Rand Capital Corp: Form 10-Q for the period ended Sep 30, 2022

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 COVID-19 on our portfolio companies; 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 2022; and statements regarding our compliance with the RIC requirements as of September 30, 2022, 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 scope of the impact of the COVID-19 pandemic and its specific impact on our portfolio companies, 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, 2021.

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

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

In December 2020, Rand’s shareholders approved a new investment advisory and management agreement (the “Investment Management Agreement”) with RCM at a special meeting of shareholders (the “Special Meeting”). The approval was required because Callodine Group, LLC (“Callodine”) planned to acquire a controlling interest in RCM, which was, at that time, majority owned by East (the “Adviser Change in Control”). The terms of the Investment Management Agreement are identical to those contained in the Prior Investment Management Agreement, with RCM continuing to provide investment advisory and management services to Rand following the Adviser Change in Control. Following approval by Rand’s shareholders at the Special Meeting, Rand, on December 31, 2020, entered into the Investment Management Agreement and a new administration agreement (the “Administration Agreement”) with RCM and terminated the Prior Administration Agreement. The terms of the Administration Agreement are identical to those contained in the Prior Administration Agreement.

Pursuant to the terms of the Investment Management Agreement, Rand pays RCM a base management fee and may pay an incentive fee if specified benchmarks are met.

We elected U.S federal tax treatment as a regulated investment company (“RIC”) as of January 1, 2020, under subchapter M of the Internal Revenue Code of 1986, as amended, on our timely filed U.S. Federal tax return for the 2020 tax year. To maintain our qualification as a RIC, we must, among other things, meet certain source of income and asset diversification requirements. As of September 30, 2022, we believe we were in compliance with the RIC requirements. As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our shareholders as dividends.

In connection with our RIC election, we paid a special dividend of $23.7 million, or approximately $1.62 per share, on the Corporation’s common stock, par value $0.10 per shares (the “Common Stock”), in cash and stock to our shareholders on May 11, 2020, which distributed all of our accumulated earnings and profits since our inception through 2019. The total amount of cash distributed to all shareholders, as part of the special dividend, was limited to $4.8 million, or 20% of the total special dividend that was paid. The remaining 80% of the special dividend was paid using approximately 8.6 million shares of the Corporation’s common stock.

In addition, to maintain our RIC status, 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 initiated a quarterly cash dividend.

The Board of Directors declared the following quarterly cash dividends during the nine months ended September 30, 2022:

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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, the Corporation, RCM and certain of their affiliates received exemptive relief from the SEC to permit the Corporation to co-invest in portfolio companies with certain other funds, 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”). Pursuant to the Order, the Corporation is generally permitted to co-invest with affiliated funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Corporation’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 the Corporation and its shareholders and do not involve overreaching in respect of the Corporation or its shareholders on the part of any person concerned; and (2) the transaction is consistent with the interests of the Corporation’s shareholders and is consistent with the Corporation’s investment objective and strategies.

On March 29, 2021, the SEC approved a new exemptive relief order (the “New Order”) reflecting the new organizational structure of RCM and its affiliates after the Adviser Change of Control. This New Order supersedes the Order and permits, subject to compliance with specified conditions, the Corporation to co-invest with funds managed by RCM and its affiliates under RCM’s current ownership structure after the completion of the Adviser Change in Control.

COVID-19 Update

Since the outbreak of the COVID-19 pandemic, our investment adviser, RCM, has continued to engage in active discussions with the management teams of the companies within our portfolio regarding actions taken by those portfolio companies with respect to the safety and welfare of their employees. RCM has informed us about the impact of COVID-19 on the businesses of our portfolio companies, and the potential impact of disruptions in the supply chain, and the actions these portfolio companies have taken, and are taking, to adapt to changes in demand, both increased and decreased, depending upon the portfolio company. While we do not know what the ultimate long-term impact of the COVID -19 pandemic will be on our portfolio companies, RCM is actively monitoring our portfolio companies, their liquidity and operational status.

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, 2021 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Financial Condition

Overview:

Net asset value per share (NAV) was $22.62 at September 30, 2022 and $23.54 at December 31, 2021.

Cash approximated 1.8% of net assets at September 30, 2022, as compared to 1.4% of net assets at December 31, 2021.

During the second quarter of 2022, we entered into a new $25 million senior secured revolving credit facility (the “Credit Facility”), with the amount that we can borrow thereunder, at any given time, determined based upon a borrowing base formula. The Credit Facility has a 5-year term with a maturity date of June 27, 2027. Our borrowings under the Credit Facility bear interest at a variable rate determined as a rate per annum equal to 3.50 percentage points above the greater of (i) the applicable daily simple secured overnight financing rate (SOFR) and (ii) 0.25%. There was no outstanding balance drawn on the Credit Facility at September 30, 2022. See “Note 6. Senior Secured Revolving Credit Facility” 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.

Our total investments at fair value, as determined by RCM and approved by our Board of Directors, approximated 102% of net assets at September 30, 2022 as compared to approximately 106% of net assets at December 31, 2021.

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 may also invest in publicly traded shares of other business development companies that provide income through dividends and have more liquidity than our private company equity investments.

The change in investments during the nine months ended September 30, 2022, at cost, is comprised of the following:

Results of Operations

Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021

Investment Income

The total investment income during the three months ended September 30, 2022 was received from 21 portfolio companies. For the three months ended September 30, 2021 total investment income was generated from 23 portfolio companies.

Interest from portfolio companies – Interest from portfolio companies was approximately 45% higher during the three months ended September 30, 2022 versus the same period in 2021 due to the fact that we originated more interest yielding investments during the last year. The new debt instruments were originated from Applied Image, Inc. (Applied Image), DSD Operating, LLC (DSD), Nailbiter Inc. (Nailbiter) and Seybert’s Billiards Corporation (Seybert’s).

Interest from other investments - The decrease in interest from other investments is due to lower cash balances during the three months ended September 30, 2022 versus the same period in 2021.

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

Fee income - Fee income generally consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of financings, income from portfolio company board attendance fees 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 $32,553 and $24,180 for the three months ended September 30, 2022 and 2021, respectively.

Expenses

The decrease in total expenses during the three months ended September 30, 2022 versus the same period in 2021 was primarily due to a $432,000 decrease in the capital gains incentive fee accrual and a $78,148 decrease in interest expense. The decrease in the capital gains incentive fee accrual during the three months ended September 30, 2022 was primarily due to the decrease in unrealized appreciation on our publicly traded securities. The Investment Management Agreement with RCM does not include unrealized gains in calculating the amount of the capital gains incentive fee payable under that agreement. However, as required by GAAP, we must accrue capital gains incentive fees including unrealized gains on our Consolidated Statement of Financial Position. Our capital gains incentive fee accrual, on our Consolidated Statement of Financial Position, 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 be paid a capital gains incentive fee with respect to unrealized gains unless and until such gains are actually realized.

On June 27, 2022, we entered into a credit agreement with M&T Bank, as lender (the “Lender”), which provides us with a senior secured revolving credit facility in a principal amount not to exceed $25 million. We incurred $26,042 in interest expense related to the line of credit during the three months ended September 30, 2022. There was no corresponding expense during the three months ended September 30, 2022.

During the fourth quarter of 2021, we repaid, in full, our $11,000,000 of outstanding SBA debentures, using cash on hand. Therefore, we did not incur any interest expense related to the SBA debentures during the three months ended September 30, 2022, while we incurred $104,190 in interest expense during the same period in 2021.

Net Investment Income

The net investment income for the three months ended September 30, 2022 and 2021 was $1,010,166 and $53,152, respectively.

Realized Gain on Investments

During the three months ended September 30, 2022, we recognized a gain of $1,919 on GiveGab, Inc. (Givegab), an investment we exited in 2021.

During the three months ended September 30, 2021, we sold our investment in Centivo Corporation and recognized a realized gain of $1,614,433. In addition, during the three months ended September 30, 2021, we recognized a net realized gain of $957,573 on the sale of 50,000 shares of Class A common stock of ACV Auctions, Inc. (ACV). As of September 30, 2021, we owned 540,580 shares of Class A common stock of ACV. In addition, during the three months ended September 30, 2021, we received additional proceeds from the sale of our investment in Givegab and recognized a gain of $29,355.

Change in Unrealized Appreciation (Depreciation) of Investments

The change in net unrealized appreciation (depreciation), before income taxes, for the three months ended September 30, 2022, was comprised of the following:

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ACV, 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 three-day average closing price prior to the end of the quarter.

The change in unrealized appreciation (depreciation), before income taxes, for the three months ended September 30, 2021, was comprised of the following:

Ares, Barings, Carlyle, FS KKR, Golub, Owl Rock and Pennantpark are all publicly traded stocks, and as such, are marked to market at the end of each quarter.

ACV completed an Initial Public Offering (IPO) at a price of $25.00 per share on March 23, 2021. At September 30, 2021, we held 540,580 shares of unrestricted Class A common stock. Our holdings in the Class A common stock of ACV at September 30, 2021 was valued using a price of $18.12 per share, based upon the three-day average closing price.

In accordance with the Corporation’s valuation policy, we increased the value of our investment in Tilson based on a significant equity financing by new non-strategic outside investors that had a higher valuation for this portfolio company.

During the three months ended September 30, 2021, the valuations of our investments in Knoa and New Monarch were decreased after a review of their operations and financial condition. In addition, our investment in Mercantile was increased during the same three-month period after a review of their financial operations.

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

Net Increase in Net Assets from Operations

The net increase in net assets from operations on our consolidated statements of operations for the three months ended September 30, 2022 and 2021 was $1,104,902 and $2,321,200, respectively.

Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021

Investment Income

The total investment income during the nine months ended September 30, 2022 was received from 23 portfolio companies as compared to 26 companies during the prior year period.

Interest from portfolio companies – Interest from portfolio companies was approximately 43% higher during the nine months ended September 30, 2022 versus the same period in 2021 due to the fact that we originated more interest yielding investments during the last year. The new debt instruments were originated from Applied Image, Inc. (Applied Image), BMP Swanson Holdco, LLC (Swanson), Caitec, Inc. (Caitec), DSD Operating, LLC (DSD), ITA Acquisition, LLC (ITA), Nailbiter Inc. (Nailbiter) and Seybert’s Billiards Corporation (Seybert’s).

Interest from other investments - The decrease in interest from other investments is due to lower cash balances during the nine months ended September 30, 2022 versus the same period in 2021.

Dividend and other investment income - Dividend income is comprised of cash distributions from limited liability companies (LLCs) and corporations in which we have invested, including our investment in the shares of publicly traded business development companies (BDC). 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:

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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 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 $94,001 and $57,959 for the nine months ended September 30, 2022 and 2021, respectively.

In addition, during the nine months ended September 30, 2022, we recognized a one-time loan monitoring fee of $10,000 from our investment in Seybert’s. During the nine months ended September 30, 2021, we recognized a one-time fee of $30,000 in conjunction with the repayment of the Microcision loan instrument.

There were no board fees earned during the nine months ended September 30, 2022 and $14,096 in board fees earned for the nine months ended September 30, 2021.

Expenses

The decrease in total expenses during the nine months ended September 30, 2022 versus the same period in 2021 was primarily due to a $4,994,760 decrease in the capital gains incentive fees expense and a $286,528 decrease in interest expense. The decrease was partially offset by a $190,928 increase in professional fees.

The decrease in capital gains incentive fees expense is due to an adjustment of the capital gains incentive fees accrual during the nine months ended September 30, 2022 based on valuation changes within our portfolio companies. The Investment Management Agreement with RCM does not include unrealized gains in calculating the amount of the capital gains incentive fee payable under that agreement. However, as required by GAAP, we must accrue capital gains incentive fees including unrealized gains on our Consolidated Statement of Financial Position. Our capital gains incentive fee accrual, on our Consolidated Statement of Financial Position, 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 be paid a capital gains incentive fee with respect to unrealized gains unless and until such gains are actually realized.

On June 27, 2022, we entered into a credit agreement with the Lender, which provides us with a senior secured revolving credit facility in a principal amount not to exceed $25 million. We incurred $26,042 in interest expense related to the line of credit during the nine months ended September 30, 2022. There was no corresponding expense during the nine months ended September 30, 2021.

During the fourth quarter of 2021, we repaid, in full, our $11,000,000 of outstanding SBA debentures. Therefore, we did not incur any interest expense related to the SBA debentures during the nine months ended September 30, 2022, while we incurred $312,570 in interest expense during the same period in 2021.

These decreases are offset by increases in our base management fees and professional fees. The base management fee, payable to RCM, increased 13%, or $77,532, during the nine months ended September 30, 2022 versus the same period in 2021 because, as we deploy more cash into investments, the base management fee payable to RCM increases accordingly. Professional fees increased 50%, or $190,928, during the nine months ended September 30, 2022 versus the same period in 2021 because we incurred increased fees associated with the complex regulatory environment in which we operate.

Net Investment Income (Loss)

The net investment income (loss) for the nine months ended September 30, 2022 and 2021 was $3,200,306 and ($2,924,763), respectively.

Realized Gain on Investments

During the nine months ended September 30, 2022, we sold our investment in Social Flow and recognized a realized loss of ($1,481,498). Additionally, during the nine months ended September 30, 2022, we sold our investment in Microcision and recognized a realized gain of $190,000 and recognized a realized loss of ($22,841) on our investment in New Monarch Machine Tool, Inc. (New Monarch), when the company commenced bankruptcy proceedings. We recognized a realized gain on the receipt of $38,881 from ClearView Social, Inc. (Clearview Social), an investment we exited during 2021. We also recognized a realized gain of $1,919 from additional proceeds received from GiveGab, Inc. (Givegab), an investment we exited during 2021.

We recognized a net realized gain of $1,701,446 on the sale of 123,000 shares of Class A common stock of ACV Auctions, Inc. (ACV), during the nine months ended September 30, 2022. At September 30, 2022, we owned 319,934 shares of Class A common stock of ACV.

In addition, during the nine months ended September 30, 2022, we recognized a $73,101 realized gain on the sale of 31,250 shares of Golub Capital BDC, Inc (Golub), a $97,932 realized gain on the sale of 30,000 shares of Owl Rock Capital Corporation (Owl Rock), a $50,238 realized gain on the sale of 6,000 shares of Ares Capital Corporation (Ares), and a $41,413 realized gain on the sale of 6,000 shares of FS KKR Capital Corp. (FS KKR).

During the nine months ended September 30, 2021, we sold our investment in Givegab and recognized a gain of $1,846,705, sold our investment in Centivo Corporation and recognized a gain of $1,614,433, and sold our investment in ClearView Social, Inc. and recognized a gain of $135,430. The realized gain from the sale of our investment in Clearview Social included $35,766 that was held in escrow and was received during the nine months ended September 30, 2022.

In addition, during the nine months ended September 30, 2021 we recognized a net realized gain of $957,573 on the sale of 50,000 shares of ACV. As of September 30, 2021, we owned 540,580 shares of ACV. During the nine months ended September 30, 2021, we also sold our shares in Apollo Investment Corporation and recognized a gain of approximately $175,000.

Change in Unrealized (Depreciation) Appreciation of Investments

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The change in net unrealized (depreciation) appreciation, before income taxes, for the nine months ended September 30, 2022, was comprised of the following:

ACV, 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 three-day average closing price prior to the end of the quarter.

We sold our investments in Social Flow, Golub and Owl Rock during the nine months ended September 30, 2022.

The change in net unrealized appreciation, before income taxes, for the nine months ended September 30, 2021, was comprised of the following:

Ares, Barings, Carlyle, FS KKR, Golub, Owl Rock and Pennantpark are all publicly traded stocks, and as such, are marked to market at the end of each quarter. We sold our Apollo shares during the nine months ended September 30, 2021.

ACV completed an Initial Public Offering (IPO) at a price of $25.00 per share on March 23, 2021. At September 30, 2021, we held 540,580 shares of unrestricted Class A common stock. Our holdings in the Class A common stock of ACV at September 30, 2021 was valued using a price of $18.12 per share, based upon the three-day average closing price.

In accordance with the Corporation’s valuation policy, we increased the value of our investments in Open Exchange and Tilson based on significant equity financings for each of these portfolio companies.

During the nine months ended September 30, 2021, the valuation of our investments in Knoa, New Monarch and Post Process was decreased after a review of their operations and financial condition. In addition, our investment in Mercantile was increased during the nine months ended September 30, 2021 after a review of their financial operations.

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

Net (Decrease) Increase in Net Assets from Operations

The net (decrease) increase in net assets from operations on our consolidated statements of operations for the nine months ended September 30, 2022 and 2021 was ($1,202,024) and $14,852,793, 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 September 30, 2022, our total liquidity consisted of approximately $1,035,000 in cash. In addition, we hold publicly traded equity securities of several BDCs and ACV Auctions, which are available for future liquidity requirements.

During the second quarter of 2022, we entered into a new $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. As of September 30, 2022, under the borrowing base formula described above, we could have borrowed approximately $21.0 million under the Credit Facility.

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%.

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 3:00:1:00, 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 2:50:1:00, which is measured quarterly on a trailing twelve-months basis.

There was no outstanding balance drawn on the Credit Facility at September 30, 2022. See “Note 6. Senior Secured Revolving Credit Facility” on our Consolidated Statement of Financial Position for additional information regarding the terms of our Credit Facility. See “Note 10. Subsequent Event”.

For the nine months ended September 30, 2022, we experienced a net increase in cash of approximately $202,000, which is a net effect of approximately $1,488,000 of cash provided in our operating activities and approximately $1,286,000 used in our financing activities.

We anticipate that we will continue to fund our investment activities through cash, cash flows 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.

Our ongoing liquidity is tied to the performance of our portfolio companies and, as such, it may be affected going forward based on the impact of the COVID-19 pandemic and its lasting impact on the capital markets, our portfolio companies, and the U.S. economy in general.

Our investment activities contain elements of risk. Our investment portfolio primarily consists of equity and debt securities in private companies and is subject to valuation risk. Because there is typically no public market for the equity and debt securities in which we invest, the valuation of the equity interests in the portfolio is stated at “fair value” as determined in good faith by RCM and approved by our Board of Directors. This is in accordance with our investment valuation policy (see the discussion of valuation policy contained in “Note 3. Investments” in the Consolidated Financial Statements contained in Item 1 of this report, which is hereby incorporated herein by reference.) In the absence of readily ascertainable market values, the estimated value of investments in our portfolio may differ significantly from the values that would be placed on such investments in our portfolio if a ready market for the investments existed. Any changes in valuation are recorded on the consolidated statement of operations as “Net change in unrealized depreciation on investments.”

At times, our portfolio may include, and does currently include, marketable securities traded in the over-the-counter market or on other stock markets. In addition, there may be a portion of the portfolio for which no regular trading market exists. In order to realize the full value of a security, the market must trade in an orderly fashion, or a willing purchaser must be available when a sale is to be made. Should an economic or other event occur that would not allow markets to trade in an orderly fashion, we may not be able to realize the fair value of our marketable investments or other investments in a timely manner.

At September 30, 2022, we did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments.

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 September 30, 2022. 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 September 30, 2022.

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

See the information provided under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2021.