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, 2018

☐ 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicated by check mark if the registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

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, 2018 was approximately $15,361,100 based upon the closing price as reported on the Nasdaq Capital Market on such date.

As of March 1, 2019, there were 6,321,988 shares of the registrant’s common stock outstanding.

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-K

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Mine Safety Disclosures	13
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	77
Item 9A.	Controls and Procedures	77
Item 9B.	Other Information	77
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	78
Item 11.	Executive Compensation	83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93
Item 13.	Certain Relationships and Related Transactions, and Director Independence	94
Item 14.	Principal Accountant Fees and Services	95
PART IV
Item 15.	Exhibits and Financial Statement Schedules	97
Item 16	Form 10-K Summary	99

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, often in upstate New York and regions in close proximity. In accordance with our strategic growth plan, we look for companies with strong leadership that are bringing to market new or unique products, technologies or services and have a high potential for growth. We invest in a mixture of debt and equity instruments. The debt securities typically have an equity component in the form of warrants or options to acquire stock or the right to convert the debt securities into stock. We established our small business investment company (“SBIC”) in 2002, Rand Capital SBIC, Inc. (“Rand SBIC”), whereby we utilized funds borrowed from the Small Business Administration (“SBA”) combined with our capital to invest in our portfolio companies.

Recent Developments

As previously announced, on January 24, 2019, Rand entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among Rand, East Asset Management, LLC (“East”), and, solely for purposes of being bound by Sections 7.10 and 10.9(a) and (b) thereof, Rand Capital Management LLC (“RCM”). Pursuant to the terms of the Stock Purchase Agreement, at the closing of the transaction (the “Closing”), East will purchase 8,333,333.33 shares (the “Shares”) of Rand’s common stock, par value $0.10 per share, at a purchase price of $3.00 per Share for an aggregate purchase price of $25,000,000 (the “Stock Purchase”), which consideration is to be paid to Rand partially in cash and partially through the contribution of existing loans and other securities (the “Contributed Assets”). As a condition to Closing, Rand will enter into a Shareholder Agreement with East (the “Shareholder Agreement”), which provides East with the right to designate two or three persons, depending upon the size of Rand’s board of directors (the “Board”), for nomination for election to the Board.

The Stock Purchase Agreement also contemplates that, at the Closing, Rand will enter into an investment advisory and management agreement (the “Advisory Agreement”) with RCM pursuant to which RCM will serve as Rand’s external investment adviser. Pursuant to the terms of the Advisory Agreement, Rand will pay RCM a base management fee and an incentive fee. At the Closing, Rand will also enter into an administration agreement (the “Administration Agreement”) with RCM pursuant to which RCM will serve as Rand’s administrator.

The transactions contemplated by the Stock Purchase Agreement including the entry into the Advisory Agreement with RCM (which we refer to as the “Transactions”) are subject to shareholder approval. Rand has agreed to hold a special meeting of shareholders for purposes of obtaining these approvals.

Additional information regarding the Stock Purchase Agreement and the Transactions is available in Rand’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on January 25, 2019. Rand is in the process of preparing and intends to file in the near future a proxy statement with the Securities and Exchange Commission for purposes of seeking to obtain shareholder approval of the Transactions.

In the event the Transactions are completed, Rand intends to accelerate its shift to an investment strategy focused on higher yielding debt investments, to elect tax treatment as a regulated investment company (“RIC”), and in connection with such RIC election to pay a special dividend to shareholders, and to adopt a new dividend policy that may include regular cash dividends to shareholders.

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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 loan and 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 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 accountants, bankers, lawyers 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 quality 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 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, if needed. 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 SBA restrictions.

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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 portfolio company. We anticipate our debt investments will be repaid with interest and expect to realize further appreciation from the warrants or other equity type instruments received 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 quality 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, 2018, we had four employees, unchanged from 2017.

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 as provided for in the 1940 Act and the rules and regulations promulgated thereunder. 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 – Regulations, Business Development Company Regulations.”

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 Securities and Exchange Commission (“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 Capital or Rand SBIC.

During 2017 we established a second SBIC subsidiary, Rand Capital SBIC II, L.P. (“Rand SBIC II”), and began making investments through this SBIC subsidiary. During 2018, together with the SBA, we determined that the optimal structure was to revert back to investing in small businesses through our original SBIC, Rand SBIC, and the assets of Rand SBIC II were transferred to Rand SBIC.

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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 (“RIC”) 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 SBIC.

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

Regulations

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.

Business Development Company Regulations

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 their 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.

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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, 2018, 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.

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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 these requirements since the inception of Rand SBIC.

The SBA prohibits an SBIC from providing funds to small businesses with specific characteristics, such as businesses with the majority of their employees located outside the United States, or from investing in passive or non-operating businesses, real estate, project financing, farmland, or financial lenders. Without prior SBA approval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory capital in any one company and its affiliates.

The SBA places limitations on the financing terms of investments by SBICs in portfolio companies such as limiting the prepayment options, the financing fees that can be charged to a portfolio company, the allowable interest rate on loan and debt securities that an SBIC can charge a portfolio company, and the maximum term of such financing. An SBIC may exercise control over a small business for a period of up to seven years from the date on which the SBIC initially acquires its control position.

The SBA restricts the ability of an SBIC to lend money to any of its officers, directors and employees or to invest in associates. The SBA also prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person, or a group of persons acting together, owning 10% or more of a class of capital stock of a licensed SBIC. A “change of control” is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise.

Rand SBIC may invest directly in a portfolio company’s equity, 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 $4.8 million.

In addition the SBA regulations require an examination of a licensed SBIC by an SBA examiner to determine the SBIC’s compliance with the relevant SBA regulations. Our annual report, submitted to the SBA, must be audited by an independent public accounting firm.

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

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instruments. 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.

At December 31, 2018, we had $8,750,000 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 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 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 SEC and the SBA. Changes in the laws or regulations that govern BDCs and SBICs 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 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.

In addition, our outstanding $8,750,000 in SBA debentures will reach maturity and become payable between 2022 and 2029. In order to repay our outstanding SBA debentures, we will need to identify sources of additional funding if the proceeds received upon the exits of our investments are insufficient to fund our operations and repay our SBA obligations. We cannot be assured that the proceeds to be received upon the exits from our investments will be sufficient to meet our funding needs or, if such proceeds are insufficient, that we will be able to obtain access to the necessary funding on terms that are acceptable to us.

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

At December 31, 2018, 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 investment portfolio 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 change 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 executive officers 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 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 the officers.

We operate in a competitive market for investment opportunities

We operate in a 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 potential 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 are subject to cyber security risks and incidents that may adversely affect the operations of our company or the companies in which we invest. A failure in our cyber security systems could impair our ability to conduct business and damage our business relationships, compromise or corrupt our confidential information and ultimately negatively impact business, financial condition and operating results.

Our operations are dependent on secure information technology systems for data processing, storage and reporting. Increased cyber security vulnerabilities, threats and more sophisticated and targeted cyber-attacks pose a risk to the security of our information and the information of our portfolio companies. These cyber-attacks could affect our computer network, our website or our service providers (such as, but not limited to, accountants, lawyers, and transfer agents) and could result in operating disruptions or information misappropriation, which could have a material adverse effect on our business operations and the integrity and availability of our financial information. We have attempted to mitigate these cybersecurity risks by employing a number of processes, procedures and internal controls within our company but we remain potentially vulnerable to additional known and unknown threats.

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We may experience fluctuations in our quarterly results

Our quarterly operating results may 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 performs poorly or goes 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 whose securities are not publicly traded and may be subject to restrictions on resale, and as a result 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 investment quickly, given the lack of available markets for their sale.    

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 more acutely affected negatively by this instability and suffer deterioration in operational or financial results. 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, products or services, 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 technologies, products or services, the market for those new technologies, 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.

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We generally do not control our portfolio companies

We do not have an expectation to control the decision making in our portfolio companies, even though we may have a board seat or board observation rights. Because of this, we are subject to the risk that our portfolio companies will make business decisions with which we disagree or will incur risks or otherwise act in ways that do not maximize their value and serve our interests as minority debt and equity holders. Due to the lack of liquidity in our investments in these private companies, we may not be able to dispose of our investment in these portfolio companies as freely as we would like or at a valuation that is appropriate. As a result, a portfolio company may make decisions that would decrease the value of our portfolio holdings.

We typically are minority shareholders in our portfolio 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 a 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 common stock

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 common stock may have an adverse effect on the market price of our securities.

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

Our shares often 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 and our shares have often traded at such a discount. 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 if, or when, our shares will trade at, above, or below net asset value.

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Risks related to the transactions contemplated by the Stock Purchase Agreement

The failure to complete the Transactions may result in a decrease in the market value of our shares.

After the Transactions were announced on January 24, 2019, the market price for our shares of common stock rose significantly. The Transactions are subject to a number of contingencies, including approval by our shareholders and the other closing conditions set forth in the Stock Purchase Agreement. As a result, there is a risk that the Transactions will not be completed. If the Transactions are not completed for any reason or are delayed for a significant period of time, the market price of our shares may decline, including to a price per share that is below the price per share on the date that the Transactions were announced.

If the Transactions are not consummated, there may not be any other offers from potential acquirers or parties interested in a potential strategic transaction.

If the Transactions are not consummated, we may seek another strategic transaction. Although we have had prior discussions with other parties regarding a strategic transaction, these parties may no longer have an interest in a strategic transaction with Rand, or be willing to offer acceptable terms in a transaction.

If we do not complete the Transactions, we may continue to face challenges and uncertainties in our ability to achieve business success.

Historically, Rand has focused on a total return strategy that involved seeking long-term capital appreciation on its equity investments, while maintaining a current cash flow from debt investments and pass-through equity instruments to fund expenses. Rand has observed that this total return strategy has become disfavored among investors resulting in an increasingly larger spread between the share price for the Common Stock and our Net Asset Value (NAV) per share. If the Transactions are not completed, we will not engage an external investment adviser to manage our investment strategy and will remain, for the time being, an internally managed BDC that is likely to continue the same legacy total return strategy. Therefore, if we are unable to complete the Transactions, we may continue to operate our business in a manner that is substantially similar to the manner in which it is currently operated, and would continue to face the same business challenges and uncertainties associated with our current business strategy.

Under certain circumstances, a termination fee may be payable by Rand upon termination of the Stock Purchase Agreement.

The Stock Purchase Agreement provides for the payment by Rand of a termination fee of up to $750,000 if the Stock Purchase Agreement is terminated under certain circumstances. Given our financial condition and amount of cash and cash equivalents on hand, payment of the termination fee in an amount up to $750,000 would likely have a material adverse effect on our financial condition and on our ability to make any significant new investments or follow-on investments in the near future.

The Stock Purchase Agreement contains restrictions limiting our ability to pursue alternatives to the Transactions.

The Stock Purchase Agreement contains provisions that limit our ability to actively solicit, discuss or negotiate competing third-party proposals for strategic transactions. These provisions, which are typical for transactions of this type, and include the termination fee payable under certain circumstances, might discourage a competing acquirer that might have an interest in acquiring all or a significant part of Rand from considering or proposing a transaction even if it were prepared to pay consideration with a higher price than that to be paid by East in the Stock Purchase Agreement or might result in a potential competing acquirer proposing to pay a lower price to acquire Rand than it might otherwise have proposed to pay without Rand’s requirement to pay the termination fee in order to terminate the Stock Purchase Agreement to accept a superior proposal.

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The failure of satisfy the closing conditions under the Stock Purchase Agreement, including receipt of shareholder approvals, will result in the Transactions not being completed.

The Transactions are subject to closing conditions, including certain approvals of shareholders and approval of the SBA, which, if not satisfied, will prevent the Transactions from being completed. The closing condition requiring shareholder approvals may not be waived under applicable law and must be satisfied for the Transactions to be completed. In addition to the required approvals from the shareholders, the Transactions are subject to a number of other conditions, some of which are beyond our direct control. We cannot predict when the conditions set forth in the Stock Purchase Agreement will be satisfied or if they will be satisfied at all.

The Company will be subject to operational uncertainties and contractual restrictions while the Transactions are pending.

Uncertainty about the effect of the Transactions may have an adverse effect on Rand while the Transactions are pending. These uncertainties may impair Rand’s ability to retain key personnel until the Transactions are consummated and could cause those that deal with Rand to seek to change their existing relationships with Rand. In addition, the Stock Purchase Agreement imposes limitations on Rand with respect to actions that it can take while the Transactions are pending, which may result in us not pursuing or being unable to pursue certain business opportunities that may arise prior to the completion of the Transactions.

If the Transactions do not close, the Company will not benefit from the expenses incurred in furtherance of the Transactions.

If the Transactions are not completed, Rand will have incurred substantial expenses for which no ultimate benefit will have been received. Rand has incurred, and will continue to incur, out-of-pocket expenses in connection with the Transactions for investment banking, legal and accounting fees and other expenses, much of which will be incurred even if the Transactions are not completed.

If we complete the Transactions, we will face risks associated with the terms and structure of the Transactions.

If the Transactions are completed, there are risks arising from the terms and structure of the Transactions, including the following:

• Despite our expressed intentions, we may not declare or pay a special dividend or regular cash dividends to shareholders.

• East will exercise significant influence in connection with its ownership of Common Stock.

• RCM has no prior experience managing or acting as an investor adviser for a BDC.

• We will be dependent upon RCM for our future success.

• There are potential conflicts of interest, including the management of other investment funds and accounts by the principals and certain members of the Investment Committee of RCM, which could impact our investment returns.

• Our ability to enter into transactions with affiliates of RCM will be restricted.

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.

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Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

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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.”

We have historically not paid any cash dividends to shareholders. Unless the transactions contemplated by the Stock Purchase Agreement are completed, we have no present intention of paying cash dividends in the foreseeable future.

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 – 10/31/2018		—		—		—		458,954
11/1 – 11/30/2018		—		—		—		458,954
12/1 – 12/31/2018		—		—		—		458,954

(1) There were no shares repurchased during the fourth quarter of 2018.

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

(3) On October 25, 2018, the Board of Directors extended the repurchase authorization of up to 1,000,000 shares of the Common Stock on the open market at prices no greater than the then current net asset value through October 25, 2019.

Shareholders of Record

On March 1, 2019, we had a total of approximately 908 shareholders, which included 77 record holders of our Common Stock, and an estimated 831 holders with shares beneficially owned in nominee name or under clearinghouse positions of brokerage firms or banks.

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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 an old and new Peer Group, assuming a base index of $100 at the end of 2013. 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 cumulative total return of one or more companies, peer groups, industry indexes and/or broad markets

	YEAR ENDED DECEMBER 31,
Company/Index/Market	2013		2014		2015		2016		2017		2018
Rand Capital Corporation	$	100.00	$	133.22	$	122.80	$	102.93	$	98.37	$	81.46
NASDAQ Market Index	$	100.00	$	114.75	$	122.74	$	133.62	$	173.22	$	168.30
New Peer Group Index	$	100.00	$	90.09	$	69.29	$	46.63	$	54.92	$	54.75
Old Peer Group Index	$	100.00		99.36	$	52.83	$	45.78	$	51.88	$	60.37

The New Peer Group was comprised of the following companies:

Equus Total Return, Inc. (NYSE: EQS)

Firsthand Technology Value Fund, Inc. (NasdaqGS: SVVC)

GSV Capital Corp. (NasdaqCM: GSVC)

180 Degree Capital Corp. (NasdaqGM: TURN)

The Old Peer Group was comprised of the following companies:

Capital Southwest Corporation (NasdaqGS: CSWC)

Firsthand Technology Value Fund, Inc. (NasdaqGS: SVVC)

GSV Capital Corp. (NasdaqCM: GSVC)

180 Degree Capital Corp. (NasdaqGM: TURN)

We selected the New 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. Capital Southwest was removed from our peer group to reflect the change in their business strategy.

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.

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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:
	2018			2017			2016			2015			2014
Total assets	$	40,521,724		$	40,133,913		$	42,418,530		$	44,562,060		$	45,525,987
Total liabilities	$	8,997,537		$	8,215,228		$	9,789,167		$	10,708,400		$	13,172,546
Net assets	$	31,524,187		$	31,918,685		$	32,629,363		$	33,853,660		$	32,353,441
Net asset value per outstanding share	$	4.99		$	5.05		$	5.16		$	5.35		$	5.11
Shares of common stock outstanding		6,321,988			6,321,988			6,321,988			6,328,538			6,328,538
	Operating Data for the Years Ended December 31:
	2018			2017			2016			2015			2014
Investment income	$	2,106,954		$	1,454,782		$	1,031,858		$	2,824,337		$	2,584,475
Total expenses	$	2,193,672		$	2,010,977		$	3,401,037		$	1,817,279		$	2,499,297
Net investment (loss) gain, net of tax	($	68,406	)	($	19,298	)	($	1,553,268	)	$	842,902		$	21,835
Net realized (loss) gain on sales and dispositions of investments, net of tax	($	994,295	)	$	88,684		$	8,864,653		($	27,973	)	$	4,767,484
Net increase (decrease) in unrealized depreciation or appreciation on investments, net of tax	$	668,203		($	780,064	)	($	8,514,068	)	$	685,290		($	247,838	)
Net (decrease) increase in net assets from operations	($	394,498	)	($	710,678	)	($	1,202,683	)	$	1,500,219		$	4,541,481

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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 SEC. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions 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

Currently, 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. Rand SBIC was approved for an additional $6.0 million in new SBA leverage commitments during 2018.

Our principal investment objective has historically been 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.

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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 an outright sale of the portfolio 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 January 2019, we entered into a stock purchase agreement to sell approximately 8.3 million shares of our common stock to East Asset Management, LLC (“East”) for $25 million in cash and portfolio assets. The portfolio assets will be income-producing instruments that were originated in the last 48 months. Additionally, a new entity, Rand Capital Management, LLC (“RCM”), will be established as an external management company and will be retained by Rand Capital to be its investment advisor. RCM will have the same management team that is currently at Rand. The sale and issuance of common stock pursuant to the stock purchase agreement as well as the externalization of the management structure are subject to shareholder and other regulatory approvals.

Following the closing of the above-described transactions ( the “Transactions”) and contingent upon meeting certain tax-related conditions, we intend to elect to become a regulated investment company (“RIC”) for U.S. federal tax purposes. This will enable the pass through of capital gains and investment income to shareholders without payment of corporate-level U.S. federal income tax by Rand.

2018 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.

• Net asset value of our portfolio decreased to $4.99 per share, or $31.5 million, at December 31, 2018, down ($0.06) per share, or (1.2%), compared with net asset value of $5.05 per share, or $31.9 million, at the end of the prior year.

• At year end, the estimated value of our portfolio, which included investments in securities from 30 active companies, was $34.7 million. This value included $3.6 million in net pre-tax unrealized depreciation.

• Approximately 59% of the portfolio was equity investments with the remainder being debt and loan investments.

• The portfolio generated approximately $2.1 million in interest, fee, dividend and other income in 2018.

• During 2018, we made $2.5 million of new investments in 8 companies, of which one was a new portfolio company.

Outlook

At the end of 2018, we had $4.0 million in cash available for future investments and expenses, a decrease from $6.3 million at the end of 2017. The decrease was primarily due to $2.5 million of investments originated during 2018 as well as funding ongoing operating expenses.

We received SBA approval during 2018 for an additional $6.0 million in leverage and we drew down $750,000 of that leverage as of December 31, 2018 and an additional $2,250,000 in January 2019.

We believe the combination of cash on hand, proceeds from portfolio exits, SBA leverage, and prospective investment income provide sufficient capital for us to continue to add new investments to our

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portfolio while reinvesting in existing portfolio companies that demonstrate continued growth potential. Additionally, upon the anticipated closing of the Transactions described above, we will have additional investments in our portfolio and additional cash to invest. The following 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 strong macroeconomic environment and eager reception of new technologies and service concepts.

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

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

• As our portfolio expands, we are able to better leverage our 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.

• We believe the anticipated receipt of cash and portfolio assets from East, as well as the establishment of RCM as an external management company, will broaden our potential pipeline of investment opportunities in order to build our portfolio and grow further. Strategically, we expect to advance our efforts to increase our income producing investments that can support a regular cash dividend for shareholders and complement our equity investments that drive capital appreciation.

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 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 approved by our Board of Directors. We invest in loan, debt, and equity instruments and there is no single standard for determining fair value of these investments. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio company while employing a consistent valuation process. We analyze and value each investment quarterly, and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of the recorded value of an equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that an underlying portfolio company has appreciated in value and, therefore, its equity security has also appreciated in value. These estimated fair values may differ from the values that would have been used had a ready market for the investments existed and these differences could be material if our assumptions and judgments differ from results of actual liquidation events.

Our investments are carried at fair value in accordance with Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements.

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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 portfolio 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 cost given the carrying interest rate versus the related inherent portfolio risk of the investment. A loan or debt instrument may be reduced in value if it is judged to be of poor quality, collection is in doubt or insufficient liquidation proceeds exist.

• 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. This approach values the equity at the value remaining after the portfolio company pays of its debt and loan balances and its outstanding liabilities. 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 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 change in unrealized depreciation 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 Level 1 or Level 2 investments as of December 31, 2018.

In the valuation process, we value restricted securities, categorized as Level 3 investments, using information from these portfolio companies, which may include:

• Audited and unaudited statements of operations, balance sheets and operating budgets;

• Current and projected financial, operational and technological developments of the portfolio company;

• Current and projected ability of the portfolio company to service its debt obligations;

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• The current capital structure of the business and the seniority of the various classes of equity if a deemed liquidation event were to occur;

• Pending debt or capital restructuring of the portfolio company;

• Current information regarding any offers to purchase the investment, or recent fundraising transactions;

• Current ability of the portfolio company to raise additional financing if needed;

• Changes in the economic environment which may have a material impact on the operating results of the portfolio company;

• Internal circumstances and events that may have an impact (both positive and negative) on the operating performance of the portfolio company;

• 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

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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.

Our 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 security is redeemed.

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Financial Condition

	12/31/18		12/31/17		Increase (Decrease)			% Increase (Decrease)
Overview:
Total assets	$	40,521,724	$	40,133,913	$	387,811			1.0	%
Total liabilities		8,997,537		8,215,228		782,309			9.5	%
Net assets	$	31,524,187	$	31,918,685	($	394,498	)		(1.2	%)

Net asset value was $4.99 per share at December 31, 2018 versus $5.05 per share at December 31, 2017.

The outstanding SBA debentures at December 31, 2018 and 2017 are $8,750,000 and $8,000,000, respectively. The debentures mature from 2022 through 2029.

Cash approximated 13% of net assets at December 31, 2018 compared to 20% at December 31, 2017.

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.

	12/31/18			12/31/17			Change		% Change
Investments, at cost	$	38,292,143		$	36,689,319		$	1,602,824		4.4	%
Unrealized depreciation, net		(3,625,339	)		(4,405,257	)		779,918		(17.7	%)
Investments, at fair value	$	34,666,804		$	32,284,062		$	2,382,742		7.4	%
Number of Active Portfolio Companies		30			30

Our total investments at fair value, as estimated by management and approved by the Board of Directors, approximated 110% of net assets at December 31, 2018 and 101% of net assets at December 31, 2017.

The change in investments, at cost, during the year ended December 31, 2018, is comprised of the following:

	Cost Increase (Decrease)
New investments:
KnowledgeVision Systems, Inc. (Knowledgevision)	$	775,000
Tech 2000, Inc. (Tech 2000)		600,000
BeetNPath, LLC (Beetnpath)		262,627
Genicon Inc. (Genicon)		250,000
SciAps, Inc. (Sciaps)		250,000
Centivo Corporation (Centivo)		200,000
Tilson Technology Management, Inc. (Tilson)		100,000
Empire Genomics, LLC (Empire Genomics)		50,000
Total of new investments		2,487,627
Other changes to investments:
Empire Genomics capitalized fee income and interest conversion		298,287
Genicon interest conversion and OID amortization		231,807
OnCore Golf Technology, Inc. (Oncore) interest conversion		77,712
Microcision LLC (Microcision) interest conversion		19,213
Tech 2000 interest conversion		10,777
GoNoodle, Inc. (GoNoodle) interest conversion		10,333
Centivo interest conversion		1,342
Total of other changes to investments		649,471

23

Investments repaid, sold or liquidated:
Intrinsiq Material, Inc. (Intrinsiq) realized loss		(1,125,673	)
First Wave Technologies, Inc. (First Wave) realized loss		(338,469	)
Knoa Software Inc. (Knoa) repayment		(48,466	)
Empire Genomics repayment		(21,667	)
Total of investments repaid, sold or liquidated		(1,534,274	)
Net change in investments, at cost	$	1,602,824

Our top five portfolio companies represented 39% of total assets at December 31, 2018:

Company	Industry	Fair Value at December 31, 2018		% of Total Assets at December 31, 2018
Genicon, Inc.	Health Care – Testing Device	$	4,423,086		11	%
eHealth Global Technologies, Inc.	Health Care	$	3,500,000		9	%
ACV Auctions, Inc.	Software	$	2,776,907		7	%
Tilson Technology Management, Inc.	Professional Services	$	2,600,000		6	%
Microcision, LLC	Manufacturing	$	2,543,353		6	%

Our top five portfolio companies represented 37% of total assets at December 31, 2017:

Company	Industry	Fair Value at December 31, 2017		% of Total Assets at December 31, 2017
Genicon, Inc.	Health Care – Testing Device	$	4,023,779		10	%
eHealth Global Technologies, Inc.	Health Care	$	3,500,000		9	%
Rheonix, Inc.	Health Care – Testing Device	$	2,938,731		7	%
Tilson Technology Management, Inc.	Professional Services	$	2,500,000		6	%
Outmatch Holdings, LLC	Software	$	2,145,496		5	%

Below is the geographic breakdown of our investments at fair value as of December 31, 2018 and 2017:

Geographic Region	% of Net Asset Value at December 31, 2018			% of Net Asset Value at December 31, 2017
USA – East		94	%		86	%
USA - South		16	%		15	%
Total investments as a % of net asset value		110	%		101	%

24

As of December 31, 2018 and 2017, the investment portfolio consisted of the following types of investments:

	Cost		Percentage of Total Portfolio			Fair Value		Percentage of Total Portfolio
December 31, 2018:
Subordinated Debt and Promissory Notes	$	14,017,541		36	%	$	13,296,948		38	%
Convertible Debt		1,866,615		5			1,036,808		3
Equity and Membership Interests		22,155,337		58			20,260,523		59
Equity Warrants		252,650		1			72,525		0
Total	$	38,292,143		100	%	$	34,666,804		100	%
December 31, 2017:
Subordinated Debt and Promissory Notes	$	12,924,321		35	%	$	11,796,289		37	%
Convertible Debt		1,849,955		5			1,849,955		6
Equity and Membership Interests		21,640,393		59			18,482,793		57
Equity Warrants		274,650		1			155,025		0
Total	$	36,689,319		100	%	$	32,284,062		100	%

25

Results of Operations

Investment Income

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.

Comparison of the years ended December 31, 2018 and 2017

	December 31, 2018		December 31, 2017		Increase		% Increase
Interest from portfolio companies	$	1,498,740	$	1,155,316	$	343,424		30	%
Interest from other investments		37,614		30,761		6,853		22	%
Dividend and other investment income		384,382		243,614		140,768		58	%
Fee income		186,218		25,091		161,127		642	%
Total investment income	$	2,106,954	$	1,454,782	$	652,172		45	%

Investment income increased 45%, or $652,172, from $1,454,782 for the year ended December 31, 2017 to $2,106,954 for the year ended December 31, 2018. The total investment income that is received on a current basis for the year ended December 31, 2018 is received from 9 portfolio companies. This contrasts with the 11 portfolio companies generating current income for the year ended December 31, 2017.    

Interest from portfolio companies – Interest from portfolio companies was approximately 30% higher during the year ended December 31, 2018 versus the same period in 2017 due to the fact that we have originated more income-producing debt investments in the last year. The new debt instruments were originated from KnowledgeVision Systems, Inc. (Knowledgevision), Tech 2000, Inc. (Tech 2000), Genicon Inc. (Genicon) and several other portfolio companies. In addition, during 2018 the Empire Genomics loans were modified and resulted in a recording of interest that had previously not been accrued of approximately $91,000. This amount was capitalized into the loan balance as part of the debt modification and is non-recurring.    

The following investments are on non-accrual status: G-TEC Natural Gas Systems (G-Tec) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balances.

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, 2018 versus the year ended December 31, 2017.

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

	December 31, 2018		December 31, 2017
Carolina Skiff LLC (Carolina Skiff)	$	251,913	$	178,532
Advantage 24/7 LLC (Advantage 24/7)		60,000		—
Tilson Technology Management, Inc. (Tilson)		39,002		21,579
New Monarch Machine Tool, LLC (Monarch)		27,409		27,409
Empire Genomics, LLC (Empire Genomics)		6,058		10,070
SOMS Technologies, LLC (SOMS)		—		6,024
Total dividend and other investment income	$	384,382	$	243,614

26

Fee income – Fee income typically consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of 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 $41,872 and $24,091 for the years ended December 31, 2018 and 2017, respectively. The financing fee income based on the existing portfolio is expected to be approximately $46,000 in 2019, $21,000 in 2020 and $6,000 in 2021.

Fees paid for board service at the portfolio companies were $2,000 and $1,000 for the years ended December 31, 2018 and 2017, respectively.

In addition, we recorded a one-time debt modification fee of approximately $142,000 from Empire Genomics which was capitalized into the Empire Genomics loan balances as part of the debt modification.

Comparison of the years ended December 31, 2017 and 2016

	December 31, 2017		December 31, 2016		Increase (Decrease)			% Increase (Decrease)
Interest from portfolio companies	$	1,155,316	$	767,153	$	388,163			51	%
Interest from other investments		30,761		45,139		(14,378	)		(32	%)
Dividend and other investment income		243,614		192,932		50,682			26	%
Fee income		25,091		26,634		(1,543	)		(6	%)
Total investment income	$	1,454,782	$	1,031,858	$	422,924			41	%

Investment income increased 41%, or $422,924, from $1,031,858 for the year ended December 31, 2016 to $1,454,782 for the year ended December 31, 2017.

Interest from portfolio companies – Interest from portfolio companies was 51% higher during the year ended December 31, 2017 versus the same period in 2016 due to the fact that more income-producing debt investments were originated in the last year. These new debt instruments were originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth), Empire Genomics, LLC (Empire Genomics) and several other portfolio companies.

The following investments were on non-accrual status at December 31, 2017: 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 decrease in interest from other investments was primarily due to lower average cash balances during the year ended December 31, 2017 versus the year ended December 31, 2016.

27

Dividend and other investment income – The dividend distributions for the respective periods were:

	December 31, 2017		December 31, 2016
Carolina Skiff LLC (Carolina Skiff)	$	178,532	$	131,785
New Monarch Machine Tool, LLC (Monarch)		27,409		27,409
Tilson Technology Management, Inc. (Tilson)		21,579		16,250
Empire Genomics, LLC (Empire Genomics)		10,070		4,024
SOMS Technologies, LLC (SOMS)		6,024		13,464
Total dividend and other investment income	$	243,614	$	192,932

Fee income - The income associated with the amortization of financing fees was $24,091 and $22,634 for the years ended December 31, 2017 and 2016, respectively. The financing fee income based on the existing portfolio is expected to be approximately $21,000 in 2018, $15,000 in 2019 and $2,000 in 2020.

Fees paid for board service at the portfolio companies were $1,000 and $4,000 for the years ended December 31, 2017 and 2016, respectively.

Expenses

Comparison of the years ended December 31, 2018 and 2017

	December 31, 2018		December 31, 2017		Increase		% Increase
Total expenses	$	2,193,672	$	2,010,977	$	182,695		9	%

Expenses predominately consist of interest expense on outstanding SBA borrowings, compensation expense, and general and administrative expenses, including stockholder and office operating expenses and professional fees.

The increase in expenses during the year ended December 31, 2018 versus the same period in 2017 was primarily caused by a 14%, or approximately $50,000, increase in professional fees. Professional fees are higher during 2018 primarily as a result of expenses incurred in the consideration of strategic alternatives. These expenses included external legal, tax consulting and other advisory expenses to support analysis of our strategic alternatives, which involved assessing options relative to the complex regulatory environment in which we operate.

In addition bonus and profit sharing expense went from $12,000 during the year ended December 31, 2017 to $125,000 during the year ended December 31, 2018, an $113,000 increase.

Comparison of the years ended December 31, 2017 and 2016

	December 31, 2017		December 31, 2016		Decrease			% Decrease
Total expenses	$	2,010,977	$	3,401,037	($	1,390,060	)		(41	%)

The decrease in expenses during the year ended December 31, 2017 versus the same period in 2016 was primarily caused by a decrease of $1,373,052 in bonus and profit sharing expense related to the Gemcor II, LLC (Gemcor) exit in early 2016. Gemcor sold its assets in March 2016 and based on our ownership percentage, we received gross cash proceeds of approximately $13.8 million, excluding an escrow receivable, and realized a gain, before income taxes, of approximately $13.2 million from the sale. As a result of this sale, we recognized $1,385,052 under our Profit Sharing Plan during the year ended December 31, 2016. There were no amounts earned pursuant to the Profit Sharing Plan for the year ended December 31, 2017.

Net Realized Gains and Losses on Investments

	December 31, 2018			December 31, 2017		December 31, 2016
Net realized (loss) gain on sales and dispositions, before income tax (benefit) expense	($	1,464,142	)	$	138,240	$	14,138,203

28

During the year ended December 31, 2018, we recognized a realized loss of $1,125,673 on our investment in Intrinsiq Material, Inc. (Intrinsiq) when the company was sold and we did not receive any proceeds. In addition we restructured our notes in First Wave Technologies, Inc. (First Wave) and converted the notes into equity. As part of that restructuring we recognized a realized loss of $338,469 on the junior note and the warrants.

During the year ended December 31, 2017, one of our portfolio companies, Athenex Inc. (Athenex) completed an initial public offering and its common stock became publicly traded on the Nasdaq Global Select Market under the symbol “ATNX”. We sold our shares in Athenex and recognized a net realized gain, before income taxes, of $638,240 on the sale of the 46,296 Athenex shares.

In addition, during 2017, we recognized a realized loss of $500,000 on our investment in City Dining Cards (Loupe) when the company ceased operations.

During 2016 our portfolio company, Gemcor II, LLC, sold its assets, and we received gross cash proceeds of approximately $14.1 million, excluding amounts held in escrow, and recognized a realized gain, before income taxes, of $14,620,063. The escrow holdback at December 31, 2016 was $1,100,000. The escrow was released, in full, during 2017.

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

Net Change in Unrealized Depreciation on Investments

The change in unrealized depreciation, before income taxes, for the year ended December 31, 2018 was comprised of the following:

	Year ended December 31, 2018
Empire Genomics, LLC (Empire Genomics)	($	901,360	)
Rheonix, Inc. (Rheonix)		(735,999	)
SOMS Technologies, LLC (SOMS)		(528,348	)
BeetNPath, LLC (Beetnpath)		(388,723	)
KnowledgeVision Systems, Inc. (Knowledgevision)		(300,000	)
Mercantile Adjustment Bureau, LLC (Mercantile)		(249,040	)
G-Tec Natural Gas Systems (Gtec)		(100,000	)
Genicon, Inc. (Genicon)		(82,500	)
OnCore Golf Technology, Inc. (Oncore)		(77,712	)
First Wave Products Group (First Wave)		121,469
GiveGab, Inc. (Givegab)		191,907
Microcision LLC (Microcision)		610,000
Intrinsiq Material, Inc. (Intrinsiq) reclassed to a realized loss		725,673
ACV Auctions, Inc. (ACV)		2,494,551
Total change in net unrealized depreciation of investments before income taxes during the year ended December 31, 2018	$	779,918

29

The valuations of our investments in Beetnpath, Empire Genomics, Gtec, Mercantile, Oncore, Rheonix, and SOMS were decreased after we reviewed each of the portfolio company’s operations, commercial progress against their business plan, and past and projected financial condition and determined that a valuation adjustment was necessary.

Our valuation of First Wave was changed to reflect a conversion from debt instruments to equity holdings. As part of this restructure we recognized a realized loss on the junior note and the warrants.

Givegab’s value was increased to the cost basis of the investment after a financial analysis of the portfolio company indicating continued improved performance.

Our valuation of Knowledgevision and Genicon were decreased during the year ended December 31, 2018 to revalue our holdings based upon liquidation preferences of our securities and on a recent round of financing.

In accordance with our valuation policy, we increased the value of our holdings in ACV and Microcision. ACV was increased based on a significant equity financing during 2018 with sophisticated new non-strategic outside investors at a higher valuation than their prior financing round valuation. Microcision was increased based on a financial analysis of the company indicating positive cash flow from operations for the past two years.

The Intrinsiq investment was written off after the company was sold during 2018 and we did not receive any proceeds.

The change in unrealized depreciation, before income taxes, for the year ended December 31, 2017 was comprised of the following:

	Year ended December 31, 2017
SciAps, Inc. (Sciaps)	($	554,710	)
Teleservices Solutions Holdings, LLC (Teleservices)		(395,398	)
Intrinsiq Materials, Inc. (Intrinsiq)		(380,000	)
Athenex, Inc. (Athenex) reclass to a realized gain		(273,379	)
Mercantile Adjustment Bureau, LLC (Mercantile)		(250,000	)
BeetNPath, LLC (Beetnpath)		29,723
ACV Auctions, Inc. (ACV)		119,356
Carolina Skiff LLC (Carolina Skiff)		650,000
Knoa Software, Inc. (Knoa)		779,700
Total change in net unrealized depreciation on investments before income taxes during the year ended December 31, 2017	($	274,708	)

The valuations of our investments in Intrinsiq, Mercantile and Teleservices were decreased after we reviewed each portfolio company and its current and projected financial condition and determined that a valuation adjustment was necessary.

In accordance with our valuation policy, we adjusted the value of our investments in ACV, Beetnpath and Sciaps based on a significant equity financing by a new non-strategic outside entity, and consideration of the related affect on the liquidation preferences of our existing investment instrument in each of the companies. In addition, our investments in Carolina Skiff and Knoa were increased based on a financial analysis of each portfolio company indicating improved performance.

30

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

	Year ended December 31, 2016
Gemcor II, LLC (Gemcor) reclassed 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 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 was held in escrow at December 31, 2016.

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. 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 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.

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 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 in net assets from operations” on our consolidated statements of operations. During the year ended December 31, 2018, the net decrease in net assets from operations was ($394,498) as compared with net decreases of ($710,678) in 2017 and ($1,202,683) in 2016.

Liquidity and Capital Resources

Historically, our principle objective has been 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 discussed above, on the closing of the Transactions contemplated by the Stock Purchase Agreement with East, we expect to receive interest bearing investments and subsequently to position the portfolio to earn a current yield.

31

As of December 31, 2018, our total liquidity consisted of $4,033,792 in cash and cash equivalents. In addition we had an outstanding SBA leverage commitment of $5,250,000 at December 31, 2018.

Net cash used by operating activities has averaged approximately $820,000 over the last three years. The cash used for investments in portfolio companies has averaged approximately $4,600,000 over the last three years. Our cash flow may fluctuate based on the timing of the receipt of dividend income, realized exits and the associated income taxes paid. We will generally use cash to fund our operating expenses and to invest in companies as we build our portfolio. We anticipate that we will continue to exit investments. However, the timing of liquidation events within the portfolio is difficult to project. Starting in 2022 (See Note 5. in the Notes to the Consolidated Financial Statements), our outstanding 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.

The following table summarizes the SBA leverage at the year ends indicated:

	December 31, 2018		December 31, 2017
Outstanding SBA leverage	$	8,750,000	$	8,000,000
Outstanding SBA commitment	$	5,250,000	$	0

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, 2018. These payments represent scheduled principal and interest payments that are due under the terms of the investment securities we own in each portfolio company and are subject to change based on factors such as conversions and restructurings. It does not include any equity investments, which may provide additional proceeds upon exit of the investment.

	Cash Receipts due by year
	2019		2020		2021		2022		2023 and beyond
Scheduled cash receipts from portfolio companies	$	1,507,000	$	12,709,000	$	2,026,000	$	1,100,000	$	2,500,000
Number of companies contributing to the scheduled cash receipts		10		10		4		2		1

We believe that the cash on hand at December 31, 2018, the outstanding SBA leverage commitment and the scheduled interest payments on our portfolio investments will be sufficient to meet our cash needs throughout 2019. We continue to pursue 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, 2018. We do not have any capital lease obligations or other long-term liabilities reflected on our consolidated statement of financial position.     

	Payments due by period
	Total		Less than 1 year		1-3 years		4-5 years		More than 5 yrs
SBA debentures	$	8,750,000	$	0	$	3,000,000	$	4,000,000	$	1,750,000
SBA interest expense	$	1,706,000	$	304,000	$	943,000	$	301,000	$	158,000
Operating lease obligations (Rent of office space)	$	39,180	$	19,440	$	19,740	$	0	$	0
Total	$	10,495,180	$	323,440	$	3,962,740	$	4,301,000	$	1,908,000

32

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our investment activities contain elements of risk. The portion of our investment portfolio consisting of debt and equity securities in private companies is subject to valuation risk. Because there is typically no public market for the debt and equity securities in which we invest, the valuations of the debt and equity interests in the portfolio are stated at “fair value” as determined in good faith by our management 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 change in unrealized depreciation on investments.”

At times, a portion of our portfolio may include marketable securities traded in the over-the-counter market or on stock exchange. 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, 2018, we did not have any off-balance sheet arrangements or hedging or similar derivative financial instrument investments.

33

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:

Consolidated Statements of Financial Position as of December  31, 2018 and 2017	35
Consolidated Statements of Operations for the three years in the period ended December 31, 2018	36
Consolidated Statements of Changes in Net Assets for the three years in the period ended December 31, 2018	37
Consolidated Statements of Cash Flows for the three years in the period ended December 31, 2018	38
Consolidated Schedule of Portfolio Investments as of December  31, 2018	39
Consolidated Schedule of Portfolio Investments as of December  31, 2017	47
Financial Highlights Schedule for the five years in the period ended December 31, 2018	55
Notes to the Consolidated Financial Statements	56
Supplemental Schedule of Consolidated Changes in Investments at Cost and Realized Loss for the year ended December 31, 2018	74
Report of Independent Registered Public Accounting Firm	75

34

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31,

	2018			2017
ASSETS
Investments at fair value:
Control investments (cost of $ 99,500)	$	99,500		$	99,500
Affiliate investments (cost of $20,708,659 and $20,871,129, respectively)		17,026,091			17,016,795
Non-Control/Non-Affiliate investments (cost of $17,483,984 and $15,718,690, respectively)		17,541,213			15,167,767
Total investments, at fair value (cost of $38,292,143 and $36,689,319, respectively)		34,666,804			32,284,062
Cash and cash equivalents		4,033,792			6,262,039
Interest receivable (net of allowance: $161,000)		145,532			231,048
Deferred tax asset		525,198			551,863
Prepaid income taxes		1,138,708			762,047
Other assets		11,690			42,854
Total assets	$	40,521,724		$	40,133,913
LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)
Liabilities:
Debentures guaranteed by the SBA (net of debt issuance costs)	$	8,554,443		$	7,855,173
Profit sharing and bonus payable		125,000			144,000
Accounts payable and accrued expenses		245,758			178,348
Deferred revenue		72,336			37,707
Total liabilities		8,997,537			8,215,228
Commitments and contingencies (See Note 9)
Stockholders’ equity (net assets):
Common stock, $0.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,321,988 at 2018 and 2017		686,304			686,304
Capital in excess of par value		10,581,789			10,581,789
Accumulated net investment loss		(1,665,552	)		(1,597,146	)
Undistributed net realized gain on investments		26,221,443			27,215,738
Net unrealized depreciation on investments		(2,830,692	)		(3,498,895	)
Treasury stock, at cost: 541,046 shares		(1,469,105	)		(1,469,105	)
Total stockholders’ equity (net assets) (per share 2018: $4.99, 2017: $5.05)		31,524,187			31,918,685
Total liabilities and stockholders’ equity (net assets)	$	40,521,724		$	40,133,913

See accompanying notes

35

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Years Ended December 31, 2018, 2017 and 2016

	2018			2017			2016
Investment income:
Interest from portfolio companies:
Control investments	$	—		$	—		$	11,828
Affiliate investments		741,432			563,708			403,850
Non-Control/Non-Affiliate investments		757,308			591,608			351,475
Total interest from portfolio companies		1,498,740			1,155,316			767,153
Interest from other investments:
Non-Control/Non-Affiliate investments		37,614			30,761			45,139
Total interest from other investments		37,614			30,761			45,139
Dividend and other investment income:
Control investments		60,000			—			—
Affiliate investments		318,324			233,544			188,908
Non-Control/Non-Affiliate investments		6,058			10,070			4,024
Total dividend and other investment income		384,382			243,614			192,932
Fee income:
Control investments		—			—			2,000
Affiliate investments		15,667			8,416			5,862
Non-Control/Non-Affiliate investments		170,551			16,675			18,772
Total fee income		186,218			25,091			26,634
Total investment income		2,106,954			1,454,782			1,031,858
Expenses:
Salaries		679,499			661,650			621,749
Profit sharing and bonuses		125,000			12,000			1,385,052
Employee benefits		194,818			160,779			174,796
Directors’ fees		128,750			142,499			184,750
Professional fees		407,159			356,936			339,823
Shareholders and office operating		230,050			249,085			227,631
Insurance		34,187			31,876			32,134
Corporate development		62,117			65,202			64,412
Other operating		21,092			20,675			21,414
		1,882,672			1,700,702			3,051,761
Interest on SBA obligations		311,000			310,275			310,276
Bad debt expense		—			—			39,000
Total expenses		2,193,672			2,010,977			3,401,037
Investment loss before income taxes		(86,718	)		(556,195	)		(2,369,179	)
Income tax benefit		(18,312	)		(536,897	)		(815,911	)
Net investment loss		(68,406	)		(19,298	)		(1,553,268	)
Net realized (loss) gain on sales and dispositions of investments:
Control investments		—			—			14,620,063
Affiliate investments		(1,464,142	)		—			(650,000	)
Non-Control/Non-Affiliate investments		—			138,240			168,140
Net realized (loss) gain on sales and dispositions, before income taxes		(1,464,142	)		138,240			14,138,203
Income tax (benefit) expense		(469,847	)		49,556			5,273,550
Net realized (loss) gain on sales and dispositions of investments		(994,295	)		88,684			8,864,653
Net change in unrealized depreciation on investments:
Control investments		—			—			(12,775,000	)
Affiliate investments		608,207			129,315			(846,651	)
Non-Control/Non-Affiliate investments		171,711			(404,023	)		69,444
Change in unrealized depreciation before income taxes		779,918			(274,708	)		(13,552,207	)
Deferred income tax expense (benefit)		111,715			505,356			(5,038,139	)
Net change in unrealized depreciation or appreciation on investments		668,203			(780,064	)		(8,514,068	)
Net realized and unrealized (loss) gain on investments		(326,092	)		(691,380	)		350,585
Net decrease in net assets from operations	($	394,498	)	($	710,678	)	($	1,202,683	)
Weighted average shares outstanding		6,321,988			6,321,988			6,325,792
Basic and diluted net decrease in net assets from operations per share		(0.06	)		(0.11	)		(0.19	)

See accompanying notes

36

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

For The Years Ended December 31, 2018, 2017 and 2016

	2018			2017			2016
Net assets at beginning of year	$	31,918,685		$	32,629,363		$	33,853,660
Net investment loss		(68,406	)		(19,298	)		(1,553,268	)
Net realized (loss) gain on sales and dispositions of investments		(994,295	)		88,684			8,864,653
Net increase (decrease) in unrealized depreciation or appreciation on investments		668,203			(780,064	)		(8,514,068	)
Net decrease in net assets from operations		(394,498	)		(710,678	)		(1,202,683	)
Purchase of treasury stock		—			—			(21,614	)
Total decrease in net assets		(394,498	)		(710,678	)		(1,224,297	)
Net assets at end of year	$	31,524,187		$	31,918,685		$	32,629,363
Accumulated net investment loss	($	1,665,552	)	($	1,597,146	)	($	1,577,848	)

See accompanying notes.

37

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 2018, 2017 and 2016

	2018			2017			2016
Cash flows from operating activities:
Net decrease in net assets from operations	($	394,498	)	($	710,678	)	($	1,202,683	)
Adjustments to reconcile net decrease in net assets to net cash (used in) provided by operating activities:
Investments originated		(2,487,627	)		(5,400,000	)		(5,883,012	)
Proceeds from sale of portfolio investments		—			781,525			15,413,203
Proceeds from loan repayments		70,131			—			416,972
Net realized loss (gain) on portfolio investments		1,464,142			(138,240	)		(14,138,203	)
Change in unrealized depreciation on investments		(779,918	)		274,708			13,552,207
Deferred tax expense (benefit)		26,665			613,301			(3,526,350	)
Depreciation and amortization		29,686			31,433			33,390
Original issue discount accretion		(39,653	)		(32,129	)		(9,996	)
Change in interest receivable allowance		—			—			39,000
Non-cash conversion of debenture interest		(609,817	)		(269,445	)		(19,252	)
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable		85,516			93,189			(148,013	)
Decrease in other assets		28,936			1,101,621			450,752
(Increase) decrease in prepaid income taxes		(376,661	)		(762,047	)		65,228
(Decrease) increase in income taxes payable		—			(320,008	)		320,008
(Decrease) increase in profit sharing and bonus payable		(19,000	)		(1,126,052	)		988,052
Increase (decrease) in accounts payable and accrued liabilities		67,410			(146,189	)		85,626
Increase (decrease) in deferred revenue		34,629			(9,090	)		20,867
Total adjustments		(2,505,561	)		(5,307,423	)		7,660,479
Net cash (used in) provided by operating activities		(2,900,059	)		(6,018,101	)		6,457,796
Cash flows from investing activities:
Capital expenditures		—			—			(837	)
Net cash used in investing activities		—			—			(837	)
Cash flows from financing activities:
Proceeds from SBA debentures		750,000			—			—
Origination costs to SBA		(78,188	)		—			—
Purchase of treasury shares		—			—			(21,614	)
Net cash provided by (used in) financing activities		671,812			—			(21,614	)
Net (decrease) increase in cash		(2,228,247	)		(6,018,101	)		6,435,345
Cash:
Beginning of year		6,262,039			12,280,140			5,844,795
End of year	$	4,033,792		$	6,262,039		$	12,280,140

See accompanying notes

38

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018

Company, Geographic Location, Business Description, (Industry) and Website	(a)                 Type of Investment	(b) Date   Acquired		(c)   Equity			Cost		(d)(f) Fair   Value		Percent of Net   Assets
Non-Control/Non-Affiliate Investments – 55.7% of net assets: (j)
ACV Auctions, Inc. (e)(g)	1,181,160 Series A Preferred.		8/12/16		<1	%	$	163,000	$	2,776,907		8.8	%
Buffalo, NY. Live mobile wholesale auctions for new and used car dealers. (Software) www.acvauctions.com
Centivo Corporation (e)(g)	190,967 Series A-1 Preferred.		7/5/17		<1	%		200,000		200,000		1.0	%
New York, NY. Tech-enabled health solutions company that helps self-insured employers and their employees save money and have a better experience. (Health Care) www.centivo.com	337,808 Series A-2 Preferred.							101,342		101,342
	Total Centivo							301,342		301,342
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	$3,500,000 Term Note at 13% due December 31, 2020.		6/28/16		0	%		3,500,000		3,500,000		11.1	%
Empire Genomics, LLC (g)(m) 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	$1,209,014 Senior Secured Convertible Term Notes at 10% (8% PIK through September 30, 2019) due December 31, 2020. $444,915 Promissory Note at 9% (4% PIK) due December 31, 2020.		6/13/14		0	%		1,233,195 444,915		474,181 302,569		2.4	%
	Total Empire							1,678,110		776,750
GiveGab, Inc. (e)(g)	5,084,329 Series Seed Preferred.		3/13/13		4	%		616,221		616,221		2.0	%
Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software) www.givegab.com
GoNoodle, Inc. (g)(m)	$1,000,000 Secured Note at 12%		2/6/15		<1	%		1,039,663		1,039,663		3.3	%
Nashville, TN. Student engagement education software providing core aligned physical activity breaks. (Software) www.gonoodle.com	due January 31, 2020, (1% PIK). Warrant for 47,324 Series C Preferred.							25		25
	Total GoNoodle							1,039,688		1,039,688
Mercantile Adjustment Bureau, LLC (g) Williamsville, NY. Full service	$1,199,039 Subordinated Secured Note at 13% (3% for the calendar year 2018) due January 31, 2019.		10/22/12		4	%		1,199,040		700,000		2.2	%
accounts receivable management and collections company. (Contact Center)	(e) $150,000 Subordinated Debenture at 8% due June 30, 2018.							150,000		—
www.mercantilesolutions.com	Warrant for 3.29% Membership Interests. Option for 1.5% Membership Interests.							97,625		—
	(i) Interest receivable $50,254.
	Total Mercantile							1,446,665		700,000
Outmatch Holdings, LLC (e)(g)	2,798,883 Class P1 Units.		11/18/10		4	%		2,140,007		2,140,007		6.8	%
(Chequed Holdings, LLC)	109,788 Class C1 Units.							5,489		5,489
Dallas, TX. Web based predictive employee selection and reference checking. (Software) www.outmatch.com
	Total Outmatch							2,145,496		2,145,496
PostProcess Technologies LLC (e)(g)	$300,000 Convertible Promissory		7/25/16		0	%		300,000		300,000		1.0	%
Buffalo, NY. Provides innovative solutions for the post-processing of additive manufactured 3D parts. (Manufacturing) www.postprocess.com	Note at 5% due July 28, 2020.

39

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Company, Geographic Location, Business Description, (Industry) and Website	(a) Type of Investment	(b) Date Acquired	(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
Rheonix, Inc. (e)	9,676 Common.	10/29/09		4	%		—		—		7.0	%
Ithaca, NY. Developer of fully automated microfluidic based molecular assay and diagnostic testing devices. (Health Care) www.rheonix.com	(g) 1,839,422 Series A Preferred.						2,099,999		1,500,000
	(g) 50,593 Common.						—		—
	(g) 589,420 Series B Preferred.						702,732		702,732
	Total Rheonix						2,802,731		2,202,732
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. 1,204,819 Series B-1 Preferred. 717,772 Series C Preferred.	4/5/13		4	%		500,000 750,000 500,000		731,431 839,648 500,221		6.6	%
	Total Social Flow						1,750,000		2,071,300
Somerset Gas Transmission Company, LLC (e)	26.5337 Units.	7/10/02		3	%		719,097		500,000		1.6	%
Columbus, OH. Natural gas transportation. (Oil and Gas) www.somersetgas.com
Tech 2000, Inc. (g)(m)	$600,000 Term Note at 14% (PIK through December 31, 2018) due November 15, 2021.	11/16/18		0	%		610,777		610,777		1.9	%
Herndon, VA. Develops and delivers IT training. (Software) www.t2000inc.com
Other Non-Control/Non-Affiliate Investments:
DataView, LLC (e) (Software)	Membership Interest.	10/1/98		5	%		310,357		—		0.0	%
UStec/Wi3 (e) (Manufacturing)	Common stock.	12/17/98		<1	%		100,500		—		0.0	%
Subtotal Non-Control/Non-Affiliate Investments						$	17,483,984	$	17,541,213
Affiliate Investments – 54.0% of net assets (k)
BeetNPath, LLC (Grainful) (e)(g)	1,119,024 Series A-2 Preferred Membership Units.	10/20/14		9	%	$	359,000	$	—		1.7	%
Ithaca, NY. Frozen entrées made from 100% whole grain steel cut oats under Grainful brand name. (Consumer Product) www.grainful.com
	1,032,918 Series B Preferred Membership Units.
							261,277		261,277
	$262,626.64 Convertible Secured Notes at 8% due December 21, 2019.						262,627		262,627
	Total BeetNPath						882,904		523,904
Carolina Skiff LLC (g) Waycross, GA. Manufacturer of ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com	6.0825% Class A Common Membership Interest.	1/30/04		7	%		15,000		1,750,000		5.6	%
ClearView Social, Inc. (e)(g)	312,500 Series Seed Plus Preferred.	1/4/16		6	%		200,000		200,000		0.6	%
Buffalo, NY. Social media publishing tool for law, CPA and professional firms. (Software) www.clearviewsocial.com
First Wave Technologies, Inc. (e)(g)	670,443.2 Class A Common.	4/19/12		5	%		661,563		33,000		0.1	%
Batavia, NY. Sells First Crush automated pill crusher that crushes and grinds pills for nursing homes and medical institutions. (Health Care) www.firstwaveproducts.com

40

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Company, Geographic Location, Business Description, (Industry) and Website	(a) Type of Investment	(b) Date Acquired	(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
Genicon, Inc. (g) (m)	1,586,902 Series B Preferred.	4/10/15		6	%		1,000,000		1,000,000		14.0	%
Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care) www.geniconendo.com	$3,250,000 Promissory Notes at 10%
	due May 1, 2020, (8% PIK).						3,385,586		3,385,586
	Warrants for 500,000 Common.						120,000		37,500
	Total Genicon						4,505,586		4,423,086
Knoa Software, Inc. (e)(g)	973,533 Series A-1 Convertible Preferred. 1,876,922 Series B Preferred.	11/20/12		7	%		750,000		750,000		3.9	%
New York, NY. End user experience management and performance (EMP) solutions utilizing enterprise applications. (Software) www.knoa.com							479,155		479,155
	Total Knoa						1,229,155		1,229,155
KnowledgeVision Systems, Inc. (g)	200,000 Series A-1 Preferred.	11/13/13		7	%		250,000		—		3.2	%
Lincoln, MA. Online presentation and training software. (Software)	214,285 Series A-2 Preferred.						300,000		—
	129,033 Series A-3 Preferred.						165,001		165,001
www.knowledgevision.com	Warrant for 46,743 Series A-3.						35,000		35,000
	$75,000 Subordinated Promissory Notes at 8% payable on demand of majority of holders after August 31, 2019.(e) $750,000 Term Note at 11% due April						75,000		75,000
	30, 2021.						750,000		750,000
	Total KnowledgeVision						1,575,001		1,025,001
Mezmeriz, Inc. (e)(g)	1,554,565 Series Seed Preferred.	1/9/08		12	%		742,850		351,477		1.1	%
Ithaca, NY. Technology company developing novel reality capture tools for 3D mapping, reality modeling, object tracking and classification. (Electronics Developer) www.mezmeriz.com
Microcision LLC (g)(m)	$1,500,000 Subordinated Promissory	9/24/09		15	%		1,933,353		1,933,353		8.1	%
Pennsauken Township, NJ. Manufacturer of precision machined medical implants, components and assemblies. (Manufacturing)	Note at 12% (1% PIK) due December
	31, 2024.
	15% Class A Common Membership
www.microcision.com	Interest.						—		610,000
	Total Microcision						1,933,353		2,543,353
New Monarch Machine Tool, Inc. (g)	22.84 Common.	9/24/03		15	%		22,841		22,841		0.1	%
Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing)
www.monarchmt.com
OnCore Golf Technology, Inc. (e)(g)	300,483 Preferred AA.	12/31/14		8	%		752,712		300,000		1.0	%
Buffalo, NY. Patented and Proprietary Golf Balls utilizing breakthrough technology and innovation, inspiring golfers at all skill levels and abilities. (Consumer Product)
www.oncoregolf.com
SciAps, Inc. (e)(g)	187,500 Series A Preferred.	7/12/13		6	%		1,500,000		700,000		6.4	%
Woburn, MA. Instrumentation company producing portable analytical devices using XRF, LIBS and RAMAN spectroscopy to identify compounds, minerals, and elements. (Manufacturing) www.sciaps.com	274,299 Series A-1 Convertible Preferred.						504,710		250,000
	117,371 Series B Convertible Preferred.						250,000		250,000
	113,636 Series C Convertible Preferred.						175,000		175,000
	369,698 Series C-1 Convertible Preferred.						399,274		399,274
	147,059 Series D Convertible Preferred.						250,000		250,000
	Total SciAps						3,078,984		2,024,274

41

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Company, Geographic Location, Business Description, (Industry) and Website	(a) Type of Investment	(b) Date Acquired	(c) Equity			Cost		(d)(f) Fair Value			Percent of Net Assets
Teleservices Solutions Holdings, LLC (e)(g)(m)	250,000 Class B Preferred Units.	5/30/14		6	%		250,000		—			0.0	%
Montvale, NJ. Customer contact center specializing in customer acquisition and retention for selected industries. (Contact Center) www.ipacesetters.com	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.						1,190,680		—
							91,200		—
							104,198		—
	Total Teleservices						1,636,078		—
Tilson Technology Management, Inc. (g)	120,000 Series B Preferred.	1/20/15		11	%		600,000		600,000			8.2	%
Portland, ME. Cellular, fiber optic and wireless	21,391 Series C Preferred.						200,000		200,000
information systems, construction, and	70,176 Series D Preferred.						800,000		800,000
management. (Professional Services)	$800,000 Subordinated Promissory
www.tilsontech.com	Notes at 8% due December 1, 2022.						800,000		800,000
	$200,000 Subordinated Promissory
	Note at 8% due September 28, 2021.						200,000		200,000
	Total Tilson						2,600,000		2,600,000
Other Affiliate Investments:
G-TEC Natural Gas Systems(e)	Membership Interest	8/31/99		17	%		400,000		—			0.0	%
(Manufacturing)
SOMS Technologies, LLC (e)(g)	Membership Interest	12/2/08		9	%		472,632		—			0.0	%
(Consumer Products)
Subtotal Affiliate Investments						$	20,708,659	$	17,026,091
Control Investments – 0.3% of net assets (l)
Advantage 24/7 LLC (g)	45% Membership Interest.	12/30/10		45	%	$	99,500	$	99,500			0.3	%
Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company) www.advantage24-7.com
Subtotal Control Investments						$	99,500	$	99,500
TOTAL INVESTMENTS – 110%						$	38,292,143	$	34,666,804
LIABILITIES IN EXCESS OF OTHER ASSETS – (10%)									(3,142,617	)
NET ASSETS – 100%								$	31,524,187

42

RAND CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Notes to the Consolidated Schedule of Portfolio Investments

(a) At December 31, 2018, 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. Type of investment for equity position is in form of shares unless otherwise noted as units or interests, i.e., preferred shares, common shares.

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

(c) Each equity percentage estimates the 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, 2018, 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 reporting period. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 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. However, if a debt or a preferred equity fails to make its most recent payment, then the investment will also be classified as non-income producing.

(f) As of December 31, 2018 the total cost of investment securities was approximately $38.3 million. Net unrealized depreciation was approximately ($3.6) million, which was comprised of $5.3 million of unrealized appreciation of investment securities and ($8.9) million of unrealized depreciation of investment securities. At December 31, 2018, the aggregate gross unrealized gain for federal income tax purposes was $5.2 million and the aggregate gross unrealized loss for federal income tax purposes was ($5.9) million. The net unrealized loss for federal income tax purposes was ($0.7) million based on a tax cost of $35.4 million.

(g) Rand Capital SBIC, Inc. investment.

(h) Reduction in cost and value from previously reported balances reflects current principal repayment.

(i) Represents interest due (amounts over $50,000) from investments included as interest receivable on the Corporation’s Consolidated Statements 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.

43

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Investments in and Advances to Affiliates

Company	Type of Investment	December 31, 2017 Fair Value		Gross Additions (1)		Gross Reductions (2)			December 31, 2018 Fair Value		Net Realized (Losses)			Amount of Interest/ Dividend/ Fee Income (3)
Control Investments:
Advantage 24/7 LLC	45% Membership Interest.	$	99,500	$	—	$	—		$	99,500	$	—		$	60,000
	Total Control Investments	$	99,500	$	—	$	—		$	99,500	$	—		$	60,000
Affiliate Investments:
BeetNPath, LLC	1,119,024 Series A-2 Preferred Membership Units.	$	359,000	$	—	($	359,000	)	$	—	$	—		$	—
	1,032,918 Series B Preferred Membership Units.		291,000		—		(29,723	)		261,277		—			—
	$262,626.64 Convertible Secured Note at 8%		—		262,627		—			262,627		—			5,413
	Total BeetNPath		650,000		262,627		(388,723	)		523,904		—			5,413
Carolina Skiff LLC	6.0825% Class A Common Membership interest.		1,750,000		—		—			1,750,000		—			251,913
ClearView Social, Inc.	312,500 Series Seed Plus Preferred.		200,000		—		—			200,000		—			—
First Wave Technologies, Inc.	$500,000 senior term notes at 10%.		250,000		—		(250,000	)		—		(316,469	)		—
	$280,000 junior term notes at 10%		—		—		—			—		—			—
	Warrant for 41,619 capital securities.		—		—		—			—		( 22,000	)		—
	670,443.2 Class A Common.		—		33,000		—			33,000		—			—
	Total First Wave		250,000		33,000		(250,000	)		33,000		(338,469	)		—
Genicon, Inc.	1,586,902 Series B Preferred.		1,000,000		—		—			1,000,000		—			—
	$3,250,000 Promissory Notes at 8%.		2,903,779		481,807		—			3,385,586		—			348,512
	Warrant for 250,000 Common.		120,000		—		(82,500	)		37,500		—			—
	Total Genicon		4,023,779		481,807		(82,500	)		4,423,086		—			348,512
GiveGab, Inc.	5,084,329 Series Seed Preferred.		424,314		191,907		(616,221	)		—		—			—
G-TEC Natural Gas Systems	16.639% Class A Membership Interest. 8% cumulative dividend.		100,000		—		(100,000	)		—		(1,125,673	)		—
Intrinsiq Materials, Inc.	4,161,747 Series A Preferred.		400,000		—		(400,000	)		—		—			—
Knoa Software, Inc.	973,533 Series A-1 Convertible Preferred.		750,000		—		—			750,000		—			—
	1,876,922 Series B Preferred.		479,155		—		—			479,155		—			—
	$48,466 Convertible Promissory Note at 8%.		48,466		—		(48,466	)		—		—			773
	Total Knoa		1,277,621		—		(48,466	)		1,229,155		—			773
KnowledgeVision	200,000 Series A-1 Preferred.		—		—		—			—		—			—
Systems, Inc.	214,285 Series A-2 Preferred.		300,000		—		(300,000	)		—		—			—
	129,033 Series A-3 Preferred.		165,001		—		—			165,001		—			—
	$75,000 Subordinated Promissory Notes at
	8%		50,000		25,000		—			75,000		—			5,408
	$750,000 term note at 11%		—		750,000		—			750,000		—			60,241
	Warrant for 46,743 Series A-3.		35,000		—		—			35,000		—			—
	Total KnowledgeVision		550,001		775,000		(300,000	)		1,025,001		—			65,649
Mezmeriz, Inc.	1,554,565 Series Seed Preferred.		351,477		—		—			351,477		—			—
Microcision LLC	$1,500,000 Subordinated Promissory Note at 12% (1% PIK) due December 31, 2024.		1,914,140		19,213		—			1,933,353		—			230,559
	15% Class A Common Membership Interest.		—		610,000		—			610,000		—			—
	Total Microcision		1,914,140		629,213		—			2,543,353		—			230,559
New Monarch Machine Tool, Inc.	22.84 Common.		22,841		—		—			22,841		—			29,409

44

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Investments in and Advances to Affiliates

Company	Type of Investment	December 31, 2017 Fair Value		Gross Additions (1)		Gross Reductions (2)			December 31, 2018 Fair Value		Net Realized (Losses)			Amount of Interest/ Dividend/ Fee Income (3)
OnCore Golf Technology, Inc.	150,000 Series AA Preferred. $300,000 Subordinated Convertible		—		300,000		—			300,000		—			—
	Promissory notes at 6%.		300,000		—		(300,000	)		—		—			27,370
	Total OnCore		300,000		300,000		(300,000	)		300,000		—			27,370
SciAps, Inc.	187,500 Series A Convertible Preferred.		700,000		—		—			700,000		—			—
	274,299 Series A-1 Convertible Preferred.		250,000		—		—			250,000		—			—
	117,371 Series B Convertible Preferred.		250,000		—		—			250,000		—			—
	113,636 Series C Preferred.		175,000		—		—			175,000		—			—
	369,698 Series C-1 Preferred.		399,274		—		—			399,274		—			—
	147,059 Series D Convertible Preferred		—		250,000		—			250,000		—			—
	Total SciAps		1,774,274		250,000		—			2,024,274		—			—
SOMS Technologies, LLC	5,959,490 Series B membership Interests.		528,348		—		(528,348	)		—		—			—
Teleservices Solutions Holdings, LLC	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.		—		—		—			—		—			—
	Total Teleservices		—		—		—			—		—			—
Tilson Technology Management, Inc.	120,000 Series B Preferred.		600,000		—		—			600,000		—			20,000
	21,391 Series C Convertible Preferred.		200,000		—		—			200,000		—			—
	70,176 Series D Preferred.		750,000		50,000		—			800,000		—			19,003
	$200,000 Subordinated Promissory Note at 8%.		200,000		—		—			200,000		—			16,000
	$800,000 Subordinated Promissory Note at 8%.		750,000		50,000		—			800,000		—			60,822
	Total Tilson		2,500,000		100,000		—			2,600,000		—			115,825
	Total Affiliate Investments	$	17,016,795	$	3,023,554	($	3,014,258	)	$	17,026,091	($	1,464,142	)	$	1,075,423
	Total Control and Affiliate Investments	$	17,116,295	$	3,023,554	($	3,014,258	)	$	17,125,591	($	1,464,142	)	$	1,135,423

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

(2) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales, note conversions, net increases in unrealized depreciation, net decreases in unrealized appreciation, the exchange of existing securities for new securities and the movement of an existing portfolio company out of this category and into another category.

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

45

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2018 (Continued)

Industry Classification	Percentage of Total Investments (at fair value) as of December 31, 2018
Software		33.8	%
Healthcare		32.4
Manufacturing		19.2
Professional Services		7.5
Consumer Product		2.4
Contact Center		2.0
Oil and Gas		1.4
Electronics		1.0
Marketing		0.3
Total Investments		100	%

46

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017

Company, Geographic Location, Business Description, (Industry) and Website	(a) Type of Investment	(b) Date Acquired		(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
Non-Control/Non-Affiliate Investments – 47.5% of net assets: (j)
ACV Auctions, Inc. (e)(g) Buffalo, NY. Live mobile wholesale auctions for new and used car dealers. (Software) www.acvauctions.com	1,181,160 Series A preferred shares.		8/12/16		<1	%	$	163,000	$	282,356		0.9	%
Centivo Corporation (e)(n) New York, NY. Tech-enabled health solutions company that helps self-insured employers and their employees save money and have a better experience. (Health Care)	$100,000 convertible unsecured note at 2% due February 1, 2019.		7/5/17		0	%		100,000		100,000		0.3	%
eHealth Global Technologies, Inc. Henrietta, NY. eHealth Connect® improves health care delivery through intelligently aggregated clinical record and images for patient referrals. (Health Care) www.ehealthtechnologies.com	(g) $1,500,000 term note at 10% due September 2, 2019. (n) $2,000,000 term note at 10% due September 2, 2019.		6/28/16		0	%		1,500,000		1,500,000		11.0	%
								2,000,000		2,000,000
	Total eHealth							3,500,000		3,500,000
Empire Genomics, LLC (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	$1,101,489 senior secured convertible term notes at 10% due April 30, 2018. $250,000 promissory note at 12% due December 31, 2019.		6/13/14		0	%		1,101,489		1,101,489		4.2	%
								250,000		250,000
	(i) Interest receivable $65,906.
	Total Empire							1,351,489		1,351,489
GoNoodle, Inc. (g)(m) (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	%		1,029,330		1,029,330		3.2	%
								25		25
	Total GoNoodle							1,029,355		1,029,355
Mercantile Adjustment Bureau, LLC (g) Williamsville, NY. Full service accounts receivable management and collections company. (Contact Center) www.mercantilesolutions.com	$1,199,039 subordinated secured note at 13% (3% for the calendar year 2017) due January 31, 2018.		10/22/12		4	%		1,199,040		949,040		3.0	%
	(e) $150,000 subordinated debenture at 8% due June 30, 2018.							150,000		—
	Warrant for 3.29% membership interests. Option for 1.5% membership interests. (i) Interest receivable $55,983.							97,625		—
	Total Mercantile							1,446,665		949,040
Outmatch Holdings, LLC (e)(g) (Chequed Holdings, LLC) Dallas, TX. Web based predictive employee selection and reference checking. (Software) www.outmatch.com	2,641,899 Class P1 Units. 109,788 Class C1 Units.		11/18/10		4	%		2,140,007		2,140,007		6.7	%
								5,489		5,489
	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	%

47

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

Company, Geographic Location, Business Description, (Industry) and Website	(a)         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.		10/29/09		4	%		—		11,000		9.2	%
	(g) 1,839,422 Series A preferred shares.							2,099,999		2,165,999
	(g) 50,593 common shares.							—		59,000
	(g) 589,420 Series B preferred shares.							702,732		702,732
	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.		4/5/13		4	%		500,000		731,431		6.5	%
	1,204,819 Series B-1 preferred shares.							750,000		839,648
	717,772 Series C preferred shares.							500,000		500,221
	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		1.6	%
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							$	15,718,690	$	15,167,767
Affiliate Investments – 53.3% 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.		10/20/14		9	%	$	359,000	$	359,000		2.0	%
	1,032,918 Series B Preferred Membership Units.							261,277		291,000
	Total BeetNPath							620,277		650,000
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		1,750,000		5.5	%
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 July 31, 2017.		4/19/12		7	%		661,563		250,000		0.8	%
	$280,000 junior term notes at 10% due July 31, 2017.							316,469		—
	Warrant for 41,619 capital securities.							22,000		—
	Total First Wave							1,000,032		250,000
Genicon, Inc. Winter Park, FL. Designs, produces and distributes patented surgical instrumentation. (Health Care) www.geniconendo.com	(g) 1,586,902 Series B preferred shares.		4/10/15		6	%		1,000,000		1,000,000		12.6	%
	(g) $2,000,000 promissory note at 8% due May 1, 2020.							1,936,002		1,936,002
	(g) Warrant for 250,000 common shares.							80,000		80,000
	(n) $1,000,000 promissory note at 8% due May 1, 2020.							967,777		967,777
	(n) Warrant for 125,000 common shares.							40,000		40,000
	Total Genicon							4,023,779		4,023,779

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

Company, Geographic Location, Business Description, (Industry) and Website	(a) Type of Investment	(b) Date Acquired	(c) Equity			Cost		(d)(f) Fair Value		Percent of Net Assets
GiveGab, Inc. (e)(g)	5,084,329 Series Seed preferred shares.	3/13/13		6	%		616,221		424,314		1.3	%
Ithaca, NY. Online fundraising, day of giving supporter engagement software for non-profit organizations. (Software) www.givegab.com
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	16.639% Class A membership interest. 8% cumulative dividend.	8/31/99		17	%		400,000		100,000		0.3	%
Intrinsiq Materials, Inc. (e)(g)	4,161,747 Series A preferred shares.	9/19/13		12	%		1,125,673		400,000		1.3	%
Rochester, NY. Produces printable electronics utilizing a unique process of nanomaterial based ink in a room-temperature environment. (Manufacturing) www.intrinsiqmaterials.com
Knoa Software, Inc. (g) New York, NY. End user experience	973,533 Series A-1 convertible preferred shares.	11/20/12		7	%		750,000		750,000		4.0	%
management and performance (EMP) solutions utilizing enterprise applications. (Software)	1,876,922 Series B preferred shares. $48,466 convertible promissory note at						479,155		479,155
www.knoa.com	8% due May 9, 2018.						48,466		48,466
	Total Knoa						1,277,621		1,277,621
KnowledgeVision Systems, Inc. (e)(g)	200,000 Series A-1 preferred shares.	11/13/13		7	%		250,000		—		1.7	%
Lincoln, MA. Online presentation and training software. (Software)	214,285 Series A-2 preferred shares.						300,000		300,000
	129,033 Series A-3 preferred shares.						165,001		165,001
www.knowledgevision.com	Warrant for 46,743 Series A-3 shares.						35,000		35,000
	$50,000 subordinated promissory note
	at 8% payable on demand of majority of
	noteholders after August 31, 2017.						50,000		50,000
	Total KnowledgeVision						800,001		550,001
Mezmeriz, Inc. (e)(g)	1,554,565 Series Seed preferred shares.	1/9/08		14	%		742,850		351,477		1.1	%
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
Microcision LLC (g)(m) Pennsauken Township, NJ. Manufacturer of precision machined medical implants,	$1,500,000 subordinated promissory note at 12% (1% PIK) due December 31, 2024.	9/24/09		15	%		1,914,140		1,914,140		6.0	%
components and assemblies. (Manufacturing) www.microcision.com	15% Class A common membership interest.						—		—
	Total Microcision						1,914,140		1,914,140
New Monarch Machine Tool, Inc. (g)	22.84 common shares.	9/24/03		15	%		22,841		22,841		0.1	%
Cortland, NY. Manufactures and services vertical/horizontal machining centers. (Manufacturing) www.monarchmt.com

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

Company, Geographic Location, Business Description, (Industry) and Website	(a)     Type of Investment	(b) Date     Acquired	(c)     Equity			Cost		(d)(f) Fair     Value			Percent of Net     Assets
OnCore Golf Technology, Inc. (e)(g) Buffalo, NY. Maker of patented golf balls. (Consumer Product) www.oncoregolf.com	150,000 Series AA preferred shares. $300,000 subordinated convertible promissory notes at 6% (10% for calendar year 2017) due January 24, 2018.	12/31/14		9	%		375,000		—			0.9	%
	(i) Interest receivable $50,342.						300,000		300,000
	Total OnCore						675,000		300,000
SciAps, Inc. (e)(g) Woburn, MA. Instrumentation	187,500 Series A convertible preferred shares.	7/12/13		8	%		1,500,000		700,000			5.6	%
company producing portable analytical devices using XRF, LIBS and	274,299 Series A-1 convertible preferred shares.						504,710		250,000
RAMAN spectroscopy to identify compounds, minerals, and elements.	117,371 Series B convertible preferred shares.						250,000		250,000
(Manufacturing)	113,636 Series C preferred shares.						175,000		175,000
www.sciaps.com	369,698 Series C-1 preferred shares.						399,274		399,274
	Total SciAps						2,828,984		1,774,274
SOMS Technologies, LLC (e)(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			1.7	%
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.	5/30/14		6	%		250,000		—			0.0	%
	1,000,000 Class C preferred units.						1,190,680		—
	80,000 Class D preferred units.						91,200		—
	104,198 Class E preferred units.						104,198		—
	PIK dividend for Series C and D at 12% and 14%, respectively.
	Total Teleservices						1,636,078		—
Tilson Technology Management, Inc	(g) 120,000 Series B preferred shares.	1/20/15		11	%		600,000		600,000			7.8	%
Portland, ME. Cellular, fiber optic and wireless information systems, construction, and management. (Professional Services) www.tilsontech.com	21,391 Series C convertible preferred shares.						200,000		200,000
	(g) $200,000 subordinated promissory note at 8% due September 28, 2021.						200,000		200,000
	(n) 65,790 Series D preferred shares.						750,000		750,000
	(n) $750,000 subordinated promissory
	note at 8% due December 1, 2022.						750,000		750,000
	Total Tilson						2,500,000		2,500,000
Subtotal Affiliate Investments						$	20,871,129	$	17,016,795
Control Investments – 0.3% of net assets (l)
Advantage 24/7 LLC (e)(g)	53% Membership interest.	12/30/10		53	%	$	99,500	$	99,500			0.3	%
Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company)
www.advantage24-7.com
Subtotal Control Investments						$	99,500	$	99,500
TOTAL INVESTMENTS – 101.1%						$	36,689,319	$	32,284,062
LIABLITIES IN EXCESS OF OTHER ASSETS – (1.1%)									(365,377	)
NET ASSETS – 100%								$	31,918,685

50

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CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

Notes to the Consolidated Schedule of Portfolio Investments

(a) At December 31, 2017, restricted securities represented 100% of the fair value of the investment portfolio. Restricted securities are subject to one or more restrictions on resale and are not freely marketable.

(b) The Date Acquired column indicates the 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, 2017, 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 reporting period. Restricted securities are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount that the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company (see Note 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, 2017, the total cost of investment securities was approximately $36.7 million. Net unrealized depreciation was approximately ($4.4) million, which was comprised of $2.4 million of unrealized appreciation of investment securities and ($6.8) million of unrealized depreciation of investment securities. At December 31, 2017, the aggregate gross unrealized gain for federal income tax purposes was $2.8 million and the aggregate gross unrealized loss for federal income tax purposes was ($4.4) million. The net unrealized loss for federal income tax purposes was ($1.6) million based on a tax cost of $33.9 million.

(g) Rand Capital SBIC, Inc. investment.

(h) Reduction in cost and value from previously reported balances reflects current principal repayment. There were no principal repayments during the year ended December 31, 2017.

(i) Represents interest due (amounts over $50,000) from investments included as interest receivable on the Corporation’s Consolidated Statements 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.

(n) Rand Capital SBIC II, L.P. investment.

51

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

Investments in and Advances to Affiliates

Company	Type of Investment	December 31, 2016 Fair Value		Gross Additions (1)		Gross Reductions (2)			December 31, 2017 Fair Value		Net Realized Gains (Losses)		Amount of Interest/ Dividend/ Fee Income (3)
Control Investments:
Advantage 24/7 LLC	53% Membership interest.	$	99,500	$	—	$	—		$	99,500	$	—	$	—
	Total Control Investments	$	99,500	$	—	$	—		$	99,500	$	—	$	—
Affiliate Investments:
BeetNPath, LLC	1,119,024 Series A-2 Preferred Membership Units. 1,032,918 Series B Preferred Membership Units $150,000 convertible promissory note at 8%.	$	359,000	$	—	$	—		$	359,000	$	—	$	—
			—	$	291,000		—			291,000		—   —		—
			150,000		—		(150,000	)		—		—		4,800
	Total BeetNPath		509,000		291,000		(150,000	)		650,000		—		4,800
Carolina Skiff LLC	6.0825% Class A common membership interest.		1,100,000		650,000		—			1,750,000		—		178,532
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%.		250,000		—		—			250,000		—		—
	$280,000 junior term notes at 10%.		—		—		—			—		—		—
	Warrant for 41,619 capital securities.		—		—		—			—		—		—
	Total First Wave		250,000		—		—			250,000		—		—
Genicon, Inc.	1,586,902 Series B preferred shares. $1,100,000 senior term loans at 12%. $600,000 term loan at 14%. $2,000,000 promissory note at 8% $1,000,000 promissory note at 8% Warrant for 250,000 common shares Warrant for 125,000 common shares		1,000,000		—		—			1,000,000		—		—
			1,100,000		—		(1,100,000	)		—		—		50,234
			600,000		—		(600,000	)		—		—		32,200
			—		2,016,002		(80,000	)		1,936,002		—		129,752
			—		1,007,777		(40,000	)		967,777		—		60,860
			—		80,000		—			80,000		—
			—		40,000		—			40,000		—		—
	Total Genicon		2,700,000		3,143,779		(1,820,000	)		4,023,779		—		273,046