# Rand Capital Corp: Form 10-Q for the period ended Mar 31, 2024

- Company: [Rand Capital Corp](/companies/rand.md) (CIK 81955)
- Form: 10-Q
- Filed: 2024-05-13
- Accepted by EDGAR: May 13, 2024, 07:31 ET
- Period: 2024-03-31
- Accession: 0000950170-24-058202
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/81955/000095017024058202/rand-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/81955/000095017024058202/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $778 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $1.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.54 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.54 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 2,581,021 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$4.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2024-01-01 to 2024-03-31 | $645.3k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2024-03-31 | $759.2k | us-gaap:Cash |
| Total assets | at 2024-03-31 | $84.4m | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $22.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $61.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,935 characters.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.

### FORWARD LOOKING STATEMENTS

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by us from time to time, and forward-looking statements may be included in documents that are filed with the SEC. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions, including statements related to our investment strategies and our intention to co-invest with certain of our affiliates; the impact of our election as a RIC for U.S. federal tax purposes on the payment of corporate level U.S. federal income taxes by Rand; statements regarding our liquidity and financial resources; statements regarding any capital gains fee that may be due to RCM upon a hypothetical liquidation of our portfolio and the amount of the capital gains fee that may be payable for 2024; and statements regarding our compliance with the RIC requirements as of March 31, 2024, and statements regarding future dividend payments, and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part II, Item 1A of this report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.

There may be other factors not identified that affect the accuracy of our forward-looking statements. Further, any forward-looking statement speaks only as of the date when it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and we cannot predict all of them.

### Overview

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

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

In November 2019, Rand completed a stock sale transaction (the “Closing”) with East Asset Management (“East”). The transaction consisted of a $25 million investment in Rand by East, in the form of cash and contributed portfolio assets, in exchange for approximately 8.3 million shares of Rand common stock. East owns approximately 64% of Rand Capital’s outstanding common stock at March 31, 2024. Concurrent with the Closing, Rand Capital Management, LLC (“RCM”), a registered investment adviser, was retained by Rand as its external investment adviser and administrator (the Closing and the retention of RCM as our investment adviser and administrator are collectively referred to herein as the “Transaction”). The term of the new investment advisory and management agreement (the “Investment Management Agreement”) with RCM was extended after its renewal was approved by our Board of Directors (the “Board”) in October 2023 and is now set to expire on December 31, 2024. In addition, the term of the administration agreement (the “Administration Agreement”) with RCM was extended after its renewal was approved by the Board in October 2023 and is now set to expire on December 31, 2024. The Investment Management Agreement and Administration Agreement can continue for successive annual periods after December 31, 2024 provided that such continuance is specifically approved at least annually by (i)(A) the affirmative vote of a majority of the Board or (B) the affirmative vote of a majority of our outstanding voting securities, and (ii) the affirmative vote of a majority of our directors who are not “interested persons,” as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act"), of us, RCM or our respective affiliates.

Pursuant to the terms of the Investment Management Agreement, Rand pays RCM a base management fee and may pay an incentive fee, comprised of two parts: (1) the "Income Based Fee" and (2) the "Capital Gains Fee", if specified benchmarks are met.

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

Our Board of Directors declared the following quarterly cash dividend during the three months ended March 31, 2024:

| Quarter | Dividend/Share Amount | Record Date | Payment Date |
| --- | ---: | --- | --- |
| 1st | $0.25 | March 13, 2024 | March 29, 2024 |

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

### SEC Exemptive Order

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

### Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. A summary of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2023 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

### Financial Condition

### Overview:

|  | March 31, 2024 | December 31, 2023 | Increase | % Increase |
| --- | ---: | ---: | ---: | ---: |
| Total assets | $84,355,130 | $81,021,982 | $3,333,148 | 4.1% |
| Total liabilities | 22,785,791 | 20,206,769 | 2,579,022 | 12.8% |
| Net assets | $61,569,339 | $60,815,213 | $754,126 | 1.2% |

Net asset value per share (NAV) was $23.85 at March 31, 2024 and $23.56 at December 31, 2023.

Cash approximated 1.2% of net assets at March 31, 2024, as compared to 5.4% of net assets at December 31, 2023.

During 2022, we entered into a $25 million senior secured revolving credit facility (the “Credit Facility”) with M&T Bank, as lender (the “Lender”), with the amount that we can borrow thereunder, at any given time, determined based upon a borrowing base formula. The Credit Facility has a 5-year term with a maturity date of June 27, 2027. Our borrowings under the Credit Facility bear interest at a variable rate per annum equal to 3.50 percentage points above the greater of (i) the applicable daily simple secured overnight financing rate (SOFR) and (ii) 0.25%. At March 31, 2024, there was $19,200,000 drawn on the Credit Facility and the applicable interest rate was 8.84%. See “Note 6. Senior Secured Revolving Credit Facility” in the Notes to the Consolidated Financial Statements for additional information regarding the terms of our Credit Facility.

### Composition of Our Investment Portfolio

Our financial condition is dependent on the success of our portfolio holdings. The following summarizes our investment portfolio at the dates indicated.

|  | March 31, 2024 | December 31, 2023 | Increase (Decrease) | % Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Investments, at cost | $76,904,315 | $68,365,606 | $8,538,709 | 12.5% |
| Unrealized appreciation, net | 5,869,810 | 8,760,106 | (2,890,296) | (33.0)% |
| Investments, at fair value | $82,774,125 | $77,125,712 | $5,648,413 | 7.3% |

Our total investments at fair value, as determined by RCM and approved by our Board of Directors, approximated 134% of net assets at March 31, 2024 as compared to approximately 127% of net assets at December 31, 2023.

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

The change in investments during the three months ended March 31, 2024, at cost, is comprised of the following:

| New investments: | Cost Increase (Decrease) |
| --- | ---: |
| Mattison Avenue Holdings, LLC (Mattison) | $5,500,000 |
| Mountain Regional Equipment Solutions (MRES) | 3,204,545 |
| Seybert’s Billiards Corporation (Seybert's) | 1,800,000 |
| ITA Acquisition, LLC (ITA) | 333,333 |
| Total of new investments | 10,837,878 |
| **Other changes to investments:** |  |
| Caitec, Inc. (Caitec) interest conversion | 139,094 |
| ITA interest conversion | 55,142 |
| Seybert’s OID amortization and interest conversion | 31,680 |
| Highland All About People Holdings, Inc. (All About People) interest conversion | 30,831 |
| Pressure Pro, Inc. (Pressure Pro) OID amortization and interest conversion | 21,515 |
| Inter-National Electronic Alloys LLC (INEA) interest conversion | 16,904 |
| Filterworks Acquisition USA, LLC (Filterworks) interest conversion | 14,565 |
| FCM Industries Holdco LLC (First Coast Mulch) interest conversion | 11,169 |
| HDI Acquisition LLC (Hilton Displays) interest conversion | 5,310 |
| GoNoodle, Inc. (GoNoodle) interest conversion | 3,565 |
| Mattison interest conversion | 3,056 |
| MRES OID amortization | 3,000 |
| Total of other changes to investments | 335,831 |
| **Investments repaid, sold, liquidated or converted:** |  |
| ACV Auctions, Inc. (ACV) sale | (53,094) |
| Pressure Pro debt repayment | (687,436) |
| Mattison debt repayment | (1,894,470) |
| Total of investments repaid, sold, liquidated or converted | (2,635,000) |
| **Net change in investments, at cost** | **$8,538,709** |

### Results of Operations

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

### Investment Income

|  | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Increase (Decrease) | % Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Interest from portfolio companies | $1,813,648 | $1,296,903 | $516,745 | 39.8% |
| Interest from other investments | 1,914 | 132 | 1,782 | NM |
| Dividend and other investment income | 151,835 | 474,743 | (322,908) | (68.0)% |
| Fee income | 99,822 | 79,720 | 20,102 | 25.2% |
| Total investment income | $2,067,219 | $1,851,498 | $215,721 | 11.7% |

#### NM - Not meaningful

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

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

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

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

|  | Three months ended March 31, 2024 | Three months ended March 31, 2023 |
| --- | ---: | ---: |
| Carlyle Secured Lending Inc. (Carlyle) | $41,280 | $37,840 |
| PennantPark Investment Corporation (Pennantpark) | 40,950 | 36,075 |
| FS KKR Capital Corp. (FS KKR) | 36,000 | 33,600 |
| Tilson Technology Management Inc. (Tilson) | 13,125 | 13,125 |
| Barings BDC, Inc. (Barings) | 10,400 | 10,000 |
| Ares Capital Corporation (Ares) | 10,080 | 10,080 |
| Carolina Skiff LLC (Carolina Skiff) | — | 299,173 |
| Knoa Software, Inc. (Knoa) | — | 34,850 |
| Total dividend and other investment income | $151,835 | $474,743 |

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

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

### Expenses

|  | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Increase | % Increase |
| --- | ---: | ---: | ---: | ---: |
| Total expenses | $1,226,856 | $1,047,845 | $179,011 | 17.1% |

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

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

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

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

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

### Net Investment Income

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

### Realized Gain on Investments

|  | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Change |
| --- | ---: | ---: | ---: |
| Realized gain on investments before income taxes | $3,450,092 | $53,388 | $3,396,704 |

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

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

### Change in Unrealized Appreciation (Depreciation) of Investments

|  | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Change |
| --- | ---: | ---: | ---: |
| Change in unrealized appreciation (depreciation) of investments before income taxes | $(2,890,296) | $1,401,973 | $(4,292,269) |

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

|  | Three months ended March 31, 2024 |
| --- | ---: |
| Carlyle | $113,520 |
| Barings | 28,800 |
| Ares | 16,590 |
| Pennantpark | (5,850) |
| FS KKR | (43,200) |
| Knoa | (100,000) |
| ACV | (2,900,156) |
| **Total change in net unrealized appreciation (depreciation) of investments before income taxes** | $(2,890,296) |

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

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

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

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

|  | Three months ended March 31, 2023 |
| --- | ---: |
| ACV | $1,515,420 |
| FS KKR | 48,000 |
| Ares | (9,030) |
| Barings | (12,800) |
| Carlyle | (54,467) |
| Pennantpark | (85,150) |
| **Total change in net unrealized appreciation (depreciation) of investments before income taxes** | $1,401,973 |

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

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

### Net Increase in Net Assets from Operations

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

### Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

## Market risk

As filed, 4,095 characters.

We are subject to financial market risks, including changes in interest rates and the valuation of our investment portfolio.

### Interest Rate Risk

Changes in interest rates may affect our interest expense on the debt outstanding under our Credit Facility. Our debt borrowings under the Credit Facility bear interest at a variable rate determined as a rate per annum equal to 3.50 percentage points above the greater of (i) the applicable daily simple secured overnight financing rate (SOFR) and (ii) 0.25%. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. As of March 31, 2024, all of our debt investments had fixed interest rates and were not directly impacted by changes in market interest rates.

Based on our Consolidated Statement of Financial Position as of March 31, 2024, the following table shows the approximate annualized increase (decrease) in net investment income due to hypothetical base rate changes in interest rates under our Credit Facility, assuming no changes in our borrowings as of March 31, 2024. Because we often borrow money to make investments, our net investment income is dependent upon the difference between our borrowing rate and the rate we earn on the invested proceeds borrowed. In periods of rising interest rates, the rate we earn on our debt investments with fixed interest rates will remain the same, while the interest incurred on our borrowings under the Credit Facility will increase.

|  | Impact on net investment income from a change in interest rates on our Credit Facility at: |  |  |
| --- | ---: | ---: | ---: |
|  | **1%** | **2%** | **3%** |
| Increase in interest rate | $(192,000) | $(384,000) | $(576,000) |
| Decrease in interest rate | 192,000 | 384,000 | 576,000 |

Although we believe that this analysis is indicative of our existing interest rate sensitivity under our Credit Facility at March 31, 2024, it does not adjust for changes in the credit quality, size and composition of our investment portfolio, and other business developments, including borrowing under our Credit Facility, that could affect our net investment income. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds.

### Valuation Risk

We carry our investments at fair value, as determined in good faith by RCM and approved by our Board. Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio company investment while employing a consistent valuation process. Due to the inherent uncertainty of determining the fair value of portfolio investments, there may be material risks associated with this determination including that estimated fair values may differ from the values that would have been used had a readily available market value for the investments existed and these differences could be material if our assumptions and judgments differ from results of actual liquidation events. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the value realized on these investments to be different than the valuations that are assigned. The types of factors that we may take into account in valuation of our investments include, as relevant, third party valuations, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly-traded securities, recent sales of or offers to buy comparable companies, and other relevant factors.

## Controls and procedures

As filed, 1,365 characters.

*Disclosure Controls and Procedures.* The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of March 31, 2024. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s controls and procedures were effective as of March 31, 2024.

*Changes in Internal Control over Financial Reporting.* There have been no changes in our internal control over financial reporting during the Corporation’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

### PART II.

### OTHER INFORMATION

## Risk factors

As filed, 133 characters.

See the information provided under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2023.

Filed May 13, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-058202. Last ingested by Listed: Nov 4, 2026, 08:48 ET. No prices; not investment advice.