Rand Capital (RAND) 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

For the quarterly period ended September 30, 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)

(716)853-0802

(Registrant’s telephone number, including area code)

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 RegulationS-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 whether the registrant is a large accelerated filer, an accelerated filer, anon-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” inRule 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, indicate by check mark if the registrant has elected not to use the 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 inRule 12b-2 of the Act).     Yes  ☐    No  ☑

As of November 5, 2018, there were 6,321,988 shares of the registrant’s common stock outstanding.

RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM10-Q

PART I. – FINANCIAL INFORMATION

Item 1.	Financial Statements and Supplementary Data	1
	Consolidated Statements of Financial Position as of September 30, 2018 (Unaudited) and December 31, 2017	1
	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	2
	Consolidated Statements of Changes in Net Assets for the Three Months and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	4
	Consolidated Schedule of Portfolio Investments as of September 30, 2018 (Unaudited)	5
	Consolidated Schedule of Portfolio Investments as of December 31, 2017	13
	Notes to the Consolidated Financial Statements (Unaudited)	21
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42
PART II. – OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Supplementary Data

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	September 30, 2018 (Unaudited)			December 31, 2017
ASSETS
Investments at fair value:
Control investments (cost of $99,500)	$	99,500		$	99,500
Affiliate investments (cost of $20,413,709 and $20,871,129, respectively)		16,728,607			17,016,795
NonControl/Non-Affiliate investments (cost of $16,796,433 and $15,718,690, respectively)		15,344,150			15,167,767
Total investments, at fair value (cost of $37,309,642 and $36,689,319, respectively)		32,172,257			32,284,062
Cash and cash equivalents		4,404,574			6,262,039
Interest receivable (net of allowance: $211,342 at 9/30/18; $161,000 at 12/31/17)		147,934			231,048
Deferred tax asset		772,275			551,863
Prepaid income taxes		1,122,826			762,047
Other assets		38,360			42,854
Total assets	$	38,658,226		$	40,133,913
LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS)
Liabilities:
Debentures guaranteed by the SBA (net of debt issuance costs)	$	7,875,723		$	7,855,173
Profit sharing and bonus payable		—			144,000
Accounts payable and accrued expenses		120,886			178,348
Deferred revenue		73,941			37,707
Total liabilities		8,070,550			8,215,228
Commitments and contingencies (See Note 5)
Stockholders’ equity (net assets):
Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034; shares outstanding of 6,321,988		686,304			686,304
Capital in excess of par value		10,581,789			10,581,789
Accumulated net investment loss		(1,643,744	)		(1,597,146	)
Undistributed net realized gain on investments		26,496,804			27,215,738
Net unrealized depreciation on investments		(4,064,372	)		(3,498,895	)
Treasury stock, at cost: 541,046 shares		(1,469,105	)		(1,469,105	)
				��
Total stockholders’ equity (net assets) (per share $4.84 at 9/30/18; $5.05 at 12/31/17)		30,587,676			31,918,685
Total liabilities and stockholders’ equity (net assets)	$	38,658,226		$	40,133,913

See accompanying notes

1

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended September 30, 2018			Three months ended September 30, 2017			Nine months ended September 30, 2018			Nine months ended September 30, 2017
Investment income:
Interest from portfolio companies:
Affiliate investments	$	192,758		$	142,247		$	515,784		$	416,247
Non-Control/Non-Affiliate investments		257,531			167,675			547,553			417,406
Total interest from portfolio companies		450,289			309,922			1,063,337			833,653
Interest from other investments:
Non-Control/Non-Affiliate investments		7,872			6,348			20,717			24,182
Total interest from other investments		7,872			6,348			20,717			24,182
Dividend and other investment income:
Affiliate investments		48,856			74,408			175,905			189,805
Non-Control/Non-Affiliate investments		—			2,405			6,058			7,598
Total dividend and other investment income		48,856			76,813			181,963			197,403
Fee income:
Affiliate investments		4,042			2,166			11,625			6,250
Non-Control/Non-Affiliate investments		151,243			1,770			160,987			13,307
Total fee income		155,285			3,936			172,612			19,557
Total investment income		662,302			397,019			1,438,629			1,074,795
Expenses:
Salaries		169,875			165,413			509,624			496,239
Employee benefits		39,845			38,454			148,841			138,523
Directors’ fees		28,624			36,374			92,123			107,623
Professional fees		81,745			48,433			220,773			310,628
Stockholders and office operating		47,839			45,355			176,877			193,290
Insurance		8,700			8,058			27,588			25,618
Corporate development		15,028			16,621			41,470			49,938
Other operating		4,875			2,772			9,990			8,055
		396,531			361,480			1,227,286			1,329,914
Interest on SBA obligations		77,568			77,568			232,406			232,706
Bad debt (recovery) expense		(26,299	)		—			50,342			—
Total expenses		447,800			439,048			1,510,034			1,562,620
Net investment gain (loss) before income taxes		214,502			(42,029	)		(71,405	)		(487,825	)
Income tax expense (benefit)		50,003			(17,050	)		(24,807	)		(188,961	)
Net investment gain (loss)		164,499			(24,979	)		(46,598	)		(298,864	)
Net realized loss on sales and dispositions of investments:
Affiliate investments		(1,125,673	)		—			(1,125,673	)		—
Net realized loss before income tax benefit		(1,125,673	)		—			(1,125,673	)		—
Income tax benefit		406,739			—			406,739			—
Net realized loss on investments		(718,934	)		—			(718,934	)		—
Change in unrealized depreciation on investments:
Affiliate investments		725,673			—			169,232			(665,675	)
Non-Control/Non-Affiliate investments		(249,871	)		111,000			(901,360	)		(322,308	)
Change in unrealized depreciation before income tax expense (benefit)		475,802			111,000			(732,128	)		(987,983	)
Deferred income tax expense (benefit)		100,669			28,090			(166,651	)		(349,960	)
Net change in unrealized depreciation on investments		375,133			82,910			(565,477	)		(638,023	)
Net realized and unrealized (loss) gain on investments		(343,801	)		82,910			(1,284,411	)		(638,023	)
Net (decrease) increase in net assets from operations	($	179,302	)	$	57,931		($	1,331,009	)	($	936,887	)
Weighted average shares outstanding		6,321,988			6,321,988			6,321,988			6,321,988
Basic and diluted net (decrease) increase in net assets from operations per share	($	0.03	)	$	0.01		($	0.21	)	($	0.15	)

See accompanying notes

2

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

	Three months ended September 30, 2018			Three months ended September 30, 2017			Nine months ended September 30, 2018			Nine months ended September 30, 2017
Net assets at beginning of period	$	30,766,978		$	31,634,545		$	31,918,685		$	32,629,363
Net investment gain (loss)		164,499			(24,979	)		(46,598	)		(298,864	)
Net realized loss on investment		(718,934	)		—			(718,934	)		—
Net change in unrealized depreciation on investments		375,133			82,910			(565,477	)		(638,023	)
Net (decrease) increase in net assets from operations		(179,302	)		57,931			(1,331,009	)		(936,887	)
Total (decrease) increase in net assets		(179,302	)		57,931			(1,331,009	)		(936,887	)
Net assets at end of period	$	30,587,676		$	31,692,476		$	30,587,676		$	31,692,476
Accumulated net investment loss	($	1,643,744	)	($	1,876,712	)	($	1,643,744	)	($	1,876,712	)

See accompanying notes

3

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30, 2018			Nine months ended September 30, 2017
Cash flows from operating activities:
Net decrease in net assets from operations	($	1,331,009	)	($	936,887	)
Adjustments to reconcile net decrease in net assets to net cash and cash equivalents used in operating activities:
Investments in portfolio companies		(1,365,000	)		(3,900,000	)
Proceeds from loan repayments		70,131			—
Change in unrealized depreciation on investments		732,128			987,983
Deferred tax benefit		(220,412	)		(542,917	)
Realized loss on portfolio investments		1,125,673			—
Depreciation and amortization		22,200			23,550
Original issue discount amortization		(29,462	)		(21,085	)
Non-cash conversion of debenture interest		(421,665	)		(262,105	)
Change in interest receivable allowance		50,342			—
Changes in operating assets and liabilities:
Decrease in interest receivable		32,772			121,675
Decrease in other assets		2,844			561,499
Increase in prepaid income taxes		(360,779	)		(266,935	)
Decrease in income tax payable		—			(320,008	)
Decrease in accounts payable and accrued expenses		(69,462	)		(210,173	)
Decrease in profit sharing and bonus payable		(132,000	)		(1,138,052	)
Increase (decrease) in deferred revenue		36,234			(3,557	)
Total adjustments		(526,456	)		(4,970,125	)
Net cash and cash equivalents used in operating activities		(1,857,465	)		(5,907,012	)
Net decrease in cash and cash and cash equivalents		(1,857,465	)		(5,907,012	)
Cash and cash equivalents:
Beginning of period		6,262,039			12,280,140
End of period	$	4,404,574		$	6,373,128

See accompanying notes

4

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018

(Unaudited)

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 – 50.2% of net assets: (j)
ACV Auctions, Inc. (e)(g)	1,181,160 Series A Preferred	8/12/16	<1%					0.9%
Buffalo, NY. Live mobile wholesale auctions for new	shares.				$163,000		$282,356
and used car dealers. (Software) www.acvauctions.com
Centivo Corporation (e)(g)	190,967 SeriesA-1 Preferred	7/5/17	<1%					1.0%
New York, NY. Tech-enabled health solutions	shares.				200,000		200,000
company that helps self-insured employers and their	337,808 SeriesA-2 Preferred
employees save money and have a better experience.	shares.				101,342		101,342
(Health Care)	Total Centivo				301,342		301,342
www.centivo.com
eHealth Global Technologies, Inc. (g)	$3,500,000 Replacement Term	6/28/16	0%					11.5%
Henrietta, NY. eHealth Connect® improves health	Note at 13% due December 31, 2020.				3,500,000		3,500,000
care delivery through intelligently aggregated clinical record and images for patient referrals.
(Health Care) www.ehealthtechnologies.com
Empire Genomics, LLC (g)(m)	$1,209,014 Senior Secured	6/13/14	0%					2.3%
Buffalo, NY. Molecular diagnostics company that	Convertible Term Notes at 10%
offers a comprehensive menu of assay services for	(8% Payment in Kind (PIK)) due
diagnosing and guiding patient therapeutic treatments.	December 31, 2020.				1,209,014		450,000
(Health Care)	$444,916 Promissory Note at 9%
www.empiregenomics.com	due December 31, 2020.				394,915		252,569
	Total Empire				1,603,929		702,569
GiveGab, Inc. (e)(g)	5,084,329 Series Seed Preferred	3/13/13	4%					2.0%
Ithaca, NY. Online fundraising, day of giving	shares.				616,221		616,221
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%					3.4%
Nashville, TN. Student engagement education	due January 31, 2020, (1%
software providing core aligned physical activity	Payment in Kind (PIK)).				1,037,070		1,037,070
breaks. (Software)	Warrant for 47,324 Series C
www.gonoodle.com	Preferred shares.				25		25
	Total GoNoodle				1,037,095		1,037,095
Mercantile Adjustment Bureau, LLC (g)	$1,199,039 Subordinated Secured	10/22/12	4%					3.1%
Williamsville, NY. Full service accounts receivable	Note at 13% (3% for the calendar
management and collections company. (Contact	year 2018) due January 31, 2019.				1,199,040		949,040
Center) www.mercantilesolutions.com	(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.				97,625		-
	(i)Interest receivable $51,761.
	Total Mercantile				1,446,665		949,040
Outmatch Holdings, LLC (e)(g)	2,745,545 Class P1 Units.	11/18/10	4%		2,140,007		2,140,007	7.0%
(Chequed Holdings, LLC)	109,788 Class C1 Units.				5,489		5,489
Dallas, TX. Web based predictive employee selection	Total Outmatch				2,145,496		2,145,496
and reference checking. (Software)
www.outmatch.com
PostProcess Technologies LLC (e)(g)	$300,000 Convertible Promissory	7/25/16	0%					1.0%
Buffalo, NY. Provides innovative solutions for the	Note at 5% due July 28, 2020.				300,000		300,000
post-processing of additive manufactured 3D parts.
(Manufacturing)
www.postprocess.com

5

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

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 shares.	10/29/09	4%		-		11,000	9.6%
Ithaca, NY. Developer of fully automated	(g)1,839,422 Series A preferred
microfluidic based molecular assay and diagnostic	shares.				2,099,999		2,165,999
testing devices. (Health Care)	(g)50,593 Common shares.				-		59,000
www.rheonix.com	(g)589,420 Series B Preferred shares.				702,732		702,732
	Total Rheonix				2,802,731		2,938,731
SocialFlow, Inc. (e)(g)	1,049,538 Series B Preferred shares.	4/5/13	4%		500,000		731,431	6.8%
New York, NY. Provides instant analysis of social	1,204,819 Series B-1 Preferred shares.				750,000		839,648
networks using a proprietary, predictive analytic	717,772 Series C Preferred shares.				500,000		500,221
algorithm to optimize advertising and publishing.	Total Social Flow				1,750,000		2,071,300
(Software)
www.socialflow.com
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
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
					$16,796,433		$15,344,150
Affiliate Investments – 54.7% of net assets (k)
BeetNPath, LLC (Grainful) (e)(g)	1,119,024 Series A-2 Preferred	10/20/14	9%					2.6%
Ithaca, NY. Frozen entrées made from 100%	Membership Units.				$359,000		$359,000
whole grain steel cut oats under Grainful brand	1,032,918 Series B Preferred
name. (Consumer Product)	Membership Units.				261,277		291,000
www.grainful.com	$140,000 Convertible Secured Note at
	8% due December 21, 2019				140,000		140,000
	Total BeetNPath				760,277		790,000
Carolina Skiff LLC (g)	6.0825% Class A Common	1/30/04	7%					5.8%
Waycross, GA. Manufacturer of ocean fishing and	Membership Interest.				15,000		1,750,000
pleasure boats.
(Manufacturing)
www.carolinaskiff.com
ClearView Social, Inc. (e)(g)	312,500 Series Seed Plus Preferred	1/4/16	6%					0.6%
Buffalo, NY. Social media publishing tool for law,	shares.				200,000		200,000
CPA and professional firms. (Software)
www.clearviewsocial.com
First Wave Products Group, LLC (e)(g)	$500,000 Senior Term Notes at 10%	4/19/12	7%					0.0%
Batavia, NY. Sells First Crush automated pill	due July 31, 2017.				661,563		-
crusher that crushes and grinds pills for nursing	$280,000 Junior Term Notes at 10%
homes and medical institutions. (Health Care)	due July 31, 2017.				316,469		-
www.firstwaveproducts.com	Warrant for 41,619 Capital Securities.				22,000		-
	Total First Wave				1,000,032		-

6

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

		(b)	(c)			(d)(f)		Percent
Company, Geographic Location, Business	(a)	Date				Fair		of Net
Description, (Industry) and Website	Type of Investment	Acquired	Equity	Cost		Value		Assets
Genicon, Inc. (g) (m)	1,586,902 Series B Preferred shares.	4/10/15	6%		1,000,000		1,000,000	13.7%
Winter Park, FL. Designs, produces and	$3,000,000 Promissory Notes at 10%
distributes patented surgical instrumentation.	due May 1, 2020, (8% Payment in Kind
(Health Care)	(PIK)).				3,057,327		3,057,327
www.geniconendo.com	Warrant for 250,000 Common shares.				80,000		80,000
	Warrant for 125,000 Common shares.				40,000		40,000
	Total Genicon				4,177,327		4,177,327
G-TEC Natural Gas Systems (e)	16.639% Class A Membership Interest.	8/31/99	17%					0.3%
Buffalo, NY. Manufactures and distributes	8% cumulative dividend.				400,000		100,000
systems that allow natural gas to be used as an
alternative fuel to gases. (Manufacturing)
www.gas-tec.com
Knoa Software, Inc. (e)(g)(h)	973,533 Series A-1 Convertible	11/20/12	7%					4.0%
New York, NY. End user experience	Preferred shares.				750,000		750,000
management and performance (EMP) solutions	1,876,922 Series B Preferred shares.				479,155		479,155
utilizing enterprise applications. (Software)	Total Knoa				1,229,155		1,229,155
www.knoa.com
KnowledgeVision Systems, Inc. (g)	200,000 Series A-1 Preferred shares.	11/13/13	7%		250,000		-	4.3%
Lincoln, MA. Online presentation and training	214,285 Series A-2 Preferred shares.				300,000		300,000
software. (Software)	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
	$75,000 Subordinated Promissory Notes
	at 8% payable on demand of majority of
	holders after August 31, 2019.(e)				75,000		75,000
	$750,000 Replacement Term Note at
	11% due April 30, 2021.				750,000		750,000
	Total KnowledgeVision				1,575,001		1,325,001
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)	$1,500,000 Subordinated Promissory	9/24/09	15%					6.3%
Pennsauken Township, NJ. Manufacturer of	Note at 12% (1% Payment in Kind
precision machined medical implants,	(PIK)) due December 31, 2024.				1,928,532		1,928,532
components and assemblies. (Manufacturing)	15% Class A Common Membership
www.microcision.com	Interest.				-		-
	Total Microcision				1,928,532		1,928,532
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
OnCore Golf Technology, Inc. (e)(g)	150,000 Series AA Preferred shares.	12/31/14	9%		375,000		-	1.0%
Buffalo, NY. Maker of patented golf balls.	$300,000 Subordinated Convertible
(Consumer Product)	Promissory Notes at 10% due January
www.oncoregolf.com	24, 2018.				300,000		300,000
	(i)Interest receivable $50,342.
	Total OnCore				675,000		300,000

7

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

	(a)	(b)	(c)		(d)(f)		Percent
Company, Geographic Location, Business		Date			Fair		of Net
Description, (Industry) and Website	Type of Investment	Acquired	Equity	Cost	Value		Assets
SciAps, Inc. (e)(g)	187,500 Series A Preferred shares.	7/12/13	6%	1,500,000		700,000	6.6%
Woburn, MA. Instrumentation company producing	274,299 Series A-1 Convertible
portable analytical devices using XRF, LIBS and	Preferred shares.			504,710		250,000
RAMAN spectroscopy to identify compounds,	117,371 Series B Convertible
minerals, and elements. (Manufacturing)	Preferred shares.			250,000		250,000
www.sciaps.com	113,636 Series C Convertible
	Preferred shares.			175,000		175,000
	369,698 Series C-1 Convertible
	Preferred shares.			399,274		399,274
	147,059 Series D Convertible
	Preferred shares.			250,000		250,000
	Total SciAps			3,078,984		2,024,274
SOMS Technologies, LLC (e)(g)	5,959,490 Series B Membership	12/2/08	9%				0.1%
Valhalla, NY. Produces and markets the	Interests.			472,632		30,000
microGreen Extended Performance Oil Filter.
(Consumer Products)
www.microgreenfilter.com
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	1,000,000 Class C Preferred Units.			1,190,680		-
specializing in customer acquisition and retention	80,000 Class D Preferred Units.			91,200		-
for selected industries. (Contact Center)	104,198 Class E Preferred Units.			104,198		-
www.ipacesetters.com	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	8.2%
Portland, ME. Cellular, fiber optic and wireless	21,391 Series C Convertible Preferred
information systems, construction, and	shares.			200,000		200,000
management. (Professional Services)	65,790 Series D Preferred shares.			750,000		750,000
www.tilsontech.com	$750,000 Subordinated Promissory
	Note at 8% due December 1, 2022.			750,000		750,000
	$200,000 Subordinated Promissory
	Note at 8% due September 28, 2021.			200,000		200,000
	Total Tilson			2,500,000		2,500,000
Subtotal Affiliate Investments				$20,413,709		$16,728,607
Control Investments – 0.3% of net assets (l)
Advantage 24/7 LLC (e)(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 –105.2%				$37,309,642		$32,172,257
OTHER ASSETS IN EXCESS OF LIABILITIES – (5.2%)						(1,584,581)
NET ASSETS – 100%						$30,587,676

8

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

Notes to the Consolidated Schedule of Portfolio Investments

(a)  At September 30, 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.

(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 September 30, 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 3 “Investments” to the Consolidated Financial Statements).

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

(f)  As of September 30, 2018 the total cost of investment securities was approximately $37.3 million. Net unrealized depreciation was approximately ($5.1) million, which was comprised of $2.3 million of unrealized appreciation of investment securities and ($7.4) million of unrealized depreciation of investment securities. At September 30, 2018, the aggregate gross unrealized gain for federal income tax purposes was $2.6 million and the aggregate gross unrealized loss for federal income tax purposes was ($6.5) million. The net unrealized loss for federal income tax purposes was ($3.9) million based on a tax cost of $36.1 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 Statement of Financial Position.

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

(k)  Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as thoseNon-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.

9

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

  Investments in and Advances to Affiliates

												Amount of
										Net		Interest/
		December				Gross		September		Realized		Dividend/
Company	Type of Investment	31, 2017   Fair Value		Gross   Additions (1)		Reductions   (2)		30, 2018   Fair Value		Gains (Losses)		Fee Income (3)
Control Investments:
Advantage 24/7 LLC	45% 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.		$359,000		$-		$-		$359,000		$-		$-
	1,032,918 Series B Preferred Membership										-
	Units.		291,000		-		-		291,000		-		-
	$140,000 convertible secured note at 8%		-		140,000		-		140,000		-		2,551
	Total BeetNPath		650,000		140,000		-		790,000				2,551
Carolina Skiff LLC	6.0825% Class A common membership
	interest.		1,750,000		-		-		1,750,000		-		119,433
ClearView Social, Inc.	312,500 Series seed plus preferred shares.		200,000		-		-		200,000		-		-
First Wave Products	$500,000 senior term notes at 10%.		250,000		-		(250,000)		-		-		-
Group, LLC	$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.		1,000,000		-		-		1,000,000		-		-
	$3,000,000 promissory notes at 8%.		2,903,779		153,548		-		3,057,327		-		251,069
	Warrant for 250,000 common shares		80,000		-		-		80,000		-		-
	Warrant for 125,000 common shares		40,000		-		-		40,000		-		-
	Total Genicon		4,023,779		153,548		-		4,177,327		-		251,069
GiveGab, Inc.	5,084,329 Series Seed preferred shares.		424,314		191,907		(616,221)		-		-		-
G-TEC Natural Gas	16.639% Class A membership interest. 8%
Systems	cumulative dividend.		100,000		-		-		100,000		-		-
Intrinsiq Materials,	4,161,747 Series A preferred shares.		400,000		-		(400,000)		-		(1,125,673)		-
Inc.
Knoa Software, Inc.	973,533 Series A-1 convertible preferred
	shares.		750,000		-		-		750,000		-		-
	1,876,922 Series B preferred shares.		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 shares.		-		-		-		-		-		-
Systems, Inc.	214,285 Series A-2 preferred shares.		300,000		-		-		300,000		-		-
	129,033 Series A-3 preferred shares.		165,001		-		-		165,001		-		-
	$75,000 subordinated promissory notes at 8%		50,000		25,000		-		75,000		-		3,896
	$750,000 replacement term note at 11%		-		750,000		-		750,000		-		37,571
	Warrant for 46,743 Series A-3 shares.		35,000		-		-		35,000		-		-
	Total Knowledge		550,001		775,000		-		1,325,001		-		41,467
	Vision
Mezmeriz, Inc.	1,554,565 Series seed preferred shares.		351,477		-		-		351,477		-		-
Microcision LLC	$1,500,000 subordinated promissory note at
	12% (1% PIK).		1,914,140		14,392		-		1,928,532		-		172,704
New Monarch	22.84 common shares.		22,841		-		-		22,841		-		29,409
Machine Tool, Inc.

10

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

  Investments in and Advances to Affiliates

Company	Type of Investment	December 31,   2017 Fair   Value		Gross   Additions   (1)		Gross   Reductions   (2)			September   30, 2018   Fair Value		Net   Realized   Gains (Losses)		Amount of   Interest/ Dividend/ Fee Income (3)
OnCore Golf	150,000 Series AA preferred shares.		-		-		-			-		-		-
Technology, Inc.	$300,000 subordinated convertible
	promissory notes at 6%.		300,000		-		-			300,000		-		-
	Total OnCore		300,000		-		-			300,000		-		-
SciAps, Inc.	187,500 Series A convertible preferred
	shares.		700,000		-		-			700,000		-		-
	274,299 Series A-1 convertible preferred
	shares.		250,000		-		-			250,000		-		-
	117,371 Series B convertible preferred
	shares.		250,000		-		-			250,000		-		-
	113,636 Series C preferred shares.		175,000		-		-			175,000		-		-
	369,698 Series C-1 preferred shares.		399,274		-		-			399,274		-		-
	147,059 Series D shares		-		250,000		-			250,000		-		-
	Total SciAps		1,774,274		250,000		-			2,024,274		-		-
SOMS	5,959,490 Series B membership interests.		528,348		-		(498,348	)		30,000		-		-
Technologies, LLC
Teleservices	250,000 Class B preferred units.		-		-		-			-		-		-
Solutions	1,000,000 Class C preferred units.		-		-		-			-		-		-
Holdings, LLC	80,000 Class D preferred units.		-		-		-			-		-		-
	104,198 Class E preferred units.		-		-		-			-		-		-
	Total Teleservices		-		-		-			-		-		-
Tilson Technology	120,000 Series B preferred shares.		600,000		-		-			600,000		-		15,000
Management, Inc.	21,391 Series C convertible preferred
	shares.		200,000		-		-			200,000		-		-
	$200,000 subordinated promissory note at
	8%.		200,000		-		-			200,000		-		11,967
	65,790 Series D preferred shares.		750,000		-		-			750,000		-		14,064
	$750,000 subordinated promissory note at
	8%.		750,000		-		-			750,000		-		44,877
	Total Tilson		2,500,000		-		-			2,500,000		-		85,908
	Total Affiliate Investments		$17,016,795		$1,524,847		($1,813,035)			$16,728,607		($1,125,673)		$703,314
	Total Control and Affiliate Investments		$17,116,295		$1,524,847		($1,813,035)			$16,828,107		($1,125,673)		$703,314

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.

11

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

September 30, 2018 (Continued)

(Unaudited)

Industry Classification	Percentage of Total Investments (at fair value) as of September 30, 2018
Healthcare	36.1%
Software	27.7
Manufacturing	19.0
Professional Services	7.8
Consumer Product	3.5
Contact Center	2.9
Oil and Gas	1.6
Electronics	1.1
Marketing	0.3
Total Investments	100%

12

RAND CAPITAL CORPORATION AND SUBSIDIARIES

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% ofnet assets: (j)
ACV Auctions, Inc. (e)(g)	1,181,160 Series A preferred	8/12/16	<1%					0.9%
Buffalo, NY. Live mobile wholesale auctions for new	shares.				$163,000		$282,356
and used car dealers. (Software)
www.acvauctions.com
Centivo Corporation (e)(n)	$100,000 convertible unsecured	7/5/17	0%					0.3%
New York, NY. Tech-enabled health solutions	note at 2% due February 1, 2019.				100,000		100,000
company that helps self-insured employers and their
employees save money and have a better experience.
(Health Care)
eHealth Global Technologies, Inc.	(g)$1,500,000 term note at 10%	6/28/16	0%					11.0%
Henrietta, NY. eHealth Connect® improves health	due September 2, 2019.				1,500,000		1,500,000
care delivery through intelligently aggregated clinical	(n)$2,000,000 term note at 10%
record and images for patient referrals.	due September 2, 2019.				2,000,000		2,000,000
(Health Care)	Total eHealth				3,500,000		3,500,000
www.ehealthtechnologies.com
Empire Genomics, LLC (g)	$1,101,489 senior secured	6/13/14	0%					4.2%
Buffalo, NY. Molecular diagnostics company that	convertible term notes at 10% due
offers a comprehensive menu of assay services for	April 30, 2018.				1,101,489		1,101,489
diagnosing and guiding patient therapeutic treatments.	$250,000 promissory note at 12%
(Health Care)	due December 31, 2019.				250,000		250,000
www.empiregenomics.com	(i)Interest receivable $65,906.
	Total Empire				1,351,489		1,351,489
GoNoodle, Inc. (g)(m)	$1,000,000 secured note at 12%	2/6/15	<1%					3.2%
(Formerly HealthTeacher, Inc.)	due January 31, 2020, (1%
Nashville, TN. Student engagement education	Payment in Kind (PIK)).				1,029,330		1,029,330
software providing core aligned physical activity	Warrant for 47,324 Series C
breaks. (Software)	Preferred shares.				25		25
www.gonoodle.com	Total GoNoodle				1,029,355		1,029,355
Mercantile Adjustment Bureau, LLC (g)	$1,199,039 subordinated secured	10/22/12	4%					3.0%
Williamsville, NY. Full service accounts receivable	note at 13% (3% for the calendar
management and collections company.	year 2017) due January 31, 2018.				1,199,040		949,040
(Contact Center)	(e)$150,000 subordinated
www.mercantilesolutions.com	debenture at 8% due June 30,
	2018.				150,000		-
	Warrant for 3.29% membership
	interests. Option for 1.5%
	membership interests.				97,625		-
	(i)Interest receivable $55,983.
	Total Mercantile				1,446,665		949,040
Outmatch Holdings, LLC (e)(g)	2,641,899 Class P1 Units.	11/18/10	4%		2,140,007		2,140,007	6.7%
(Chequed Holdings, LLC)	109,788 Class C1 Units.				5,489		5,489
Dallas, TX. Web based predictive employee selection	Total Outmatch				2,145,496		2,145,496
and reference checking. (Software)
www.outmatch.com
PostProcess Technologies LLC (e)(g)	$300,000 convertible promissory	7/25/16	0%					0.9%
Buffalo, NY. Provides innovative solutions for the	note at 5% due July 28, 2018.				300,000		300,000
post-processing of additive manufactured 3D parts.
(Manufacturing)
www.postprocess.com

13

RAND CAPITAL CORPORATION AND SUBSIDIARIES

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)	9,676 common shares.	10/29/09	4%		-		11,000	9.2%
Ithaca, NY. Developer of fully automated	(g)1,839,422 Series A preferred
microfluidic based molecular assay and diagnostic	shares.				2,099,999		2,165,999
testing devices. (Health Care)	(g)50,593 common shares.				-		59,000
www.rheonix.com	(g)589,420 Series B preferred shares.				702,732		702,732
	Total Rheonix				2,802,731		2,938,731
SocialFlow, Inc. (e)(g)	1,049,538 Series B preferred shares.	4/5/13	4%		500,000		731,431	6.5%
New York, NY. Provides instant analysis of social	1,204,819 Series B-1 preferred shares.				750,000		839,648
networks using a proprietary, predictive analytic	717,772 Series C preferred shares.				500,000		500,221
algorithm to optimize advertising and publishing.	Total Social Flow				1,750,000		2,071,300
(Software)
www.socialflow.com
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
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)	1,119,024 Series A-2 Preferred	10/20/14	9%					2.0%
Ithaca, NY. Frozen entrées and packaged dry side	Membership Units.				$359,000		$359,000
dishes made from 100% whole grain steel cut oats	1,032,918 Series B Preferred
under Grainful brand name. (Consumer Product)	Membership Units.				261,277		291,000
www.grainful.com	Total BeetNPath				620,277		650,000
Carolina Skiff LLC (g)	6.0825% Class A common	1/30/04	7%					5.5%
Waycross, GA. Manufacturer of fresh water,	membership interest.				15,000		1,750,000
ocean fishing and pleasure boats.
(Manufacturing)
www.carolinaskiff.com
ClearView Social, Inc. (e)(g)	312,500 Series seed plus preferred	1/4/16	6%					0.6%
Buffalo, NY. Social media publishing tool for law,	shares.				200,000		200,000
CPA and professional firms. (Software)
www.clearviewsocial.com
First Wave Products Group, LLC (e)(g)	$500,000 senior term notes at 10% due	4/19/12	7%					0.8%
Batavia, NY. Sells First Crush automated pill	July 31, 2017.				661,563		250,000
crusher that crushes and grinds medical pills for	$280,000 junior term notes at 10% due
nursing homes and medical institutions. (Health	July 31, 2017.				316,469		-
Care)	Warrant for 41,619 capital securities.				22,000		-
www.firstwaveproducts.com	Total First Wave				1,000,032		250,000
Genicon, Inc.	(g)1,586,902 Series B preferred shares.	4/10/15	6%		1,000,000		1,000,000	12.6%
Winter Park, FL. Designs, produces and	(g)$2,000,000 promissory note at 8%
distributes patented surgical instrumentation.	due May 1, 2020.				1,936,002		1,936,002
(Health Care)	(g)Warrant for 250,000 common
www.geniconendo.com	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

14

RAND CAPITAL CORPORATION AND SUBSIDIARIES

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)	16.639% Class A membership interest.	8/31/99	17%					0.3%
Buffalo, NY. Manufactures and distributes	8% cumulative dividend.				400,000		100,000
systems that allow natural gas to be used as an
alternative fuel to gases. (Manufacturing)
www.gas-tec.com
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)	973,533 Series A-1 convertible	11/20/12	7%					4.0%
New York, NY. End user experience	preferred shares.				750,000		750,000
management and performance (EMP) solutions	1,876,922 Series B preferred shares.				479,155		479,155
utilizing enterprise applications. (Software)	$48,466 convertible promissory note at
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	214,285 Series A-2 preferred shares.				300,000		300,000
software. (Software)	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)	$1,500,000 subordinated promissory	9/24/09	15%					6.0%
Pennsauken Township, NJ. Manufacturer of	note at 12% (1% PIK) due December
precision machined medical implants,	31, 2024.				1,914,140		1,914,140
components and assemblies. (Manufacturing)	15% Class A common membership
www.microcision.com	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

15

RAND CAPITAL CORPORATION AND SUBSIDIARIES

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)	150,000 Series AA preferred shares.	12/31/14	9%		375,000		-	0.9%
Buffalo, NY. Maker of patented golf balls.	$300,000 subordinated convertible
(Consumer Product)	promissory notes at 6% (10% for
www.oncoregolf.com	calendar year 2017) due January 24,
	2018.
	(i)Interest receivable $50,342.				300,000		300,000
	Total OnCore				675,000		300,000
SciAps, Inc. (e)(g)	187,500 Series A convertible preferred	7/12/13	8%					5.6%
Woburn, MA. Instrumentation company	shares.				1,500,000		700,000
producing portable analytical devices using XRF,	274,299 Series A-1 convertible
LIBS and RAMAN spectroscopy to identify	preferred shares.				504,710		250,000
compounds, minerals, and elements.	117,371 Series B convertible preferred
(Manufacturing)	shares.				250,000		250,000
www.sciaps.com	113,636 Series C preferred shares.				175,000		175,000
	369,698 Series C-1 preferred shares.				399,274		399,274
	Total SciAps				2,828,984		1,774,274
SOMS Technologies, LLC (e)(g)	5,959,490 Series B membership	12/2/08	9%					1.7%
Valhalla, NY. Produces and markets the	interests.				472,632		528,348
microGreen Extended Performance Oil Filter.
(Consumer Products)
www.microgreenfilter.com
Teleservices Solutions Holdings, LLC (e)	250,000 Class B preferred units.	5/30/14	6%		250,000		-	0.0%
(g)(m)	1,000,000 Class C preferred units.				1,190,680		-
Montvale, NJ. Customer contact center	80,000 Class D preferred units.				91,200		-
specializing in customer acquisition and retention	104,198 Class E preferred units.				104,198		-
for selected industries. (Contact Center)	PIK dividend for Series C and D at 12%
www.ipacesetters.com	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	21,391 Series C convertible preferred
information systems, construction, and	shares.				200,000		200,000
management. (Professional Services)	(g)$200,000 subordinated promissory
www.tilsontech.com	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
OTHER ASSETS IN EXCESS OFLIABILITIES – (1.1%)							(365,377)
NET ASSETS – 100%							$31,918,685

16

RAND CAPITAL CORPORATION AND SUBSIDIARIES

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 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, 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 3 “Investments” to the Consolidated Financial Statements).

(e) These investments arenon-income producing. All other investments are income producing.Non-income producing investments have not generated cash payments of interest or dividends including LLCtax-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 Statement of Financial Position.

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

(k) Affiliate Investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as thoseNon-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.

17

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.		$359,000				$-		$359,000		-		$-
	1,032,918 Series B Preferred Membership										-
	Units		-		$291,000		-		291,000		-		-
	$150,000 convertible promissory note at 8%.		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	$500,000 senior term notes at 10%.		250,000		-		-		250,000		-		-
Group, LLC	$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.		1,000,000		-		-		1,000,000		-		-
	$1,100,000 senior term loans at 12%.		1,100,000		-		(1,100,000)		-		-		50,234
	$600,000 term loan at 14%.		600,000		-		(600,000)		-		-		32,200
	$2,000,000 promissory note at 8%		-		2,016,002		(80,000)		1,936,002		-		129,752
	$1,000,000 promissory note at 8%		-		1,007,777		(40,000)		967,777		-		60,860
	Warrant for 250,000 common shares		-		80,000		-		80,000		-
	Warrant for 125,000 common shares		-		40,000		-		40,000		-		-
	Total Genicon		2,700,000		3,143,779		(1,820,000)		4,023,779		-		273,046
GiveGab, Inc.	5,084,329 Series Seed preferred shares.		424,314		-		-		424,314		-		-
G-TEC Natural Gas Systems	16.639% Class A membership interest. 8% cumulative dividend		100,000		-		-		100,000		-		-
Intrinsiq Materials, Inc.	4,161,747 Series A preferred shares.		780,000		-		(380,000)		400,000		-		-
Knoa Software, Inc.	973,533 Series A-1 convertible preferred		-		750,000		-		750,000		-		-
	shares. 1,876,922 Series B preferred shares.		449,455		29,700		-		479,155		-		-
	$48,466 convertible promissory note at 8%.		48,466		-		-		48,466		-		3,877
	Total Knoa		497,921		779,700		-		1,277,621		-		3,877
KnowledgeVision	200,000 Series A-1 preferred shares.		-		-		-		-		-		-
Systems, Inc.	214,285 Series A-2 preferred shares.		300,000		-		-		300,000		-		-
	129,033 Series A-3 preferred shares.		165,001		-		-		165,001		-		-
	$50,000 subordinated promissory note at 8%		-		50,000		-		50,000		-		3,748
	Warrant for 46,743 Series A-3 shares.		35,000		-		-		35,000		-		-
	Total Knowledge Vision		500,001		50,000		-		550,001		-		3,748
Mezmeriz, Inc.	1,554,565 Series seed preferred shares.		351,477		-		-		351,477		-		-
Microcision LLC	$1,500,000 subordinated promissory note at 12% (1% PIK).		1,891,964		22,176		-		1,914,140		-		228,239
New Monarch Machine Tool, Inc.	22.84 common shares.		22,841		-		-		22,841		-		28,409

18

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)
OnCore Golf	150,000 Series AA preferred shares.		-		-		-		-		-		-
Technology, Inc.	$300,000 subordinated convertible
	promissory notes at 6%.		300,000		-		-		300,000		-		29,211
	Total OnCore		300,000		-		-		300,000		-		29,211
SciAps, Inc.	187,500 Series A convertible preferred
	shares.		1,000,000		-		(300,000)		700,000		-		-
	274,299 Series A-1 convertible preferred
	shares.		504,710		-		(254,710)		250,000		-		-
	117,371 Series B convertible preferred
	shares.		250,000		-		-		250,000		-		-
	113,636 Series C preferred shares.		-		175,000		-		175,000		-		-
	369,698 Series C-1 preferred shares.		-		399,274		-		399,274		-		-
	$200,000 subordinated promissory note at
	10%.		200,000		-		(200,000)		-		-		4,731
	$100,000 secured subordinated convertible
	note at 10%.		100,000		-		(100,000)		-		-		2,376
	Total SciAps		2,054,710		574,274		(854,710)		1,774,274		-		7,107
SOMS	5,959,490 Series B membership interests.		528,348		-		-		528,348		-		6,024
Technologies, LLC
Teleservices	250,000 Class B preferred units.		-		-		-		-		-		-
Solutions	1,000,000 Class C preferred units.		200,000		-		(200,000)		-		-		-
Holdings, LLC	80,000 Class D preferred units.		91,200		-		( 91,200)		-		-		-
	104,198 Class E preferred units.		104,198		-		(104,198)		-		-		-
	Total Teleservices		395,398		-		(395,398)		-		-		-
Tilson Technology	120,000 Series B preferred shares.		600,000		-		-		600,000		-		20,000
Management, Inc.	21,391 Series C convertible preferred		200,000		-				200,000		-		-
	shares.						-
	$200,000 subordinated promissory note at		200,000		-				200,000		-		16,000
	8%.		-		750,000				750,000				1,579
	65,790 Series D preferred shares.
	$750,000 subordinated promissory note at		-		750,000		-		750,000		-		5,096
	8%.		1,000,000		1,500,000		-		2,500,000		-		42,675
	Total Tilson
	Total Affiliate Investments		$13,605,974		$7,010,929		($3,600,108)		$17,016,795		$-		$805,668
	Total Control and Affiliate     Investments		$13,705,474		$7,010,929		($3,600,108)		$17,116,295		$-		$805,668

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.

19

RAND CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2017 (Continued)

Industry Classification	Percentage of Total Investments (at fair value) as of December 31, 2017
Healthcare	37.7%
Software	24.7
Manufacturing	19.4
Professional Services	7.7
Consumer Product	4.6
Contact Center	2.9
Oil and Gas	1.6
Electronics	1.1
Marketing	0.3
Total Investments	100%

20

Rand Capital Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1. ORGANIZATION

Rand Capital Corporation (“Rand”, “we”, “us” and “our”) was incorporated under the laws of New York in February 1969. We completed our initial public offering in 1971 as an internally managed,closed-end, diversified, management investment company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets” and provide managerial assistance to the portfolio companies in which we invest. See Item 1. Business – Regulation, Regulation as a Business Development Company in our Annual Report on Form10-K for the year ended December 31, 2017.

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 equity securities.

We established our first 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. We historically made the majority of our venture capital investments through Rand SBIC. Rand SBIC’s predecessor was organized as a Delaware limited partnership and was converted into a New York corporation on December 31, 2008, at which time our operations as a licensed SBIC were continued. Although Rand SBIC was operated as if it were a BDC, it was registered as an investment company under the 1940 Act. In 2012, the SEC granted an Order of Exemption for Rand with respect to the operations of Rand SBIC, and then Rand SBIC filed an election to be regulated as a BDC under the 1940 Act. Rand SBIC’s board of directors is comprised of the directors of Rand, a majority of whom are not “interested persons” of Rand or Rand SBIC.

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 the first quarter of 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. Rand SBIC has applied for $6 million in new SBA leverage commitment and is currently undergoing the review and approval process.

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

In this Quarterly Report on Form10-Q, unless the context otherwise requires, “we”, the “Corporation”, “us”, and “our” refer to Rand Capital Corporation and Rand SBIC.

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

21

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation –It is our opinion that the accompanying consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation in accordance with United States generally accepted accounting principles (“GAAP”) of the consolidated financial position, results of operations, cash flows and statement of changes in net assets for the interim periods presented. Certain information and note disclosures normally included in audited annual consolidated financial statements prepared in accordance with GAAP have been omitted; however, we believe that the disclosures made are adequate to make the information presented herein not misleading. Our interim results for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year.

These statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form10-K for the year ended December 31, 2017. Information contained in this filing should also be reviewed in conjunction with our related filings with the SEC prior to the date of this report. Those filings include, but are not limited to, the following:

N-54A Election to Adopt Business Development Company status

DEF-14A 2018 Definitive Proxy Statement submitted to shareholders

Principles of Consolidation – The consolidated financial statements include the accounts of Rand and its two wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments – The carrying amounts reported in the consolidated statement of financial position of cash, interest receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term nature of these financial instruments.

Fair Value of SBA Debentures –In September 2018, the SBIC Funding Corporation completed a pooling of SBA debentures that have a coupon rate of 3.548%, excluding a mandatory SBA annual charge estimated to be 0.804%, resulting in a total estimated fixed rate for ten years of 4.352%. The carrying value of Rand’s SBA debentures is a reasonable estimate of fair value because their stated interest rates approximate current interest rates that are available for debt with similar terms.

Investment Classification –In accordance with the provisions of the 1940 Act, the Corporation classifies its investments by level of control. Under the 1940 Act, “Control Investments” are investments in companies that the Corporation is deemed to “Control” because it owns more than 25% of the voting securities of the company or has greater than 50% representation on the company’s board. “Affiliate Investments” are companies in which the Corporation owns between 5% and 25% of the voting securities.“Non-Control/Non-Affiliate Investments” are those companies that are neither Control Investments nor Affiliate Investments.

Investments – Investments are valued at fair value as determined in good faith by the management of the Corporation and approved by the Board of Directors. The Corporation invests in loan instruments, debt instruments, and equity instruments. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistent valuation process. The Corporation analyzes and values each investment quarterly, and records unrealized depreciation for an investment that it believes has become impaired, including where collection of a loan or debt security or realization of the recorded value of an equity security is doubtful. Conversely, the Corporation will record unrealized appreciation if it believes that an underlying portfolio company has appreciated in value and, therefore, its equity securities have 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 the Corporation’s assumptions and judgments differ from results of actual liquidation events.

22

Qualifying Assets – All of the Corporation’s investments were made in privately held small business enterprises, that were not investment companies, were principally based in the United States, and represent qualifying assets as defined by Section 55(a) of the 1940 Act.

Cash and Cash Equivalents – Temporary cash investments having a maturity of less than a year when purchased are considered to be cash equivalents.

Revenue Recognition –Interest Income – Interest income is recognized on the accrual basis except where the investment is in default or otherwise presumed to be in doubt. In such cases, interest is recognized at the time of receipt. A reserve for possible losses on interest receivable is maintained when appropriate.

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

The following investments are onnon-accrual status:G-TEC Natural Gas Systems(G-Tec), First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

The Corporation holds debt securities in its investment portfolio that containpayment-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.

Revenue Recognition – Dividend Income –The Corporation may receive cash distributions from portfolio companies that are limited liability companies or corporations and 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.

The Corporation may hold preferred equity securities that contain cumulative dividend provisions. Cumulative dividends are recorded as dividend income, if declared and deemed collectible, and any dividends in arrears are recognized into income and added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed.

Revenue Recognition – Fee Income – Consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of SBIC financings and income associated with portfolio company board attendance fees. The income associated with the amortization of financing fees was $28,266 and $18,557 for the nine months ended September 30, 2018 and 2017, respectively. The board fees were $2,000 and $1,000 for the nine months ended September 30, 2018 and 2017, respectively. In addition, we recorded a fee of approximately $142,000 for modifying a debt instrument during the nine months ended September 30, 2018.

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Investments –Amounts reported as realized gains and losses are measured by the difference between the proceeds from the sale or exchange and the cost basis of the investment without regard to unrealized gains or losses recorded in prior periods. The cost of securities that have, in management’s judgment, become worthless are written off and reported as realized losses when appropriate. Unrealized appreciation or depreciation reflects the difference between the fair value of the investments and the cost basis of the investments.

23

Original Issue Discount – Investments may include “original issue discount” or OID income. This occurs when the Corporation purchases a warrant and a note from a portfolio company simultaneously, which requires an allocation of a portion of the purchase price to the warrant and reduces the note or debt instrument by an equal amount in the form of a note discount or OID. The note is reported net of the OID and the OID is accreted into interest income over the life of the loan. The Corporation recognized $29,462 and $21,085 in OID income for nine months ended September 30, 2018 and 2017, respectively. OID income is estimated to be approximately $10,000 for the remainder of 2018.

Deferred Debenture Costs – SBA debenture origination and commitment costs, which are netted against the debenture obligation (See Note 6 “SBA Debentures”), will be amortized ratably over the terms of the SBA debentures. Amortization expense was $20,550 for each of the nine months ended September 30, 2018 and 2017. Amortization expense on currently outstanding debentures for the next five years is estimated to average approximately $23,000 per year.

SBA Debentures –The Corporation had $8,000,000 in outstanding SBA debentures at September 30, 2018 and December 31, 2017 with a weighted average interest rate of 3.54%. The debentures are presented net of deferred debenture costs (See Note 6 “SBA Debentures”). The $8,000,000 in outstanding SBA leverage matures from 2022 through 2025.

In the event of a future default of such SBA obligations, the Corporation has consented to the exercise, by the SBA, of all rights of the SBA under 13 C.F.R. 107.1810(i) “SBA remedies for automatic events of default” and has agreed to take all actions that the SBA may so require. These actions may include the Corporation’s automatic consent to the appointment of the SBA, or its designee, as receiver under Section 311(c) of the Small Business Investment Act of 1958.

Net Assets per Share – Net assets per share are based on the number of shares of common stock outstanding. The Corporation does not have any common stock equivalents outstanding.

Supplemental Cash Flow Information – Income taxes (refunded) paid during the nine months ended September 30, 2018 and 2017 were ($17,006) and $590,940, respectively. Interest paid during each of the nine months ended September 30, 2018 and 2017 was $282,875. The Corporation converted $279,319 and $262,105 of interest receivable into investments during the nine months ended September 30, 2018 and 2017, respectively.

Accounting Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stockholders’ Equity (Net Assets) –At September 30, 2018 and December 31, 2017, there were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

On October 25, 2018, the Board of Directors extended the repurchase authorization for up to 1,000,000 shares of the Corporation’s outstanding common stock on the open market through October 25, 2019 at prices no greater than the then current net asset value. No shares were repurchased during the nine months ended September 30, 2018. At September 30, 2018, the total treasury shares held was 541,046 shares with a total cost of $1,469,105.

Profit Sharing and Stock Option Plan –In 2001, the stockholders of the Corporation authorized the establishment of an Employee Stock Option Plan (the “Option Plan”), that provides for the award of stock options to purchase up to 200,000 common shares to eligible employees. In 2002, the Corporation placed the Option Plan on inactive status as it developed a new profit sharing plan for the Corporation’s employees in connection with the formation of its SBIC subsidiary. As of September 30, 2018, no stock options had been

24

awarded under the Option Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any option, warrant or right is outstanding under an executive compensation plan, no stock options will be granted under the Option Plan while any profit sharing plan is in effect with respect to the Corporation.

In 2002, the Corporation established a Profit Sharing Plan (the “Plan”) for its executive officers in accordance with Section 57(n) of the 1940 Act. Under the Plan, the Corporation will pay its executive officers aggregate profit sharing payments equal to 12% of the net realized capital gains of its SBIC subsidiary, net of all realized capital losses and unrealized depreciation of the SBIC subsidiary, for the fiscal year, computed in accordance with the Plan and the Corporation’s interpretation of the Plan. Any profit sharing paid or accrued cannot exceed 20% of the Corporation’s net income, as defined in the Plan. For purposes of the 20% profit sharing test, the Corporation interprets net income to be the total of the Corporation’s net investment gain (loss) and its net realized gain (loss) on investments, prior to inclusion of the estimated profit sharing obligation. The profit sharing payments are split equally between the Corporation’s two executive officers, each of whom is fully vested in the Plan.

The Corporation did not record any expense pursuant to the Plan for the nine months ended September 30, 2018 and 2017, respectively. Included in the profit sharing and bonus payable line on the Consolidated Statement of Financial Position at December 31, 2017 was $132,000 that was paid during the first quarter of 2018.

Income Taxes –The Corporation reviews the tax positions it has taken to determine if they meet a “more likely than not threshold” for the benefit of the tax position to be recognized in the consolidated financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in either a reduction of a current or deferred tax asset or receivable, or the recording of a current or deferred tax liability. There were no uncertain tax positions recorded at September 30, 2018.

It is the Corporation’s policy to include interest and penalties related to income tax liabilities in income tax expense. There were no amounts recognized for interest or penalties for the nine months ended September 30, 2018 or 2017.

Concentration of Credit and Market Risk – The Corporation’s financial instruments potentially subject it to concentrations of credit risk. Cash is invested with banks in amounts which, at times, exceed insurable limits. Management does not anticipatenon-performance by such banks.

The following are the concentrations of the top five portfolio company values to the fair value of the Corporation’s total investment portfolio:

	September 30, 2018			December 31, 2017
Genicon, Inc. (Genicon)		13	%		12	%
eHealth Global Technologies, Inc. (eHealth),		11	%		11	%
Rheonix, Inc. (Rheonix)		9	%		9	%
Tilson Technology Management, Inc. (Tilson)		8	%		8	%
Outmatch (Outmatch)		7	%		7	%

Note 3. INVESTMENTS

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, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.

25

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

The Corporation uses 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. To the extent the value exceeds the remaining principal amount of the debt or loan securities of the portfolio company, the fair value of such securities is generally estimated to be their cost. However, where value is less than the remaining principal amount of the loan and debt securities, the Corporation may discount the value of an equity security. The market approach uses observable prices and other relevant information generated by similar market transactions. It may include the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, the Corporation adjusts 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 the Corporation’s valuation at the measurement date. Under the valuation policy, the Corporation values 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.

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.

There were no Level 1 or 2 investments as of September 30, 2018.

In the valuation process, the Corporation values 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;

26

• 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 the Corporation’s 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 the Corporation’s equity investments are earnings before interest, tax and depreciation and amortization (EBITDA) and revenue multiples, where applicable, the financial and operational performance of the business, and the debt and senior equity preferences that may exist in a deemed liquidation event. Standard industry multiples may be used when available; however, the Corporation’s 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 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 entered into by the portfolio company with a sophisticated,non-strategic, unrelated, new investor. The terms of these equity transactions may not be identical to the equity transactions between the portfolio company and the Corporation, 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 of less than one year old, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair value inputs are identified causing the Corporation to depart from this basis.

27

Loan and Debt Securities

The significant unobservable inputs used in the fair value measurement of the Corporation’s loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, as well as the market acceptance for the portfolio company’s products or services. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. The Corporation’s loan and 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, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair value inputs are identified causing the Corporation to depart from this basis.

The following table provides a summary of the significant unobservable inputs used to determine the fair value of the Corporation’s Level 3 portfolio investments as of September 30, 2018:

Investment Type	Market Approach EBITDA Multiple		Market Approach Liquidation Seniority		Market Approach Revenue Multiple		Market Approach Transaction Pricing		Totals
Non-Control/Non-Affiliate Equity	$	—	$	25	$	2,645,496	$	6,209,950	$	8,855,471
Non-Control/Non-Affiliate Debt	$	949,040		1,739,639		3,500,000		300,000		6,488,679
TotalNon-Control/Non-Affiliate	$	949,040	$	1,739,664	$	6,145,496	$	6,509,950	$	15,344,150
Affiliate Equity	$	4,420,000	$	22,841	$	4,053,430	$	1,031,477	$	9,527,748
Affiliate Debt		5,935,859		—		—		1,265,000		7,200,859
Total Affiliate	$	10,355,859	$	22,841	$	4,053,430	$	2,296,477	$	16,728,607
Control Equity	$	—	$	—	$	99,500	$	—	$	99,500
Total Control	$	—	$	—	$	99,500	$	—	$	99,500
Total Level 3 Investments	$	11,304,899	$	1,762,505	$	10,298,426	$	8,806,427	$	32,172,257
Range		4X-9X		1X		1X-3.3X		Not Applicable
Unobservable Input		EBITDA Multiple		Asset Value		Revenue Multiple		Transaction Price
Weighted Average		5.6X		1X		2.1X		Not Applicable

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at September 30, 2018:

			Fair Value Measurements at Reported Date Using
Description	September 30, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Other Significant Unobservable Inputs (Level 3)
Loan investments	$	4,325,000	$	—	$	—	$	4,325,000
Debt investments		9,364,538		—		—		9,364,538
Equity investments		18,482,719		—		—		18,482,719
Total	$	32,172,257	$	—	$	—	$	32,172,257

28

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value on a Recurring Basis at December 31, 2017:

			Fair Value Measurements at Reported Date Using
Description	December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Other Significant Unobservable Inputs (Level 3)
Loan investments	$	3,550,000	$	—	$	—	$	3,550,000
Debt investments		10,096,244		—		—		10,096,244
Equity investments		18,637,818		—		—		18,637,818
Total	$	32,284,062	$	—	$	—	$	32,284,062

The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2018:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Venture Capital Investments
Description	Loan Investments		Debt Investments			Equity Investments			Total
Ending Balance, December 31, 2017, of Level 3 Assets	$	3,550,000	$	10,096,244		$	18,637,818		$	32,284,062
Realized loss included in net change in net assets from operations:
Intrinsiq Material, Inc. (Intrinsiq)		—		—			(1,125,673	)		(1,125,673	)
Total Realized Losses		—		—			(1,125,673	)		(1,125,673	)
Unrealized Losses included in net change in net assets from operations:
Empire Genomics, LLC (Empire Genomics)		—		(901,360	)		—			(901,360	)
First Wave Products Group, LLC (First Wave)		—		(250,000	)		—			(250,000	)
GiveGab, Inc. (Givegab)		—		—			191,907			191,907
Intrinsiq		—		—			725,673			725,673
SOMS Technologies, LLC (SOMS)		—		—			(498,348	)		(498,348	)
Total Unrealized Losses		—		(1,151,360	)		419,232			(732,128	)
Purchases of Securities/Changes toSecurities/Non-cash conversions:
BeetNPath, LLC (Beetnpath)		—		140,000			—			140,000
Centivo Corporation (Centivo)		—		—			201,342			201,342
Empire Genomics		—		274,106			—			274,106
Genicon, Inc. (Genicon)		—		153,548			—			153,548
GoNoodle, Inc. (GoNoodle)		—		7,739			—			7,739
KnowledgeVision Systems, Inc. (Knowledgevision)		775,000		—			—			775,000
Microcision LLC (Microcision)		—		14,392			—			14,392
SciAps, Inc. (Sciaps)		—		—			250,000			250,000
Total Purchases of Securities/Changes toSecurities/Non-cash conversions		775,000		589,785			451,342			1,816,127
Repayments and Sale of Securities:
Empire Genomics		—		(21,665	)		—			(21,665	)
Knoa Software, Inc. (Knoa)		—		(48,466	)		—			(48,466	)
Total Repayments and Sale of Securities		—		(70,131	)		—			(70,131	)
Transfers within Level 3		—		(100,000	)		100,000			—
Ending Balance, September 30, 2018, of Level 3 Assets	$	4,325,000	$	9,364,538		$	18,482,719		$	32,172,257
Change in unrealized depreciation on investments for the period included in changes in net assets									($	732,128	)
Net realized loss on investments for the period included in changes in net assets									($	1,125,673	)

29

The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2017:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Venture Capital Investments
Description	Loan Investments			Debt Investments			Equity Investments			Total
Ending Balance, December 31, 2016, of Level 3 Assets	$	3,200,000		$	6,700,221		$	17,600,260		$	27,500,481
Unrealized Gains and Losses included in net change in net assets from operations:
ACV Auctions, Inc. (ACV Auctions)		—			—			119,356			119,356
Athenex, Inc. (Athenex)		—			—			308,336			308,336
BeetNPath, LLC (Beetnpath)		—			—			29,723			29,723
City Dining Cards, Inc. (Loupe)		—			—			(500,000	)		(500,000	)
Mercantile Adjustment Bureau, LLC (Mercantile)		—			(250,000	)		—			(250,000	)
SciAps, Inc. (Sciaps)		—						(300,000	)		(300,000	)
Teleservices Solutions Holdings, LLC (Teleservices)		—						(395,398	)		(395,398	)
Total Unrealized Gains and Losses		—			(250,000	)		(737,983	)		(987,983	)
Purchases of Securities/Changes toSecurities/Non-cash conversions:
Beetnpath		—			100,000			11,277			111,277
Centivo Corporation (Centivo)		—			100,000			—			100,000
eHealth Global Technologies, Inc. (eHealth)		2,000,000			—			—			2,000,000
Empire Genomics, LLC (Empire Genomics)		—			201,489			—			201,489
Genicon, Inc. (Genicon)		300,000			893,588			120,000			1,313,588
GoNoodle, Inc. (GoNoodle)		—			7,662			—			7,662
KnowledgeVision Systems, Inc. (Knowledge Vision)		50,000			—			—			50,000
Mercantile		—			107,497			—			107,497
Microcision LLC (Microcision)		—			17,403			—			17,403
Sciaps		—			—			274,274			274,274
Total Purchases of Securities/Changes toSecurities/Non-cash conversions		2,350,000			1,427,639			405,551			4,183,190
Transfers within Level 3		(2,000,000	)		1,450,000			550,000			—
Transfers out of Level 3		—			—			(725,000	)		(725,000	)
Ending Balance, September 30, 2017, of Level 3 Assets	$	3,550,000		$	9,327,860		$	17,092,828		$	29,970,688
Change in unrealized depreciation on investments for the period included in changes in net assets										($	987,983	)
Net realized gain on investments for the period included in changes in net assets										$	—

30

NOTE 4. OTHER ASSETS

At September 30, 2018 and December 31, 2017, other assets was comprised of the following:

	September 30, 2018		December 31, 2017
Prepaid expenses	$	34,621	$	—
Operating receivables		2,899		3,204
Equipment (net)		840		2,490
Dividend receivable		—		37,160
Total other assets	$	38,360	$	42,854

Note 5. COMMITMENTS AND CONTINGENCIES

The Corporation had one commitment to fund a $50,000 investment at September 30, 2018.

Note 6. SBA DEBENTURES

Pursuant to Accounting Standard Update (ASU)2015-03, the debt origination costs associated with the SBA debt obligations are presented as a direct deduction of the related debt obligation.

	September 30, 2018			December 31, 2017
Debentures guaranteed by the SBA	$	8,000,000		$	8,000,000
Less unamortized issue costs		(124,277	)		(144,827	)
Debentures guaranteed by the SBA, net	$	7,875,723		$	7,855,173

31

Note 7. FINANCIAL HIGHLIGHTS

The following schedule provides the financial highlights, calculated based on weighted average shares outstanding, for the nine months ended September 30, 2018 and 2017:

	Nine months ended September 30, 2018 (Unaudited)			Nine months ended September 30, 2017 (Unaudited)
Income from investment operations (1):
Investment income	$	0.23		$	0.17
Operating expenses		0.24			0.25
Investment loss before income taxes		(0.01	)		(0.08	)
Income tax benefit		0.00			(0.03	)
Net investment loss		(0.01	)		(0.05	)
Net realized and unrealized loss on investments		(0.20	)		(0.10	)
Decrease in net asset value		(0.21	)		(0.15	)
Net asset value, beginning of period		5.05			5.16
Net asset value, end of period	$	4.84		$	5.01
Per share market price, end of period	$	2.40		$	2.96
Total return based on market value		(20.5	%)		(6.3	%)
Total return based on net asset value		(4.2	%)		(2.9	%)
Supplemental data:
Ratio of operating expenses before income taxes to average net assets		4.8	%		4.9	%
Ratio of operating expenses including income taxes to average net assets		2.9	%		3.2	%
Ratio of net investment loss to average net assets		(0.2	%)		(0.9	%)
Portfolio turnover		4.2	%		13.4	%
Net assets, end of period	$	30,587,676		$	31,692,476
Weighted shares outstanding, end of period		6,321,988			6,321,988

(1) Per share data are based on weighted average shares outstanding and the results are rounded to the nearest cent.

The Corporation’s interim period results could fluctuate as a result of a number of factors; therefore results for any interim period should not be relied upon as being indicative of performance for the full year or in future periods.

32

Item 2. 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 elsewhere in this report. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.

FORWARD LOOKING STATEMENTS

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by us from time to time, and forward-looking statements may be included in documents that are filed with the Securities and Exchange Commission. Forward-looking statements involve risks and uncertainties that could cause our results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the United States economy and the local markets in which our portfolio companies operate, the state of the securities markets in which the securities of our portfolio companies could be traded, liquidity within the United States financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described under the caption “Risk Factors” contained in Part II, Item 1A of this report and in Part I, Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017.

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

Overview

We are an internally managed investment company that lends to and invests in small companies often concurrently with other investors. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. We have historically made the majority of our investments through our wholly-owned subsidiary, Rand Capital SBIC, Inc. (“Rand SBIC”), which operates as a small business investment company (“SBIC”) and has been licensed by the U.S. Small Business Administration (“SBA”) since 2002. 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 the first quarter of 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. Rand SBIC has applied for an additional $6 million in new SBA leverage commitments and is currently undergoing the review and approval process.

33

Outlook

At the end of the third quarter of 2018, we had approximately $4.4 million in cash and cash equivalents available for future investments and expenses. We believe the combination of cash and cash equivalents on hand, proceeds from portfolio exits, anticipated additional SBA leverage, and prospective investment income provide sufficient capital for us to continue to add new investments to our portfolio while reinvesting in existing portfolio companies that demonstrate continued growth potential. 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 actively involved with the governance and management of our portfolio companies, which enables us to support their operating and marketing efforts and facilitate their growth.

• We have sufficient cash to invest in new opportunities and to opportunistically repurchase shares. At the end of the third quarter of 2018, 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.

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

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. A summary of our critical accounting policies can be found in our Annual Report on Form10-K for the year ended December 31, 2017 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

34

Financial Condition

	September 30, 2018		December 31, 2017		Decrease			% Decrease
Overview:
Total assets	$	38,658,226	$	40,133,913	($	1,475,687	)		(3.7	%)
Total liabilities		8,070,550		8,215,228		(144,678	)		(1.8	%)
Net assets	$	30,587,676	$	31,918,685	($	1,331,009	)		(4.2	%)

Net asset value per share (NAV) was $4.84 at September 30, 2018 and $5.05 at December 31, 2017.

Our gross outstanding SBA debentures at September 30, 2018 were $8,000,000 and will mature from 2022 through 2025. Cash and cash equivalents approximated 14% of net assets at September 30, 2018, as compared to 20% at December 31, 2017.

Composition of Our Investment Portfolio

Our financial condition is dependent on the success of our portfolio holdings. We have invested substantially all of our assets in small tomedium-sized companies. The following summarizes our investment portfolio at the dates indicated.

	September 30, 2018			December 31, 2017			Increase (Decrease)			% Increase (Decrease)
Investments, at cost	$	37,309,642		$	36,689,319		$	620,323			1.7	%
Unrealized depreciation, net		(5,137,385	)		(4,405,257	)		(732,128	)		16.6	%
Investments at fair value	$	32,172,257		$	32,284,062		($	111,805	)		(0.3	%)

Our total investments at fair value, as estimated by management and approved by our Board of Directors, approximated 105% of net assets at September 30, 2018 versus 101% of net assets at December 31, 2017.

The change in investments during the nine months ended September 30, 2018, at cost, is comprised of the following:

	Cost Increase (Decrease)
New investments:
KnowledgeVision Systems, Inc. (Knowledgevision)	$	775,000
SciAps, Inc. (Sciaps)		250,000
Centivo Corporation (Centivo)		200,000
BeetNPath, LLC (Beetnpath)		140,000
Total of new investments		1,365,000
Other changes to investments:
Empire Genomics, LLC (Empire Genomics) capitalized fee income and interest conversion		274,106
Genicon Inc. (Genicon) interest conversion and OID amortization		153,548
Microcision LLC (Microcision) interest conversion		14,392
GoNoodle, Inc. (GoNoodle) interest conversion		7,740
Centivo interest conversion		1,342
Total of other changes to investments		451,128
Investments repaid, sold or liquidated:
Intrinsiq Material, Inc. (Intrinsiq) realized loss		(1,125,673	)
Knoa Software Inc. (Knoa) repayment		(48,466	)
Empire Genomics repayment		(21,666	)
Total of investments repaid, sold or liquidated		(1,195,808	)
Net change in investments, at cost	$	620,323

35

Results of Operations

Our principal investment objective is to achieve long-term capital appreciation on our equity investments while maintaining a current cash flow from our debt instruments 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 three months ended September 30, 2018 to the three months ended September 30, 2017

Investment Income

	Three months ended September 30, 2018		Three months ended September 30, 2017		Increase			% Increase
Interest from portfolio companies	$	450,289	$	309,922	$	140,367			45.3	%
Interest from other investments		7,872		6,348		1,524			24.0	%
Dividend and other investment income		48,856		76,813		(27,957	)		(36.4	%)
Fee income		155,285		3,936		151,349			3,845.2	%
Total investment income	$	662,302	$	397,019	$	265,283			66.8	%

The total investment income that is received on a current basis for the three months ended September 30, 2018 is received from ten portfolio companies. This contrasts with the nine portfolio companies generating current income for the three months ended September 30, 2017.

Interest from portfolio companies – Interest from portfolio companies was approximately 45% higher during the three months ended September 30, 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 Genicon Inc. (Genicon), eHealth Global Technologies, Inc. (eHealth) and several other portfolio companies. In addition, during the third quarter of 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 isnon-recurring.

The following investments are onnon-accrual status:G-TEC Natural Gas Systems(G-Tec), First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balances.

Interest from other investments—The increase in interest from other investments is primarily due to higher interest rates during the three months ended September 30, 2018 versus the same period in 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:

	Three months ended September 30, 2018		Three months ended September 30, 2017
Carolina Skiff LLC (Carolina Skiff)	$	39,169	$	41,999
Tilson Technology Management, Inc. (Tilson)		9,687		5,000
New Monarch Machine Tool, Inc. (New Monarch)		—		27,409
Empire Genomics LLC (Empire Genomics)		—		2,405
Total dividend and other investment income	$	48,856	$	76,813

36

Fee income—Fee income 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 $12,939 and $3,936 for the three months ended September 30, 2018 and 2017, respectively.

In addition, we recorded aone-time debt modification fee of approximately $142,000 during the three month ended September 30, 2018. We charged the fee to Empire Genomics and the fee was capitalized into the Empire Genomics loan balances as part of the debt modification.

The portion of total investment income that is received in cash, on a current basis, is received from nine portfolio companies.

Expenses

	Three months ended September 30, 2018		Three months ended September 30, 2017		Increase		% Increase
Total expenses	$	447,800	$	439,048	$	8,752		2.0	%

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 three months ended September 30, 2018 versus the same period in 2017 was primarily caused by a 69%, or $33,312, increase in professional fees. Professional fees are higher during the third quarter of 2018 because we continue to incur expenses in connection with developing and implementing our long-term growth strategy. These expenses included external legal, tax consulting and other advisory expenses to support refinement of our strategy, which involved assessing options relative to the complex regulatory environment in which we operate.

This increase was offset by a $26,299 recovery of bad debt expense associated with the Empire Genomics loan modification for the three months ended September 30, 2018. There was no bad debt expense (recovery) for the three months ended September 30, 2017.

Realized Losses on Investments

	Three months ended September 30, 2018			Three months ended September 30, 2017		Change
Realized loss on investments before income taxes	($	1,125,673	)	$	—	($	1,125,673	)

During the three months ended September 30, 2018, we recognized a loss on our investment in Intrinsiq Material, Inc. (Intrinsiq) when the company was sold and we did not receive any proceeds. There were no realized gains or losses during the three months ended September 30, 2017.

37

Change in Unrealized Depreciation of Investments

	Three months ended September 30, 2018		Three months ended September 30, 2017		Change
Change in unrealized depreciation of investments before income taxes	$	475,802	$	111,000	$	364,802

The change in unrealized depreciation, before income taxes, for the three months ended September 30, 2018 was comprised of the following:

	Three months ended September 30, 2018
Empire Genomics, LLC (Empire Genomics)	($	249,871	)
Intrinsiq Material, Inc. (Intrinsiq) realized loss		725,673
Total change in net unrealized depreciation of investments before income taxes during the three months ended September 30, 2018	$	475,802

The valuation of our investment in Empire Genomics was decreased after we reviewed the portfolio company’s operations and current and projected financial condition, after the debt modification, and determined that a valuation adjustment was necessary.

Intrinsiq was sold during the third quarter of 2018 and a realized loss was recorded.

The change in unrealized depreciation, before income taxes, for the three months ended September 30, 2017 was comprised of the following:

	Three months ended September 30, 2017
Athenex, Inc. (Athenex)	$	111,000
Total change in net unrealized depreciation of investments before income taxes during the three months ended September 30, 2017	$	111,000

Athenex completed an initial public offering (IPO) during the second quarter of 2017 and its shares of common stock are now publicly traded on the NASDAQ Global Select Market under the symbol “ATNX”. At September 30, 2017 we held 46,296 shares of the common stock of Athenex and valued these shares using the average bid price for the last three trading days of the reporting period, which was then discounted 10% due to restrictions on the sale of the shares. Subsequent to quarter end, the sale restrictions on our shares in Athenex common stock were removed and these shares became freely tradable.

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

Net (Decrease) Increase in Net Assets from Operations

We account for our operations under GAAP for investment companies. The principal measure of our financial performance is “net (decrease) increase in net assets from operations” on our consolidated statements of operations. For the three months ended September 30, 2018 and 2017, the net (decrease) increase in net assets from operations was ($179,302) and $57,931, respectively.

38

Comparison of the nine months ended September 30, 2018 to the nine months ended September 30, 2017

Investment Income

	Nine months ended September 30, 2018		Nine months ended September 30, 2017		Increase (Decrease)			% Increase (Decrease)
Interest from portfolio companies	$	1,063,337	$	833,653	$	229,684			27.6	%
Interest from other investments		20,717		24,182		(3,465	)		(14.3	%)
Dividend and other investment income		181,963		197,403		(15,440	)		(7.8	%)
Fee income		172,612		19,557		153,055			782.6	%
Total investment income	$	1,438,629	$	1,074,795	$	363,834			33.9	%

The total investment income that is received on a current basis for the nine months ended September 30, 2018 is received from ten portfolio companies. This contrasts with the nine portfolio companies generating current income for the nine months ended September 30, 2017.

Interest from portfolio companies – Interest from portfolio companies was approximately 28% higher during the nine months ended September 30, 2018 versus the same period in 2017 due to the fact that we have originated more income-producing debt investments in the last year. These new debt instruments were originated from Genicon Inc. (Genicon), eHealth Global Technologies, Inc. and several other portfolio companies. In addition, during the third quarter of 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.

The following investments are onnon-accrual status:G-TEC Natural Gas Systems(G-Tec), First Wave Products Group, LLC (First Wave), OnCore Golf Technology, Inc. (Oncore) and a portion of the Mercantile Adjustment Bureau, LLC (Mercantile) outstanding loan balance.

Interest from other investments—The decrease in interest from other investments is primarily due to lower average cash balances during the nine months ended September 30, 2018 versus the same period in 2017.

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

	Nine months ended September 30, 2018		Nine months ended September 30, 2017
Carolina Skiff LLC (Carolina Skiff)	$	119,433	$	141,372
Tilson Technology Management, Inc. (Tilson)		29,063		15,000
New Monarch Machine Tool, Inc. (New Monarch)		27,409		27,409
Empire Genomics LLC (Empire Genomics)		6,058		7,598
SOMS Technologies, LLC (SOMS)		—		6,024
Total dividend and other investment income	$	181,963	$	197,403

Fee income—The income associated with the amortization of financing fees was $28,266 and $18,557 for the nine months ended September 30, 2018 and 2017, respectively. The income from board fees was $2,000 and $1,000 for the nine months ended September 30, 2018 and 2017, respectively.

In addition, we recorded aone-time debt modification fee of approximately $142,000 during the nine month ended September 30, 2018. We charged the fee to Empire Genomics and the fee was capitalized into the Empire Genomics loan balances as part of the debt modification.

Expenses

	Nine months ended September 30, 2018		Nine months ended September 30, 2017		Decrease			% Decrease
Total expenses	$	1,510,034	$	1,562,620	($	52,586	)		(3.4	%)

39

The decrease in expenses during the nine months ended September 30, 2018 is due to an overall decrease of 29%, or $89,855, in professional fees as compared to the same period in 2017. This decrease was offset by a $50,342 charge to bad debt expense for the nine months ended September 30, 2018 while there was no bad debt expense for the nine months ended September 30, 2017.

Realized Losses on Investments

	Nine months ended September 30, 2018			Nine months ended September 30, 2017		Change
Realized loss on investments before income taxes	($	1,125,673	)	$	—	($	1,125,673	)

During the nine months ended September 30, 2018, we recognized a loss on our investment in Intrinsiq Material, Inc. (Intrinsiq) when the company was sold and we did not receive any proceeds.

Change in Unrealized Depreciation of Investments

	Nine months ended September 30, 2018			Nine months ended September 30, 2017			Change
Change in unrealized depreciation of investments before income taxes	($	732,128	)	($	987,983	)	($	255,855	)

The change in unrealized depreciation, before income taxes, for the nine months ended September 30, 2018 was comprised of the following:

	Nine months ended September 30, 2018
Empire Genomics, LLC (Empire Genomics)	($	901,360	)
SOMS Technologies, LLC (SOMS)		(498,348	)
First Wave Products Group (First Wave)		(250,000	)
GiveGab, Inc. (Givegab)		191,907
Intrinsiq Material, Inc. (Intrinsiq) realized loss		725,673
Total change in net unrealized depreciation of investments before income taxes during the nine months ended September 30, 2018	($	732,128	)

The valuations of our investments in Empire Genomics and SOMS were decreased after we reviewed each of the portfolio company’s operations and current and projected financial condition and determined that a valuation adjustment was necessary.

Our valuation of First Wave was decreased to reflect an anticipated round of financing expected to be completed by First Wave in the fourth quarter of 2018.

Givegab’s value was increased to the cost basis of the investment after a financial analysis of the portfolio company indicating continued improved performance. Intrinsiq was sold during the third quarter of 2018 and a realized loss was recorded.

The change in unrealized depreciation, before income taxes, for the nine months ended September 30, 2017 was comprised of the following:

	Nine months ended September 30, 2017
City Dining Cards, Inc. (Loupe)	($	500,000	)
Teleservices Solutions Holdings, LLC (Teleservices)		(395,398	)
SciAps, Inc. (Sciaps)		(300,000	)
Mercantile Adjustment Bureau, LLC (Mercantile)		(250,000	)
Athenex, Inc. (Athenex)		308,336
ACV Auctions, Inc. (ACV)		119,356
BeetNPath, LLC (Beetnpath)		29,723
Total change in net unrealized depreciation of investments before income taxes during the nine months ended September 30, 2017	($	987,983	)

40

The valuations of our investments in Loupe, 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.

The valuation of Sciaps was decreased to revalue our equity holdings based upon the liquidation preferences of our securities as compared to the most recent equity round of financing completed by Sciaps.

In accordance with our valuation policy, we increased the value of our investments in ACV and Beetnpath based on a significant equity financing by a newnon-strategic outside entity.

Athenex completed an initial public offering (IPO) during the second quarter of 2017 and its shares of common stock were publicly traded on the NASDAQ Global Select Market under the symbol “ATNX”. At September 30 2017 we held 46,296 shares of the common stock of Athenex and valued the shares using the average bid price for the last three trading days of the reporting period, which was then discounted due to restrictions on the sale of the shares.

All of these value adjustments resulted from a review by our 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. For the nine months ended September 30, 2018 and 2017, the net decrease in net assets from operations was ($1,331,009) and ($936,887), respectively.

Liquidity and Capital Resources

Our principal long-term objective is to achieve growth in net asset value per share through capital appreciation. Therefore, a significant portion of our investment portfolio is structured to maximize the potential for capital appreciation, and certain portfolio investments may be structured to provide little or no current yield in the form of dividends or interest payments.

As of September 30, 2018, our total liquidity consisted of approximately $4.4 million in cash and cash equivalents on hand.

Net cash used by operating activities has averaged approximately $626,000 over the last three years. The average cash used for investment in portfolio companies over the last three years was approximately $3,700,000. Our cash flow from operations may fluctuate based on the timing of the receipt of dividend income and realized gains and the associated income taxes paid. We will generally use cash to fund our operating expenses and also to invest in companies, as we seek to build our portfolio utilizing our available cash and proceeds from liquidations of portfolio investments. We anticipate that we will continue to exit investments. However, the timing of liquidation events within the portfolio is difficult to project with any certainty. As of September 30, 2018, we did not have any outstanding commitments to borrow funds from the SBA. Starting in 2022, our SBA debt begins to reach maturity, and this will require us to identify sources of future funding if liquidation of investments is not sufficient to fund operations and repay the SBA debt obligation.

41

We believe that the cash on hand at September 30, 2018, the scheduled interest payments on our portfolio investments and the anticipated additional SBA leverage will be sufficient to meet our cash needs for the next twelve months. We continue to seek potential exits from portfolio companies to increase the amount of liquidity available for new investments, operating activities and future SBA debenture repayment obligations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our investment activities contain elements of risk. Our investment portfolio consists of equity and debt securities in private companies and is subject to valuation risk. Because there is typically no public market for the equity and debt securities in which we invest, the valuation of the equity interests in the portfolio is stated at “fair value” as determined in good faith by our management and approved by our Board of Directors. This is in accordance with our investment valuation policy (see the discussion of valuation policy contained in “Note 3. Investments” in the consolidated financial statements contained in Item 1 of this report, which is hereby incorporated herein by reference.) In the absence of readily ascertainable market values, the estimated value of 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 theover-the-counter market. In addition, there may be a portion of the portfolio for which no regular trading market exists. In order to realize the full value of a security, the market must trade in an orderly fashion or a willing purchaser must be available when a sale is to be made. Should an economic or other event occur that would not allow markets to trade in an orderly fashion, we may not be able to realize the fair value of our marketable investments or other investments in a timely manner.

As of September 30, 2018 we did not have anyoff-balance sheet arrangements or hedging or similar derivative financial instrument investments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures.The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as September 30, 2018. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s controls and procedures were effective as of September 30, 2018.

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

42

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

See Part I, Item 1A, “Risk Factors,” of the Annual Report on Form10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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 program
7/1/2018 – 7/31/2018		—		—		—		458,954
8/1/2018 – 8/31/18		—		—		—		458,954
9/1/2018 – 9/30/2018		—		—		—		458,954

(1) There were no shares repurchased during the third 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 Corporation’s common stock on the open market at prices no greater than the then current net asset value through October 25, 2019.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

43

Item 6. Exhibits

(a)	Exhibits
	The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule12b-32 under the Securities Exchange Act of 1934.
(3.1)(i)	Certificate of Incorporation of the Corporation, incorporated by reference to Exhibit (a)(1) of FormN-2 filed with the Securities Exchange Commission on April 22, 1997. (FileNo. 333-25617).
(3.1)(ii)	By-laws of the Corporation, incorporated by reference to Exhibit 3(ii) to the Corporation’s Quarterly Report on Form10-Q for the period ended September 30, 2016 filed with the Securities Exchange Commission on November 2, 2016. (FileNo. 814-00235).
(4)	Specimen certificate of common stock certificate, incorporated by reference to Exhibit (b)  of FormN-2 filed with the Securities Exchange Commission on April 22, 1997. (FileNo. 333-25617).
(31.1)	Certification of Principal Executive Officer Pursuant to Rules13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended – filed herewith.
(31.2)	Certification of Principal Financial Officer Pursuant to Rules13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended – filed herewith.
(32.1)	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Rand Capital Corporation – filed herewith.

44

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 7, 2018

RAND CAPITAL CORPORATION

By:	/s/ Allen F. Grum
	Allen F. Grum, President

By:	/s/ Daniel P. Penberthy
	Daniel P. Penberthy, Treasurer

45