
|
|
|
$
|
32,230,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
4X-9X
|
|
|
|
1X
|
|
|
|
0.5X-6.2X
|
|
|
|
Not Applicable
|
|
|
|
|
|
Unobservable Input
|
|
|
EBITDA Multiple
|
|
|
|
Asset Value
|
|
|
|
Revenue Multiple
|
|
|
|
Transaction Price
|
|
|
|
|
|
Weighted Average
|
|
|
5.7X
|
|
|
|
1X
|
|
|
|
2.3X
|
|
|
|
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, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reported Date Using
|
|
Description
|
|
March 31,
2018
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
Other Significant
Unobservable
Inputs
(Level 3)
|
|
Loan investments
|
|
$
|
3,550,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,550,000
|
|
Debt investments
|
|
|
9,491,063
|
|
|
|
|
|
|
|
|
|
|
|
9,491,063
|
|
Equity investments
|
|
|
19,189,160
|
|
|
|
|
|
|
|
|
|
|
|
19,189,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,230,223
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,230,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured
at Fair Value on a Recurring Basis at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reported Date Using
|
|
Description
|
|
December 31,
2017
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
Other Significant
Unobservable
Inputs
(Level 3)
|
|
Loan investments
|
|
$
|
3,550,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,550,000
|
|
Debt investments
|
|
|
10,096,244
|
|
|
|
|
|
|
|
|
|
|
|
10,096,244
|
|
Equity investments
|
|
|
18,637,818
|
|
|
|
|
|
|
|
|
|
|
|
18,637,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,284,062
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,284,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of changes in Assets Measured at Fair Value Using Significant
Unobservable Inputs (Level 3) for the quarter ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Venture Capital Investments
|
|
Description
|
|
Loan
Investments
|
|
|
Debt
Investments
|
|
|
Equity
Investments
|
|
|
Total
|
|
Ending Balance, December 31, 2017, of Level 3 Assets
|
|
$
|
3,550,000
|
|
|
$
|
10,096,244
|
|
|
$
|
18,637,818
|
|
|
$
|
32,284,062
|
|
Unrealized Losses included in net change in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Empire Genomics, LLC (Empire Genomics)
|
|
|
|
|
|
|
(201,489
|
)
|
|
|
|
|
|
|
(201,489
|
)
|
First Wave Products Group, LLC (First Wave)
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized Losses
|
|
|
|
|
|
|
(451,489
|
)
|
|
|
|
|
|
|
(451,489
|
)
|
Purchases of Securities/Changes to
Securities/Non-cash
conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centivo Corporation (Centivo)
|
|
|
|
|
|
|
|
|
|
|
201,342
|
|
|
|
201,342
|
|
Genicon, Inc. (Genicon)
|
|
|
|
|
|
|
9,080
|
|
|
|
|
|
|
|
9,080
|
|
GoNoodle, Inc. (GoNoodle)
|
|
|
|
|
|
|
2,573
|
|
|
|
|
|
|
|
2,573
|
|
Microcision LLC (Microcision)
|
|
|
|
|
|
|
4,786
|
|
|
|
|
|
|
|
4,786
|
|
SciAps, Inc. (Sciaps)
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchases of Securities/Changes to
Securities/Non-cash
conversions
|
|
|
|
|
|
|
16,439
|
|
|
|
451,342
|
|
|
|
467,781
|
|
Repayments and Sale of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Empire Genomics
|
|
|
|
|
|
|
(21,665
|
)
|
|
|
|
|
|
|
(21,665
|
)
|
Knoa Software, Inc. (Knoa)
|
|
|
|
|
|
|
(48,466
|
)
|
|
|
|
|
|
|
(48,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Repayments and Sale of Securities
|
|
|
|
|
|
|
(70,131
|
)
|
|
|
|
|
|
|
(70,131
|
)
|
Transfers within Level 3
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
100,000
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance, March 31, 2018, of Level 3 Assets
|
|
$
|
3,550,000
|
|
|
$
|
9,491,063
|
|
|
$
|
19,189,160
|
|
|
$
|
32,230,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized depreciation on investments for the period included in changes
in net assets
|
|
|
|
($451,489
|
)
|
Net realized gain on investments for the period included in changes in net
assets
|
|
|
$
|
|
|
31
The following table provides a summary of changes in Assets Measured at Fair Value on a Recurring
Basis Using Significant Unobservable Inputs (Level 3) for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
|
|
Venture Capital Investments
|
|
Description
|
|
Loan
Investments
|
|
|
Debt
Investments
|
|
|
Equity
Investments
|
|
|
Total
|
|
Ending Balance, December 31, 2016, of Level 3 Assets
|
|
$
|
3,200,000
|
|
|
$
|
6,700,221
|
|
|
$
|
17,600,260
|
|
|
$
|
27,500,481
|
|
Unrealized Gains and Losses included in net change in net assets from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACV Auctions, Inc. (ACV Auctions)
|
|
|
|
|
|
|
|
|
|
|
119,356
|
|
|
|
119,356
|
|
City Dining Cards, Inc. (Loupe)
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
(250,000
|
)
|
Mercantile Adjustment Bureau, LLC (Mercantile)
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized Gains and Losses
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
(130,644
|
)
|
|
|
(380,644
|
)
|
Purchases of Securities/Changes to
Securities/Non-cash
conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Genicon, Inc. (Genicon)
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
GoNoodle, Inc. (GoNoodle)
|
|
|
|
|
|
|
2,548
|
|
|
|
|
|
|
|
2,548
|
|
KnowledgeVision Systems, Inc. (Knowledge Vision)
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
Mercantile
|
|
|
|
|
|
|
102,499
|
|
|
|
|
|
|
|
102,499
|
|
Microcision LLC (Microcision)
|
|
|
|
|
|
|
7,891
|
|
|
|
|
|
|
|
7,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchases of Securities/Changes to
Securities/Non-cash
conversions
|
|
|
300,000
|
|
|
|
162,938
|
|
|
|
|
|
|
|
462,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance, March 31, 2017, of Level 3 Assets
|
|
$
|
3,500,000
|
|
|
$
|
6,613,159
|
|
|
$
|
17,469,616
|
|
|
$
|
27,582,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized depreciation on investments for the period included in changes
in net assets
|
|
|
|
($380,644
|
)
|
Net realized gain on investments for the period included in changes in net assets
|
|
|
$
|
|
|
NOTE 4. OTHER ASSETS
At March 31, 2018 and December 31, 2017, other assets was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Prepaid expenses
|
|
$
|
77,435
|
|
|
$
|
|
|
Operating receivables
|
|
|
2,872
|
|
|
|
3,204
|
|
Equipment (net)
|
|
|
1,940
|
|
|
|
2,490
|
|
Dividend receivable
|
|
|
|
|
|
|
37,160
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
82,247
|
|
|
$
|
42,854
|
|
|
|
|
|
|
|
|
|
|
Note 5. COMMITMENTS AND CONTINGENCIES
The Corporation did not have any commitments to fund any investments as of March 31, 2018.
Note 6. SBA DEBENTURES
Pursuant to
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, 2018
|
|
|
December 31, 2017
|
|
Debentures guaranteed by the SBA
|
|
$
|
8,000,000
|
|
|
$
|
8,000,000
|
|
Less unamortized issue costs
|
|
|
(137,977
|
)
|
|
|
(144,827
|
)
|
|
|
|
|
|
|
|
|
|
Debentures guaranteed by the SBA, net
|
|
$
|
7,862,023
|
|
|
$
|
7,855,173
|
|
|
|
|
|
|
|
|
|
|
32
Note 7. FINANCIAL HIGHLIGHTS
The following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the three months ended
March 31, 2018 and March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2018
(Unaudited)
|
|
|
Three months ended
March 31, 2017
(Unaudited)
|
|
Income from investment operations (1):
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Operating expenses
|
|
|
0.09
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Investment loss before income taxes
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
Income tax benefit
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Net investment loss
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
Net realized and unrealized (loss) gain on investments
|
|
|
(0.05
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in net asset value
|
|
|
(0.08
|
)
|
|
|
(0.06
|
)
|
Net asset value, beginning of period
|
|
|
5.05
|
|
|
|
5.16
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
4.97
|
|
|
$
|
5.10
|
|
|
|
|
|
|
|
|
|
|
Per share market price, end of period
|
|
$
|
2.69
|
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
|
Total return based on market value
|
|
|
(10.93
|
%)
|
|
|
(3.80
|
%)
|
Total return based on net asset value
|
|
|
(1.63
|
%)
|
|
|
(1.10
|
%)
|
Supplemental data:
|
|
|
|
|
|
|
|
|
Ratio of operating expenses before income taxes to average net assets
|
|
|
1.86
|
%
|
|
|
1.59
|
%
|
Ratio of operating expenses including income taxes to average net assets
|
|
|
1.36
|
%
|
|
|
0.95
|
%
|
Ratio of net investment loss to average net assets
|
|
|
(0.55
|
%)
|
|
|
(1.11
|
%)
|
Portfolio turnover
|
|
|
1.4
|
%
|
|
|
1.7
|
%
|
Net assets, end of period
|
|
$
|
31,398,272
|
|
|
$
|
32,269,882
|
|
Weighted shares outstanding, end of period
|
|
|
6,321,988
|
|
|
|
6,321,988
|
|
(1)
|
Per share data are based on weighted average shares outstanding and the results are rounded to the nearest cent.
|
The Corporations 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.
33