Form 10-K

10-K 1 d307452d10k.htm FORM 10-K Form 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 814-00235

Rand Capital Corporation

(Exact name of registrant as specified in its charter)


New York		16-0961359
(State or Other Jurisdiction of Incorporation or organization)		(IRS Employer Identification No.)

2200 Rand Building, Buffalo, NY		14203
(Address of Principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (716) 853-0802

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Exchange on Which Registered
Common Stock, $0.10 par value		NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.


Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☑	Smaller reporting company ☐
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $18,330,211 based upon the closing price as reported on the NASDAQ Capital Market on such date.

As of March 1, 2017, there were 6,321,988 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Corporation’s definitive proxy statement for the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-K


PART I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	8
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Mine Safety Disclosures	8
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6.	Selected Financial Data	10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	70
Item 9A.	Controls and Procedures	70
Item 9B.	Other Information	70
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	70
Item 11.	Executive Compensation	71
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13.	Certain Relationships and Related Transactions, and Director Independence	71
Item 14.	Principal Accountant Fees and Services	71
PART IV
Item 15.	Exhibits and Financial Statement Schedules	71
Item 16	Form 10-K Summary	72

PART I

Item 1. Business

Overview of Our Business

Rand Capital Corporation (“Rand”, “we”, “us” and “our”) was incorporated under the laws of New York in February 1969. Throughout our history, our principal business has been to make venture capital investments in early or expansion stage companies, typically in upstate New York. We are now seeking investments in a broader geographic area, in close proximity to New York, in accordance with our strategic growth plan. We look for companies with strong leadership that are bringing to market new or unique products, technologies or services and have a high potential for growth. We invest in a mixture of debt and equity instruments. The debt securities typically have an equity component in the form of warrants or options to acquire stock or the right to convert the debt securities into stock. Responding to our request during 2016, the U.S. Small Business Administration (SBA) issued a “green light” or “go forth” letter inviting Rand to continue its application process to obtain a license to form and operate its second small business investment company (“SBIC”) subsidiary. Our anticipated new SBIC subsidiary will continue our investment strategy of focusing on privately-held, early stage and emerging growth businesses with proven management teams. Our first SBIC, Rand Capital SBIC, Inc. (Rand SBIC) has historically been our primary investment vehicle since its formation; once approved, we expect to continue this investment strategy through our new SBIC subsidiary.

Our Investment Objectives and Strategy

Our principal investment objective is to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments to fund expenses. Therefore, we invest in a variety of financial instruments to provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term and typically do not generate current income in the form of dividends or interest.

Our investment strategy is to partner with other investors to invest in small companies that either have a new product, service or technology they are trying to commercialize or are working to accelerate their rate of growth. We define small companies as businesses that may not yet be generating revenue up to companies with $20 million in revenue.

We have historically made an initial investment of $500,000 to $1,000,000 directly in a company through equity or in debt or loan instruments and frequently provide follow-on investments during our investment tenure. The debt instruments we acquire generally have a maturity of not more than five years and usually are convertible or have detachable equity warrants. Interest is either paid currently or deferred. We fund new investments and operating expenses through existing cash balances, proceeds from investment exits, and interest and principal payments from our portfolio companies.

Our Investment Process

Our primary business is making subordinated debt and equity investments in small companies that meet some or all of the following criteria:

1) a qualified and experienced management team;

2) a new or unique product or service; and

3) high potential for growth in revenue and cash flow.

Our management team identifies investment opportunities through a network of investment referral relationships. Investment proposals may come to us from other sources, including unsolicited proposals from companies and referrals from banks, lawyers, accountants and other members of the financial community. We believe that our reputation in the investment community and our experience provide a competitive advantage in originating qualified new investments.

In a typical private financing, our management team will review, analyze, and confirm, through due diligence, the business plan and operations of the potential portfolio company. Additionally, we will familiarize ourselves with the portfolio company’s industry and competition and may conduct reference checks with its customers and suppliers.

Following our initial investment, we may make follow-on investments in the portfolio company. Follow-on investments may be made to take advantage of warrants or other preferential rights granted to us to increase or maintain our position in a promising portfolio company, or provide additional funds to allow a portfolio company to fully implement its business plans, develop a new line of business or recover from unexpected business problems. Follow-on investments in a portfolio company are evaluated individually and may be subject to regulatory restrictions.

Disposition of Investments

We may exit investments through the maturation of a debt security or when a liquidity event takes place, such as the sale, recapitalization, or initial public offering of a portfolio company. The method and timing of the disposition of our portfolio investments can be critical to the realization of maximum total return. We generally expect to dispose of our equity securities through private sales of securities to other investors or through the sale or merger of the company. We anticipate our debt investments will be repaid with interest and hope to realize further appreciation from the warrants or other equity type instruments we receive in connection with the investment.

Current Portfolio Companies

For a description of our current portfolio company investments, see “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Composition of the Investment Portfolio.”

Competition

We compete for investments with other venture capital firms, individual investors, business development companies, and investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks. We believe we are able to compete with these entities primarily on the basis of our referral network, our investing reputation and experience, our responsive, quick and efficient investment analysis and decision-making process, the investment terms we offer, and our willingness to make smaller investments.

For information concerning the competitive risks we face, see “Item 1A. Risk Factors.”

Employees

As of December 31, 2016, we had four employees, unchanged from 2015.

Organization and History

We completed our initial public offering in 1971 as an internally managed, closed-end, diversified, management investment company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets” and provide managerial assistance to the portfolio companies in which we invest. See “Item 1. Business — Regulation, Regulation as a Business Development Company.”

We historically made the majority of our investments through Rand SBIC, an SBIC that has been licensed by the SBA since 2002. Rand SBIC’s predecessor was organized as a Delaware limited partnership and was converted into a New York corporation in 2008, at which time our operations as a licensed SBIC were continued. Although Rand SBIC had operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC and Rand SBIC then filed an election to be regulated as a BDC under the 1940 Act. Rand SBIC’s board of directors is comprised of the directors of Rand, a majority of whom are not “interested persons” of Rand or Rand SBIC.

We operate as an internally managed investment company whereby our officers and employees conduct our business under the general supervision of our Board of Directors. We have not elected to qualify to be taxed as a regulated investment company as defined under Subchapter M of the Internal Revenue Code.

In this Annual Report on Form 10-K, (“Annual Report”), unless the context otherwise requires, “we”, the “Corporation”, “us”, and “our” refer to Rand Corporation and Rand Capital SBIC.

Our corporate office is located in Buffalo, NY and our website address is www.randcapital.com. We make available free of charge on our website our annual and periodic reports, proxy statements and other information as soon as reasonably practicable after such material is filed with the Securities and Exchange Commission (“SEC”). Our shares are traded on the NASDAQ Capital Market under the ticker symbol “RAND.”

Regulation

The following discussion is a general summary of the material prohibitions and descriptions governing BDCs and SBA-licensed SBICs. It does not purport to be a complete description of all of the laws and regulations affecting BDCs and SBICs.

Regulation as a Business Development Company

We have elected to be regulated as a BDC under the 1940 Act. Although the 1940 Act exempts a BDC from registration under that Act, it contains significant limitations on the operations of BDCs. Among other things, the 1940 Act contains prohibitions and restrictions relating to transactions between a BDC and its affiliates, principal underwriters and affiliates of its affiliates or underwriters. The 1940 Act also prohibits a BDC from changing the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by a vote of the holders of a majority of its outstanding voting securities. BDCs are not required to maintain fundamental investment policies relating to diversification and concentration of investments within a single industry. More specifically, in order to qualify as a BDC, a company must:

(1) be a domestic company;

(2) have registered a class of its equity securities or have filed a registration statement with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”);

(3) operate for the purpose of investing in the securities of certain types of companies, namely immature or emerging companies and businesses suffering or just recovering from financial distress. Generally, a BDC must be primarily engaged in the business of furnishing capital and providing managerial expertise to companies that do not have ready access to capital through conventional financial channels. Such companies are termed “eligible portfolio companies;”

(4) extend significant managerial assistance to such portfolio companies; and

(5) have a majority of “disinterested” directors (as defined in the 1940 Act).

Qualifying Assets

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The 1940 Act prohibits BDCs from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms and investment companies.

An eligible portfolio company is, generally, a private domestic operating company, or a public domestic operating company whose securities are not listed on a national securities exchange. In addition, any small business investment company that is licensed by the SBA and is a wholly owned subsidiary of a BDC is an eligible portfolio company.

Qualifying assets include:

(1) securities of companies that were eligible portfolio companies at the time the BDC acquired their securities;

(2) securities of bankrupt or insolvent companies that were eligible at the time of the BDC’s initial acquisition of their securities but are no longer eligible, provided that the BDC has maintained a substantial portion of its initial investment in those companies;

(3) securities received in exchange for or distributed on or with respect to any of the foregoing; and

(4) cash items, government securities and high-quality short-term debt.

The 1940 Act also places restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased in order for the securities to be considered qualifying assets.

A BDC is permitted to invest in the securities of public companies and other investments that are not qualifying assets, but those kinds of investments may not exceed 30% of the BDC’s total asset value at the time of the investment. At December 31, 2016, we were in compliance with this rule.

Managerial Assistance to Portfolio Companies

In order to count portfolio securities as qualifying assets for the purpose of the 70% test discussed above, a BDC must either control the issuer of the securities or must offer to make available significant managerial assistance; except that, where the BDC purchases the securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.

Small Business Investment Company Regulations

SBA Lending Restrictions

SBICs are designed to stimulate the flow of private debt and/or equity capital to small businesses. The types and dollar amounts of the loans and other investments we may make are limited by the 1940 Act, the Small Business Act (the “SBA Act”) and SBA regulations. Rand SBIC uses funds borrowed from the SBA that can be combined with our own capital to provide loans to, and make equity investments in, businesses that meet the following criteria:

(a) have a tangible net worth not in excess of $19.5 million and average net income after U.S. federal income taxes for the preceding two completed fiscal years not in excess of $6.5 million, or

(b) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which the businesses are primarily engaged.

In addition, at the end of each fiscal year, an SBIC must have at least 20% (in total dollars) invested in “smaller enterprises.” The SBA defines “smaller enterprises” as businesses that:

(a) do not have a net worth in excess of $6 million and have average net income after U.S. federal income taxes for the preceding two years no greater than $2 million, or

(b) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which the concerns are primarily engaged.

We have complied with this requirement since the inception of Rand SBIC.

Rand SBIC is subject to regulation and oversight by the SBA. Receipt of an SBIC license does not assure that Rand SBIC will receive future SBA guaranteed debenture funding, which is dependent upon it continuing to

be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to Rand SBIC’s assets over our shareholders in the event we liquidate Rand SBIC or the SBA exercises its remedies under the SBA-guaranteed debentures issued by Rand SBIC upon an event of default.

Rand SBIC may invest directly in the equity of portfolio companies, but may not become a general partner of a non-incorporated entity or otherwise become jointly or severally liable for the general obligations of a non-incorporated entity. Rand SBIC may acquire options or warrants in portfolio companies, and the options or warrants may have redemption provisions, subject to certain restrictions. Pursuant to SBA regulations, the maximum cash which may be invested in any one portfolio company by Rand SBIC is currently $3.0 million.

SBA Leverage

The SBA raises capital to enable it to provide funds to SBICs by guaranteeing certificates or bonds that are pooled and sold to purchasers of the government guaranteed securities. The amount of funds that the SBA may lend to SBICs is determined by annual Congressional appropriations.

SBA debentures are issued with ten year maturities. Interest only is payable semi-annually until maturity. All of our outstanding SBA debentures may be prepaid without penalty. To reserve the approved SBA debenture leverage, we paid an upfront 1% commitment fee to the SBA as a partial prepayment of the SBA’s nonrefundable 3% leverage fee. These fees are expensed over the life of the corresponding SBA debenture instruments.

At December 31, 2016, we had $8,000,000 in outstanding SBA debenture instruments.

Item 1A. Risk Factors

Risks related to our business and structure

Our financial results will depend on our skill to manage and deploy capital effectively

Our ability to achieve our principal investment objective to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments depends on our capability to effectively identify, invest and manage our capital.

Accomplishing this investment objective effectively will be based on our management team’s handling of the investment process, starting with its ability to find investments that offer us favorable terms and meet our investment objective. They will also have to monitor the portfolio company’s performance and may be called upon to provide managerial assistance. These demands on their time may distract them or may slow the rate of investment.

Even if we are able to grow and build on our investment, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. If we cannot successfully operate our business or implement our investment objective, it could negatively impact our stock price.

We are subject to risks created by our regulated environment

We are regulated by the SBA and the SEC. Changes in the laws or regulations that govern SBICs and BDCs could significantly affect our business. Regulations and laws may be changed periodically, and the interpretations of the relevant regulations and laws are also subject to change. Any change in the regulations and laws governing our business could have a material impact on our financial condition and our results of operations. Moreover, the laws and regulations that govern BDCs and SBICs may place conflicting demands on the manner in which we operate, and the resolution of those conflicts may restrict or otherwise adversely affect our operations.

We are subject to risks created by borrowing funds from the SBA

Our liabilities include large amounts of debt instruments issued through the SBA which have fixed interest rates. Until and unless we are able to invest substantially all of the proceeds from debentures at annualized interest or other rates of return that substantially exceed annualized interest rates that Rand SBIC must pay the SBA, our operating results may be adversely affected which may, in turn, depress the market price of our common stock.

We are subject to risks created by the valuation of our portfolio investments

At December 31, 2016, 100% of our investments are in private securities that are not publicly traded. There is typically no public market for securities of the small privately held companies in which we invest. Investments are valued in accordance with our established valuation policy and are stated at fair value as determined in good faith by management and approved by our Board of Directors. In the absence of a readily ascertainable market value, the estimated value of our portfolio of securities may differ significantly, favorably or unfavorably, from the values that would be placed on the portfolio if a ready market for the securities existed. Any changes in estimated value are recorded in the consolidated statement of operations as “Net increase (decrease) in unrealized depreciation or appreciation on investments.”

We are dependent upon key management personnel for future success

We are dependent on the skill, diligence, and the network of business contacts of our two executive officers, Allen F. Grum and Daniel P. Penberthy, for the sourcing and selection, structuring, closing, monitoring and valuation of our investments. Our future success depends, to a significant extent, on the continued employment of these two officers and their departure could materially adversely affect our ability to implement our business strategy. We do not maintain key man life insurance or employment agreements on these officers.

We operate in a competitive market for investment opportunities

We operate in a highly competitive market for investment opportunities. We face competition in our investing activities from many entities including other SBICs, private venture capital funds, investment affiliates of large companies, wealthy individuals and other domestic or foreign investors. The competition is not limited to entities that operate in the same geographical area as we do. As a regulated BDC, we are required to disclose quarterly and annually the name and business description of our portfolio companies and the value of their portfolio securities. Most of our competitors are not subject to this disclosure requirement. This obligation to disclose this information could hinder our ability to invest in some portfolio companies. Additionally, other regulations, current and future, may make us less attractive as a potential investor to a given portfolio company than a private venture capital fund.

We may experience fluctuations in our quarterly results

Our quarterly operating results could fluctuate significantly as a result of a number of factors. These factors include, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which portfolio companies encounter competition in their markets, their ability to raise additional capital, if needed, and general economic conditions. As a result of these factors, results for any quarter cannot be relied upon as being indicative of performance in future quarters or for a full year.

Risks related to our investments

We have a limited number of companies in our portfolio of investments, and may be subjected to greater risk if any of these companies default

Our portfolio investment values are concentrated in a small number of companies and as such, we may experience a significant loss in our net asset value if one or more of these companies perform poorly or go out of business. The unrealized or realized depreciation in the value of the securities of any one of these companies would negatively impact our net asset value.

The lack of liquidity in our investments may adversely affect our business

We invest, and will continue to invest, in portfolio companies that are not publicly traded, and whose securities are subject to restrictions on resale and will be less liquid than publicly traded securities. Most of our investments are or will be either equity securities or subordinated debt securities acquired directly from small, private companies. The illiquidity of most of our portfolio may adversely affect our ability to dispose of the securities at times when it may be advantageous for us to liquidate investments. In addition, we may not realize the full value of these private investments if we have to liquidate all or a part of our portfolio quickly.

Economic downturns or recessions may adversely affect our portfolio companies’ financial performance and therefore harm our operating results

The United States economy has periodically experienced periods of instability and recessions and the financial results of the small companies in which we invest could be negatively affected by this instability and suffer deterioration. This deterioration may have a negative effect on our financial performance.

Investing in private companies involves a high degree of risk

We typically invest a substantial portion of our assets in small private companies. These private businesses may be thinly capitalized, unproven companies with risky technologies, may lack management depth, and may not have attained profitability. Because of the speculative nature and the lack of a public market for these investments, there is significantly greater risk of loss than is the case with securities traded on a public exchange. We expect that some of our investments will become worthless and that some will appear likely to become successful but will never realize their potential. We have been risk seeking rather than risk averse in our approach to our investments.

Even if our portfolio companies are able to develop commercially viable products, the market for those new products and services is likely to be highly competitive and rapidly changing. Commercial success is difficult to predict and the marketing efforts of the portfolio companies may not be successful.

We typically are minority shareholders in companies

We typically invest as a minority shareholder in our portfolio companies. As a minority shareholder we are unable to require the company to seek or entertain liquidity events as a way to exit our investments. This may cause us to hold investments longer than planned or to seek a sale that may not reflect the full value of our investment.

We may not have the funds or ability to make follow-on investments in our portfolio companies

We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a company, we may be asked to participate in another round of financing to the company. There is no assurance that we will make, or have sufficient funds to make, these follow-on investments. Any decision to not make an additional investment in our portfolio company may have a negative impact on the portfolio company in need of the capital, and have a negative impact on our ownership in the company.

Risks related to our securities

Investing in our shares may be inappropriate for an investor’s risk tolerance

Our venture capital investments, in accordance with our investment objective and principal strategies, result in a greater than average amount of risk and volatility and may result in loss of principal. Our investments in portfolio companies are highly speculative and aggressive and, therefore, an investment in our shares may not be suitable for investors for whom such risk is inappropriate. Neither our investments nor an investment in our shares constitutes a balanced investment program.

Sales of substantial amounts of our securities may have an adverse effect on the market price of our securities.

Sales of substantial amounts of our securities, or the availability of such securities for sale, could adversely affect the prevailing market prices for our securities.

Our shares may trade at a discount to our net asset value

Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict whether shares will trade at, above, or below net asset value.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We currently lease office space in Buffalo, New York for our corporate headquarters. We believe that these leased facilities are adequate to support our current staff and expected future needs.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock (“Common Stock”) is traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol “RAND.” The following table sets forth, for the periods indicated, the range of high and low closing sales prices per share as reported by NASDAQ:


2016 Quarter ended:	High		Low
March 31	$	4.69	$	3.48
June 30	$	4.50	$	3.65
September 30	$	3.78	$	3.21
December 31	$	3.61	$	3.12

2015 Quarter ended:	High		Low
March 31	$	4.20	$	3.83
June 30	$	4.01	$	3.73
September 30	$	4.15	$	3.77
December 31	$	4.03	$	3.58

We have not paid any cash dividends in the two most recent fiscal years, and have no present intention of paying cash dividends in the 2017 fiscal year.

Issuer Purchases of Equity Securities


Period	Total number of shares purchased(1)		Average price paid per share(2)		Total number of shares purchased as part of publicly announced plan(3)		Maximum number of shares that may yet be purchased under the share repurchase plan(3)
10/1 – 10/31/2016		—		—		—		458,954
11/1 – 11/30/2016		—		—		—		458,954
12/1 – 12/31/2016		—		—		—		458,954

(1)	There were no shares repurchased during the fourth quarter of 2016.

(2)	The average price paid per share is calculated on a settlement basis and includes commission.

(3)	On October 19, 2016, the Board of Directors extended the repurchase authorization of up to 1,000,000 shares of the Corporation’s common stock on the open market at prices no greater than the then current net asset value through October 19, 2017.

Shareholders of Record

On March 1, 2017 we had a total of 792 shareholders, which included 92 record holders of our Common Stock, and an estimated 700 holders with shares beneficially owned in nominee name or under clearinghouse positions of brokerage firms or banks.

Corporation Performance Graph

The following graph shows a five-year comparison of cumulative total shareholder returns for our Common Stock, the NASDAQ Market Index, and our Peer Group, assuming a base index of $100 at the end of 2011. The cumulative total return for each annual period within the five years presented is measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between share prices at the end and at the beginning of the measurement period by (2) the share price at the beginning of the measurement period.

Comparison of 5 Year Cumulative Total Return

Assumes Initial Investment of $100

December 2016

LOGO

Comparison of cumulative total return of one or more companies, peer groups, industry indexes and/or broad markets

FISCAL YEAR ENDED DECEMBER 31,


Company/Index/Market	2011		2012		2013		2014		2015		2016
Rand Capital Corporation	$	100.00	$	75.48	$	99.03	$	131.94	$	121.61	$	101.94
NASDAQ Market Index	$	100.00	$	117.45	$	164.57	$	188.84	$	201.98	$	219.89
Peer Group Index	$	100.00	$	122.65	$	165.51	$	164.44	$	87.44	$	75.78

The Peer Group was comprised of the following companies:

Capital Southwest Corporation (NasdaqGS: CSWC)

First Hand Technology Value Fund, Inc. (NasdaqGS: SVVC)

GSV Capital Corp. (NasdaqCM: GSVC)

Harris & Harris Group, Inc. (NasdaqGM: TINY)

We selected the Peer Group because it is our belief that the four issuers in the group have investment objectives that are similar to ours, and among the publicly traded companies, they are relatively similar in size to us.

The performance graph information provided above will not be deemed to be “soliciting material” or “filed” with the SEC or subject to Regulations 14A or 14C, or to the liabilities of section 18 of the Securities Exchange Act, unless in the future we specifically request that the information be treated as soliciting material or specifically incorporate it by reference into any filing under the Securities Act or the Exchange Act.

Item 6. Selected Financial Data

The following table provides selected consolidated financial data for the periods indicated. You should read the selected financial data set forth below in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with the consolidated financial statements and related notes appearing within Item 8. of this Annual Report.

Balance Sheet Data as of December 31:


	2016		2015		2014		2013		2012
Total assets	$	42,418,530	$	44,562,060	$	45,525,987	$	39,750,370	$	34,252,413
Total liabilities	$	9,789,167	$	10,708,400	$	13,172,546	$	11,681,038	$	8,470,113
Net assets	$	32,629,363	$	33,853,660	$	32,353,441	$	28,069,332	$	25,782,300
Net asset value per outstanding share	$	5.16	$	5.35	$	5.11	$	4.38	$	3.90
Shares of common stock outstanding		6,321,988		6,328,538		6,328,538		6,411,918		6,610,236

Operating Data for the years ended December 31:


	2016			2015			2014			2013			2012
Investment income	$	1,031,858		$	2,824,337		$	2,584,475		$	2,451,036		$	2,604,621
Total expenses	$	3,401,037		$	1,817,279		$	2,499,297		$	2,359,252		$	1,795,600
Net investment (loss) gain, net of tax	($	1,553,268	)	$	842,902		$	21,835		$	154,478		$	686,061
Net realized gain (loss) on sales and dispositions of investments, net of tax	$	8,864,653		($	27,973	)	$	4,767,484		$	4,374,354		$	831,139
Net (decrease) increase in unrealized depreciation or appreciation on investments, net of tax	($	8,514,068	)	$	685,290		($	247,838	)	($	1,655,475	)	$	422,567
Net (decrease) increase in net assets from operations	($	1,202,683	)	$	1,500,219		$	4,541,481		$	2,873,357		$	1,939,767

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 the Securities and Exchange Commission. 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 and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part I, Item 1A. of this Annual Report.

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 internally managed investment company that lends to and invests in small companies often concurrently with other investors. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. We have historically made the majority of our investments through our wholly-owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which operates as a small business investment company (“SBIC”) and has been licensed by the U.S. Small Business Administration (“SBA”) since 2002. Responding to our request during 2016, in early 2017 the U.S. Small Business Administration (SBA) issued a “green light” or “go forth” letter inviting Rand to continue its application process to obtain a license to form and operate its second SBIC subsidiary. Our anticipated new SBIC subsidiary will continue our investment strategy of focusing on privately-held, early stage and emerging growth businesses with proven management teams. Our initial wholly-owned subsidiary, Rand SBIC, has historically been our primary investment vehicle since its formation and, once approved by the SBA, we expect to continue this investment strategy through our new SBIC subsidiary.

Our principal investment objective is to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debenture and pass-through equity instruments to fund our operating expenses. Therefore, we invest in a variety of financial instruments to provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term and typically do not generate current income in the form of dividends or interest.

We have historically made initial investments of $500,000 to $1,000,000 directly in companies through equity or in debt or loan instruments and frequently provided follow-on investments during our investment tenure. The debt instruments generally have a maturity of not more than five years and usually have detachable equity warrants. Interest may be paid currently or deferred, based on the investment structure negotiated.

outright sale of the company or a merger. We anticipate our debt investments will be repaid with interest and hope to realize further appreciation from the warrants or other equity type instruments we receive in connection with the investment. We fund new investments and operating expenses through existing cash balances, investment returns, and interest and principal payments from our portfolio companies. In addition, following the anticipated licensing of the new SBIC fund, we believe the SBA will provide additional leverage for future investments.

2016 Portfolio and Investment Activity

We believe the change in net asset value over time is the leading valuation metric of our performance. Exits from our portfolio holdings are the key driver of growth in net asset value over time. Changes from quarter to quarter, and at any point in time, are impacted by specific activity related to an investment, but the overall growth trend demonstrates the effectiveness of our investment efforts.

•

Net asset value of our portfolio decreased to $5.16 per share, or $32.6 million, at December 31, 2016, down ($0.19) per share, or (3.6%), compared with net asset value of $5.35 per share, or $33.9 million, at the end of the prior year.

•

We exited from one investment during 2016, Gemcor, whose appreciated value was recorded during 2015 and in prior years. Accordingly, our net asset value did not benefit from any exits during 2016.

•

At year end, the estimated value of our portfolio, which included securities held in 33 businesses, was $27.5 million. This value included $4.1 million in net pre-tax unrealized depreciation.

•

Approximately 64% of the portfolio was equity investments with the remainder being debt and loan investments.

•

The portfolio generated approximately $1.0 million in interest, fee, dividend and other income.

•

During 2016, we made $5.9 million in new investments in 12 businesses, including follow-on investments in eight existing portfolio companies. We added four new portfolio companies during the year.

•

In January 2017, we received a “green light” letter from the SBA that authorized us to file a formal application for a new SBIC fund. If approved, the new SBIC will provide $15 million of available SBA borrowings for additional investments.

Outlook

At the end of 2016, we had $12.3 million in cash for future investments and expenses, an increase from $5.8 million at the end of 2015. The increase is the result of cash proceeds from the Gemcor sale during 2016. During our 12-year holding period, Gemcor grew to be a strong provider of cash flow to Rand in the form of dividend and investment income. Accordingly, our near-term investment focus is on rebuilding cash dividends and interest to fund our ongoing operating expenses.

With the “green light” letter from the SBA authorizing us to proceed with our application process we plan to use some of the cash we received from the Gemcor exit, combined with additional the SBA additional leverage, to create a new $22.5 million SBIC fund. We will use the fund to advance our investment strategy of focusing on privately-held, early stage and emerging growth businesses with proven management teams.

As we work to create our new SBIC fund, we believe the combination of cash on hand, proceeds from portfolio exits, potential future SBA leverage, and prospective investment income provide sufficient capital for us to continue to add new investments to our portfolio while reinvesting in existing portfolio companies that demonstrate continued growth potential. Both short and long-term trends provide us confidence in our ability to grow Rand.

•

We expect that well run businesses will require capital to grow and should be able to compete effectively given the low cost of capital, strong business and consumer spending, and eager reception of new technologies and service concepts.

•

Given our increased scale we are able to invest larger amounts in companies, which will provide an opportunity to accelerate our rate of growth.

•

We continue to manage risk by investing with other investors, when possible.

•

We are actively involved with the governance and management of our portfolio companies which enables us to support their operating and marketing efforts and facilitate their growth.

•

As our portfolio continues to expand, we are able to better leverage our infrastructure.

•

We have sufficient cash to invest in new opportunities and to repurchase shares. At year end, we had authorization to repurchase an additional 458,954 shares of our common stock. However, our prioritized use of cash continues to be growing our portfolio.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United 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 require us to closely 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

Investments are valued at fair value as determined in good faith by management and submitted to the Board of Directors for approval. 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 investment and 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.

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.

Loan investments are defined as traditional loan financings with no equity features. Debt investments are defined as debt financings that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. A financing may also be categorized as a debt financing if it is accompanied by the direct purchase of an equity interest in the company.

We utilize several approaches to determine the fair value of an investment. The main approaches are:

•

Loan and debt securities are valued at cost when it is representative of the fair value of the investment or sufficient assets or liquidation proceeds are expected to exist from a sale of a portfolio company at its estimated fair value. However, they may be valued at an amount other than the price the security would command given the rate and related inherent portfolio risk of the investment. We believe the contractual rates of the respective portfolio investments represent market.

A loan or debt instrument may be reduced in value if it is judged to be of poor quality, collection is in doubt or insufficient liquidation proceeds exist.

•

Equity securities may be valued using the “asset approach”, “market approach” or “income approach.” The asset approach involves estimating the liquidation value of the portfolio company’s assets. The market approach uses observable prices and other relevant information generated by similar market transactions. It may include the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, we may 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 a cash flow and discounting methodology to value an investment.

ASC 820 classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, used in our valuation at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable and significant inputs to determining the fair value.

Financial assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

Any changes in estimated fair value are recorded in the statement of operations as “Net (decrease) increase in unrealized depreciation or appreciation on investments.”

Under the valuation policy, we value unrestricted publicly traded companies, categorized as Level 1 investments, at the average closing bid price for the last three trading days of the reporting period. There were no such Level 1 investments as of December 31, 2016.

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;

•

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 occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;

•

Qualitative assessment of key management;

•

Contractual rights, obligations or restrictions associated with the investment; and

•

Other factors deemed relevant by our management to assess valuation.

The valuation may be reduced if a portfolio company’s performance and potential have deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.

Equity Securities

Equity Securities may include preferred stock, common stock, warrants and limited liability company membership interests.

The significant unobservable inputs used in the fair value measurement of 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 recent investments, 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.

Loans and Debt Securities

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, current market rates for underlying risks associated with the particular company, as well as the market acceptance of the portfolio company’s products or services and its future performance. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. Our debt investments are often junior secured or unsecured debt securities. Fair value may also be determined based on other criteria where appropriate. Significant changes to the unobservable inputs may result in a change in fair value. For recent investments, we generally rely on the cost basis, which is deemed to represent the fair value, unless other fair market 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.

Rand SBIC’s interest accrual is also regulated by the SBA’s “Accounting Standards and Financial Reporting Requirements for Small Business Investment Companies.” Under these rules, interest income cannot be recognized if collection is doubtful, and a 100% reserve must be established. The collection of interest is presumed to be in doubt when there is substantial doubt about a portfolio company’s ability to continue as a

going concern or the loan is in default more than 120 days. Management also uses other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

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 equity is redeemed.

Financial Condition

Overview:


	12/31/16		12/31/15		Decrease			% Decrease
Total assets	$	42,418,530	$	44,562,060	($	2,143,530	)		(4.8	%)
Total liabilities		9,789,167		10,708,400		(919,233	)		(8.6	%)

Net assets	$	32,629,363	$	33,853,660	($	1,224,297	)		(3.6	%)

Net asset value was $5.16 per share at December 31, 2016 versus $5.35 per share at December 31, 2015.

The outstanding SBA debentures at December 31, 2016 are $8,000,000, which will mature from 2022 through 2025.

Cash approximated 38% of net assets at December 31, 2016 compared to 17% at December 31, 2015.

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.


	12/31/16			12/31/15		Increase (Decrease)			% Increase (Decrease)
Investments, at cost	$	31,631,030		$	27,410,742	$	4,220,288			15.4	%
Unrealized (depreciation) appreciation, net		(4,130,549	)		9,421,658		(13,552,207	)		(143.8	%)

Investments, at fair value	$	27,500,481		$	36,832,400	($	9,331,919	)		(25.3	%)

Number of Portfolio Companies		33			31

Our total investments at fair value, as estimated by management and approved by the Board of Directors, approximated 84% of net assets at December 31, 2016 and 109% of net assets at December 31, 2015.

The change in investments, at cost, during the year ended December 31, 2016, is comprised of the following:


	Cost Increase (Decrease)
New investments:
Genicon, Inc. (Genicon)	$	1,700,000
eHealth Global Technologies, Inc. (eHealth)		1,500,000
Empire Genomics, LLC (Empire Genomics)		550,000
Intrinsiq Materials, Inc. (Intrinsiq)		421,546
Tilson Technology Management, Inc. (Tilson)		400,000
PostProcess Technologies LLC (Post Process)		300,000
SciAps, Inc. (Sciaps)		300,000
ClearView Social, Inc. (Clearview Social)		200,000
ACV Auctions, Inc. (ACV Auctions)		163,000
BeetNPath, LLC (Beetnpath)		150,000
OnCore Golf Technology, Inc. (Oncore)		150,000
Knoa Software, Inc. (Knoa)		48,466

Total of new investments		5,883,012

Other changes to investments:
Intrinsiq interest conversion		9,125
GoNoodle, Inc. (GoNoodle) interest conversion		10,127
Mercantile Adjustment Bureau, LLC (Mercantile) OID amortization		9,996

Total of other changes to investments		29,248

Investments repaid, sold or liquidated:
Statisfy, Inc. (Statisfy) realized loss		(650,000	)
Gemcor II, LLC (Gemcor) repayment		(1,041,972	)

Total investments repaid, sold or liquidated		(1,691,972	)

Net change in investments, at cost	$	4,220,288

Our top five portfolio companies represented 28% of total assets at December 31, 2016:


Company	Industry	Fair Value at December 31, 2016		% of Total Assets at December 31, 2016
Rheonix, Inc.	Health Care — Testing Device	$	2,938,731		7	%
Genicon, Inc.	Health Care — Testing Device	$	2,700,000		6	%
Outmatch Holdings, LLC	Software	$	2,145,496		5	%
Social Flow, Inc.	Software	$	2,071,300		5	%
SciAps, Inc. (Sciaps)	Manufacturing	$	2,054,710		5	%

Our top five portfolio companies represented 50% of total assets at December 31, 2015:


Company	Industry	Fair Value at December 31, 2015		% of Total Assets at December 31, 2015
Gemcor	Manufacturing — Aerospace Machinery	$	13,816,972		31	%
Rheonix, Inc.	Health Care — Testing Devices	$	2,938,731		7	%
Outmatch Holdings, LLC	Software	$	2,145,496		5	%
Social Flow, Inc.	Software	$	2,071,300		4	%
Microcision, LLC	Manufacturing — Medical Products	$	1,891,964		4	%

Below is the geographic breakdown of our investments at fair value as of December 31, 2016 and 2015:


Geographic Region	% of Net Asset Value at December 31, 2016			% of Net Asset Value at December 31, 2015
USA – East		78	%		107	%
USA – South		6	%		2	%

Total investments as a % of net asset value		84	%		109	%

As of December 31, 2016 and 2015, the investment portfolio consisted of the following investments:


	Cost		Percentage of Total Portfolio			Fair Value		Percentage of Total Portfolio
December 31, 2016:
Subordinated Debt and Promissory Notes	$	8,779,787		28	%	$	7,901,755		29	%
Convertible Debt		1,998,466		6			1,998,466		7
Equity and Membership Interests		20,698,127		65			17,565,235		64
Equity Warrants		154,650		1			35,025		0

Total	$	31,631,030		100	%	$	27,500,481		100	%

December 31, 2015:
Subordinated Debt and Promissory Notes	$	5,526,636		20	%	$	4,648,604		13	%
Convertible Debt		845,000		3			845,000		2
Equity and Membership Interests		20,290,424		74			30,709,739		83
Equity Warrants		748,682		3			629,057		2

Total	$	27,410,742		100	%	$	36,832,400		100	%

Results of Operations

Investment Income

Our investment objective is to achieve long-term capital appreciation on our equity investments while investing in a mixture of loan, debenture and equity instruments, which may provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term.

Comparison of the years ended December 31, 2016 and 2015

Investment income decreased 64%, or $1,792,479, from $2,824,337 for the year ended December 31, 2015 to $1,031,858 for the year ended December 31, 2016. The net decrease was primarily attributable to a decrease in dividend income caused by the sale of a large dividend producing investment, Gemcor, II, LLC (Gemcor) during 2016.


	December 31, 2016		December 31, 2015		Increase (Decrease)			% Increase (Decrease)
Interest from portfolio companies	$	767,153	$	691,109	$	76,044			11	%
Interest from other investments		45,139		22,048		23,091			105	%
Dividend and other investment income		192,932		2,081,847		(1,888,915	)		(91	%)
Fee income		26,634		29,333		(2,699	)		(9	%)

Total investment income	$	1,031,858	$	2,824,337	($	1,792,479	)		(64	%)

Interest from portfolio companies — Our portfolio interest income increased during 2016 due to the addition of several large debt instruments in late 2015 and throughout 2016. The new debt instruments were originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Empire Genomics, LLC (Empire Genomics), SciAps, Inc. (Sciaps) and several other portfolio companies.

The following investments remain on non-accrual status: G-TEC Natural Gas Systems (G-Tec), First Wave Products Group, LLC (First Wave) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

Interest from other investments — The increase in interest from other investments was primarily due to higher average cash balances during the year ended December 31, 2016 versus the year ended December 31, 2015.

Dividend and other investment income — Dividend income is comprised of distributions from limited liability companies (LLCs) and corporations in which we have invested. Our investment agreements with certain LLCs require those LLCs to distribute funds to us for payment of income taxes on our allocable share of the LLC’s profits. These portfolio companies may also elect to make additional discretionary distributions. Dividend income will fluctuate based upon the profitability of these LLCs and corporations and the timing of the distributions or the impact of new investments or divestitures. Dividend and other investment income decreased in 2016 due to the asset sale of Gemcor II, LLC in March 2016. The dividend distributions for the respective years were:


	December 31, 2016		December 31, 2015
Carolina Skiff LLC (Carolina Skiff)	$	131,785	$	116,052
New Monarch Machine Tool, LLC (Monarch)		27,409		27,409
Tilson Technology Management, Inc. (Tilson)		16,250		14,417
SOMS Technologies, LLC (SOMS)		13,464		4,355
Empire Genomics, LLC (Empire Genomics)		4,024		—
Gemcor, II, LLC (Gemcor)		—		1,735,934
Teleservices Solutions Holdings, LLC (Teleservices)		—		183,680

Total dividend and other investment income	$	192,932	$	2,081,847

Fee income — Fee income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financings and income from portfolio company board attendance 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 $22,634 and $18,333 for the years ended December 31, 2016 and 2015, respectively. The financing fee income based on the existing portfolio is expected to be approximately $20,000 in 2017, $15,000 in 2018, $11,000 in 2019 and $300 in 2020.

Fees paid for board service at the portfolio companies were $4,000 and $11,000 for the years ended December 31, 2016 and 2015, respectively.

Comparison of the years ended December 31, 2015 and 2014

Investment income increased 9%, or $239,862, from $2,584,475 for the year ended December 31, 2014 to $2,824,337 for the year ended December 31, 2015. The net increase was primarily attributable to an increase in dividend income.


	December 31, 2015		December 31, 2014		(Decrease) Increase			% (Decrease) Increase
Interest from portfolio companies	$	691,109	$	789,548	($	98,439	)		(13	%)
Interest from other investments		22,048		14,288		7,760			54	%
Dividend and other investment income		2,081,847		1,750,439		331,408			19	%
Fee income		29,333		30,200		(867	)		(3	%)

Total investment income	$	2,824,337	$	2,584,475	$	239,862			9	%

Interest from portfolio companies — Our portfolio interest income decreased during 2015 due to the decrease in principal balances on loan and debt investments in Gemcor, II, LLC (Gemcor) and Carolina Skiff, LLC (Carolina Skiff).

After reviewing their performance and the circumstances surrounding our investments, we ceased accruing interest income on First Wave Products Group, LLC (First Wave), Intrinsiq Materials, Inc. (Intrinsiq), and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance during 2015.

Interest from other investments — The increase in interest from other investments was primarily due to higher average cash balances during the year ended December 31, 2015 versus the year ended December 31, 2014.

Dividend and other investment income — Dividend income is comprised of 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. The dividend distributions for the respective years were:


	December 31, 2015		December 31, 2014
Gemcor, II, LLC (Gemcor)	$	1,735,934	$	1,508,822
Teleservices Solutions Holdings, LLC (Teleservices)		183,680		98,952
Carolina Skiff LLC (Carolina Skiff)		116,052		54,089
New Monarch Machine Tool, LLC (Monarch)		27,409		45,682
Tilson Technology Management, Inc. (Tilson)		14,417		—
SOMS Technologies, LLC (SOMS)		4,355		—
Advantage 24/7 LLC (Advantage)		—		37,695
NDT Acquisition LLC (NDT)		—		2,668
Somerset Gas Transmission Company, LLC (Somerset)		—		2,531

Total dividend and other investment income	$	2,081,847	$	1,750,439

The amortization of financing fees was $18,333 and $16,200 for the years ended December 31, 2015 and 2014, respectively. The financing fee income based on the existing portfolio is expected to be approximately $10,000 in 2016, $8,000 in 2017 and $4,000 in each of 2018 and 2019.

Fees paid for board service at the portfolio companies were $11,000 and $14,000 for the years ended December 31, 2015 and 2014, respectively.

Expenses

Comparison of the years ended December 31, 2016 and 2015


	December 31, 2016		December 31, 2015		Increase		% Increase
Total expenses	$	3,401,037	$	1,817,279	$	1,583,758		87	%

Operating expenses predominately consist of compensation expense, including profit sharing, and related benefits, interest expense on outstanding SBA borrowings, and general and administrative expenses including shareholder and office expenses and professional fees.

The increase in operating expenses during 2016 was comprised primarily of a $1,262,552 increase in bonus and profit sharing expense and a $137,629, increase in professional fees.

Our largest portfolio company, in terms of fair value, Gemcor II, LLC (Gemcor) sold its assets during March 2016 and, based on our ownership percentage, we received gross cash proceeds of approximately $14.1 million. The realized gain from the sale, before income taxes, was $14,620,063 and included $1,100,000 that continued to be held in escrow at December 31, 2016. The escrow holdback is recorded in “Other Assets” on the accompanying consolidated statement of financial position. The escrow is scheduled to be released during 2017, subject to potential claims. Related to this asset sale, we accrued $1,270,052 under our Profit Sharing Plan for the year ended December 31, 2016, that is payable to our executive officers. Recording of the profit sharing expense is primarily based on net realized gains, which may be in years subsequent to when the unrealized appreciation is recognized on the underlying investments in the financial statements. This may cause a recognition of profit sharing expense in a period later than when the appreciation is recognized, as was the case in 2016. There were no amounts earned pursuant to the Profit Sharing Plan for the year ended December 31, 2015.

Professional fees were also higher during the year ended December 31, 2016 versus 2015 because we incurred additional expenses in connection with developing and implementing our long-term growth strategy. These expenses included external legal, tax consulting and other advisory expenses to support refinement of our strategy, which involved assessing options relative to the complex regulatory environment in which we operate.

Comparison of the years ended December 31, 2015 and 2014


	December 31, 2015		December 31, 2014		Decrease			% Decrease
Total expenses	$	1,817,279	$	2,499,297	($	682,018	)		(27	%)

Operating expenses predominately consist of compensation expense and related benefits, interest expense on outstanding SBA borrowings, and general and administrative expenses including shareholder and office expenses and professional fees.

The 27%, or $682,018, decrease in operating expenses for the year ended December 31, 2015 as compared to the same period in 2014 is due, in part, to the fact that bonus and profit sharing expense decreased

approximately $814,000. During the year ended December 31, 2015 we accrued $122,500 in bonus expense. There was no profit sharing expense during the year ended December 31, 2015. During the year ended December 31, 2014, we accrued $899,500 in profit sharing obligations and $91,490 in bonus expense. This decrease was partially offset by an increase in interest and shareholder expense. Interest expense on our SBA borrowings increased due to higher outstanding debt balances during 2015 versus 2014. Shareholder expense increased because we have increased our strategic analysis and communication to shareholders and potential investors.

Net Realized Gains and Losses on Investments


	December 31, 2016		December 31, 2015			December 31, 2014
Net realized gain (loss) on sales and dispositions, before income tax expense (benefit)	$	14,138,203	($	42,469	)	$	7,237,937

During the first quarter of 2016, our portfolio company Gemcor II, LLC sold its assets, and accordingly, we received gross cash proceeds of approximately $14.1 million, excluding amounts that continue to be held in escrow, and recognized a realized gain, before income taxes, of $14,620,063. The escrow holdback at December 31, 2016 is $1,100,000 and is recorded in “Other Assets” on the accompanying consolidated statement of financial position. The escrow is scheduled to be released during 2017, subject to potential claims.

In addition, we recorded a realized gain of $168,140 during the year ended December 31, 2016 from the earn out provision in connection with the 2014 sale of QuaDPharma, LLC to Athenex Inc.

We realized a loss of $650,000 on our investment in Statisfy, Inc. (Statisfy) during the year ended December 31, 2016 when the company ceased operations.

During the year ended December 31, 2015, we recognized a net realized gain, before income taxes, of $262,925 on the sale of 301,582 shares of Synacor, Inc. (Synacor). Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. As of December 31, 2015, we did not own any shares of Synacor.

We recognized a realized loss of $5,394 on an adjustment to the BinOptics Corporation (Binoptics) escrow receivable. At December 31, 2015 the Binoptics escrow receivable was $1,504,854 and was received during 2016. The escrow holdback was recorded in “Other Assets” on the accompanying consolidated statement of financial position.

We realized a loss of $300,000 on our investment in CrowdBouncer, Inc. during the year ended December 31, 2015 when the company ceased operations.

For the year ended December 31, 2014, we recognized a realized gain on Binoptics of $8,333,344 which included $1,510,248 that was held in escrow at December 31, 2014.

QuaDPharma, LLC (Quadpharma) was purchased by Athenex, Inc. (Athenex) (formerly Kinex Pharmaceuticals, Inc.) during 2014 and we received $923,634 in net proceeds for our debt and equity securities. The realized gain from the sale of $160,634 included $14,737 that was held in escrow and received during 2014. As part of the sale, we also received 11,574 common shares of Athenex that had a fair value at the time of receipt of $254,628.

During the year ended December 31, 2014, we recognized a net realized loss of $9,792 on the sale of 127,061 shares of Synacor. Synacor trades on the NASDAQ Global Market under the symbol “SYNC”. At December 31, 2014, we owned 301,582 shares of Synacor.

In addition, during the year ended December 31, 2014, we recognized a realized loss of $778,253 on Emerging Med. The company was sold during January 2014 and we did not receive any proceeds from the sale. This investment had been valued at $0 at December 31, 2013. We also recognized a realized loss of $472,664 on an adjustment to the Liazon Corporation escrow receivable and a gain of $4,668 on an adjustment to the Ultra-Scan escrow receivable.

Net (Decrease) Increase in Unrealized Depreciation or Appreciation of Investments

The change in unrealized depreciation before income taxes for the year ended December 31, 2016 was comprised of the following:


	December 31, 2016
Reclassify Gemcor II, LLC (Gemcor) to a realized gain	($	12,775,000	)
Teleservices Solutions Holdings, LLC (Teleservices)		(990,680	)
Knoa Software, Inc. (Knoa)		(422,800	)
OnCore Golf Technology, Inc. (Oncore)		(187,500	)
Athenex, Inc. (Athenex)		69,444
Intrinsiq Materials, Inc. (Intrinsiq)		254,329
Carolina Skiff LLC (Carolina Skiff)		500,000

Total change in net unrealized depreciation of investments before income taxes during the year ended December 31, 2016	($	13,552,207	)

During the first quarter of 2016, our portfolio company, Gemcor II, LLC sold its assets and we received gross cash proceeds of approximately $14.1 million. The realized gain from the sale, before income taxes, was $14,620,063 and included $1,100,000 that is held in escrow and recorded on the accompanying consolidated statement of financial position in “Other Assets.”

Our investment in Teleservices was revalued after we reviewed their operations and their current and past financial performance. This review indicated that a further deterioration of their business had occurred. If the factors that led to this reduction in valuation are overcome, the value may be restored. The portfolio company remains in operation and is developing new business strategies.

The valuation of our investment in Knoa was decreased during 2016 to value our equity at liquidation value.

The valuation of our investment in Oncore was decreased after we reviewed the portfolio company and its financial condition and determined that a valuation adjustment was necessary.

In accordance with our valuation policy, we increased the value of our investment in Athenex based on a significant equity financing by a new non-strategic outside entity. This new financing used a higher valuation for Athenex than had been used for its prior financing rounds.

Intrinsiq’s value was increased based on a the completion of an equity refinancing in the third quarter of 2016.

Carolina Skiff’s value was increased based on a financial analysis of the portfolio company indicating continued improved performance.

The change in unrealized appreciation before income taxes for the year ended December 31, 2015 was comprised of the following:


	December 31, 2015
Gemcor II, LLC (Gemcor)	$	4,100,000
SocialFlow, Inc. (SocialFlow)		321,300
CrowdBouncer, Inc.(Crowdbouncer) reclass to a realized loss		300,000
Athenex, Inc. (Athenex) (formerly Kinex Pharmaceuticals, Inc.)		92,592
OnCore Golf Technology, Inc. (Oncore)		(187,500	)
GiveGab, Inc. (Givegab)		(191,907	)
Synacor, Inc. (Synacor) reclass to a realized gain		(220,320	)
Mercantile Adjustment Bureau, LLC (Mercantile)		(247,625	)
KnowledgeVision Systems, Inc. (Knowledge Vision)		(250,000	)
Teleservices Solutions Holdings, LLC (Teleservices)		(250,000	)
Somerset Gas Transmission Company, LLC (Somerset)		(286,748	)
SciAps, Inc. (Sciaps)		(500,000	)
Intrinsiq Materials, Inc. (Intrinsiq)		(600,002	)
First Wave Products Group, LLC (First Wave)		(750,031	)

Total change in net unrealized appreciation of investments before income taxes during the year ended December 31, 2015	$	1,329,759

In December 2015 we entered into an asset purchase agreement under which we agreed to sell Gemcor. The required percentage of Gemcor shareholders ratified and approved the sale in January 2016. The transaction closed in the first quarter of 2016. Based on our ownership of Gemcor, we received gross cash proceeds of approximately $14 million at closing, before considering the $1.1 million held in escrow. Additionally, we incurred the related profit sharing expense in the first quarter of 2016. We valued our investment in Gemcor at December 31, 2015 based on an EBITDA multiple which approximated our sales proceeds.

In accordance with our valuation policy, we increased the value of our holdings in Athenex and Social Flow based on significant equity financings for each during 2015 with sophisticated new non-strategic outside investors at a higher valuation for each than their prior financing round valuation.

The Crowdbouncer investment was written off after the company ceased doing business during 2015.

We sold our remaining shares of Synacor during the year ended December 31, 2015.

The Oncore, Givegab, Mercantile and Knowledge Vision investment values were decreased after we reviewed each of the portfolio companies’ commercial progress against their business plans and their past financial performance. These reviews indicated that deterioration of their respective businesses had occurred. If the factors which led to these reductions in valuations are overcome, the valuations may be restored.

The Somerset investment value was decreased during 2015 after a review of the company’s financial performance and the overall weakness in the oil and gas sector.

The First Wave, Intrinsiq, and Teleservices investment values were decreased during 2015 after we reviewed each of the portfolio companies’ progress toward commercialization and broad based acceptance of their respective business technologies and services in their respective markets. We also considered in our review the past financial performance of the companies, their forecasted cash needs, and their fundraising plans for 2016 in determining that reductions in values were appropriate. The three portfolio companies remain in operation, and are developing new business strategies to achieve success in 2016. If the factors which led to the reductions in valuations are overcome, the valuations may be restored.

The valuation of Sciaps was decreased during the year ended December 31, 2015 to revalue our equity holdings based upon liquidation preferences of our securities and on the most recent equity round of financing.

The change in unrealized appreciation for the year ended December 31, 2014 was comprised of the following:


	December 31, 2014
EmergingMed.com, Inc. (Emerging Med) reclass to a realized loss	$	778,253
Athenex, Inc. (Athenex) (formerly Kinex Pharmaceuticals, Inc.)		111,343
NDT Acquisitions, LLC (NDT)		5,336
Synacor, Inc. (Synacor)		(208,503	)
CrowdBouncer, Inc. (Crowdbouncer)		(300,000	)
Knoa Software, Inc. (Knoa)		(356,900	)
Mezmeriz, Inc. (Mezmeriz)		(391,373	)

Total change in net unrealized appreciation before income taxes during the year ended December 31, 2014	($	361,844	)

The Emerging Med investment was written off during the year ended December 31, 2014, after the company was sold and we did not receive proceeds.

The Athenex shares were received as part of the sale of our investment in Quadpharma. The proceeds from this sale included cash and Athenex stock. The value of the stock was based on a 2014 equity financing by Athenex.

The NDT investment value was adjusted for royalties received.

Synacor, as a publicly traded stock, is marked to market at the end of each quarter. We valued our 301,582 shares of Synacor at a three-day average bid price of $2.01 as of December 31, 2014.

The Crowdbouncer and Mezmeriz investment values were decreased during 2014 after we reviewed the portfolio companies and their financials and determined that both of the businesses had deteriorated since the time of our original funding. Both portfolio companies remained in operation at December 31, 2014 and were developing new business strategies.

The valuation of Knoa was decreased during the year ended December 31, 2014 to value our equity holdings at the most recent insider round of financing.

All of these value adjustments resulted from a review by management using the guidance set forth by ASC 820 and our established valuation policy.

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 ended December 31, 2016, the net decrease in net assets from operations was ($1,202,683) as compared with net increases of $1,500,219 in 2015 and $4,541,481 in 2014.

Liquidity and Capital Resources

Our principal objective is to achieve capital appreciation. Therefore, a significant portion of the investment portfolio is structured to maximize the potential for capital appreciation and may provide little or no current yield in the form of dividends or interest payments.

As of December 31, 2016, our total liquidity was $12,280,140 in cash.

Net cash provided by operating activities has averaged approximately $611,000 over the last three years. The cash flow may fluctuate based on dividend income, realized gains and the associated income taxes paid. We will generally use cash to fund our operating expenses and also to invest in companies as we build our portfolio utilizing our available cash and proceeds from liquidations of portfolio investments. We anticipate that we will continue to exit investments. However, the timing of liquidation events within the portfolio is difficult to project with any certainty. As of December 31, 2016, we did not have any outstanding commitments to borrow funds from the SBA. Starting in 2022 (See Footnote 5 in the Notes to the Consolidated Financial Statements) our SBA debt begins to reach maturity and this will require us to identify sources of future funding if liquidation of investments is not sufficient to fund operations and repay the SBA debt obligation.

We received authorization from the SBA in January 2017 to file a formal application to start a new SBIC. We expect to fund the new SBIC with $7.5 million of cash and, if our application is approved by the SBA, to receive a debt commitment for the SBA equal to two times our capital, or $15 million, for a total fund of $22.5 million.

The following table summarizes the SBA leverage at December 31, 2016 and December 31, 2015:


	12/31/16		12/31/15
Outstanding SBA leverage	$	8,000,000	$	8,000,000
Outstanding SBA commitment		—		—

The following table summarizes the cash estimated to be received over the next five years from existing portfolio companies based on contractual obligations as of December 31, 2016. This table does not include any escrow receivable amounts. 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.


	Cash Receipts due by year
	2017		2018		2019		2020		2021 and beyond
Scheduled cash receipts from portfolio companies	$	4,020,000	$	3,380,000	$	2,780,000	$	310,000	$	3,180,000

The preceding table only includes debt instruments and does not include any equity investments which may provide additional proceeds upon exit of the investment.

We believe that the cash on hand at December 31, 2016 and the scheduled interest payments on our portfolio investments will be sufficient to meet our cash needs throughout 2017. We continue to seek potential exits from portfolio companies to increase the amount of liquidity available for new investments, operating activities and future SBA debenture obligations.

Contractual Obligations

The following table shows our specified contractual obligations at December 31, 2016. We do not have any capital lease obligations or other long-term liabilities reflected on our statement of financial position.


	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 yrs
SBA debentures	$	8,000,000	$	0	$	0	$	3,000,000	$	5,000,000
SBA interest expense	$	1,953,000	$	283,000	$	849,000	$	566,000	$	255,000
Operating lease obligations (Rent of office space)	$	77,160	$	18,840	$	58,320	$	0	$	0

Total	$	10,030,160	$	301,840	$	907,320	$	3,566,000	$	5,255,000

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our investment activities contain elements of risk. The portion of our investment portfolio consisting of equity and debt securities in private companies is subject to valuation risk. Because there is typically no public market for the equity and debt securities in which we invest, the valuations of the equity interests in the portfolio are stated at “fair value” as determined in good faith by us and approved by our Board of Directors. This is in accordance with our investment valuation policy. (The discussion of valuation policy contained in “Note 1- Summary of Significant Accounting Policies—Investments” in the consolidated financial statements contained in Item 8 of this report is incorporated herein by reference.) In the absence of readily ascertainable market values, the estimated value of the portfolio may differ significantly from the values that would be placed on the portfolio if a ready market for the investments existed. Any changes in valuation are recorded on the consolidated statement of operations as “Net increase (decrease) in unrealized appreciation or depreciation on investments.”

At times, a portion of our portfolio may include marketable securities traded in the over-the-counter market. 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.

As of December 31, 2016, we did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments.

Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements and consolidated supplemental schedule of the Corporation and report of Independent Registered Public Accounting Firm thereon are set forth below:


Statements of Financial Position as of December 31, 2016 and 2015			29
Statements of Operations for the three years in the period ended December 31, 2016			30
Statements of Changes in Net Assets for the three years in the period ended December 31, 2016			31
Statements of Cash Flows for the three years in the period ended December 31, 2016			32
Schedule of Portfolio Investments as of December 31, 2016			33
Schedule of Portfolio Investments as of December 31, 2015			42
Financial Highlights Schedule for the five years in the period ended December 31, 2016			51
Notes to the Consolidated Financial Statements			52
Supplemental Schedule of Consolidated Changes in Investments at Cost and Realized Gain for the year ended December 31, 2016			68
Report of Independent Registered Public Accounting Firm			69

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31,


	2016			2015
ASSETS
Investments at fair value:
Control investments (cost of $99,500 and $1,141,472, respectively)	$	99,500		$	13,916,472
Affiliate investments (cost of $17,589,623 and $17,663,217, respectively)		13,605,974			14,662,219
Non-affiliate investments (cost of $13,941,907 and $8,606,053, respectively)		13,795,007			8,253,709

Total investments, at fair value (cost of $31,631,030 and $27,410,742, respectively)		27,500,481			36,832,400
Cash		12,280,140			5,844,795
Interest receivable (net of allowance: 2016: $161,000, 2015: $122,000)		324,237			215,224
Deferred tax asset		1,165,164			—
Prepaid income taxes		—			65,228
Other assets		1,148,508			1,604,413

Total assets	$	42,418,530		$	44,562,060

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)
Liabilities:
Debentures guaranteed by the SBA (net of debt issuance costs)	$	7,827,773		$	7,800,373
Profit sharing and bonus payable		1,270,052			282,000
Income tax payable		320,008			—
Deferred tax liability		—			2,361,186
Accounts payable and accrued expenses		324,537			238,911
Deferred revenue		46,797			25,930

Total liabilities		9,789,167			10,708,400
Commitments and contingencies (See Note 9)
Stockholders’ equity (net assets):
Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,321,988 at 12/31/16 and 6,328,538 as of 12/31/15		686,304			686,304
Capital in excess of par value		10,581,789			10,581,789
Accumulated net investment (loss)		(1,577,848	)		(24,580	)
Undistributed net realized gain on investments		27,127,054			18,262,401
Net unrealized (depreciation) appreciation on investments		(2,718,831	)		5,795,237
Treasury stock, at cost: 541,046 shares at 12/31/16 and 534,496 shares as of 12/31/15		(1,469,105	)		(1,447,491	)

Total stockholders’ equity (net assets) (per share 2016: $5.16, 2015: $5.35)		32,629,363			33,853,660

Total liabilities and stockholders’ equity	$	42,418,530		$	44,562,060

See accompanying notes

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Years Ended December 31, 2016, 2015 and 2014


	2016			2015			2014
Investment income:
Interest from portfolio companies:
Control investments	$	11,828		$	77,077		$	112,218
Affiliate investments		403,850			388,135			481,649
Non-Control/Non-Affiliate investments		351,475			225,897			195,681

Total interest from portfolio companies		767,153			691,109			789,548
Interest from other investments:
Non-Control/Non-Affiliate investments		45,139			22,048			14,288

Total interest from other investments		45,139			22,048			14,288
Dividend and other investment income:
Control investments		—			1,735,934			1,549,185
Affiliate investments		188,908			345,913			198,723
Non-Control/Non-Affiliate investments		4,024			—			2,531

Total dividend and other investment income		192,932			2,081,847			1,750,439

Fee income:
Control investments		2,000			8,000			12,000
Affiliate investments		5,862			4,666			8,866
Non-Control/Non-Affiliate investments		18,772			16,667			9,334

Total fee income		26,634			29,333			30,200

Total investment income		1,031,858			2,824,337			2,584,475

Operating expenses:
Salaries		621,749			598,220			590,675
Bonus and profit sharing		1,385,052			122,500			936,344
Employee benefits		174,796			117,937			169,808
Directors’ fees		184,750			129,000			112,500
Professional fees		339,823			202,194			164,740
Shareholders and office operating		227,631			222,431			133,505
Insurance		32,134			32,086			35,709
Corporate development		64,412			62,553			64,490
Other operating		21,414			23,330			19,116

		3,051,761			1,510,251			2,226,887
Interest on SBA obligations		310,276			307,028			266,099
Bad debt expense		39,000			—			6,311

Total expenses		3,401,037			1,817,279			2,499,297

Investment (loss) gain before income taxes		(2,369,179	)		1,007,058			85,178
Income tax (benefit) expense		(815,911	)		164,156			63,343

Net investment (loss) gain		(1,553,268	)		842,902			21,835

Net realized gain (loss) on sales and dispositions of investments:
Control investments		14,620,063			—			—
Affiliate investments		(650,000	)		(300,000	)		(617,619	)
Non-Control/Non-Affiliate investments		168,140			257,531			7,855,556

Net realized gain (loss) on sales and dispositions, before income tax expense (benefit)		14,138,203			(42,469	)		7,237,937
Income tax expense (benefit)		5,273,550			(14,496	)		2,470,453

Net realized gain (loss) on sales and dispositions of investments		8,864,653			(27,973	)		4,767,484
Net (decrease) increase in unrealized depreciation or appreciation on investments:
Control investments		(12,775,000	)		4,100,000			5,336
Affiliate investments		(846,651	)		(2,429,440	)		(270,020	)
Non-Control/Non-Affiliate investments		69,444			(340,801	)		(97,160	)

Change in unrealized depreciation or appreciation before income tax (benefit) expense		(13,552,207	)		1,329,759			(361,844	)
Deferred income tax (benefit) expense		(5,038,139	)		644,469			(114,006	)

Net (decrease) increase in unrealized depreciation or appreciation on investments		(8,514,068	)		685,290			(247,838	)

Net realized and unrealized gain on investments		350,585			657,317			4,519,646

Net (decrease) increase in net assets from operations	($	1,202,683	)	$	1,500,219		$	4,541,481

Weighted average shares outstanding		6,325,792			6,328,538			6,391,175
Basic and diluted net (decrease) increase in net assets from operations per share	$	(0.19	)	$	0.24		$	0.71

See accompanying notes

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

For The Years Ended December 31, 2016, 2015 and 2014


	2016			2015			2014
Net assets at beginning of period	$	33,853,660		$	32,353,441		$	28,069,332
Net investment (loss) gain		(1,553,268	)		842,902			21,835
Net realized gain (loss) on sales and dispositions of investments		8,864,653			(27,973	)		4,767,484
Net (decrease) increase in unrealized depreciation or appreciation on investments		(8,514,068	)		685,290			(247,838	)

Net (decrease) increase in net assets from operations		(1,202,683	)		1,500,219			4,541,481
Purchase of treasury stock		(21,614	)		—			(257,372	)

Total (decrease) increase in net assets		(1,224,297	)		1,500,219			4,284,109

Net assets at end of period	$	32,629,363		$	33,853,660		$	32,353,441

Accumulated net investment (loss)	($	1,577,848	)	($	24,580	)	($	867,482	)

See accompanying notes.

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 2016, 2015 and 2014


	2016			2015			2014
Cash flows from operating activities:
Net (decrease) increase in net assets from operations	($	1,202,683	)	$	1,500,219		$	4,541,481
Adjustments to reconcile net (decrease) increase in net assets to net cash provided by (used in) operating activities:
Investments originated		(5,883,012	)		(6,969,008	)		(6,091,152	)
Proceeds from sale of portfolio investments		15,413,203			648,605			9,234,323
Proceeds from loan repayments		416,972			1,315,829			968,803
Depreciation and amortization		33,390			33,051			28,175
Original issue discount accretion		(9,996	)		(17,339	)		(15,492	)
Change in interest receivable allowance		39,000			(6,311	)		6,311
Decrease (increase) in unrealized appreciation on investments		13,552,207			(1,329,759	)		361,844
Deferred tax (benefit) expense		(3,526,350	)		522,835			(368,457	)
Net realized (gain) loss on portfolio investments		(14,138,203	)		42,469			(7,237,937	)
Non-cash conversion of debenture interest		(19,252	)		(212,426	)		(211,127	)
Changes in operating assets and liabilities:
Increase in interest receivable		(148,013	)		(43,819	)		(113,312	)
Decrease (increase) in other assets		450,752			(14,917	)		795,404
Decrease (increase) in prepaid income taxes		65,228			(65,228	)		—
Increase (decrease) in income taxes payable		320,008			(2,065,795	)		842,368
Increase (decrease) in profit sharing and bonus payable		988,052			(671,490	)		66,246
Increase (decrease) in accounts payable and accrued liabilities		85,626			(51,735	)		(46,450	)
Increase (decrease) in deferred revenue		20,867			1,666			(2,200	)

Total adjustments		7,660,479			(8,883,372	)		(1,782,653	)

Net cash provided by (used in) operating activities		6,457,796			(7,383,153	)		2,758,828
Cash flows from investing activities:
Capital expenditures		(837	)		(2,769	)		(11,299	)

Net cash used in investing activities		(837	)		(2,769	)		(11,299	)
Cash flows from financing activities:
Proceeds from SBA debentures		—			—			1,000,000
Origination costs to SBA		—			—			(24,250	)
Purchase of treasury shares		(21,614	)		—			(257,372	)

Net cash (used in) provided by financing activities		(21,614	)		—			718,378

Net increase (decrease) in cash		6,435,345			(7,385,922	)		3,465,907

Cash:
Beginning of year		5,844,795			13,230,717			9,764,810

End of year	$	12,280,140		$	5,844,795		$	13,230,717

See accompanying notes

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016


(a) Company, Geographic Location, Business Description, (Industry) and Website	Type of Investment	(b) Date Acquired		(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
Non-Control/Non-Affiliate Investments — 42.3% of net assets:(j)
ACV Auctions, Inc.(e)(g) Buffalo, NY. Live mobile auctions for new and used cars. (Software) www.acvauctions.com	118,116 Series A preferred shares.		8/12/16		1	%	$	163,000	$	163,000		0.5	%
Athenex, Inc.(e)(g) (Formerly Kinex Pharmaceuticals, Inc.) Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care) www.athenex.com	46,296 common shares.		9/8/14		<1	%		143,285		416,664		1.3	%
City Dining Cards, Inc. (Loupe)(e)(g) Buffalo, NY. Customer loyalty technology company that helps businesses attract and retain customers. (Software) www.loupeapp.io	9,525.25 Series B preferred shares.		9/1/15		4	%		500,000		500,000		1.5	%
eHealth Global Technologies, Inc.(g) Henrietta, NY. eHealth Connect^® improves health care delivery through intelligently aggregated clinical record and images for patient referrals. (Health Care) www.ehealthtechnologies.com	$1,500,000 term note at 9% due September 2, 2019.		6/28/16		0	%		1,500,000		1,500,000		4.6	%
Empire Genomics, LLC(e)(g) Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com	$900,000 senior secured convertible term notes at 10% due April 1, 2017. $250,000 promissory note at 12% due December 31, 2019. (i) Interest receivable $200,339.		6/13/14		0	%		900,000 250,000		900,000 250,000		3.5	%

	Total Empire							1,150,000		1,150,000

GoNoodle, Inc.(g) (Formerly HealthTeacher, Inc.) Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software) www.gonoodle.com	$1,000,000 secured note at 12% due January 31, 2020, (1% Payment in Kind (PIK)). Warrant for 47,324 Series C Preferred shares.		2/6/15		<1	%		1,019,101 25		1,019,101 25		3.1	%

	Total GoNoodle							1,019,126		1,019,126

Mercantile Adjustment Bureau, LLC(g) Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center) www.mercantilesolutions.com	$1,099,039 subordinated secured note at 13% (3% for the calendar year 2016) due October 30, 2017. (e) $150,000 subordinated debenture at 8% due June 30, 2018. Warrant for 3.29% membership interests. Option for 1.5% membership interests.		10/22/12		4	%		1,090,690 150,000 97,625		1,090,690 0 0		3.3	%

	Total Mercantile							1,338,315		1,090,690

Outmatch Holdings, LLC(e)(g) (Chequed Holdings, LLC) Dallas, TX. Web based predictive employee selection and reference checking. (Software) www.outmatch.com	2,446,199 Class P1 Units. 109,788 Class C1 Units.		11/18/10		4	%		2,140,007 5,489		2,140,007 5,489		6.6	%

	Total Outmatch							2,145,496		2,145,496

PostProcess Technologies LLC(e)(g) Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing) www.postprocess.com	$300,000 convertible promissory note at 5% due July 28, 2018.		7/25/16		0	%		300,000		300,000		0.9	%

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)


(a) Company, Geographic Location, Business Description, (Industry) and Website	Type of Investment	(b) Date Acquired		(c) Equity		Cost		(d)(f) Fair Value		Percent of Net Assets
Rheonix, Inc.(e) Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care) www.rheonix.com	9,676 common shares. (g) 1,839,422 Series A preferred shares. (g) 50,593 common shares. (g) 589,420 Series B preferred shares.		10/29/09		4%	$	— 2,099,999 — 702,732	$	11,000 2,165,999 59,000 702,732		9.0	%

	Total Rheonix						2,802,731		2,938,731

SocialFlow, Inc.(e)(g) New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com	1,049,538 Series B preferred shares. 1,204,819 Series B-1 preferred shares. 717,772 Series C preferred shares.		4/5/13		4%		500,000 750,000 500,000		731,431 839,648 500,221		6.3	%

	Total Social Flow						1,750,000		2,071,300

Somerset Gas Transmission Company, LLC(e) Columbus, OH. Natural gas transportation. (Oil and Gas) www.somersetgas.com	26.5337 units.		7/10/02		3%		719,097		500,000		1.5	%
Other Non-Control/Non-Affiliate Investments:
DataView, LLC (Software)(e)	Membership Interest.		—		—		310,357		—		0.0	%
UStec/Wi3 (Manufacturing)(e)	Common Stock.		—		—		100,500		—		0.0	%

Subtotal Non-Control/Non-Affiliate Investments						$	13,941,907	$	13,795,007

Affiliate Investments — 41.7% of net assets(k)
BeetNPath, LLC (Grainful)(e)(g) Ithaca, NY. Frozen entrées and packaged dry side dishes made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product) www.grainful.com	1,119,024 Series A-2 Preferred Membership Units. $150,000 convertible promissory note at 8% due September 1, 2017.		10/20/14		9%	$	359,000 150,000	$	359,000 150,000		1.6	%

	Total BeetNPath						509,000		509,000

Carolina Skiff LLC(g) Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com	6.0825% Class A common membership interest.		1/30/04		7%		15,000		1,100,000		3.4	%
ClearView Social, Inc.(e)(g) Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software) www.clearviewsocial.com	312,500 Series seed plus preferred shares.		1/4/16		6%		200,000		200,000		0.6	%
First Wave Products Group, LLC(e)(g) Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds medical pills for nursing homes and medical institutions. (Health Care) www.firstwaveproducts.com	$500,000 senior term notes at 10% due January 31, 2017. $280,000 junior term notes at 10% due January 31, 2017. Warrant for 41,619 capital securities.		4/19/12		7%		661,563 316,469 22,000		250,000 0 0		0.8	%

	Total First Wave						1,000,032		250,000

Genicon, Inc.(g) Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care) www.geniconendo.com	1,586,902 Series B preferred shares. $1,100,000 promissory note at 12% due April 1, 2019. $600,000 promissory note at 14% due March 31, 2018.		4/10/15		6%		1,000,000 1,100,000 600,000		1,000,000 1,100,000 600,000		8.3	%

	Total Genicon						2,700,000		2,700,000

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)


(a) Company, Geographic Location, Business Description, (Industry) and Website	Type of Investment	(b) Date Acquired		(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
GiveGab, Inc.(e)(g) Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software) www.givegab.com	5,084,329 Series Seed preferred shares.		3/13/13		7	%	$	616,221	$	424,314		1.3	%
G-TEC Natural Gas Systems(e) Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing) www.gas-tec.com	16.930% Class A membership interest. 8% cumulative dividend.		8/31/99		18%			400,000		100,000		0.3	%
Intrinsiq Materials, Inc.(e)(g) Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing) www.intrinsiqmaterials.com	4,161,747 Series A preferred shares.		9/19/13		12%			1,125,673		780,000		2.4	%
Knoa Software, Inc.(e)(g) New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software) www.knoa.com	973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. $48,466 convertible promissory note at 8% due May 9, 2018.		11/20/12		7%			750,000 479,155 48,466		0 449,455 48,466		1.5	%

	Total Knoa							1,277,621		497,921

KnowledgeVision Systems, Inc.(e)(g) Lincoln, MA. Online presentation and training software. (Software) www.knowledgevision.com	200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. 129,033 Series A-3 preferred shares. Warrant for 46,743 Series A-3 shares.		11/13/13		7%			250,000 300,000 165,001 35,000		0 300,000 165,001 35,000		1.5	%

	Total KnowledgeVision							750,001		500,001

Mezmeriz, Inc.(e)(g) Ithaca, NY. Micro-electronic mechanical systems (MEMS) developer of carbon fiber MEMS mirror modules for gesture recognition and 3D scanning. (Electronics Developer) www.mezmeriz.com	1,554,565 Series Seed preferred shares.		1/9/08		14%			742,850		351,477		1.1	%
Microcision LLC(g) Pennsauken Township, NJ. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing) www.microcision.com	$1,500,000 subordinated promissory note at 12% (1% PIK) due December 31, 2024. 15% Class A common membership interest.		9/24/09		15%			1,891,964 —		1,891,964 —		5.8	%

	Total Microcision							1,891,964		1,891,964

New Monarch Machine Tool, Inc.(g) Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing) www.monarchmt.com	22.84 common shares.		9/24/03		15%			22,841		22,841		0.1	%
OnCore Golf Technology, Inc.(e)(g) Buffalo, NY. Maker of patented hollow-metal core golf balls. (Consumer Product) www.oncoregolf.com	150,000 Series AA preferred shares. $300,000 subordinated convertible promissory notes at 6% due January 24, 2017.		12/31/14		7%			375,000 300,000		0 300,000		0.9	%

	Total OnCore							675,000		300,000

SciAps, Inc.(e)(g) Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing) www.sciaps.com	187,500 Series A convertible preferred shares. 274,299 Series A-1 convertible preferred shares. 117,371 Series B convertible preferred shares. $200,000 subordinated convertible note at 10% due April 8, 2017. $100,000 secured subordinated convertible note at 10% due December 31, 2017.		7/12/13		9%			1,500,000 504,710 250,000 200,000 100,000		1,000,000 504,710 250,000 200,000 100,000		6.3	%

	Total SciAps							2,554,710		2,054,710

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)


(a) Company, Geographic Location, Business Description, (Industry) and Website	Type of Investment	(b) Date Acquired		(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
SOMS Technologies, LLC(g) Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Consumer Products) www.microgreenfilter.com	5,959,490 Series B membership interests.		12/2/08		9	%	$	472,632	$	528,348		1.6	%
Teleservices Solutions Holdings, LLC(e)(g)(m) Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center) www.ipacesetters.com	250,000 Class B preferred units. 1,000,000 Class C preferred units. 80,000 Class D preferred units. 104,198 Class E preferred units. PIK dividend for Series C and D at 12% and 14%, respectively.		5/30/14		6	%		250,000 1,190,680 91,200 104,198		0 200,000 91,200 104,198		1.2	%

	Total Teleservices							1,636,078		395,398


Tilson Technology Management, Inc.(g) Portland, ME. Cellular, fiber optic and wireless information systems, construction, and management. (Professional Services) www.tilsontech.com	120,000 Series B preferred shares. 21,391 Series C convertible preferred shares. $200,000 subordinated promissory note at 8% due September 28, 2021.		1/20/15		8	%		600,000 200,000 200,000		600,000 200,000 200,000		3.1	%

	Total Tilson							1,000,000		1,000,000

Subtotal Affiliate Investments							$	17,589,623	$	13,605,974

Control Investments — 0.3% of net assets(l)
Advantage 24/7 LLC(e)(g) Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company) www.advantage24-7.com	53% Membership interest.		12/30/10		53	%	$	99,500	$	99,500		0.3	%

Subtotal Control Investments							$	99,500	$	99,500

TOTAL INVESTMENTS — 84.3%							$	31,631,030	$	27,500,481

OTHER ASSETS IN EXCESS OF
LIABILITIES — 15.7%										5,128,882

NET ASSETS — 100%									$	32,629,363

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

Notes to the Consolidated Schedule of Portfolio Investments

(a)	At December 31, 2016, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable.

(b)	The Date Acquired column indicates the year in which the Corporation first acquired an investment in the company or a predecessor company.

(c)

Each equity percentage estimates the Corporation’s ownership interest in the applicable portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. If applicable, the symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent.

(d)

The Corporation’s investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures,” which defines fair value and establishes guidelines for measuring fair value. At December 31, 2016, ASC 820 designates 100% of the Corporation’s investments as “Level 3” assets. Under the valuation policy of the Corporation, unrestricted publicly held securities are valued at the average closing bid price for these securities for the last three trading days of the month. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 2 “Investments” to the Consolidated Financial Statements).

(e)	These investments are non-income producing. All other investments are income producing. Non-income producing investments have not generated cash payments of interest or dividends including LLC tax-related distributions within the last twelve months, or are not expected to do so going forward.

(f)

As of December 31, 2016 the total cost of investment securities was approximately $31.6 million. Net unrealized depreciation was approximately ($4.1) million, which was comprised of $1.9 million of unrealized appreciation of investment securities and ($6.0) million of unrealized depreciation of investment securities. At December 31, 2016, the aggregate gross unrealized gain for federal income tax purposes was $2.2 million and the aggregate gross unrealized loss for federal income tax purposes was ($5.4) million. The net unrealized loss for federal income tax purposes was ($3.3) million based on a tax cost of $30.8 million.

(g)	Rand Capital SBIC, Inc. investment.

(h)	Reduction in cost and value from previously reported balances reflects current principal repayment. There were no principal repayments during the three months ended December 31, 2016.

(i)	Represents interest due (amounts over $50,000 net of reserves) from investment included as interest receivable on the Corporation’s Statement of Financial Position.

(j)	Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments.

(k)	Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as those Non-Control investments in companies in which between 5% and 25% of the voting securities are owned by the Corporation.

(l)	Control Investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned by the Corporation or where greater than 50% of the board representation is maintained.

(m)	Payment in kind (PIK) represents earned interest that is added to the cost basis of the investment.

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)

Investments in and Advances to Affiliates


Company	Type of Investment	December 31, 2015 Fair Value		Gross Additions (1)		Gross Reductions (2)			December 31, 2016 Fair Value		Amount of Interest/ Dividend/ Fee Income(3)

Control Investments:

Advantage 24/7 LLC	53% Membership interest.	$	99,500	$	—	$	—		$	99,500	$	—

Gemcor II, LLC	$1,000,000 subordinated promissory note at 15%. 31.25 membership units. Escrow receivable due from sale of business.		416,972 13,400,000 —		— — —		(416,972 (13,400,000 —	) )		— — —		11,828 2,000 —

	Total Gemcor		13,816,972		—		(13,816,972	)		—		13,828

	Total Control Investments	$	13,916,472	$	0	($	13,816,972	)	$	99,500	$	13,828

Affiliate Investments:
BeetNPath, LLC	1,119,024 Series A-2 Preferred Membership Units. $150,000 convertible promissory note at 8%.	$	359,000 —	$	— 150,000	$	— —		$	359,000 150,000	$	— 6,477

	Total BeetNPath		359,000		150,000		—			509,000		6,477

Carolina Skiff LLC	6.0825% Class A common membership interest.		600,000		500,000		—			1,100,000		131,785
ClearView Social, Inc.	312,500 Series seed plus preferred shares.		—		200,000		—			200,000		—
First Wave Products Group, LLC	$500,000 senior term notes at 10%. $280,000 junior term notes at 10%. Warrant for 41,619 capital securities.		250,000 — —		— — —		— — —			250,000 — —		834 — —

	Total First Wave		250,000		—		—			250,000		834

Genicon, Inc.	1,586,902 Series B preferred shares. $1,100,000 senior term loans at 12%. $600,000 term loan at 14%.		1,000,000 — —		— 1,100,000 600,000		— — —			1,000,000 1,100,000 600,000		3,028 109,700 28,700

	Total Genicon		1,000,000		1,700,000		—			2,700,000		141,428

GiveGab, Inc.	5,084,329 Series Seed preferred shares.		424,314		—		—			424,314		—
G-TEC Natural Gas Systems	17.845% Class A membership interest. 8% cumulative dividend.		100,000		—		—			100,000		—
Intrinsiq Materials, Inc.	4,161,747 Series A preferred shares. $95,000 convertible promissory note at 8%.		— 95,000		780,000 —		— (95,000	)		780,000 —		— 6,689

	Total Intrinsiq		95,000		780,000		(95,000	)		780,000		6,689

Knoa Software, Inc.	973,533 Series A-1 convertible preferred shares. 1,876,922 Series B preferred shares. $48,466 convertible promissory note at 8%.		381,503 490,752 —		— — 48,466		(381,503 (41,297 —	) )		— 449,455 48,466		— — 2,499

	Total Knoa		872,255		48,466		(422,800	)		497,921		2,499

KnowledgeVision Systems, Inc.	200,000 Series A-1 preferred shares. 214,285 Series A-2 preferred shares. 129,033 Series A-3 preferred shares. Warrant for 46,743 Series A-3 shares.		— 300,000 165,001 35,000		— — — —		— — — —			— 300,000 165,001 35,000		— — — —

	Total Knowledge Vision		500,001		—		—			500,001		—

Mezmeriz, Inc.	1,554,565 Series seed preferred shares.		351,477		—		—			351,477		—
Microcision LLC	$1,500,000 subordinated promissory note at 11%. 15% Class A common membership interest.		1,891,964 —		— —		— —			1,891,964 —		211,269 —

	Total Microcision		1,891,964		—		—			1,891,964		211,269

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)


Company	Type of Investment	December 31, 2015 Fair Value		Gross Additions (1)		Gross Reductions (2)			December 31, 2016 Fair Value		Amount of Interest/ Dividend/ Fee Income(3)
New Monarch Machine Tool, Inc.	22.84 common shares.		22,841		—		—			22,841		29,409
OnCore Golf Technology, Inc.	150,000 Series AA preferred shares. $300,000 subordinated convertible promissory notes at 6%.		187,500 150,000		— 150,000		(187,500 —	)		— 300,000		— 17,186

	Total OnCore		337,500		150,000		(187,500	)		300,000		17,186

Rheonix, Inc.	9,676 common shares. 1,839,422 Series A preferred shares. 50,593 common shares. 589,420 Series B preferred shares.		11,000 2,165,999 59,000 702,732		— — — —		(11,000 (2,165,999 (59,000 (702,732	) ) ) )		— — — —		— — — —

	Total Rheonix		2,938,731		—		(2,938,731	)		—		—

SciAps, Inc.	187,500 Series A convertible preferred shares. 274,299 Series A-1 convertible preferred shares. 117,371 Series B preferred shares. $200,000 subordinated promissory note at 10%. $100,000 secured subordinated convertible note at 10%.	$	1,000,000 504,710 250,000 — —	$	— — — 200,000 100,000	$	— — — — —		$	1,000,000 504,710 250,000 200,000 100,000	$	— — — 14,611 2,555

	Total SciAps		1,754,710		300,000		—			2,054,710		17,166

SOMS Technologies, LLC	5,959,490 Series B membership interests.		528,348		—		—			528,348		13,464
Statisfy, Inc.	65,000 Series seed preferred shares. Warrant for 1,950,000 Series seed preferred shares.		20,968 629,032		— —		(20,968 (629,032	) )		— —		— —

	Total Statisfy		650,000		—		(650,000	)		—		—

Teleservices Solutions Holdings, LLC	250,000 Class B shares. 1,000,000 Class C shares. 80,000 Class D preferred units. 104,198 Class E preferred units.		— 1,190,680 91,200 104,198		— — — —		— (990,680 — —	)		— 200,000 91,200 104,198		— — — —

	Total Teleservices		1,386,078		—		(990,680	)		395,398

Tilson Technology Management, Inc.	12 Series B preferred shares. 21,390 Series C convertible preferred shares. $200,000 subordinated promissory note at 8%.		600,000 — —		— 200,000 200,000		— — —			600,000 200,000 200,000		16,250 — 4,164

	Total Tilson		600,000		400,000		—			1,000,000		20,414

	Total Affiliate Investments	$	14,662,219	$	4,228,466	($	5,284,711	)	$	13,605,974	$	598,620

	Total Control and Affiliate Investments	$	28,578,691	$	4,228,466	($	19,101,683	)	$	13,705,474	$	612,448

This schedule should be read in conjunction with the Corporation’s Consolidated Financial Statements, including the Consolidated Schedule of Portfolio Investments and Notes to the Consolidated Financial Statements.

(1)

Gross additions include increases in the cost basis of investments resulting from new portfolio investment, follow on investments, capitalized interest and the accretion of discounts. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation, and the movement of an existing portfolio company into this category and out of another category.

(2)	Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation,

the exchange of existing securities for new securities and the movement of an existing portfolio company out of this category and into another category.

(3)	Represents the total amount of interest, fees or dividends credited to income for the portion of the period an investment was included in Control or Affiliate categories, respectively.

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2016 (Continued)


Industry Classification	Percentage of Total Investments (at fair value) as of December 31, 2016
Healthcare		32.6	%
Software		27.3
Manufacturing		22.7
Contact Center		5.4
Consumer Product		4.9
Professional Services		3.6
Oil and Gas		1.8
Electronics		1.3
Marketing		0.4

Total Investments		100	%

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015


(a) Company, Geographic Location, Business Description, (Industry) and Website	Type of Investment	(b) Date Acquired		(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
Non-Control/Non-Affiliate Investments — 24.4% of net assets:(j)
Athenex, Inc.(e)(g) (Formerly Kinex Pharmaceuticals, Inc.) Buffalo, NY. Specialty pharmaceutical and drug development. (Health Care) www.athenex.com	46,296 common shares.		9/8/14		<1	%	$	143,285	$	347,220		1.0	%
City Dining Cards, Inc. (Loupe)(e)(g) Buffalo, NY. Customer loyalty technology company that helps businesses attract and retain customers. (Software) www.citydiningcards.com	9,525.25 Series B preferred shares.		9/1/15		4	%		500,000		500,000		1.5	%
Empire Genomics, LLC(e)(g) Buffalo, NY. Molecular diagnostics company that offers a comprehensive menu of assay services for diagnosing and guiding patient therapeutic treatments. (Health Care) www.empiregenomics.com	$600,000 senior secured convertible term note at 10% due April 1, 2017. (i) Interest receivable $92,833.		6/13/14		—			600,000		600,000		1.8	%
GoNoodle, Inc.(g) (Formerly HealthTeacher, Inc.) Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software) www.gonoodle.com	$1,000,000 secured note at 12% due January 31, 2020, (1% Payment in Kind (PIK)). Warrant for 47,324 Series C Preferred shares.		2/6/15		<1	%		1,008,974 25		1,008,974 25		3.0	%

	Total GoNoodle							1,008,999		1,008,999

Mercantile Adjustment Bureau, LLC(g) Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center) www.mercantilesolutions.com	$1,099,039 subordinated secured note at 13% (3% for the calendar year 2015) due October 30, 2017. (e) $150,000 subordinated debenture at 8% due June 30, 2018. Warrant for 3.29% membership interests. Option for 1.5% membership interests. (i) Interest receivable $93,455.		10/22/12		4	%		1,080,694 150,000 97,625		1,080,694 0 0		3.2	%

	Total Mercantile							1,328,319		1,080,694

Outmatch(e)(g)	2,264,995 Class P1 Units.		11/18/10		4	%		2,140,007		2,140,007		6.3	%
(Formerly Chequed Holdings, LLC)	109,788 Class C1 Units.							5,489		5,489
Saratoga Springs, NY. Web based predictive employee selection and reference checking. (Software) www.outmatch.com

	Total Outmatch							2,145,496		2,145,496

SocialFlow, Inc.(e)(g) New York, NY. Provides instant analysis of social networks using a proprietary, predictive analytic algorithm to optimize advertising and publishing. (Software) www.socialflow.com	1,049,538 Series B preferred shares. 1,204,819 Series B-1 preferred shares. 717,772 Series C preferred		4/5/13		4	%		500,000 750,000 500,000		731,431 839,648 500,221		6.1	%

	Total Social Flow							1,750,000		2,071,300

Somerset Gas Transmission Company, LLC(e) Columbus, OH. Natural gas transportation. (Oil and Gas) www.somersetgas.com	26.5337 units.		7/10/02		3	%		719,097		500,000		1.5	%
Other Non-Control/Non-Affiliate Investments:
DataView, LLC (Software) (e)	Membership Interest		—		—			310,357		—		0.0	%
UStec/Wi3 (Manufacturing) (e)	Common Stock.		—		—			100,500		—		0.0	%

Subtotal Non-Control/Non-Affiliate Investments							$	8,606,053	$	8,253,709

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015 (Continued)

(a)

Company, Geographic Location, Business
Description, (Industry)

and Website

Type of Investment

(b)
Date
Acquired

Cost

(d)(f)
Fair
Value

Percent
of Net
Assets

Affiliate Investments — 43.3% of net assets(k)

BeetNPath, LLC(e)(g)

Ithaca, NY. Frozen entrées and packaged dry side di