RAND CAPITAL CORPORATION 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 within Item 8 of this Annual Report.
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 theSEC . 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 forU.S. federal tax purposes on the payment of corporate levelU.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 ofDecember 31, 2022 , and future dividend payments are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions the state ofthe 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 withinthe United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption "Risk Factors" contained in Part I, Item 1A of this Annual Report. 34
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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. At times when excess cash is available, we also invest in high yielding publicly traded equity securities. 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. Prior to 2020, we made the majority of our investments through our wholly owned subsidiary,Rand Capital SBIC, Inc. ("Rand SBIC"), which operated as a small business investment company ("SBIC") and had been licensed by theU.S. Small Business Administration ("SBA") since 2002. InNovember 2021 , Rand SBIC repaid its$11,000,000 in outstanding debentures to the SBA. In addition, inNovember 2021 , Rand SBIC received approval from the SBA to surrender its SBA license. In connection with the surrender of its SBIC license, Rand SBIC changed its name toRand Capital Sub, Inc. ("Rand Sub"), withdrew its election to be regulated as a BDC, and merged with and intoRand Capital Sub LLC , aDelaware limited liability company, a wholly owned subsidiary of Rand. All of our investments going forward are expected be made out ofRand Capital Corporation (the "Corporation", "we" or "Rand"). InNovember 2019 , Rand completed a stock sale transaction (the "Transaction") withEast Asset Management ("East"). The Transaction consisted of a$25 million investment in Rand by East, in exchange for approximately 8.3 million shares of Rand common stock. Concurrent with the closing of the Transaction with East onNovember 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. InDecember 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 becauseCallodine Group, LLC ("Callodine") planned to acquire a controlling interest in RCM, which was, at that time, majority owned by East (the "Adviser Change of Control"). The terms of the Investment Management Agreement are identical to those contained in the PriorInvestment Management Agreement, with RCM continuing to provide investment advisory and management services to Rand following the Adviser Change of Control. Following approval by Rand's shareholders at the Special Meeting, Rand, onDecember 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 electedU.S federal tax treatment as a regulated investment company ("RIC") as ofJanuary 1, 2020 , under subchapter M of the Internal Revenue Code of 1986, as amended, on our timely filedU.S. Federal tax return for the 2020 tax year. To maintain our qualification as a RIC, we must, among other things, meet certain 35
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source of income and asset diversification requirements. As ofDecember 31, 2022 , we believe we were in compliance with the RIC requirements. As a RIC, we generally will not be subject to corporate-levelU.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 shareholders onMay 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. The Rand Board of Directors declared the following cash dividends during the year endedDecember 31, 2022 : Dividend/Share Quarter Amount Record Date Payment Date Type 1st$0.15 March 14, 2022 March 28, 2022 Regular Quarterly 2nd$0.15 June 1, 2022 June 15, 2022 Regular Quarterly 3rd$0.15 September 1, 2022 September 15, 2022 Regular Quarterly 4th$0.20 December 19, 2022 December 30, 2022 Regular Quarterly 4th$0.18 December 19, 2022 December 30, 2022 Supplemental We intend to co-invest, subject to the conditions included in the exemptive relief order we received from theSEC , 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
OnOctober 7, 2020 , Rand, RCM and certain of their affiliates received an exemptive order from theSEC 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"). OnMarch 29, 2021 , theSEC granted Rand, RCM, Callodine, 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. The New Order was sought in connection with the completion of the Adviser Change of Control. After the Adviser Change of Control, Callodine held a controlling interest in RCM. 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, onSeptember 6, 2022 , theSEC 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.
Outlook
Rand's strategy is to continue to grow and scale its business by focusing on debt and related equity investments in privately-held, lower middle market companies to drive investment income growth in order to
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increase the dividend paid to its shareholders. During 2022, we paid total
dividends of
We began 2022 with$834 thousand in cash. During the past year, we monetized some equity investments, exited some of our publicly traded securities and had loan repayments that provided approximately$5.2 million of cash proceeds. In total, we put approximately$7.0 million of available cash to work during 2022, primarily in income producing investments to increase our investment income. Also, in support of our strategy, we added a new source of capital by securing a$25 million senior secured revolving credit facility during the second quarter of 2022. At the end of 2022, having put our capital to work and distributing$2.1 million in cash to shareholders, we had$1.4 million in cash on hand and$19.3 million of availability on the credit facility for future investments. We also plan to use our publicly traded equity investments as available liquidity and capital for prospective opportunities that will provide higher yields. We made progress in shifting our investment portfolio composition towards more debt instruments, and we expect that trend to continue as we execute our strategy in 2023. AtDecember 31, 2022 , our portfolio was comprised of 56% interest yielding debt instruments compared with 46% at the end of 2021, improving our portfolio yield and net interest income. The annualized weighted average yield of the portfolio was 12.6% at the end of 2022 compared with 12.3% at the end of 2021. With the support of our strong liquidity position, we believe we can continue to execute our strategy to grow our portfolio, drive investment income and support a growing dividend. Trends and Opportunities We believe the combination of cash on hand, line of credit availability, highly liquid publicly traded BDC stocks, proceeds from portfolio exits, and prospective investment income provide us the liquidity that will enable us to add new investments to our portfolio and reinvest in existing portfolio companies that demonstrate continued growth potential. We are actively building a pipeline of investment opportunities in order to put our capital to work.
The following short and long-term trends provide us confidence in our ability to grow the Corporation:
• We expect that well run businesses will require capital to grow and should
be able to compete effectively given eager reception of new technologies
and service concepts, regardless of the macroeconomic environment.
• We continue to manage risk by investing with other investors, when possible.
• RCM, on our behalf, is involved with the governance and management of a
majority of our portfolio companies, which enables us to support their
operating and marketing efforts and facilitate their growth.
• As our portfolio expands, we are able to better leverage our externalized
management structure.
• We believe that the establishment of RCM as our external investment adviser
and its ownership by Callodine, as well as our relationship with East,
broadens our potential pipeline of investment opportunities to build our
portfolio, facilitate growth and reduce operating expenses as a percentage
of portfolio assets. Strategically, we expect to advance our efforts to
increase our income-producing investments to support and to allow us to
continue to increase our regular cash dividend for shareholders and
complement these securities with equity investments that drive capital
appreciation.
• We believe an opportunity for lending to lower middle market companies
exists because the consolidation among commercial banks has reduced their
focus on the lower middle market business. Heightened regulatory
requirements for commercial banks have also resulted in less participation
by banks in the lower middle market lending arena, opening up opportunities
for alternative lenders such as us.
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• Lower middle market companies are increasingly seeking lenders with
long-term capital to provide flexible solutions for their debt and equity
financing needs. We believe that many lower middle market companies prefer
to execute transactions with alternative lenders, such as us, because we
can address their capital requirements quickly and in the "check size" that
is best suited for their businesses.
• We believe we have sufficient liquid assets to both invest in new
opportunities and to repurchase shares. On
Directors approved a new share repurchase plan, which authorizes the
Corporation to repurchase shares of the Corporation's outstanding common
stock with an aggregate cost of up to
common stock no greater than the then current net asset value. This new
share repurchase authorization lasts for a period of 12 months from the
authorization date until
2022, we did not repurchase any shares.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance withUnited States generally accepted accounting principles, or GAAP, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. For a summary of all significant accounting policies, including critical accounting policies, see Note 1 to the consolidated financial statements in Item 8 of this Annual Report. The increasing complexity of the business environment and applicable authoritative accounting guidance requires us to monitor our accounting policies and procedures. We have two critical accounting policies that require the use of significant judgment. The following summary of critical accounting policies is intended to enhance a reader's ability to assess our financial condition and results of operations and the potential volatility due to changes in estimates.
Valuation of Investments
Our investments are carried at fair value in accordance with FASB Accounting Standards Codification (ASC) 820, "Fair Value Measurements and Disclosures", which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Investments are valued at fair value as determined in good faith by RCM and approved by our Board. We invest in loan, debt, and equity instruments and there is no single standard for determining fair value of these investments. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio company while employing a consistent valuation process. We analyze and value each investment quarterly and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of the recorded value of an equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that an underlying portfolio company has appreciated in value and, therefore, its equity security has also appreciated in value. These estimated fair values may differ from the values that would have been used had a ready market for the investments existed and these differences could be material if our assumptions and judgments differ from results of actual liquidation events. Loan investments are defined as traditional loan financings typically with no equity features or required equity co-investment. 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. Equity investments will be direct investments into a portfolio company and may include preferred stock, common stock, warrants and limited liability company membership interests.
We utilize several approaches to determine the fair value of an investment. The main approaches are:
• Loan and debt securities are generally valued using an Asset approach and
will be valued at cost when 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. The
valuation may also consider 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 company's assets. To the extent the
value exceeds the remaining principal amount of the debt or loan securities
of the portfolio company, the fair value of such securities is generally
estimated to be their cost. However, where value is less than the remaining
principal amount of the loan and debt securities, the Corporation may
discount the value of an equity security. The market approach uses
observable prices and other relevant information generated by similar
market transactions. It may include both private and public M&A
transactions where the traded price is a multiple of EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization) or another relevant
operating metric. It may also include the market value of comparable public
companies that are trading in an active market, or the use of market
multiples derived from a set of comparables to assist in pricing theinvestment. Additionally, we adjust valuations if a subsequent significant
equity financing has occurred that includes a meaningful portion of the
financing by a sophisticated, unrelated new investor. The income approach
employs valuation techniques to convert future benefits or costs, usually
in the form of cash flows, into a present value amount. The measurement is
based on value indicated by current market expectations about those future
amounts.
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 our valuation at the measurement date. Under the valuation policy, we value unrestricted publicly traded companies, categorized as Level 1 investments, at the average closing price for the last three trading days of the reporting period. Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable and significant inputs to determining the fair value.
Financial assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Any changes in estimated fair value are recorded in the statement of operations.
At
In the valuation process, we value restricted securities, categorized as Level 3 investments, using information from these portfolio companies, which may include:
• Audited and unaudited statements of operations, balance sheets and
operating budgets;
• Current and projected financial, operational and technological developments
of the portfolio company;
• Current and projected ability of the portfolio company to service its debt
obligations;
• The current capital structure of the business and the seniority of the
various classes of equity if a deemed liquidation event were to occur;
• Pending debt or capital restructuring of the portfolio company;
• Current information regarding any offers to purchase the investment, or
recent fundraising transactions;
• Current ability of the portfolio company to raise additional financing if
needed;
• Changes in the economic environment which may have a material impact on the
operating results of the portfolio company;
• Internal circumstances and events that may have an impact (both positive
and negative) on the operating performance of the portfolio company;
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• Qualitative assessment of key management;
• Contractual rights, obligations or restrictions associated with the
investment; and
• Other factors deemed relevant to assess valuation.
The valuation may be reduced if a portfolio company's performance and potential have deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.
Equity securities may include preferred stock, common stock, warrants and limited liability company membership interests.
The significant unobservable inputs used in the fair value measurement of our equity investments are earnings before interest, taxes and depreciation and amortization (EBITDA) and revenue multiples, where applicable, the financial and operational performance of the business, and the senior equity preferences that may exist in a deemed liquidation event. Standard industry multiples may be used when available; however, our 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 to the unobservable inputs, such as variances in financial performance from expectations, may result in a significantly higher or lower fair value measurement. 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 with a sophisticated non-strategic unrelated new investor entered into by the portfolio company. The terms of these equity transactions may not be identical to the equity transactions between the portfolio company and us, 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 investments made within the last year, we generally rely on the cost basis, which is deemed to represent fair value, unless other fair market value inputs are identified causing us to depart from this basis.
The significant unobservable inputs used in the fair value measurement of our
loan and debt securities are the financial and operational performance of the
portfolio company, similar debt with similar terms with other portfolio
companies, as well as the market acceptance for the portfolio company's products
or services. These inputs will likely provide an indicator as to the probability
of principal recovery of the investment. Our loan and debt investments are often
junior secured or unsecured securities. Fair value may also be determined based
on other criteria where appropriate. Significant changes to the unobservable
inputs may result in a change in fair value. For recent investments, we
generally rely on the cost basis, which is deemed to represent the fair value,
unless other fair value inputs are identified causing us to depart from this
basis.
Revenue Recognition
Interest income generally is recognized on the accrual basis except where the
investment is in default or otherwise presumed to be in doubt. In such cases,
interest income is recognized at the time of receipt. A reserve for possible
losses on interest receivable is maintained when appropriate.
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Portfolio interest income cannot be recognized if collection is doubtful, and a
100% reserve must be established. The collection of interest is presumed to be
in doubt when there is substantial doubt about a portfolio company's ability to
continue as a going concern or the loan is in default more than 120 days. RCM
also uses other qualitative and quantitative measures to determine the value of
a portfolio investment and the collectability of any accrued interest.
We hold debt securities in our investment portfolio that contain payment-in-kind
("PIK") interest provisions. PIK interest, computed at the contractual rate
specified in each debt agreement, is 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.
We may receive distributions from portfolio companies that are limited liability
companies or corporations. 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.
We hold preferred equity securities that may contain cumulative dividend
provisions. Cumulative dividends are recorded as dividend income when they are
declared and deemed a contractual obligation. 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
security is redeemed.
Financial Condition
Overview:
(Decrease) % (Decrease)
12/31/22 12/31/21 Increase Increase
Total assets $ 63,481,192 $ 65,644,854 ($ 2,163,662 ) (3.3 %)Total liabilities 5,759,872 4,899,438 860,434
17.6 %
Net assets $ 57,721,320 $ 60,745,416 ($ 3,024,096 ) (5.0 %)
Net asset value (NAV) was
Cash approximated 2% of net assets at
During the second quarter of 2022, we entered into a new$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 ofJune 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%. AtDecember 31, 2022 , there was$2,550,000 drawn on the Credit Facility. See "Note 5. Senior Secured Revolving Credit Facility" in the Notes to the Consolidated Financial Statements for additional information regarding the terms of our Credit Facility. 41
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Composition of the Investment Portfolio
Our financial condition is dependent on the success of our portfolio holdings, which are investments in small companies. The following summarizes our investment portfolio at the year ends indicated.
12/31/22 12/31/21 Change % Change
Investments, at cost $ 55,716,237 $ 52,370,668 $ 3,345,569 6.4 %
Unrealized
appreciation/depreciation,
net 5,788,022 11,697,794 (5,909,772 ) (50.5 %)
Investments, at fair value
(4.0 %)
Number of Active Portfolio
Companies 29 34
Our total investments at fair value, as determined by RCM and approved by our
Board of Directors, approximated 107% of net assets at December 31, 2022 and
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, at cost, during the year ended December 31, 2022 , is
comprised of the following:
Cost Increase
(Decrease)
New investments:
BMP Food Service Supply Holdco, LLC (FSS) $ 3,100,000
Seybert'sBilliards Corporation (Seybert's) 2,394,000ITA Acquisition, LLC (ITA) 623,810SciAps, Inc. (Sciaps) 590,000DSD Operating, LLC (DSD) 318,276 Total of new investments 7,026,086 Other changes to investments:Filterworks Acquisition USA, LLC (Filterworks) interest conversion
325,720
Seybert's OID amortization and interest conversion
110,496
ITA interest conversion
99,595
Caitec, Inc. (Caitec) interest conversion
73,326
DSD interest conversion
62,323
Mattison Avenue Holdings LLC (Mattison) interest conversion
37,175
HDI Acquisition LLC (Hilton Displays ) interest conversion
26,587
Sciaps OID amortization
15,000
GoNoodle, Inc. (GoNoodle) interest conversion
14,142
Total of other changes to investments 764,364
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Cost Increase
(Decrease)Investments repaid, sold, liquidated or converted:
SocialFlow, Inc. (Social Flow) sale
(1,750,000 )
Empire Genomics Corp (Empire Genomics) debt repayment
(1,444,915 )
Golub Capital BDC, Inc. (Golub) sale
(403,910 )
Owl Rock Capital Corporation (Owl Rock) sale
(347,067 )
Microcision LLC (Microcision) sale
(110,000 )
FS KKR Capital Corp. (FS KKR) sale
(94,380 )
GoNoodle debt repayment
(90,175 )
Ares Capital Corporation (Ares) sale
(76,320 )
Lumious (Tech 2000, Inc.) debt repayment
(70,833 )
ACV Auctions, Inc. (ACV) sale
(34,440 )
New Monarch Machine Tool, Inc. (New Monarch) liquidated
(22,841 )
Total of investments repaid, sold, liquidated or converted (4,444,881 )
Net change in investments, at cost $
3,345,569
Our top five portfolio companies represented 48% of total assets atDecember 31, 2022 : % of Total Assets Fair Value at at December 31, Company Industry December 31, 2022 2022 Tilson Technology Management, Inc. (Tilson) Professional Services$ 10,300,000 16 % Seybert's Consumer Products $ 5,868,961 9 % Sciaps Manufacturing $ 5,208,984 9 % DSD Automotive $ 5,093,980 8 % Caitec Consumer Product $ 3,955,882 6 % Our top five portfolio companies represented 47% of total assets atDecember 31, 2021 : % of Total Assets Fair Value at at December 31, Company Industry December 31, 2021 2021 Tilson Professional Services $ 8,925,015 14 % ACV Software $ 8,333,065 13 % Open Exchange, Inc. Software $ 5,570,000 8 % Caitec Consumer Product $ 3,882,556 6 % DSD Automotive $ 3,826,683 6 % Below is the geographic breakdown of our investments using fair value as ofDecember 31, 2022 and 2021: % of Net Asset Value % of Net Asset Value at December 31, at December 31, Geographic Region 2022 2021 USA - East 76 % 83 % USA - South 26 % 23 % USA - West 5 % - Total investments as a % of net asset value 107 % 106 % 43
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As of
Percentage of Percentage of
Cost Total Portfolio Fair Value Total Portfolio
December 31, 2022 :
Subordinated Debt and
Promissory Notes $ 34,160,967 61 % $ 34,160,967 56 %
Equity and Membership
Interests 18,225,477 33 20,840,681 34
Equity Warrants 95,063 - 95,063 -
Publicly traded stock 3,234,730 6 6,407,548 10
Total $ 55,716,237 100 % $ 61,504,259 100 %
December 31, 2021:
Subordinated Debt and
Promissory Notes $ 29,583,482 57 % $ 29,583,482 46 %
Equity and Membership
Interests 18,441,276 35 20,498,872 32
Equity Warrants 155,063 - 85,063 -
Publicly traded stock 4,190,847 8 13,901,045 22
Total $ 52,370,668 100 % $ 64,068,462 100 %
Results of Operations
Investment Income
Comparison of the years ended
December 31, December 31, Increase % Increase
2022 2021 (Decrease) (Decrease)
Interest from portfolio
companies $ 4,152,802 $ 3,017,634 $ 1,135,168 37.6 %
Interest from other
investments 131 13,876 (13,745 ) (99.1 %)
Dividend and other investment
income 1,456,334 888,179 568,155 64.0 %
Fee income 155,914 156,614 (700 ) (0.4 %)
Total investment income $ 5,765,181 $ 4,076,303 $ 1,688,878 41.4 %
Investment income was received, on a current basis, during the year ended
Interest from portfolio companies - Interest from portfolio companies was approximately 38% higher for the year endedDecember 31, 2022 versus 2021 due to the fact we originated more interest yielding investments during the last year. AtDecember 31, 2022 , our portfolio was comprised of 56% interest yielding debt instruments compared with 46% at the end of 2021. New debt instruments were originated fromBMP Food Service Supply Holdco, LLC (FSS),DSD Operating, LLC (DSD),SciAps, Inc. (Sciaps) and Seybert'sBilliards Corporation (Seybert's).
Interest from other investments - The decrease in interest from other
investments is due to lower average cash balances during the year ended
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
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LLCs require those LLCs to distribute funds to us for payment of income taxes on
our allocable share of the LLC's profits. These portfolio companies may also
elect to make additional discretionary distributions. Dividend income will
fluctuate based upon the profitability of these LLCs and corporations and the
timing of the distributions or the impact of new investments or divestitures.
The dividend distributions for the respective years ended were:
December 31 ,
2022 2021
Carolina Skiff LLC (Carolina Skiff)$ 653,437 $ 214,265 DSD Operating, LLC (DSD) 268,732 - Carlyle Secured Lending Inc. (Carlyle) (formerly TCG BDC, Inc.) 141,040
129,000
FS KKR Capital Corp. (FS KKR) 127,680
133,380
PennantPark Investment Corporation (Pennant Park ) 117,000
93,600
Knoa Software, Inc. (Knoa) -
87,771
Tilson Technology Management, Inc. (Tilson) 52,500
52,500
Ares Capital Corporation (Ares) 39,270
43,740
Barings BDC, Inc. (Barings) 38,000
32,800
Golub Capital BDC, Inc. (Golub) 9,375
36.563
Owl Rock Capital Corporation (Owl Rock) 9,300
37,200
Apollo -
27,360
Total dividend and other investment income$ 1,456,334
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 Consolidated Statement of Financial Position under the line item "Deferred revenue." The income associated with the amortization of financing fees was$120,914 and$87,018 for the years endedDecember 31, 2022 and 2021, respectively. During the year endedDecember 31, 2022 , we recognized a one-time loan monitoring fee of$10,000 from our investment in Seybert's. During the year endedDecember 31, 2021 , we recognized a one-time fee of$30,000 in conjunction with the repayment of the Microcision loan instrument and$25,500 in other one-time fees associated with the loan monitoring and application fees.
The board fees were
Comparison of the years ended
December 31, December 31, Increase % Increase
2021 2020 (Decrease) (Decrease)
Interest from portfolio
companies $ 3,017,634 $ 2,461,943 $ 555,691 22.6 %
Interest from other
investments 13,876 87,784 (73,908 ) (84.2 %)
Dividend and other investment
income 888,179 428,081 460,098 107.5 %
Fee income 156,614 125,111 31,503 25.2 %
Total investment income $ 4,076,303 $ 3,102,919 $ 973,384 31.4 %
Investment income was received, on a current basis, during the year ended
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Interest from portfolio companies - Interest from portfolio companies was approximately 23% higher for the year endedDecember 31, 2021 versus the same period in 2020 due to the fact that we originated more income-producing debt investments during the last twelve months. The new debt instruments were originated fromBMP Swanson Holdco, LLC (Swanson),Caitec, Inc. (Caitec),DSD Operating, LLC (DSD),ITA Acquisition, LLC (ITA),Nailbiter, Inc. (Nailbiter) and Seybert'sBilliards Corporation (Seybert's). In addition, interest income was higher due to an approximately$88,000 increase in OID income during the year endedDecember 31, 2021 due to a first quarter 2021 loan payoff.
Interest from other investments - The decrease in interest from other
investments is due to lower average cash balances and lower interest rates
during the year ended
Dividend and other investment income- Dividend income is comprised of cash
distributions from LLCs and corporations in which we have invested. Our
investment agreements with certain LLCs require those LLCs to distribute funds
to us for payment of income taxes on our allocable share of the LLC's profits.
These portfolio companies may also elect to make additional discretionary
distributions. Dividend income will fluctuate based upon the profitability of
these LLCs and corporations and the timing of the distributions or the impact of
new investments or divestitures. The dividend distributions for the respective
years ended were:
December 31, December 31,
2021 2020
Carolina Skiff LLC (Carolina Skiff) $ 214,265 $ 66,230
FS KKR Capital Corp. (FS KKR) 133,380 64,000
TCB BDC, Inc. (TCB) 129,000 29,200
PennantPark Investment Corporation (Pennant Park) 93,600 24,000
Knoa Software, Inc. (Knoa) 87,771
-
Tilson Technology Management, Inc. (Tilson) 52,500
52,500
Ares Capital Corporation (Ares) 43,740
32,400
Owl Rock Capital Corporation (Owl Rock) 37,200
46,800
Golub Capital BDC, Inc. (Golub) 36.563 27,189 Barings BDC, Inc. (Barings) 32,800 13,200 Apollo 27,360 56,700 Somerset Gas Transmission Company, LLC (Somerset) -
15,862
Total dividend and other investment income
428,081
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$87,018 and$29,188 for the years endedDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 , we recognized a one-time fee of$30,000 in conjunction with the repayment of the Microcision loan instrument and$25,500 in other one-time fees associated with the loan monitoring and application fees. During the year endedDecember 31, 2020 , we recognized a one-time pre-payment fee of$91,423 on the repayment of the Andretti debt instrument and a one-time pre-payment fee of$4,500 on the repayment of the Open Exchange debt instrument.
The board fees were
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Expenses
Comparison of the years ended
December 31, December 31, Increase % Increase
2022 2021 (Decrease) (Decrease)
Total expenses $ 1,119,229 $ 6,670,315 ($ 5,551,086 ) (83.2 %)
Total expenses decreased approximately $5,600,000 for the year ended
December 31, 2022 compared to the year ended December 31, 2021 . The decrease in
expenses was primarily due to an approximately $5,250,000 decrease in the
capital gains incentive fee expense and an approximately $500,000 decrease in
interest expense. The decrease was partially offset by an approximately $150,000
increase in professional fees and an approximately $70,000 increase in Base
Management Fees payable to RCM.
The decrease in the capital gains incentive fee expense as shown on our
Consolidated Statement of Operations, is due to the calculation at December 31,
2022 of the capital gains fee, per the Investment Management Agreement,
currently payable to RCM of approximately $332,000 and an accrued capital gains
incentive fee payable of approximately $2,167,000 , per a GAAP requirement. The
Investment Management Agreement does not allow the use of unrealized gains in
calculating the amount of the capital gains incentive fee payable under that
agreement to RCM. However, as required by GAAP, we must accrue capital gains
incentive fees on the basis of unrealized gains. 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 with respect to unrealized gains unless and until such gains are
actually realized.
The interest expense incurred during the year ended December 31, 2022 was
related to the new Credit Facility we entered into during 2022 with the Lender,
which provides us with a senior secured revolving credit facility in a principal
amount not to exceed $25 million . We incurred approximately $70,000 in interest
expense related to the Credit Facility during the year ended December 31, 2022
and there was no corresponding expense during the year ended December 31, 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 year ended December 31, 2022 , while we
incurred approximately $620,000 in interest expense during the year ended
December 31, 2021 .
Professional fees expense increased by approximately $150,000 during the year
ended December 31, 2022 , versus the same period in 2021 because 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.
Comparison of the years ended
December 31, December 31,
2021 2020 Increase % Increase
Total expenses $ 6,670,315 $ 1,974,978 $ 4,695,337 237.7 %
Total expenses increased approximately $4,700,000 for the year ended
December 31, 2021 compared to the year ended December 31, 2020 . The increase in
expenses was primarily due to a $4,200,000 increase in the capital gains
incentive fee expense, an approximately $269,000 increase in the base management
fee payable to RCM, and an approximately $201,000 increase in interest expense.
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The increase in the capital gains incentive fee expense as shown on our Consolidated Statement of Operations, is due to the calculation atDecember 31, 2021 of the capital gains fee, per the Investment Management Agreement, currently payable to RCM of approximately$652,000 and an accrual of a capital gains incentive fee of approximately$3,548,000 , per a GAAP requirement. The Investment Management Agreement does not allow the use of unrealized gains in calculating the amount of the capital gains incentive fee payable under that agreement to RCM. However, as required by GAAP, the Corporation must accrue capital gains incentive fees on the basis of unrealized gains. 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 with respect to unrealized gains unless and until such gains are actually realized. There were no capital gains incentive fees accrued or expensed for the year endedDecember 31, 2020 . 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. During the fourth quarter of 2021 we repaid, in full, the$11,000,000 of outstanding SBA debentures, using cash on hand. As a condition of the repayment, the SBA required that we pre-pay the interest expense that would have been paid onMarch 1, 2022 . We, therefore, recognized two additional months of SBA interest during the year endedDecember 31, 2021 . In addition, we expensed approximately$144,000 of remaining SBA deferred commitment and leverage fees after the repayment of the SBA debentures.
Net Investment Income
The excess of investment income over total expenses represents net investment income (loss). The net investment income (loss) for the years endedDecember 31, 2022 , 2021 and 2020 were$4,430,410 , ($2,604,908 ) and 1,756,128, respectively.
Net Realized Gains and Losses on Investments
December 31 , December
31,
2022 2021 2020
Net realized gain (loss) on sales and
dispositions, before income taxes
We recognized a net realized gain of approximately$1.7 million on the sale of 123,000 shares of Class A common stock of ACV Auctions, Inc. (ACV Auctions) during the year endedDecember 31, 2022 . ACV trades on the Nasdaq Global Select Market under the symbol "ACVA". AtDecember 31, 2022 , we owned 319,934 shares of ACV Auctions. During the year endedDecember 31, 2022 , we sold our investment inSocial Flow, Inc. (Social Flow) and recognized a realized loss of approximately ($1,480,000 ). Additionally, during the year endedDecember 31, 2022 , we sold our investment inMicrocision LLC (Microcision) and recognized a realized gain of$190,000 and recognized a realized loss of approximately ($23,000 ) on our investment inNew Monarch Machine Tool, Inc. (New Monarch), when the company commenced bankruptcy proceedings. We recognized a realized gain of approximately$54,000 fromClearView Social, Inc. (Clearview Social), an investment we exited during 2021. We also recognized a realized gain of approximately$2,000 from additional proceeds received fromGiveGab, Inc. (Givegab), an investment we exited during 2021. In addition, during the year endedDecember 31, 2022 , we recognized an approximately$73,000 realized gain on the sale of 31,250 shares of Golub Capital BDC, Inc (Golub), an approximately$98,000 realized gain on the sale of 30,000 shares of Owl Rock Capital Corporation (Owl Rock), an approximately$50,000 realized gain on the sale of 6,000 shares of Ares Capital Corporation (Ares), and an approximately$41,000 realized gain on the sale of 6,000 shares of FS KKR Capital Corp. (FS KKR). 48
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During the year endedDecember 31, 2021 we recognized a net realized gain of$2.9 million on the sale of 147,646 shares of Class A common stock of ACV Auctions. AtDecember 31, 2021 , we owned 442,934 shares of ACV Auctions. During the year endedDecember 31, 2021 , we also sold our shares in Apollo Investment Corporation and recognized a gain of approximately$175,000 . In addition, during the year endedDecember 31, 2021 , we sold our investment in Givegab and recognized a gain of$1.8 million , sold our investment inCentivo Corporation and recognized a gain of$1.6 million , sold our investment inClearView Social, Inc. and recognized a gain of approximately$135,000 and sold our investment inMercantile Adjustment Bureau, Inc. and recognized a gain of$36,000 . The realized gain from the sale of Clearview included$35,766 that was held in escrow and was received in 2022. The escrow holdback is recorded in "Other Assets" on the Corporation's Consolidated Statement of Financial Position. We also received additional proceeds of approximately$57,000 from Microcision related to the 2019 sale of our equity interest in Microcision. We sold our investment inFirst Wave Technologies, Inc. and recognized a loss of approximately ($662,000 ). In addition, we restructured our notes inEmpire Genomics, LLC , and converted our equity holdings into a debt instrument. As part of that restructuring, we recognized a realized loss of approximately ($309,000 ). During year endedDecember 31, 2020 , we realized a$2.3 million gain when we exited our investment in Outmatch as part of a strategic majority investment fromRubicon Technology Partners . We also received additional proceeds of approximately$117,000 fromMicrocision LLC (Microcision) related to the 2019 sale of our equity interest in Microcision and approximately$37,000 in additional gain from Advantage 24/7. We recognized a realized loss of$5.1 million onGenicon, Inc. following its senior creditor liquidation. In addition, we recognized a$1.6 million loss inTeleservices Solutions Holdings, LLC , a$0.9 million loss inBeetNPath, LLC , a$0.4 million loss in G-TEC Natural Gas Systems, and a$0.3 million loss inDataview, Inc. following the sale and/or liquidation of the investment securities. 49
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Net Change in Unrealized Appreciation or Depreciation on Investments
The change in net unrealized appreciation or depreciation, before income taxes,
for the year ended
Year ended
December 31,
2022
SciAps, Inc. (Sciaps) $ 2,152,984
Social Flow Inc. (Social Flow) 1,628,000
Tilson Technology Management, Inc. (Tilson)
1,374,985
DSD Operating, LLC (DSD)
886,698
Carolina Skiff LLC (Carolina Skiff)
657,000
Carlyle Secured Lending Inc. (Carlyle) (formerly TCG BDC, Inc.)
48,160
Microcision LLC (Microcision)
25,000
New Monarch Machine Tool, Inc. (New Monarch)
22,841
Golub Capital BDC, Inc. (Golub) (77,653 ) Owl Rock Capital Corporation (Owl Rock) (80,533 ) Ares Capital Corporation (Ares) (101,640 ) Barings BDC, Inc. (Barings) (111,600 ) FS KKR Capital Corp. (FS KKR) (197,420 )OnCore Golf Technology, Inc. (OnCore) (200,000 ) PennantPark Investment Corporation (Pennant Park ) (235,950 )PostProcess Technologies, Inc. (Post Process) (248,875 )Somerset Gas Transmission Company, LLC (Somerset) (375,000 )Knoa Software, Inc. (Knoa) (379,155 )ITA Acquisition, LLC (ITA) (748,810 )Open Exchange Inc. (Open Exchange) (4,168,060 ) ACV Auctions, Inc. (ACV Auctions)
(5,780,744 )
Total change in net unrealized appreciation or depreciation of investments before income taxes
($ 5,909,772 )
ACV Auctions, Ares, Barings, Carlyle, FS KKR, and
We sold our investments in Social Flow, Golub and Owl Rock during the year ended
In accordance with the Corporation's valuation policy, we increased the value of our investments in SciAps, Tilson, DSD, and Carolina Skiff after a financial analysis of each of the portfolio companies indicating continued improved performance. During the year endedDecember 31, 2022 , the valuation of our investments in Open Exchange, ITA, Knoa, Somerset, Post Process, and OnCore decreased after a review of their operations and financial condition. 50
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The change in net unrealized appreciation or depreciation, before income taxes,
for the year ended
Year ended
December 31,
2021
Open Exchange Inc. (Open Exchange) $ 4,918,061
Tilson Technology Management, Inc. (Tilson)
4,215,000
ACV Auctions, Inc. (ACV Auctions)
1,842,591
Empire Genomics, Corp. (Empire Genomics)
1,151,021
Mercantile Adjustment Bureau, LLC (Mercantile)
946,665
SciAps, Inc. (Sciaps)
721,000
First Wave Technologies, Inc. (First Wave)
628,563
PennantPark Investment Corporation (Pennant Park ) 364,751 TCG BDC, Inc. (TCG) 239,914 FS KKR Capital Corp. (FS KKR) 204,285 Ares Capital Corporation (Ares)
115,290
Barings BDC, Inc. (Barings)
71,067
Owl Rock Capital Corporation (Owl Rock)
46,700
Golub Capital BDC, Inc. (Golub)
46,043
Apollo Investment Corporation (Apollo) (7,616 )Microcision LLC (Microcision) (10,000 )New Monarch Machine Tool, Inc. (New Monarch) (22,841 )PostProcess Technologies, Inc. (Post Process) (122,728 )Carolina Skiff LLC (Carolina Skiff) (200,000 )Social Flow Inc. (Social Flow) (201,487 )Filterworks Acquisition USA, LLC (Filterworks) (369,249 )ITA Acquisition, LLC (ITA) (375,000 )Knoa Software, Inc. (Knoa) (544,860 )Centivo Corporation (Centivo) (584,832 )Rheonix Inc. (Rheonix )
(702,732 )
Total change in net unrealized appreciation or depreciation of investments before income taxes
$ 12,369,606
Ares, Barings, FS KKR, Golub, Owl Rock andPennant Park 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. We sold our Apollo shares during year endedDecember 31, 2021 . ACV Auctions completed an Initial Public Offering (IPO) at a price of$25.00 per share onMarch 23, 2021 , and trades on the NASDAQ Global Select market under the symbol "ACVA". AtDecember 31, 2021 , we held 442,934 shares of unrestricted Class A common stock. Our holdings in the Class A common stock of ACV was valued, atDecember 31, 2021 , using a price of$18.81 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 financings and continued improved performance for each of these portfolio companies. In addition, we increased the value of our investments in Empire Genomics and SciAps after a financial analysis of each of the portfolio company's indicating continued improved performance. 51
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During the year endedDecember 31, 2021 , the valuation of our investments in Carolina Skiff, Filterworks, ITA, Knoa, New Monarch, Post Process,Rheonix and Social Flow were decreased after a review of their operations and financial condition.
The change in net unrealized appreciation or depreciation, before income taxes,
for the year ended
Year ended
December 31,
2020
Genicon, Inc. (Genicon) $ 4,359,757
Teleservices Solutions Holdings, LLC (Teleservices) 1,636,078
BeetNPath, LLC (Beetnpath) 882,904
Centivo Corporation (Centivo) 584,832
G-Tec Natural Gas Systems (G-tec) 400,000
Dataview, LLC (Dataview) 310,357
Ares 108,340
USTec 100,500
Pennant Park 88,537
FS KKR 73,437
TCG BDC 41,404
Owl Rock 33,833
Barings 33,581
Golub 31,610
Apollo 7,616
Microcision LLC (Microcision) (15,000 )
Knoa Software, Inc. (Knoa) (205,140 )
Carolina Skiff, LLC (Carolina Skiff) (250,000 )
SocialFlow, Inc. (Socialflow) (426,513 )
SciAps, Inc. (Sciaps) (869,274 )
Total net change in unrealized appreciation or depreciation on investments before income taxes
$ 6,926,859
The valuations of our investments in Carolina Skiff, Knoa, Sciaps, and Socialflow were decreased after we reviewed each portfolio company and its current and projected financial condition and determined that a valuation adjustment was appropriate.
In accordance with our valuation policy, we increased the value of our investment in Centivo based on a significant equity financing during 2020 with sophisticated new non-strategic outside investors at a higher valuation than their prior financing round valuation.
Beetnpath, Dataview, G-tec, Teleservices and USTec investments, previously deemed to have a zero value, were sold and we did not receive any proceeds.
Apollo, Ares, Barings, FS KKR, Golub, Owl Rock,Pennant Park and TCG are all publicly traded stocks, and as such, are marked to market at the end of each quarter.
All of the valuation adjustments resulted using the guidance set forth by ASC 820 and our established valuation policy.
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Net (Decrease) 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 (decrease) increase in net assets from operations" on our consolidated statements of operations. During the year endedDecember 31, 2022 , the net decrease in net assets from operations was ($881,849 ) as compared with of a net increase of$15,797,428 for the year endedDecember 31, 2021 and a net increase of$743,766 for the year endedDecember 31, 2020 .
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 other general business demands. As ofDecember 31, 2022 , our total liquidity consisted of approximately$1,370,000 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 ofJune 27, 2027 . As ofDecember 31, 2022 , under the borrowing base formula described above, we could have borrowed a total of approximately$21.9 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 TangibleNet 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.
The outstanding balance drawn on the Credit Facility was
For the year endedDecember 31, 2022 , we experienced a net increase in cash in the amount of approximately$535,000 , which is a net effect of approximately$252,000 of cash provided by our operating activities and approximately$283,000 provided by our financing activities. 53
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The$252,000 of cash provided our operating activities during the year endedDecember 31, 2022 , resulted primarily from net investment income of approximately$4,430,000 and approximately$5,150,000 from the sales and repayments of debt investments and the return on capital of our equity investments. This was mostly offset by approximately$7,026,000 to fund new or follow-on portfolio company investments, approximately$739,000 in non-cash interest income, and an approximately$1,690,000 net decrease in operating liabilities. Net cash flow provided by financing activities during the year endedDecember 31, 2022 was approximately$283,000 . This is comprised of the$2,550,000 borrowed from the line of credit, the approximately$2,142,000 in dividends paid to shareholders and the$125,000 closing fee paid related to the line of credit agreement. We anticipate that we will continue to fund our investment activities through cash generated through our ongoing operating activities and the sale of our publicly traded liquid investments. We anticipate that we will continue to exit investments. However, the timing of liquidation events within our privately held investments is difficult to project. The following table summarizes the cash estimated to be received over the next five years from existing portfolio companies based on contractual obligations as ofDecember 31, 2022 . These payments represent scheduled principal and interest payments that are due under the terms of the investment securities we own in each portfolio company and are subject to change based on factors such as conversions and restructurings. It does not include any equity investments, which may provide additional proceeds upon exit of the investment. Cash Receipts due by year 2027 and 2023 2024 2025 2026 beyond Scheduled cash receipts from portfolio companies$ 11,520,000 $ 8,640,000 $ 3,120,000 $ 22,490,000 $ 4,190,000 Number of companies contributing to the scheduled cash receipts 14 10 7 7 2
We have electedU.S federal tax treatment as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be subject to corporate-levelU.S. federal income tax on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis. Taxable income commonly differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital. We intend to continue to declare and pay quarterly dividends to our shareholders. To avoid certain excise taxes imposed on RICs, we generally strive to distribute, during each calendar year, an amount at least equal to the sum of: • 98% of our ordinary net taxable income for the calendar year;
• 98.2% of our capital gains, if any, in excess of capital losses for the
one-year period ending on October 31 of the calendar year; and
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• any net ordinary income and net capital gains for the preceding year that
were not distributed during such year and on which we do not pay corporate
tax.
The amount of our declared dividends, as recommended by RCM and approved by our Board, is based primarily on an evaluation of our net taxable income and our capital gains, in excess of capital losses.
Contractual Obligations
We do not have any capital lease obligations or long-term liabilities on our
consolidated statement of financial position at
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