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EX-31.1 - VLL7INC 10Q 033116 EXHIBIT 31.1 - Venture Lending & Leasing VII, Inc.vll710q33116ex311.htm
EX-31.2 - VLL7INC 10Q 033116 EXHIBIT 31.2 - Venture Lending & Leasing VII, Inc.vll710q33116ex312.htm
EX-32.2 - VLL7INC 10Q 033116 EXHIBIT 32.2 - Venture Lending & Leasing VII, Inc.vll710q33116ex322.htm
EX-32.1 - VLL7INC 10Q 033116 EXHIBIT 32.1 - Venture Lending & Leasing VII, Inc.vll710q33116ex321.htm


FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the quarterly period ended March 31, 2016

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

For the transition period from ___________ to ______________

Commission file number 814-00969

Venture Lending & Leasing VII, Inc.
(Exact Name of Registrant as specified in its charter)
Maryland
45-5589518
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
104 La Mesa Drive, Suite 102
Portola Valley, CA 94028
(Address of principal executive offices)
(Zip Code)

(650) 234-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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 [x]  No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ]   No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and "smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [x]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]  No [x]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class
 
Outstanding as of May 13, 2016
Common Stock, $.001 par value
 
100,000




VENTURE LENDING & LEASING VII, INC.
INDEX

PART I — FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
 
 
 
Condensed Statements of Assets and Liabilities (Unaudited)
 
As of March 31, 2016 and December 31, 2015
 
 
 
Condensed Statements of Operations (Unaudited)
 
For the three months ended March 31, 2016 and 2015
 
 
 
Condensed Statements of Changes in Net Assets (Unaudited)
 
For the three months ended March 31, 2016 and 2015
 
 
 
Condensed Statements of Cash Flows (Unaudited)
 
For the three months ended March 31, 2016 and 2015
 
 
 
Notes to Condensed Financial Statements (Unaudited)
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4.
Controls and Procedures
 
 
PART II — OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
 
Item 1A.
Risk Factors
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3.
Defaults Upon Senior Securities
 
 
Item 4.
Mine Safety Issues
 
 
Item 5.
Other Information
 
 
Item 6.
Exhibits
 
 
SIGNATURES




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VENTURE LENDING & LEASING VII, INC.

CONDENSED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
AS OF MARCH 31, 2016 AND DECEMBER 31, 2015

 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Investments:
 
 
 
Loans, at estimated fair value
 
 
 
   (Cost of $376,073,500 and $393,028,200)
$
357,273,958

 
$
380,437,931

Interest Rate Caps (cost of $1,656,142 and $1,917,638)
528,272

 
1,410,963

Total Investments (Cost of $377,729,642 and $394,945,838)
357,802,230

 
381,848,894

 
 
 
 
Cash and cash equivalents
13,324,532

 
8,303,171

Other assets
5,817,561

 
6,340,619

 
 
 
 
Total assets
376,944,323

 
396,492,684

 
 
 
 
LIABILITIES
 
 
 
Borrowings under debt facility
174,000,000

 
182,000,000

Accrued management fees
2,355,902

 
2,478,079

Accounts payable and other accrued liabilities
1,778,463

 
1,523,293

 
 
 
 
Total liabilities
178,134,365

 
186,001,372

 
 
 
 
NET ASSETS
$
198,809,958

 
$
210,491,312

 
 
 
 
Analysis of Net Assets:
 
 
 
 
 
 
 
Capital paid in on shares of capital stock
$
250,925,000

 
$
250,925,000

Unrealized depreciation on investments
(19,927,412
)
 
(13,096,944
)
Distribution in excess of net investment income
(32,187,630
)
 
(27,336,744
)
Net assets (equivalent to $1,988.10 and $2,104.91 per share based on 100,000 shares of capital stock outstanding - See Note 6)
$
198,809,958

 
$
210,491,312

 
 
 
 
Commitments & Contingent Liabilities:
 
 
 
Unfunded unexpired commitments (See Note 4)
$
62,385,227

 
$
68,700,000




See notes to condensed financial statements.



3



VENTURE LENDING & LEASING VII, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 
For the Three Months Ended March 31, 2016
 
For the Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
INVESTMENT INCOME:
 
 
 
Interest on loans
$
16,167,797

 
$
13,772,513

Other interest and other income
13,573

 
107,991

Total investment income
16,181,370

 
13,880,504

 
 
 
 
EXPENSES:
 
 
 
Management fees
2,355,902

 
2,198,622

Interest expense
1,998,704

 
1,425,549

Banking and professional fees
90,896

 
83,139

Other operating expenses
25,934

 
24,081

Total expenses
4,471,436

 
3,731,391

Net investment income
11,709,934

 
10,149,113

 
 
 
 
Net realized loss from investments
(1,081,525
)
 
(1,016,588
)
Net change in unrealized gain (loss) from investments
(6,209,273
)
 
272,003

Net change in unrealized loss from hedging activities
(621,195
)
 
(546,140
)
Net realized and change in unrealized loss from investments and hedging activities
(7,911,993
)
 
(1,290,725
)
Net increase in net assets resulting from operations
$
3,797,941

 
$
8,858,388

 
 
 
 
Amount per common share:
 
 
 
Net increase in net assets resulting from operations per share
$
37.98

 
$
88.58

Weighted average shares outstanding
100,000

 
100,000




See notes to condensed financial statements.


4



VENTURE LENDING & LEASING VII, INC.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
     
 
For the Three Months Ended March 31, 2016
 
For the Three Months Ended March 31, 2015
Net increase in net assets resulting from operations:
 
 
 
Net investment income
$
11,709,934

 
$
10,149,113

Net realized loss from investments
(1,081,525
)
 
(1,016,588
)
Net change in unrealized gain (loss) from investments
(6,209,273
)
 
272,003

Net change in unrealized loss from hedging activities
(621,195
)
 
(546,140
)
 
 
 
 
Net increase in net assets resulting from operations
3,797,941

 
8,858,388

 
 
 
 
Distributions of income to shareholder
(10,628,409
)
 
(6,330,468
)
Return of capital to shareholder
(4,850,886
)
 

Contributions from shareholder

 
38,500,000

Increase (decrease) in capital transactions
(15,479,295
)
 
32,169,532

 
 
 
 
Total increase (decrease) in net assets
(11,681,354
)
 
41,027,920

 
 
 
 
Net assets
 
 
 
Beginning of period
210,491,312

 
163,495,508

 
 
 
 
End of period (Undistributed net investment income of $0 and $0)
$
198,809,958

 
$
204,523,428




See notes to condensed financial statements.


5



VENTURE LENDING & LEASING VII, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 
For the Three Months Ended March 31, 2016
 
For the Three Months Ended March 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net increase in net assets resulting from operations
$
3,797,941

 
$
8,858,388

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
 
 
 
Net realized loss from investments
1,081,525

 
1,016,588

Net change in unrealized loss (gain) from investments
6,209,273

 
(272,003
)
Net change in unrealized loss from hedging activities
621,195

 
546,140

       Amortization of deferred costs and fees related to borrowing facility
433,381

 
354,834

Net (increase) decrease in other assets
351,173

 
(932,861
)
Net increase in accounts payable, other accrued liabilities, and accrued management fees
132,993

 
28,156

Origination of loans
(28,964,773
)
 
(83,962,500
)
Principal payments on loans
44,749,803

 
30,381,154

Acquisition of equity securities
(2,091,150
)
 
(6,054,224
)
Net cash provided by (used in) operating activities
26,321,361

 
(50,036,328
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash distributions to shareholder
(13,300,000
)
 

Contributions from shareholder

 
38,500,000

  Borrowings under debt facility

 
29,000,000

Repayment of debt facility
(8,000,000
)
 

Payment of bank facility costs and fees

 
(1,023
)
Net cash provided by (used in) financing activities
(21,300,000
)
 
67,498,977

       Net increase in cash and cash equivalents
5,021,361

 
17,462,649

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
8,303,171

 
7,329,177

End of period
$
13,324,532

 
$
24,791,826

SUPPLEMENTAL DISCLOSURES:
 
 
 
CASH PAID DURING THE PERIOD:
   

 
 
Interest
$
1,528,801

 
$
988,879

NON-CASH ACTIVITIES:
   

 
 
Distributions of equity securities to shareholder
$
2,179,295

 
$
6,330,468

Receipt of equity securities as repayment of loans
$
88,145

 
$
276,244




See notes to condensed financial statements.


6



VENTURE LENDING & LEASING VII, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1.
ORGANIZATION AND OPERATIONS OF THE FUND
Venture Lending & Leasing VII, Inc. (the “Fund”), was incorporated in Maryland on June 21, 2012 as a non-diversified closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940, as amended ("1940 Act") and is managed by Westech Investment Advisors, LLC, (“Manager” or “Management”).  The Fund will be dissolved on December 31, 2022 unless an election is made to dissolve earlier by the Board of Directors of the Fund (the "Board"). One hundred percent of the stock of the Fund is held by Venture Lending & Leasing VII, LLC (the “Company”).  Prior to commencing its operations on December 18, 2012, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000 in July 2012.  This issuance of stock was a requirement in order to apply for a finance lender's license from the California Commissioner of Corporations, which was obtained on September 20, 2012.

The Fund's investment objective is to achieve a superior risk-adjusted investment return. In the Manager's opinion, the accompanying financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for interim periods. Certain information and note disclosures normally included in audited annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted; however, the Fund believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the three months ended March 31, 2016 are not necessarily indicative of what the results would be for a full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Fund's Annual Report on Form 10-K for the year ended December 31, 2015.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting

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.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and money market mutual funds with maturities of 90 days or less. Money market mutual funds held as cash equivalents are valued at their most recently traded net asset value.

Interest Income

Interest income on loans is recognized using the effective interest method including amounts from the amortization of discounts attributable to equity securities received as part of the loan transaction.  Additionally, fees received as part of the transaction are added to the loan discount and amortized over the life of the loan.

Valuation Procedures

The Fund accounts for loans at fair value in accordance with the “Valuation Methods” below.  All valuations are determined under the direction of the Manager, in accordance with the Valuation Methods.

7



The Fund's loans are valued in connection with the issuance of its periodic financial statements, the issuance or repurchase of the Fund's shares at a price equivalent to the current net asset value per share, and at such other times as required by law.  On a quarterly basis, Management submits to the Board a "Valuation Report" and "Valuation Notes", which details the rationale for the valuation of investments.
As of March 31, 2016 and December 31, 2015, the financial statements include nonmarketable investments of $357.3 million and $380.4 million, respectively (or 95% and 96% of total assets, respectively), with fair values determined by the Manager in the absence of readily determinable market values. Because of the inherent uncertainty of these valuations, estimated fair values of such investments may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Below is the information used by the Manager in making these estimates.

Loans

The Fund defines fair value as the price that would be received to sell an asset or paid to lower a liability in an orderly transaction between market participants at the measurement date. There is no secondary market for the loans made by the Fund to borrowers, hence Management determines fair value based on hypothetical markets. Venture loans are generally held to maturity and are recorded at estimated fair value. The determination of fair value is based on a number of factors including the amount for which an investment could be exchanged in a current sale, which assumes an orderly disposition over a reasonable period other than in a forced sale. Management also considers the fact that no ready market exists for substantially all of the investments held by the Fund. Management determines whether to adjust the estimated fair value of a loan based on a number of factors including but not limited to the borrower's payment history, available cash and “burn rate,” revenues, net income or loss, the likelihood that the borrower will be able to secure additional financing in the future, as well as an evaluation of the general interest rate environment. The amount of any valuation adjustment considers liquidation analysis and is determined based upon a credit analysis of the borrower and an analysis of the expected recovery from the borrower, including consideration of factors such as the nature and quality of the Fund's security interests in collateral, the estimated value of the Fund's collateral, the size of the loan, and the estimated time that will elapse before the Fund achieves a recovery. Management has evaluated these factors and has concluded that the effect of deterioration in the quality of the underlying collateral, increase in the size of the loan, increase in the estimated time to recovery, and increase in the hypothetical market coupon rate would have the effect of lowering the value of the current portfolio of loans.

Non-accrual Loans

The Fund's policy is to place a loan on non-accrual status when the loan stops performing and Management deems that it is unlikely that the loan will return to performing status.  When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed for the quarter in which the loan was placed on non-accrual status.  Any uncollected interest related to quarters prior to when the loan was placed on non-accrual status is added to the principal balance, and the aggregate balance of the principal and interest is evaluated in accordance with the policy for valuation of loans in determining Management's best estimate of fair value. Interest received by the Fund on non-accrual loans will be recorded if and when the proceeds exceed the book value of the loans.
If a borrower of a non-accrual loan resumes making regular payments and Management deems that the borrower has sufficient resources that it is unlikely the loan will return to non-accrual status, the loan is re-classified back to accrual or performing status.  Interest that would have been accrued during the non-accrual status will be added back to the remaining payment schedule, and thus changing the effective interest rate.
As of March 31, 2016, loans with a cost basis of $32.0 million and a fair value of $14.0 million have been classified as non-accrual. As of December 31, 2015 loans with a cost basis of $10.9 million and a fair value of $4.6 million have been classified as non-accrual.


8



Warrants, Stock and Convertible Notes

Warrants, stock and convertible notes that are received in connection with loan transactions generally will be assigned a fair value at the time of acquisition. These securities are then distributed by the Fund to its shareholder at the assigned value. Warrants are valued based on a modified Black-Scholes option pricing model which takes into account factors underlying stock value, expected term, volatility, and the risk-free interest rate, among other factors.  
Underlying asset value is estimated based on information available, including information regarding recent rounds of funding of the portfolio company, or the publicly-quoted stock price at the end of the financial reporting period for warrants for comparable publicly-quoted securities.
Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on an index of publicly traded companies grouped by industry and which are similar in nature to the underlying portfolio companies issuing the warrant (“Industry Index”). The volatility assumption for each Industry Index is based on the average volatility for individual public companies within the portfolio company's industry for a period of time approximating the expected life of the warrants. A hypothetical increase in the volatility of the warrants used in the modified Black-Scholes option pricing model would have the effect of increasing the value of the warrants.
The remaining expected lives of warrants are based on historical experience of the average life of the warrants, as warrants are often exercised in the event of acquisitions, mergers, or initial public offerings and terminated due to events such as bankruptcies, restructuring activities, or additional financings. These events cause the expected term to be less than the remaining contractual term of the warrants. For the three months ended March 31, 2016 and March 31, 2015, the Fund assumed the average duration of a warrant is 3.5 years. The effect of a hypothetical increase in the estimated initial term of the warrants used in the modified Black-Scholes option pricing model would have the effect of increasing the value of the warrants.
The risk-free interest rate is derived from the constant maturity tables issued by the U.S. Treasury Department. The effect of a hypothetical increase in the estimated risk-free rate used in the modified Black-Scholes option pricing model would have the effect of increasing the value of the warrants.
The Fund engages an independent valuation company to provide valuation assistance including the evaluations of the Fund's valuation methodology and the reasonableness of the assumptions used from the perspective of a market participant. They calculate several of the inputs used such as volatility and risk-free rate. Upon the receipt of such data from the valuation company, a sample test is performed to ensure the accuracy of their calculations and that the source of data is reliable and consistent with the way in which the calculations were made in prior periods. Such inputs are entered into the database with a second review to ensure the accuracy of the input information. All calculations of warrant values are performed by one employee and reviewed by a second employee. The inputs of the modified Black-Scholes option pricing model are reevaluated every quarter.

Other Assets and Liabilities
Other Assets include costs incurred in conjunction with borrowings under the Fund's debt facility and are stated at initial cost. The costs are amortized over the term of the facility.
As of March 31, 2016 and December 31, 2015, the fair values of Other Assets and Liabilities are estimated at their carrying values because of their short-term nature.
As of March 31, 2016 and December 31, 2015, based on borrowing rates available to the Fund, which are Level 2 inputs, the estimated fair values of the borrowings under the debt facility were $174.0 million and $182.0 million, respectively.



9



Commitment Fees

Unearned income and commitment fees on loans are recognized in interest on loans using the effective interest method over the term of the loan. Commitment fees are carried as liabilities when received for commitments upon which no draws have been made. When the first draw is made, the fee is treated as unearned income and is recognized as described above.  If a draw is never made, the forfeited commitment fee less any applicable legal costs becomes recognized as other income after the commitment expires.

Deferred Bank Fees

Through March 31, 2016, the deferred bank fees and costs associated with the debt facility have been capitalized and will be allocated over the estimated life of the facility, which currently is through November 7, 2017. The amortization of these costs is recorded as interest expense in the Condensed Statements of Operations (see Note 7).

Interest Rate Cap Agreements

The Fund has entered into interest rate cap agreements which are primarily valued on the basis of the future expected interest rates on the notional principal balance remaining, which is comparable to what a prospective acquirer would pay on the measurement date. Valuation pricing models consider inputs such as forward rates, anticipated interest rate volatility relating to the reference rate, as well as time value and other factors underlying cap instruments. The contracts are recorded at fair value in Interest Rate Caps in the Condensed Statements of Assets and Liabilities. The changes in fair value are recorded in the Net change in unrealized gain (loss) from hedging activities in the Condensed Statements of Operations.  The quarterly interest received or paid on the interest rate cap contracts, if any, will be recorded in Net change in realized gain (loss) from hedging activities in the Condensed Statements of Operations. Since inception through March 31, 2016, there has been no interest received or paid on interest rate cap contracts.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") 2015-03 Interest-Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Debt issuance costs related to lines of credit and revolving debt facilities are not required to be deducted from the carrying amount of that debt liability. The amended guidance is effective for the Fund’s interim and annual periods beginning on January 1, 2016. The adoption of this guidance did not significantly impact the Fund’s financial position or results of operations.

Tax Status

The Fund has elected to be treated as a Regulated Investment Company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code") and operates in a manner so as to qualify for the tax treatment applicable to RICs. Failing to maintain at least 70% of total assets in “qualifying assets” will result in the loss of BDC status, resulting in losing its favorable tax treatment as a RIC. As of March 31, 2016, the Fund has met the BDC and RIC requirements.
 
In order to qualify for favorable tax treatment as a RIC, the Fund is required to distribute annually to its sole shareholder at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Fund must distribute annually at least 98% of its ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Fund, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Fund chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to the sole shareholder. The Fund will accrue excise tax on estimated undistributed taxable income as required. Below is a table summarizing the cost (on GAAP and tax basis) and the appreciation and depreciation of the investments reported on the schedule of investments in Note 3 below.

10



As of March 31, 2016
Asset
Cost
Unrealized Appreciation
Unrealized Depreciation
Net Appreciation (Depreciation)
Fair Value
Loans
$
376,073,500

$

$
(18,799,542
)
$
(18,799,542
)
$
357,273,958

Interest Rate Cap
$
1,656,142

$

$
(1,127,870
)
$
(1,127,870
)
$
528,272

Total
$
377,729,642

$

$
(19,927,412
)
$
(19,927,412
)
$
357,802,230



As of December 31, 2015
Asset
Cost
Unrealized Appreciation
Unrealized Depreciation
Net Appreciation (Depreciation)
Fair Value
Loans
$
393,028,200

$

$
(12,590,268
)
$
(12,590,268
)
$
380,437,932

Interest Rate Cap
$
1,917,638

$

$
(506,675
)
$
(506,675
)
$
1,410,963

Total
$
394,945,838

$

$
(13,096,943
)
$
(13,096,943
)
$
381,848,895



Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Fund's annual RIC tax return.

Through March 2016, the Fund had no undistributed earnings. Additionally, for the three months ended March 31, 2016, distributions were made in excess of distributable earnings by $4.9 million. The Fund may pay distributions in excess of its taxable net investment income. This excess would be a tax-free return of capital in the period and reduce the shareholder's tax basis in its shares. As of March 31, 2016, the Fund had no uncertain tax positions. As of March 31, 2016, the Fund had no capital loss carry forwards.

The Fund's tax years open to examination by federal tax authorities and California tax authorities are for years 2012 and forward.

Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are reclassified among the Fund's capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.     
3.
SCHEDULES OF INVESTMENTS
As of March 31, 2016, all loans were made to non-affiliates as follows (unaudited):

Borrower
Percentage of Net Assets
Estimated Fair Value
3/31/2016
 
Par Value
3/31/2016
Final
Maturity
Date
 
 
 
 
 
 
Biotechnology
 
 
 
 
 
Phylagen, Inc.
 
$
223,444

 
$
223,444

7/1/2019
Subtotal:
0.1%
$
223,444

 
$
223,444

 
 
 
 
 
 
 

11



 
 
 
 
 
 
Computers & Storage
 
 
 
 
 
Canary Connect, Inc.
 
$
5,331,645

 
$
5,331,645

12/1/2018
Clustrix, Inc.
 
1,016,805

 
1,016,805

5/1/2017
D-Wave Systems, Inc. **
 
824,105

 
824,105

2/1/2017
Electric Objects, Inc.
 
888,222

 
888,222

12/1/2018
Gridstore, Inc.
 
775,217

 
775,217

6/1/2017
Rigetti & Co., Inc.
 
$
706,851

 
$
706,851

1/1/2019
Subtotal:
4.8%
$
9,542,845

 
$
9,542,845

 
 
 

 

 
Enterprise Networking
 
 
 
 
 
Apprion, Inc.
 
$
130,533

 
$
144,533

*
Subtotal:
0.1%
$
130,533

 
$
144,533

 
 
 
 
 
 
 
Internet
 
 
 
 
 
Allbirds, Inc.
 
$
227,806

 
$
227,806

12/01/18
Apartment List, Inc
 
1,380,300

 
1,380,300

11/01/19
Betaworks Studio, LLC. **
 
8,162,826

 
8,162,826

7/1/2018
Blitsy, Inc.
 
471,905

 
471,905

2/1/2019
Bloom That, Inc.
 
696,296

 
696,296

9/1/2018
Bonobos, Inc. ***
 
11,008,614

 
11,008,614

12/1/2018
CapLinked, Inc.
 
464,313

 
464,313

1/1/2019
CustomMade Ventures Corp.
 
687,276

 
687,276

*
Deja Mi, Inc.
 
1,429,399

 
1,429,399

9/1/2018
Digital Caddies, Inc. **
 

 
987,584

*
Dinner Lab, Inc.
 
294,521

 
294,521

9/1/2017
Eloquii Design, Inc.
 
1,734,200

 
1,734,200

9/1/2018
Flowplay, Inc.
 
1,302,159

 
1,302,159

12/1/2017
FLYR, Inc.
 
567,444

 
567,444

6/1/2018
Giddy Apps, Inc.
 
499,454

 
999,454

*
Giveforward, Inc.
 
181,333

 
364,333

*
Glide, Inc. **
 
5,224,401

 
5,224,401

6/1/2018
Grovo Learning, Inc.
 
6,974,348

 
6,974,348

6/1/2018
HEXAGRAM49, Inc.
 
710,280

 
710,280

6/1/2019
Homelight, Inc.
 
865,798

 
865,798

9/1/2018
Hotel Tonight, Inc.
 
9,206,185

 
9,206,185

1/1/2019
JewelScent, Inc.
 
329,374

 
329,374

12/1/2017
Kiwi Crate, Inc.
 
770,027

 
770,027

4/1/2018
Madison Reed, Inc.
 
2,605,207

 
2,605,207

3/1/2019
Monetate, Inc.
 
2,256,665

 
2,256,665

6/1/2018
Move Loot, Inc.
 
1,652,711

 
1,652,711

10/1/2018
Next Step Living, Inc.
 
2,186,944

 
11,186,944

*
Osix Corp.
 
30,470

 
30,470

10/1/2016
PerformLine, Inc.
 
639,053

 
639,053

2/1/2019
Piryx, Inc.
 
715,245

 
885,245

*
Pixalate, Inc.
 
432,164

 
432,164

6/1/2017
Placester, Inc.
 
1,038,413

 
1,038,413

12/01/17

12



Playstudios, Inc.
 
1,864,949

 
1,864,949

6/1/2018
Primary Kids, Inc.
 
657,789

 
657,789

6/1/2018
Quantcast Corp.
 
2,826,957

 
2,826,957

4/1/2017
Quri, Inc.
 
1,525,053

 
1,525,053

6/1/2018
Radius Intelligence, Inc.
 
1,106,967

 
1,106,967

10/1/2017
Relay Network, LLC
 
1,670,525

 
1,670,525

6/1/2018
Schoola, Inc.
 
78,956

 
78,956

12/1/2016
Schooltube
 

 
108,222

*
Smart Lunches, Inc.
 
38,083

 
38,083

6/1/2016
Sociable Labs, Inc.
 
87,631

 
87,631

8/1/2016
SocialChorus, Inc.
 
1,755,231

 
1,755,231

09/01/18
THECLYMB
 
836,536

 
836,536

10/1/2017
Thrive Market, Inc.
 
7,045,882

 
7,045,882

9/1/2019
TouchofModern, Inc.
 
3,706,678

 
3,706,678

12/1/2019
Traackr, Inc.
 
458,263

 
458,263

1/1/2019
Viyet, Inc.
 
211,689

 
211,689

1/1/2019
Weddington Way, Inc.
 
2,913,024

 
2,913,024

12/1/2018
WHI, Inc.
 
920,218

 
1,227,218

*
YouDocs Beauty, Inc.
 
1,179,032

 
1,192,023

*
Subtotal:
47.1%
$
93,628,594

 
$
104,897,391

 
 
 

 

 
Medical Devices
 
 
 
 
 
AxioMed, Inc.
 
$
14,238

 
$
1,560,238

*
Blockade Medical, LLC
 
303,730

 
303,730

9/1/2017
JustRight Surgical LLC
 
1,305,415

 
1,305,415

1/1/2019
MyoScience, Inc.
 
8,277,251

 
8,277,251

7/1/2018
Subtotal:
5.0%
$
9,900,634

 
$
11,446,634

 
 
 
 
 
 
 
Other Healthcare
 
 
 
 
 
Anutra Medical, Inc.
 
$
1,240,948

 
$
1,240,948

8/1/2018
Caredox, Inc.
 
704,599

 
704,599

1/1/2019
Cogito Corporation
 
252,344

 
252,344

4/1/2017
Health Integrated, Inc.
 
3,016,779

 
3,016,779

5/1/2018
Hi.Q, Inc.
 
955,309

 
955,309

6/1/2018
Lean Labs, Inc.
 
229,657

 
229,657

12/1/2018
Mulberry Health, Inc.
 
3,065,426

 
3,065,426

12/1/2017
Physician Software Systems, LLC
 
275,125

 
275,125

7/1/2017
Practice Fusion, Inc.
 
17,864,159

 
17,864,159

9/1/2018
Project Healthy Living, Inc.
 
2,932,030

 
2,932,030

12/1/2018
Seven Bridges Genomics, Inc.
 
3,009,910

 
3,009,910

7/1/2018
Symphony Performance Health, Inc.
 
19,126,034

 
19,126,034

3/1/2019
Trio Health Advisory Group, Inc.
 
909,790

 
909,790

2/1/2019
Urgent Care Centers of New England, Inc.
 
2,784,510

 
2,784,510

9/1/2018
Wellist PBC, Inc.
 
170,894

 
170,894

3/1/2019
Subtotal:
28.4%
$
56,537,514

 
$
56,537,514

 
 
 
 
 
 
 
Other Technology
 
 
 
 
 

13



21, Inc.
 
$
4,733,288

 
$
4,733,288

8/1/2019
AltspaceVR, Inc.
 
442,481

 
442,481

8/1/2017
Asset Avenue, Inc.
 
875,673

 
875,673

10/1/2018
Automatic Labs, Inc.
 
3,138,795

 
3,138,795

12/1/2018
Beeline Bikes, Inc.
 
76,002

 
76,002

6/1/2017
Candy Club Holdings, Inc.
 
855,995

 
855,995

9/1/2018
CommunityCo, LLC
 
249,291

 
249,291

3/1/2019
Crew Ventures, Inc.
 
25,000

 
1,000,000

*
Daylight Solutions, Inc.
 
1,935,332

 
1,935,332

12/1/2018
Ensyn Corporation
 
2,758,849

 
2,758,849

6/1/2019
Eponym, Inc.
 
704,129

 
704,129

12/1/2018
Faster Faster, Inc.
 
1,761,256

 
1,761,256

1/1/2019
Flo Water, Inc.
 
209,772

 
209,772

8/1/2018
Gap Year Global, Inc.
 
238,873

 
238,873

10/1/2018
General Assembly, Inc.
 
13,952,366

 
13,952,366

6/1/2019
Hyperloop Technologies, Inc.
 
7,068,516

 
7,068,516

6/1/2019
ICON Aircraft, Inc.
 
13,298,540

 
13,298,540

9/1/2019
InsideTrack, Inc.
 
776,449

 
776,449

9/1/2017
Lumo BodyTech, Inc.
 
878,206

 
878,206

12/1/2017
Mark One Lifestyle, Inc.
 
385,136

 
385,136

8/1/2016
Neuehouse, LLC
 
2,202,177

 
2,202,177

7/1/2017
New Frontier Foods, Inc.
 
612,070

 
612,070

8/1/2018
nWay, Inc.
 
1,135,468

 
2,269,468

*
One Financial Holdings Group, Inc.
 
343,202

 
343,202

1/1/2019
Owlet Baby Care, Inc.

915,660

 
915,660

3/1/2019
Pinnacle Engines, Inc.
 
761,241

 
761,241

12/1/2017
Planet Labs, Inc.
 
23,872,993

 
23,872,993

3/1/2019
Prana Holdings, Inc.
 
760,747

 
1,522,747

7/1/2016
Scoot Networks, Inc.
 
481,446

 
481,446

12/1/2017
Securiforest S.L. **
 
583,612

 
2,383,612

*
Seriforge, Inc.
 
217,179

 
217,179

9/1/2018
Skully, Inc.
 
2,509,897

 
2,509,897

12/1/2018
Stratos Technologies, Inc.
 
284,494

 
316,494

*
Theatro Labs, Inc.
 
2,387,991

 
2,387,991

3/1/2019
Tribogenics, Inc.
 
134,701

 
134,701

9/1/2016
VentureBeat, Inc.
 
828,060

 
828,060

11/1/2017
Virtuix Holdings, Inc.
 
607,479

 
607,479

9/1/2017
Subtotal:
46.8%
$
93,002,366

 
$
97,705,366

 
 
 
 
 
 
 
Security
 
 
 
 
 
Agari Data, Inc.
 
$
640,509

 
$
640,509

9/1/2017
Bottlenose, Inc.
 
1,378,711

 
1,378,711

12/1/2018
Guardian Analytics, Inc.
 
5,235,161

 
5,235,161

2/1/2019
Subtotal:
3.6%
$
7,254,381

 
$
7,254,381

 
 
 
 
 
 
 
Software
 
 
 
 
 
3Scale, Inc.
 
$
513,046

 
$
513,046

9/1/2017

14



Addepar, Inc.
 
4,789,705

 
4,789,705

6/1/2018
Apptimize, Inc.
 
948,427

 
948,427

3/1/2019
Atigeo Corporation
 
1,826,614

 
1,826,614

9/1/2017
Beanstock Media, Inc.
 
100,000

 
1,322,744

*
Beep, Inc.
 
350,849

 
350,849

12/1/2017
BlazeMeter, Inc. **
 
610,655

 
610,655

1/1/2018
Bloomboard, Inc.
 
917,704

 
917,704

8/1/2019
Bounce Exchange, Inc.
 
2,691,998

 
2,691,998

6/1/2018
ClearPath, Inc.
 
44,390

 
44,390

5/1/2016
Clypd, Inc.
 
215,426

 
215,426

11/1/2016
DocSend, Inc.
 
537,715

 
537,715

6/1/2018
ElasticBeam, Inc.
 
1,354,100

 
1,354,100

9/1/2018
Encoding.com, Inc.
 
162,336

 
162,336

11/1/2016
FieldAware US, Inc.
 
9,532,633

 
9,532,633

3/1/2019
FoxCommerce, Inc.
 
1,412,121

 
1,412,121

1/1/2019
Mconcierge System, Inc.
 
768,346

 
768,346

2/1/2018
MediaPlatform, Inc.
 
55,188

 
55,188

9/1/2016
Metric Insights, Inc.
 
948,554

 
948,554

1/1/2019
Mintigo, Inc. **
 
937,243

 
937,243

1/1/2018
Nectar Holdings, Inc.
 
761,261

 
761,261

12/1/2017
Norse Corporation
 
3,599,201

 
4,299,201

*
OrderGroove, Inc.
 
630,570

 
630,570

12/1/2017
Palantir Technologies, Inc.

475,780

 
475,780

4/1/2016
SCVNGR, Inc.
 
632,677

 
632,677

10/1/2016
SoundHound, Inc.
 
1,589,231

 
1,589,231

5/1/2017
StreetLight Data, Inc.
 
308,199

 
308,199

4/1/2017
Swift Pursuits, Inc.
 
841,101

 
841,101

7/1/2018
Swrve, Inc.
 
4,410,418

 
4,410,418

9/1/2018
Takipi, Inc.
 
1,496,651

 
1,496,651

3/1/2018
Toast, Inc.
 
473,177

 
473,177

1/1/2019
Viewpost Holdings, LLC.
 
12,542,147

 
12,542,147

5/1/2018
Vuemix, Inc.
 
184,129

 
184,129

9/1/2017
Workspot, Inc.
 
713,551

 
713,551

2/1/2019
ZeroTurnaround USA, Inc. **
 
4,982,930

 
4,982,930

6/1/2019
Subtotal:
31.4%
$
62,358,073

 
$
64,280,817

 
 
 
 
 
 
 
Technology Services
 
 
 
 
 
Akademos, Inc. ***
 
$
514,955

 
$
514,955

6/1/2017
Amped, Inc.
 
901,055

 
901,055

11/1/2017
Blazent, Inc.
 
75,260

 
75,260

5/1/2016
Blue Technologies Limited **
 
384,843

 
384,843

6/1/2017
BountyJobs, Inc.
 
289,430

 
289,430

10/1/2017
Callisto Media, Inc.

7,486,774

 
7,486,774

6/1/2018
Fluxx Labs
 
3,687,117

 
3,687,117

12/1/2018
FSA Store, Inc.
 
2,083,775

 
2,083,775

9/1/2018
Getable, Inc.
 
283,910

 
283,910

8/1/2017
Grassroots Unwired, Inc.
 
13,904

 
13,904

8/1/2016

15



Iris.tv, Inc.
 
229,707

 
229,707

04/01/19
Maxi Mobility, Inc. **
 
36,949

 
36,949

7/1/2016
PayJoy, Inc.
 
227,883

 
227,883

4/1/2019
Rated People, Ltd. **
 
379,939

 
519,939

*
TiqIQ, Inc.

150,393

 
150,393

7/1/2017
Subtotal:
8.4%
$
16,745,894

 
$
16,885,894

 
 
 
 
 
 
 
Wireless
 
 
 
 
 
Bluesmart, Inc.
 
$
1,877,997

 
$
1,877,997

9/1/2019
Flint Mobile, Inc.
 
1,346,455

 
1,496,455

*
GPShopper, LLC
 
274,096

 
274,096

7/1/2017
InfoReach, Inc.
 
218,295

 
218,295

3/1/2017
Karma Technology Holdings, Inc.
 
338,048

 
338,048

11/1/2017
Kicksend Holdings, Inc.
 
31,475

 
61,476

*
LLJ, Inc.
 
466,122

 
466,122

4/1/2018
SpiderCloud Wireless, Inc.
 
3,397,192

 
3,397,192

7/1/2017
Subtotal:
4.0%
$
7,949,680

 
$
8,129,681

 
 
 
 
 
 
 
Total Loans (Cost of $376,073,500)
179.7%
$
357,273,958

 
$
377,048,500

 
 
 
 
 
 
 
Interest Rate Caps (Cost of $1,656,142)
0.3%
$
528,272

 
$
1,656,142

 
 
 
 
 

 
Total Investments (Cost of $377,729,642)
180.0%
$
357,802,230

 
$
378,704,642

 
*As of March 31, 2016, loans with a cost basis of $32.0 million and a fair value of $14.0 million were classified as non-accrual.
** Indicates assets that the Fund deems “non-qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Fund’s total assets at the time of acquisition of any additional non-qualifying assets. As of March 31, 2016, 6.27% of the Fund’s assets represented non-qualifying assets.
*** Indicates assets that are not senior loans.

As of December 31, 2015, all loans were made to non-affiliates as follows:

Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2015
 
Par Value
12/31/2015
Final
Maturity
Date
Computers & Storage
 
 
 
 
 
Canary Connect, Inc.
 
$
5,724,890

 
$
5,724,890

12/01/2018
Clustrix, Inc.
 
1,258,439

 
1,258,439

05/01/2017
D-Wave Systems, Inc. **
 
1,003,360

 
1,003,360

02/01/2017
Electric Objects, Inc.
 
953,715

 
953,715

12/01/2018
Gridstore, Inc.
 
913,030

 
913,030

06/01/2017
Rigetti & Co., Inc.
 
702,377

 
702,377

01/01/2019
Subtotal:
5.0%
$
10,555,811

 
$
10,555,811

 
 
 
 
 
 
 
Enterprise Networking
 
 
 
 
 
Apprion, Inc.
 
$
147,799

 
$
147,799

04/01/2016
Subtotal:
0.1%
$
147,799

 
$
147,799

 

16



Internet
 
 
 
 
 
Apartment List, Inc
 
$
1,362,110

 
$
1,362,110

11/01/2019
Betaworks Studio, LLC. **
 
8,865,095

 
8,865,095

07/01/2018
Blitsy, Inc.
 
469,038

 
469,038

02/01/2019
Bloom That, Inc.
 
688,589

 
688,589

09/01/2018
Bonobos, Inc. ***
 
11,282,608

 
11,282,608

12/01/2018
CapLinked, Inc.
 
218,415

 
218,415

12/01/2018
CustomMade Ventures Corp.
 
687,276

 
687,276

*
Deja Mi, Inc.
 
1,420,241

 
1,420,241

09/01/2018
Digital Caddies, Inc. **
 

 
987,584

*
Dinner Lab, Inc.
 
335,500

 
335,500

09/01/2017
Eloquii Design, Inc.
 
1,763,949

 
1,763,949

09/01/2018
Flowplay, Inc.
 
1,473,235

 
1,473,235

12/01/2017
FLYR, Inc.
 
619,132

 
619,132

06/01/2018
Giddy Apps, Inc.
 
1,063,297

 
1,063,297

12/01/2017
Giveforward, Inc.
 
406,113

 
406,113

07/01/2017
Glide, Inc. **
 
5,708,102

 
5,708,102

06/01/2018
Grovo Learning, Inc.
 
7,679,550

 
7,679,550

06/01/2018
Homelight, Inc.
 
903,035

 
903,035

09/01/2018
Hotel Tonight, Inc.
 
9,116,138

 
9,116,138

01/01/2019
InsideVault, Inc.
 
259,715

 
259,715

05/01/2017
Jet.com, Inc.
 
9,397,239

 
9,397,239

12/01/2018
JewelScent, Inc.
 
366,642

 
366,642

12/01/2017
Kitsy Lane, Inc.
 
39,441

 
169,441

*
Kiwi Crate, Inc.
 
814,731

 
814,731

04/01/2018
Madison Reed, Inc.
 
2,706,104

 
2,706,104

03/01/2019
Monetate, Inc.
 
2,475,198

 
2,475,198

06/01/2018
Move Loot, Inc.
 
1,788,169

 
1,788,169

10/01/2018
Next Step Living, Inc.
 
5,401,979

 
11,401,979

05/01/2018
Osix Corp.
 
42,414

 
42,414

10/01/2016
PerformLine, Inc.
 
329,776

 
329,776

12/01/2018
Piryx, Inc.
 
715,245

 
885,245

*
Pixalate, Inc.
 
526,140

 
526,140

06/01/2017
Placester, Inc.
 
1,164,036

 
1,164,036

12/01/2017
Playstudios, Inc.
 
2,065,680

 
2,065,680

06/01/2018
Primary Kids, Inc.
 
699,102

 
699,102

06/01/2018
Quantcast Corp.
 
3,404,740

 
3,404,740

04/01/2017
Quri, Inc.
 
1,696,743

 
1,696,743

06/01/2018
Radius Intelligence, Inc.
 
1,257,560

 
1,257,560

10/01/2017
Relay Network, LLC
 
1,827,350

 
1,827,350

06/01/2018
Schoola, Inc.
 
102,300

 
102,300

12/01/2016
SchoolTube, Inc.
 

 
108,222

*
Smart Lunches, Inc.
 
63,640

 
63,640

06/01/2016
Sociable Labs, Inc.
 
113,422

 
113,422

07/01/2016
SocialChorus, Inc.
 
1,826,903

 
1,826,903

09/01/2018
THECLYMB
 
870,456

 
870,456

10/01/2017
Thrive Market, Inc.
 
4,597,636

 
4,597,636

09/01/2019

17



Viyet, Inc.
 
206,942

 
206,942

01/01/2019
Weddington Way, Inc.
 
3,161,421

 
3,161,421

12/01/2018
WHI, Inc.
 
1,160,565

 
1,160,565

07/01/2017
YouDocs Beauty, Inc. ***
 
1,061,305

 
1,192,024

*
Yourmechanic, Inc.
 
151,324

 
151,324

07/01/2017
Subtotal:
49.6%
$
104,355,341

 
$
111,881,866

 
 
 
 
 
 
 
Medical Devices
 
 
 
 
 
AxioMed, Inc.
 
$
14,238

 
$
1,560,238

*
Blockade Medical, LLC
 
347,432

 
347,432

09/01/2017
MyoScience, Inc.
 
9,006,754

 
9,006,754

07/01/2018
Subtotal:
4.5%
$
9,368,424

 
$
10,914,424

 
 
 
 
 
 
 
Other Healthcare
 
 
 
 
 
Anutra Medical, Inc.
 
$
1,314,818

 
$
1,314,818

08/01/2018
Caredox, Inc.
 
699,772

 
699,772

01/01/2019
Cogito Health, Inc.
 
309,223

 
309,223

04/01/2017
Health Integrated, Inc.
 
3,419,742

 
3,419,742

05/01/2018
HealthEquityLabs, Inc.
 
949,393

 
949,393

06/01/2018
Lean Labs, Inc.
 
227,272

 
227,272

12/01/2018
Mulberry Health, Inc.
 
3,436,073

 
3,436,073

12/01/2017
Physician Software Systems, LLC
 
321,221

 
321,221

07/01/2017
Practice Fusion, Inc.
 
19,654,665

 
19,654,665

09/01/2018
Project Healthy Living, Inc.
 
3,244,296

 
3,244,296

12/01/2018
Seven Bridges Genomics, Inc.
 
3,212,604

 
3,212,604

07/01/2018
Symphony Performance Health, Inc.
 
19,133,115

 
19,133,115

03/01/2019
Urgent Care Centers of New England, Inc.
 
3,050,202

 
3,050,202

09/01/2018
Wellist PBC, Inc.
 
168,014

 
168,014

03/01/2019
Subtotal:
28.1%
$
59,140,410

 
$
59,140,410

 
 
 
 
 
 
 
Other Technology
 
 
 
 
 
21, Inc.
 
$
10,680,985

 
$
10,680,985

09/01/2017
AltspaceVR, Inc.
 
512,111

 
512,111

08/01/2017
Automatic Labs, Inc.
 
3,210,960

 
3,210,960

12/01/2018
Beeline Bikes, Inc.
 
89,107

 
89,107

06/01/2017
Candy Club Holdings, Inc.
 
912,007

 
912,007

09/01/2018
CRRW, Inc.
 
937,305

 
937,305

07/01/2018
Daylight Solutions, Inc.
 
2,091,806

 
2,091,806

12/01/2018
eco.logic brands, Inc.
 
375,524

 
375,524

06/01/2017
Faster Faster, Inc.
 
1,852,870

 
1,852,870

01/01/2019
Flo Water, Inc.
 
211,622

 
211,622

08/01/2018
Gap Year Global, Inc.
 
236,385

 
236,385

10/01/2018
General Assembly, Inc.
 
14,126,004

 
14,126,004

06/01/2019
ICON Aircraft, Inc.
 
13,879,383

 
13,879,383

09/01/2019
InsideTrack, Inc.
 
906,178

 
906,178

09/01/2017
Lumo BodyTech, Inc.
 
987,135

 
987,135

12/01/2017
Mark One Lifestyle, Inc.
 
328,216

 
628,216

08/01/2016

18



Neuehouse, LLC
 
2,609,757

 
2,609,757

07/01/2017
New Frontier Foods, Inc.
 
662,391

 
662,391

08/01/2018
nWay, Inc.
 
2,445,447

 
2,445,447

07/01/2018
Owlet Baby Care, Inc.
 
906,998

 
906,998

03/01/2019
Pinnacle Engines, Inc.
 
870,363

 
870,363

12/01/2017
Planet Labs, Inc.
 
23,772,164

 
23,772,164

03/01/2019
Prana Holdings, Inc.
 
2,280,795

 
2,280,795

07/01/2016
Scoot Networks, Inc.
 
559,373

 
559,373

12/01/2017
Securiforest S.L. **
 
1,183,612

 
2,383,612

*
Seriforge, Inc.
 
212,260

 
212,260

09/01/2018
Skully, Inc.
 
2,509,869

 
2,509,869

12/01/2018
Sproutling, Inc.
 
483,238

 
483,238

09/01/2017
Stratos Technologies, Inc.
 
329,301

 
329,301

08/01/2017
Theatro Labs, Inc.
 
2,376,079

 
2,376,079

03/01/2019
Tribogenics, Inc.
 
198,399

 
198,399

09/01/2016
VentureBeat, Inc.
 
933,065

 
933,065

11/01/2017
Virtuix Holdings, Inc.
 
695,183

 
695,183

09/01/2017
Subtotal:
44.8%
$
94,365,892

 
$
95,865,892

 
 
 
 
 
 
 
Security
 
 
 
 
 
Agari Data, Inc.
 
$
734,959

 
$
734,959

09/01/2017
Bottlenose, Inc.
 
1,364,114

 
1,364,114

12/01/2018
Guardian Analytics, Inc.
 
5,160,972

 
5,160,972

02/01/2019
Uplogix, Inc.
 
369,234

 
979,234

*
Subtotal:
3.6%
$
7,629,279

 
$
8,239,279

 
 
 
 
 
 
 
Software
 
 
 
 
 
3Scale, Inc.
 
$
594,565

 
$
594,565

09/01/2017
Addepar, Inc.
 
4,762,615

 
4,762,615

06/01/2018
Apptimize, Inc.
 
458,467

 
458,467

09/01/2018
Atigeo Corporation
 
2,088,385

 
2,088,385

09/01/2017
Beanstock Media, Inc. ***
 
85,000

 
1,322,744

*
Beep, Inc.
 
394,269

 
394,269

12/01/2017
BlazeMeter, Inc. **
 
697,581

 
697,581

01/01/2018
Bloomboard, Inc.
 
910,846

 
910,846

08/01/2019
Bounce Exchange, Inc.
 
2,947,711

 
2,947,711

06/01/2018
ClearPath, Inc.
 
95,856

 
95,856

05/01/2016
Clypd, Inc.
 
291,458

 
291,458

11/01/2016
DocSend, Inc.
 
586,828

 
586,828

06/01/2018
ElasticBeam, Inc.
 
1,401,014

 
1,401,014

09/01/2018
Encoding.com, Inc.
 
239,707

 
239,707

11/01/2016
FieldAware US, Inc.
 
9,450,272

 
9,450,272

03/01/2019
Mconcierge System, Inc.
 
879,888

 
879,888

02/01/2018
MediaPlatform, Inc.
 
165,244

 
165,244

09/01/2016
Metric Insights, Inc.
 
943,266

 
943,266

01/01/2019
Mintigo, Inc. **
 
1,048,984

 
1,048,984

01/01/2018
Nectar Holdings, Inc.
 
872,439

 
872,439

12/01/2017

19



Norse Corporation
 
4,449,830

 
4,449,830

12/01/2017
OrderGroove, Inc.
 
704,374

 
704,374

12/01/2017
Palantir Technologies, Inc.
 
1,865,160

 
1,865,160

04/01/2016
SCVNGR, Inc.
 
887,926

 
887,926

10/01/2016
SoundHound, Inc.
 
2,026,388

 
2,026,388

05/01/2017
StreetLight Data, Inc.
 
378,297

 
378,297

04/01/2017
Swift Pursuits, Inc.
 
880,921

 
880,921

07/01/2018
Swrve, Inc.
 
4,769,860

 
4,769,860

09/01/2018
Takipi, Inc.
 
1,668,443

 
1,668,443

03/01/2018
Toast, Inc.
 
466,745

 
466,745

01/01/2019
Top Hat Monocle Corp. **
 
253,954

 
253,954

07/01/2016
Viewpost Holdings, LLC.
 
13,735,095

 
13,735,095

05/01/2018
Vuemix, Inc.
 
210,948

 
210,948

09/01/2017
Workspot, Inc.
 
78,658

 
78,658

09/01/2016
ZeroTurnaround USA, Inc. **
 
5,076,358

 
5,076,358

06/01/2019
Subtotal:
31.5%
$
66,367,352

 
$
67,605,096

 
 
 
 
 
 
 
Technology Services
 
 
 
 
 
Akademos, Inc. ***
 
$
598,955

 
$
598,955

06/01/2017
Amped, Inc.
 
1,036,377

 
1,036,377

11/01/2017
BandPage, Inc.
 
1,548,738

 
1,548,738

12/01/2017
BidPal, Inc.
 
229,075

 
229,075

07/01/2016
Blazent, Inc.
 
184,686

 
184,686

05/01/2016
Blue Technologies Limited **
 
453,140

 
453,140

06/01/2017
BountyJobs, Inc.
 
332,991

 
332,991

10/01/2017
Callisto Media, Inc.
 
7,558,697

 
7,558,697

06/01/2018
Classy, Inc.
 
1,519,617

 
1,519,617

03/01/2018
Fluxx Labs
 
3,775,161

 
3,775,161

12/01/2018
FSA Store, Inc.
 
2,298,913

 
2,298,913

09/01/2018
Getable, Inc.
 
326,600

 
326,600

08/01/2017
Grassroots Unwired, Inc.
 
27,182

 
27,182

08/01/2016
Maxi Mobility, Inc. **
 
63,044

 
63,044

07/01/2016
Rated People, Ltd. **
 
389,410

 
529,410

*
Stackstorm, Inc.
 
211,072

 
211,072

01/01/2018
TiqIQ, Inc.
 
172,041

 
172,041

07/01/2017
Subtotal:
9.8%
$
20,725,699

 
$
20,865,699

 
 
 
 
 
 
 
Wireless
 
 
 
 
 
Bluesmart, Inc.
 
$
657,366

 
$
657,366

09/01/2019
Flint Mobile, Inc.
 
1,473,052

 
1,473,052

03/01/2018
GPShopper, LLC
 
317,990

 
317,990

07/01/2017
InfoReach, Inc.
 
264,276

 
264,276

03/01/2017
Karma Technology Holdings, Inc.
 
382,259

 
382,259

11/01/2017
Kicksend Holdings, Inc.
 
31,475

 
61,475

*
LLJ, Inc.
 
508,013

 
508,013

04/01/2018
SpiderCloud Wireless, Inc.
 
4,147,493

 
4,147,493

07/01/2017
Subtotal:
3.7%
$
7,781,924

 
$
7,811,924

 

20



 
 
 
 
 
 
Total Loans (Cost of $393,028,200) :
180.7%
$
380,437,931

 
$
393,028,200

 
 
 
 
 
 
 
Interest Rate Caps (Cost of $1,917,638)
0.7%
$
1,410,963

 
$
1,917,638

 
 
 
 
 
 
 
Total Investments (Cost of $394,945,838)
181.4%
$
381,848,894

 
$
394,945,838

 
*As of December 31, 2015, loans with a cost basis of $10.9 million and a fair value of $4.6 million were classified as non-accrual.
** Indicates assets that the Fund deems “non-qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Fund’s total assets at the time of acquisition of any additional non-qualifying assets. As of December 31, 2015, 6.4% of the Fund’s assets represented non-qualifying assets.
*** Indicates assets that are not senior loans.
4.
FAIR VALUE DISCLOSURES
Loans generally are made to borrowers pursuant to commitments whereby the Fund agrees to finance assets and provide working capital up to a specified amount for the term of the commitment, upon the terms and subject to the conditions specified by such commitment. As of March 31, 2016, the Fund's investments in loans were primarily to companies based within the United States and were diversified among borrowers in the industry segments shown below.  The percentage of net assets that each industry group represents is shown with the industry totals below  (the sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans).  All loans are senior to unsecured creditors except for Akademos, Inc. and Bonobos, Inc., which are subordinate.

The Fund defines fair value as the price that would be received to sell an asset or paid to settle a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability was exchanged in an orderly transaction; it was not a forced liquidation or distressed sale.

Loan balances are summarized by borrower.  Typically a borrower's balance will be composed of several loans drawn under a commitment made by the Fund with the interest rate on each loan fixed at the time each loan is funded. Each loan drawn under a commitment may have a different maturity date and amount.  For the three months ended March 31, 2016 and 2015, the weighted-average interest rate on performing loans was 17.70% and 18.29%, respectively. This rate is inclusive of both cash and non-cash interest income. For the three months ended March 31, 2016 and 2015, the weighted-average interest rate on the cash portion of the interest income was 13.54% and 11.15%, respectively. Interest is calculated using the effective interest method, and rates earned by the Fund will fluctuate based on many factors including early payoffs, volatility of values ascribed to warrants and new loans funded during the period.

The risk profile of a loan changes when events occur that impact the credit analysis of the borrower and loan as described in our loan accounting policy. Such changes result in the fair value being adjusted from par value of the individual loan. Where the risk profile is consistent with the original underwriting, which is primarily the case for this loan portfolio, the par value of the loan will approximate fair value.

All loans as of March 31, 2016 and 2015 were pledged as collateral for the debt facility, and the Fund's borrowings are subsequently collateralized by all assets of the Fund.

The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies. These loans are generally secured by assets of the borrowers.  As a result, the Fund is subject to general credit risk associated with such companies.  As of March 31, 2016 and December 31, 2015, the Fund had unexpired unfunded commitments to borrowers of $62.4 million and $68.7 million, respectively.



21



Valuation Hierarchy
 
Under the FASB Accounting Standards Codification ("ASC") 820-10 "Fair Value Measurement", the Fund categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Fund's valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:

Level 1
 
Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2
 
Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3
 
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Transfers of investments between levels of the fair value hierarchy are recorded on the actual date of the event or change in circumstances that caused the transfer. There were no transfers in and out of Level 1, 2, and 3 during the period ended March 31, 2016.

The Fund's cash equivalents were valued at the traded net asset value of the money market mutual fund. As a result, these measurements are classified as Level 1. The Fund’s investments in the interest rate cap are based on quotes from the market makers that derive fair values from market data, and therefore, are classified as Level 2.
The Fund uses estimated exit values when determining the value of its investments.  Because loan transactions are individually negotiated and unique, and there is no market in which these assets trade, the inputs for these assets, which are discussed in the Valuation Methods listed above, are classified as Level 3.  

The following tables provide quantitative information about the Fund's Level 3 fair value measurements of its investments as of March 31, 2016 and December 31, 2015. In addition to the techniques and inputs noted in the tables below, the Fund may also use other valuation techniques and methodologies when determining its fair value measurements.

22



Investment Type - Level 3
 
 
 
 
 
 
Debt Investments
 
Fair Value at
3/31/2016
 
Valuation Techniques / Methodologies
 
Unobservable Input
 
Weighted
Average / Amount
or Range
 
 
 
 
 
 
 
 
 
Biotechnology
 
$
223,444

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
18%
 
 
 
 
 
 
 
 
 
Computers and Storage
 
$
9,542,845

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
 
 
 
 
 
Internet
 
$
93,628,594

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0 - $2,186,944
 
 
 
 
 
 
 
 
 
Medical Devices
 
$
9,900,634

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$14,238
 
 
 
 
 
 
 
 
 
Other Healthcare
 
$
56,537,514

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
 
 
 
 
 
Other Technology
 
$
93,002,366

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$25,000 - $1,135,468
 
 
 
 
 
 
 
 
 
Software
 
$
62,358,073

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$3,599,201
 
 
 
 
 
 
 
 
 
Technology Services
 
$
16,745,894

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
13%
 
 
 
 
Liquidation
 
Investment Collateral
 
$379,939
 
 
 
 
 
 
 
 
 
Wireless
 
$
7,949,680

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$31,475 - $1,346,455
 
 
 
 
 
 
 
 
 
Other*
 
$
7,384,914

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
17%
 
 
 
 
Liquidation
 
Investment Collateral
 
$130,533
 
 
 
 
 
 
 
 
 
 
 
$
357,273,958

 
 
 
 
 
 
* Other loans, as of March 31, 2016, were comprised of companies in the Enterprise Networking and Security industries.




23



Investment Type - Level 3
 
 
 
 
 
 
Debt Investments
 
Fair Value at
12/31/2015
 
Valuation Techniques / Methodologies
 
Unobservable Input
 
Weighted
Average / Amount or Range
 
 
 
 
 
 
 
 
 
Computers and Storage
 
$
10,555,811

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
16%
 
 
 
 
 
 
 
 
 
Internet
 
$
104,355,341

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0 - $1,061,305
 
 
 
 
 
 
 
 
 
Other Healthcare
 
$
59,140,410

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
 
 
 
 
 
Other Technology
 
$
94,365,892

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$1,183,612
 
 
 
 
 
 
 
 
 
Software
 
$
66,367,352

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$85,000
 
 
 
 
 
 
 
 
 
Technology Services
 
$
20,725,699

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
14%
 
 
 
 
Liquidation
 
Investment Collateral
 
$389,410
 
 
 
 
 
 
 
 
 
Wireless
 
$
7,781,924

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
17%
 
 
 
 
Liquidation
 
Investment Collateral
 
$31,475
 
 
 
 
 
 
 
 
 
Other *
 
$
17,145,502

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$14,238 - $369,234
 
 
 
 
 
 
 
 
 
 
 
$
380,437,931

 
 
 
 
 
 
* Other loans, as of December 31, 2015, were comprised of companies in the Enterprise Networking, Medical Device and Security industries.

The following table presents the balances of assets as of March 31, 2016 and December 31, 2015 measured at fair value on a recurring basis:

As of March 31, 2016
 
 
 
 
 
 
 
ASSETS:
Level 1
 
Level 2
 
Level 3
 
Total
Loans*
$

 
$

 
$
357,273,958

 
$
357,273,958

Interest rate cap

 
528,272

 

 
528,272

Cash equivalents
13,324,532

 

 

 
13,324,532

Total
$
13,324,532

 
$
528,272

 
$
357,273,958

 
$
371,126,762


24



As of December 31, 2015
 
 
 
 
 
 
 
ASSETS:
Level 1
 
Level 2
 
Level 3
 
Total
Loans*
$

 
$

 
$
380,437,931

 
$
380,437,931

Interest rate cap

 
1,410,963

 

 
1,410,963

Cash equivalents
8,303,171

 

 

 
8,303,171

Total
$
8,303,171

 
$
1,410,963

 
$
380,437,931

 
$
390,152,065


*For a detailed listing of borrowers comprising this amount, please refer to Note 3, Schedules of Investments.

The following table provides a summary of changes in Level 3 assets measured at fair value on a recurring basis:

 
For the Three Months Ended
March 31, 2016
 
Loans
 
Warrants
Beginning balance
$
380,437,931

 
$

Acquisitions and originations
28,964,773

 
2,179,295

Principal reductions
(44,837,948
)
 

Distribution to shareholder

 
(2,179,295
)
Net change in unrealized gain from investments
(6,209,273
)
 

Net realized loss from investments
(1,081,525
)
 

Ending balance
$
357,273,958

 
$

Net change in unrealized loss on investments relating to investments still held at March 31, 2016
$
(7,249,273
)
 
 

 
For the Three Months Ended
March 31, 2015
 
Loans
 
Warrants
 
Convertible Note
Beginning balance
$
266,992,654

 
$

 
$

Acquisitions and originations
83,962,500

 
6,080,468

 
250,000

Principal reductions
(30,657,397
)
 

 

Distribution to shareholder

 
(6,080,468
)
 
(250,000
)
Net change in unrealized gain from investments
272,003

 

 

Net realized loss from investments
(1,016,588
)
 

 

Ending balance
$
319,553,172

 
$

 
$

Net change in unrealized loss on investments relating to investments still held at March 31, 2015
$
(1,223,479
)
 
 
 
 

Net change in unrealized loss from investments and Net realized loss from investments are recorded in Net change in unrealized loss from investments and Net realized loss from investments in the Statement of Operations.
5.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average common shares outstanding.  Diluted earnings per share are computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average common shares outstanding, including the

25



dilutive effects of potential common shares (e.g., stock options).  The Fund held no instruments that would be potential common shares; thus, reported basic and diluted earnings per share are the same.
6.
CAPITAL STOCK
As of March 31, 2016 and December 31, 2015, the Fund had 10,000,000 shares of $0.001 par value common stock authorized, and 100,000 shares issued and outstanding.  Total committed capital of the Company, as of March 31, 2016 and December 31, 2015, was $375.0 million, respectively. Total contributed capital to the Company through March 31, 2016 and December 31, 2015 was $290.6 million, of which $250.9 million was contributed to the Fund, respectively.

The chart below shows the distributions of the Fund for the three months ended March 31, 2016 and 2015.
 
For The Three Months Ended
 
March 31, 2016
 
March 31, 2015
Cash distributions
$
13,300,000

 
$

Distributions of equity securities
2,179,295

 
6,330,468

Total distributions to shareholder
$
15,479,295

 
$
6,330,468


Final classification of the distributions as either a return of capital or a distribution of income is an annual determination made at the end of each year dependent upon the Fund's current year and cumulative earnings and profits.
7. DEBT FACILITY
The Fund has established a secured, syndicated revolving credit facility led by Wells Fargo, N.A. and Union Bank, N.A. in an initial amount of up to $125,000,000. In November 2014, the Fund increased the borrowing availability thereunder to $255,000,000. Borrowings by the Fund are collateralized by all of the assets of the Fund. Loans under the facility may be, at the option of the Fund, either a Reference Rate Loan or a LIBOR Rate Loan. A Reference Rate Loan is defined as a loan bearing interest at the highest of: (a) the Federal Funds Rate for such day plus one half of one percent (0.50%), (b) the Prime Rate, and (c)LIBOR plus one percent (1%). A LIBOR Rate Loan is defined as a Loan bearing interest at the prevailing LIBOR rate for a period equal to the applicable LIBOR Loan Period which appears on Reuters Screen LIBOR01 Page (or any applicable successor page) at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of the applicable LIBOR Loan Period (rounded upward, if necessary, to the nearest 1/100th of 1%) ("LIBOR Rate"). As of March 31, 2016, all of the Fund’s borrowings were based on the LIBOR Rate.

The Fund will pay interest on its borrowings, and will also pay a fee on the unused portion of the facility.

The facility terminates on November 7, 2017, but can be accelerated in the event of default, such as failure by the Fund to make timely interest or principal payments. As of March 31, 2016 and December 31, 2015, $174.0 million and $182.0 million was outstanding under the facility, respectively.

Borrowings under the facility are collateralized by receivables under loans advanced by the Fund with assignment to the financial institution, plus other assets of the Fund. Such borrowings will bear interest at an annual rate of either the LIBOR Rate plus 2.75%, in the case of LIBOR Rate Loans or the Reference Rate plus 1.75%, in the case of Reference Rate Loans. The Fund pays an unused line fee of 0.50% of the total unused commitment amount on a quarterly basis. As of March 31, 2016, the LIBOR Rate is as follows:
 
1 Month LIBOR
0.4373%
3 Month LIBOR
0.6286%


26



Bank fees and other costs of $2.7 million were incurred in connection with the facility. The bank fees and other costs incurred have been capitalized and are amortized to interest expense on a straight line basis over the expected life of the facility.  As of March 31, 2016, the remaining unamortized fees and costs of $1.1 million are being amortized over the expected life of the facility, which is expected to terminate on November 7, 2017.

The facility is revolving and as such does not have a specified repayment schedule, although advances are secured by the assets of the Fund and thus repayments will be required as assets decline. The facility contains various covenants including financial covenants related to: (i) minimum debt service coverage ratio, (ii) interest coverage ratio, (iii) maximum loan loss reserves, and (iv) unfunded commitment ratio. There are also various restrictive covenants, including limitations on (i) the incurrence of liens, (ii) consolidations, mergers and asset sales, and (iii) capital expenditures. As of March 31, 2016, Management believes that the Fund was in compliance with these covenants.

The following is the summary of the outstanding facility draws as of March 31, 2016:
Roll-Over Date
Amount
Maturity Date
Floating Interest Rate
February 26, 2016
$
174,000,000

5/26/2016*
3.39%
TOTAL OUTSTANDING
$
174,000,000

 
 
* On May 26, 2016, Management intends to roll the outstanding amount for a 90-day LIBOR loan, maturing on August 26, 2016.
8. INTEREST RATE CAP AGREEMENT
The Fund entered into interest rate cap agreements with Union Bank, N.A. to cap floating interest rates at 0.7%. The purpose of the interest rate cap agreement is to protect the Fund against rising interest rates. The Fund continues to adjust the notional principal amount as the outstanding balance under the debt facility changes. As of March 31, 2016 and March 31, 2015, the Fund had five and four interest cap contracts respectively with the total notional principal amount of $170 million and $ 101 million, respectively. The Fund paid upfront fees of $3.2 million which are amortized on a straight line basis over the life of the instrument and receives from the counterparty, payment of interest amounts above the 0.7% cap based on 90-day LIBOR. Payments, if necessary are made quarterly and will terminate on November 7, 2017. As of March 31, 2016, the 90-days LIBOR rate was 0.6286%.

The average notional amount outstanding was $170.0 million and $101.0 million for the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016 and December 31, 2015, the fair value of the Fund's derivative financial instruments was as follows:
 
 
Asset Derivatives
 
 
March 31, 2016
 
December 31, 2015
Derivatives:
 
Condensed statements of assets and liabilities
 
Fair Value
 
Condensed statements of assets and liabilities
 
Fair Value
Interest rate cap agreement
 
Interest Rate Caps
 
$
528,272

 
Interest Rate Caps
 
$
1,410,963


For the three months ended March 31, 2016 and 2015, the derivative financial instruments had the following effect on the Condensed Statements of Operations:
 
 
 
 
For The Three Months Ended
Derivatives:
 
Locations on Condensed statements of operations
 
March 31, 2016
 
March 31, 2015
Interest rate cap agreement
 
Net change in unrealized loss from hedging activities
 
$
(621,195
)
 
$
(546,140
)

27



9.  FINANCIAL HIGHLIGHTS
GAAP requires disclosure of financial highlights of the Fund for the periods presented, the three months ended March 31, 2016 and 2015.  The total rate of return is defined as the return based on the change in value during the period of a theoretical investment made at the beginning of the period.  The total rate of return assumes a constant rate of return for the Fund during the period reported and weights each cash flow by the amount of time held in the Fund.  This required methodology differs from an internal rate of return.

The ratios of expenses and net investment income to average net assets, calculated below, are annualized and are computed based upon the aggregate weighted average net assets of the Fund for the periods presented.  Net investment income is inclusive of all investment income net of expenses, and excludes realized or unrealized gains and losses.

Beginning and ending net asset values per share are based on the beginning and ending number of shares outstanding. Other per share information is calculated based upon the aggregate weighted average net assets of the Fund for the periods presented.

The following per share data and ratios have been derived from the information provided in the financial statements.
 
For the Three Months Ended March 31, 2016
 
For the Three Months Ended March 31, 2015
 
 
 
 
Total return **
1.88
%
 
4.97
%
 
 
 
 
Per share amounts:
 
 
 
Net asset value, beginning of period
$
2,104.91

 
$
1,634.96

 
 
 
 
Net investment income
117.10

 
101.49

Net realized and change in unrealized loss from investments and hedging activities
(79.12
)
 
(12.91
)
Net increase in net assets from operations
37.98

 
88.58

Distributions of income to shareholder
(106.28
)
 
(63.31
)
Return of capital to shareholder
(48.51
)
 

Contributions from shareholder

 
385.00

 


 
 
Net asset value, end of period
$
1,988.10

 
$
2,045.23

 
 

 
 
Net assets, end of period
$
198,809,958

 
$
204,523,428

 
 
 
 
Ratios to average net assets:
 
 
 
 
 
 
 
Expenses*
8.79
%
 
8.18
%
Net investment income*
23.03
%
 
22.24
%
Portfolio turnover rate
0.10
%
 
0.10%

Average debt outstanding
$
178,000,000

 
$
127,250,000

* Annualized
 
 
 
** Total return amounts presented above are not annualized.



28



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In addition to the historical information contained herein, the information in this Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the securities laws.  These forward-looking statements reflect the current view of the Fund with respect to future events and financial performance and are subject to a number of risks and uncertainties, many of which are beyond the Fund's control.  All statements, other than statements of historical facts included in this report, regarding the strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of the Fund are forward-looking statements.  When used in this report, the words “will”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  All forward-looking statements speak only as of the date of this report.  

The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome.  The Fund's actual results could differ materially from those suggested by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments and competition.  This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Fund's business. The Fund does not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

The Fund is 100% owned by the Company.  The Fund's shares of Common Stock, at $0.001 par value, were sold to its sole shareholder, the Company, under a stock purchase agreement.  The Fund has issued 100,000 of the Fund's 10,000,000 authorized shares.  The Company may make additional capital contributions to the Fund.

The Fund is a financial services company providing financing and advisory services to a variety of carefully selected venture-backed companies primarily throughout the United States with a focus on growth oriented companies.  The Fund's portfolio is expected to become more diversified and consists of companies in the communications, information services, media, and technology, including software and technology-enabled business services, bio-technology, and medical devices industry sectors, among others.  The Fund's capital is generally used by its portfolio companies to finance acquisitions of fixed assets and/or for working capital.  On December 18, 2012, the Fund completed its first closing of capital contributions, made its first investments, and became a non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940.  The Fund elected to be treated for federal income tax purposes as a RIC under the Code and has made the RIC election with the filing of its federal corporate income tax return for 2013.  Pursuant to this election, the Fund generally will not have to pay corporate-level taxes on any income it distributes to the Company as dividends, allowing the Company to substantially reduce or eliminate its corporate-level tax liability.

The Fund will seek to meet the ongoing requirements, including the diversification requirements, to qualify as a RIC under the Code.  If the Fund fails to meet these requirements, it would be taxed as an ordinary corporation on its taxable income for that year (even if that income is distributed to the Company) and all distributions out of its earnings and profits would be taxable to the Members of the Company as ordinary income; thus, such income would be subject to a double layer of tax.  There is no assurance that the Fund will meet the ongoing requirements to qualify as a RIC for tax purposes.

The Fund's investment objective is to achieve superior risk adjusted investment returns.  The Fund seeks to achieve its investment objective by providing debt financing to portfolio companies.  Since inception, the Fund's investing activities have focused primarily on private debt securities.  The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments.  The Fund generally distributes these warrants

29



to its shareholder upon receipt.  The Fund also has guidelines for the percentages of total assets which will be invested in different types of assets.

The portfolio investments of the Fund consist of debt financing to venture-capital backed companies.  The borrower's ability to repay its loans may be adversely impacted by a number of factors, and as a result, the loan may not fully be repaid.  Furthermore, the Fund's security interest in any collateral over the borrower's assets may be insufficient to make up any shortfall in payments.

 Transactions with Venture Lending & Leasing VI, Inc. (“Fund VI”)  

The Manager also serves as investment manager for Fund VI. The Fund's Board determined that so long as Fund VI had capital available to invest in loan transactions with final maturities earlier than December 31, 2020 (the date on which Fund VI will be dissolved), the Fund would invest in each portfolio company in which Fund VI invested (“Investments”). The amount of each Investment was allocated 50% to the Fund and 50% to Fund VI through June 28, 2014. As of June 28, 2014, Fund VI is now no longer permitted to enter into new commitments to borrowers; however, Fund VI will be permitted to fund existing commitments.

To the extent that clients, other than Fund VI, advised by the Manager (but in which the Manager has no proprietary interest) invest in opportunities available to the Fund, the Manager will allocate such opportunities among the Fund and such other clients in a manner deemed fair and equitable considering all of the circumstances in accordance with procedures approved by the Fund's Board (including a majority of the disinterested directors).
   
Transactions with Venture Lending & Leasing VIII, Inc. (“Fund VIII”)  

The Manager also serves as investment manager for Fund VIII. The Fund's Board determined that so long as the Fund has capital available to invest in loan transactions with final maturities earlier than December 31, 2022 (the date on which the Fund will be dissolved), the Fund would invest in each portfolio company in which Fund VIII invested (“Investments”). Initially the amount of each Investment is allocated 50% to the Fund and 50% to Fund VIII so long as the Fund has capital available to invest. After December 2016, the Fund will be no longer permitted to enter into new commitments to borrowers; however, the Fund will be permitted to fund existing commitments. The Manager is permitted to extend the Fund's investment period by up two (2) additional calendar quarters in its sole and absolute discretion.

To the extent that clients, other than Fund VIII, advised by the Manager (but in which the Manager has no proprietary interest) invest in opportunities available to the Fund, the Manager will allocate such opportunities among the Fund and such other clients in a manner deemed fair and equitable considering all of the circumstances in accordance with procedures approved by the Fund's Board (including a majority of the disinterested directors).
  
Critical Accounting Policies

The Manager has identified the most critical accounting estimates upon which the financial statements depend and determined the critical accounting estimates by considering accounting policies that involve the most complex or subjective decisions or assessments. The two critical accounting policies relate to the valuation of loans and treatment of non-accrual loans.  

Loans are held at fair value as determined by Management, in accordance with the valuation methods described in the valuation of loans section of Note 2 in the Fund's financial statements (Summary of Significant Accounting Policies).  Critical factors in determining the fair value of a loan include payment history, collateral position, financial strength of the borrower, prospects for the borrower raising future equity rounds, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan, as well as an evaluation of the general interest rate environment.  The actual value of the loans may differ from Management's estimates, which would affect net income as well as assets.



30




Results of Operations - For the Three Months Ended March 31, 2016 and 2015

Total investment income for the three months ended March 31, 2016 and 2015 was $16.2 million and $13.9 million, respectively which primarily consisted of interest on the venture loans outstanding. The remaining income consisted of interest and dividends on the temporary investment of cash and forfeited commitment fees. The income was primarily driven by the level of average loans outstanding for the three months ended March 31, 2016 and 2015 of $362.4 million and $284.5 million, respectively.

Management fees for the three months ended March 31, 2016 and 2015 were $2.4 million and $2.2 million, respectively. Management fees are calculated as 2.5 percent of the Fund's total assets. Management fees increased because of the increase of the Fund's total assets during the three months ended March 31, 2016.

Interest expense was $2.0 million and $1.4 million for the three months ended March 31, 2016 and 2015, respectively. Interest expense was comprised of amounts related to interest on debt amounts drawn down, unused line fees and amounts amortized from deferred fees incurred in conjunction with the debt line. Interest expense increased primarily because of the increase in average outstanding debt from $127.3 million for the three months ended March 31, 2015 to $178.0 million for the three months ended March 31, 2016.

The banking and professional fees were less than $0.1 million for the three months ended March 31, 2016 and 2015, respectively. The banking and professional fees were comprised of legal, audit, banking and other professional fees.

Total other operating expenses were less than $0.1 million for the three months ended March 31, 2016 and 2015, respectively.

Net investment income for the three months ended March 31, 2016 and 2015 was $11.7 million and $10.1 million, respectively.

Total net realized loss from investments was $1.1 million and $1.0 million for the three months ended March 31, 2016 and 2015, respectively.

Net change in unrealized gain (loss) from investments was $(6.2) million and $0.3 million for the three months ended March 31, 2016 and 2015, respectively. The unrealized gain (loss) consists of fair market value adjustments to loans and the reversal of fair market value adjustments previously taken against loans now paid off.

Net change in unrealized loss from hedging activities was $0.6 million and $0.5 million for the three months ended March 31, 2016 and 2015, respectively. The Fund entered into interest rate cap transactions with Union Bank, N.A. to cap the floating rate liabilities at a fixed rate (see Note 8 in the Fund's financial statements).

Net increase in net assets resulting from operations for the three months ended March 31, 2016 and 2015 was $3.8 million and $8.9 million, respectively. On a per share basis, the net increase in net assets resulting from operations was $37.98 and $88.58 for the three months ended March 31, 2016 and 2015, respectively.

Liquidity and Capital Resources – March 31, 2016 and December 31, 2015

Total capital contributed to the Fund was $250.9 million as of March 31, 2016 and December 31, 2015, respectively. Committed capital to the Company as of March 31, 2016 and December 31, 2015 was $375.0 million, of which $290.6 million had been called as of March 31, 2016 and December 31, 2015, respectively.  The remaining $84.4 million of committed capital outstanding as of March 31, 2016 is due to expire in December 2017 as the five year anniversary will have passed, at which time no further capital can be called.


31



The Fund has established a secured, syndicated revolving credit facility led by Wells Fargo, N.A. and Union Bank, N.A. in an initial amount of up to $125,000,000. In November 2014, the Fund increased the borrowing availability thereunder to $255,000,000. Borrowings by the Fund are collateralized by all of the assets of the Fund. Loans under the facility may be, at the option of the Fund, either a Reference Rate Loan or a LIBOR Rate Loan. The Fund will pay interest on its borrowings and will also pay a fee on the unused portion of the facility.

The facility terminates on November 7, 2017, but can be accelerated in the event of default, such as failure by the Fund to make timely interest or principal payments. As of March 31, 2016, $174.0 million is outstanding under the facility.

As of March 31, 2016 and December 31, 2015, 3.5% and 2.1%, respectively, of the Fund's assets consisted of cash and cash equivalents.  The Fund invested its assets in venture loans during the three months ended March 31, 2016. Amounts disbursed under the Fund's loan commitments totaled approximately $29.0 million during the three months ended March 31, 2016.  Net loan amounts outstanding after amortization decreased by approximately $23.1 million for the same period.  Unexpired, unfunded commitments totaled approximately $62.4 million as of March 31, 2016.

As of
Cumulative Amount
Disbursed
Principal
Reductions and Fair
Market Adjustments
Balance Outstanding - Fair Value
Unexpired
Unfunded
Commitments
March 31, 2016
$627.3 million
$270.0 million
$357.3 million
$62.4 million
December 31, 2015
$598.3 million
$217.9 million
$380.4 million
$68.7 million

Because venture loans are privately negotiated transactions, investments in these assets are relatively illiquid.  It is the Fund's experience that not all unfunded commitments will be used by borrowers.

The Fund seeks to meet the ongoing requirements to qualify for the special pass-through status available to RICs under the Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes to the Company.  To qualify as a RIC, the Fund must distribute to the Company for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income and net short-term capital gain) (“Distribution Requirement”).  To the extent that the terms of the Fund's venture loans provide for the receipt by the Fund of additional interest at the end of the loan term or provide for the receipt by the Fund of a purchase price for the asset at the end of the loan term (“residual income”), the Fund would be required to accrue such residual income over the life of the loan, and to include such accrued undistributed income in its gross income for each taxable year even if it receives no portion of such residual income in that year.  Thus, in order to meet the Distribution Requirement and avoid payment of income taxes or an excise tax on undistributed income, the Fund may be required in a particular year to distribute as a dividend an amount in excess of the total amount of income it actually receives.  Those distributions will be made from the Fund's cash assets, from amounts received through amortization of loans or from borrowed funds.

As of March 31, 2016, the Fund has adequate cash reserves and approximately $156.4 million in scheduled receivable payments over the next year. Additionally, the Fund has access to uncalled capital of $84.4 million as a liquidity source. These amounts are sufficient to meet the current commitment backlog and operational expenses of the Fund over the next year. The Fund constantly evaluates potential future liquidity resources and demands before making additional future commitments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Fund's business activities contain elements of risk.  The Fund considers the principal types of market risk to be interest rate risk and credit risk.  The Fund considers the management of risk essential to conducting its business and to maintaining profitability.  Accordingly, the Fund's risk management procedures are designed to identify and

32



analyze the Fund's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.  

The Fund manages its market risk by maintaining a portfolio that is diverse by industry, size of investment, stage of development, and borrower.  The Fund has limited exposure to public market price fluctuations as the Fund primarily invests in private business enterprises and the Fund generally distributes all equity securities upon receipt to the Company.

The Fund's investments are subject to market risk based on several factors, including, but not limited to, the borrower's credit history, available cash, support of the borrower's underlying investors, available liquidity, "burn rate", revenue income, security interest, secondary markets for collateral, the size of the loan, term of the loan, and the ability to exit via Initial Public Offering or Merger and Acquisition.

The Fund's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities.  The Fund utilizes various methods to assess interest rate risk in terms of the potential effect on interest income net of interest expense, the value of net assets and the value at risk in an effort to ensure that the Fund is insulated from any significant adverse effects from changes in interest rates.  At March 31, 2016, the outstanding debt balance was $174.0 million with interest expense based on a weighted average rate of 0.64%, for which the Fund had an interest expense rate cap in place at 0.70% on $170.0 million of outstanding debt, leaving the Fund's maximum exposure to interest rate sensitivity on that balance at 0.06%, which the Manager does not believe is material to the financial statements. Additionally, the Fund has interest rate risk on the $4 million uncapped portion of the debt facility.
  
Although Management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it makes estimates to adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income.  Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

Item 4.  Controls and Procedures:

Evaluation of Disclosure Controls and Procedures:

As of the end of the period covered by this quarterly report on Form 10-Q, the Fund's chief executive officer and chief financial officer conducted an evaluation of the Fund's disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934).  Based upon this evaluation, the Fund's chief executive officer and chief financial officer concluded that the Fund's disclosure controls and procedures were effective in timely alerting them of any material information relating to the Fund that is required to be disclosed by the Fund in the reports it files or submits under the Securities Exchange Act of 1934.

Changes in Internal Controls:

There were no changes in the Fund's internal controls or in other factors that could materially affect these controls during the period covered by this quarterly report on Form 10-Q.

PART II OTHER INFORMATION

Item 1.  Legal Proceedings

The Fund may become party to certain lawsuits from time to time in the normal course of business. While the outcome of any legal proceedings cannot at this time be predicted with certainty, the Fund does not expect any such proceedings will have a material effect upon the Fund's financial condition or results of operation. Management is not aware of any pending legal proceedings involving the Fund.


33



Item 1A. Risk Factors

See item 1A - 'Risk Factors' in the Fund's 2015 Annual Report on Form 10-K for a detailed description of the risks attendant to the Fund and its business. There were no material changes to these factors during the three months ended March 31, 2016.

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

Prior to the Fund's commencement of operations on December 18, 2012, the Fund sold 100,000 shares to the Fund's sole shareholder, the Company, for $25,000 in July 2012.  No other shares of the Fund have been sold; however, the Fund received an additional $250.9 million of paid in capital during the period from December 18, 2012 through March 31, 2016, which has been and is expected to be used to acquire venture loans and fund operations.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Issues

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibit Number
Description
3(i)
Articles of Incorporation of the Fund as filed with the Maryland Secretary of State on June 21, 2012, incorporated by reference to the Fund's Form 10 filed with the Securities and Exchange Commission on September 19, 2012.
3(ii)
Bylaws of the Fund, incorporated by reference to the Fund's Form 10 filed with the Securities and Exchange Commission on September 19, 2012.
4.1
Form of Purchase Agreement between the Fund and the Company, incorporated by reference to the Fund's Registration Statement on Form 10 filed with the Securities and Exchange Commission on September 19, 2012.
31.1-32.2
Certifications pursuant to The Sarbanes-Oxley Act of 2002. (Rule 13a -14 and Section 1350 Certifications).


34



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 duly authorized.

VENTURE LENDING & LEASING VII, INC.
(Registrant)

By:
/s/ Maurice C. Werdegar
By:
/s/ Martin D. Eng
Maurice C. Werdegar
Martin D. Eng
President and Chief Executive Officer
Chief Financial Officer
Date:
May 13, 2016
Date:
May 13, 2016


35



EXHIBIT INDEX

Exhibit Number
Description
31.1-32.2
Certifications pursuant to The Sarbanes-Oxley Act of 2002.


          









36