Attached files

file filename
EX-32.2 - VLL6INC 10Q 063016 EXHIBIT 32.2 - Venture Lending & Leasing VI, Inc.vll606302016ex32210q.htm
EX-32.1 - VLL6INC 10Q 063016 EXHIBIT 32.1 - Venture Lending & Leasing VI, Inc.vll606302016ex32110q.htm
EX-31.2 - VLL6INC 10Q 063016 EXHIBIT 31.2 - Venture Lending & Leasing VI, Inc.vll606302016ex31210q.htm
EX-31.1 - VLL6INC 10Q 063016 EXHIBIT 31.1 - Venture Lending & Leasing VI, Inc.vll606302016ex31110q.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 June 30, 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 814-00799

Venture Lending & Leasing VI, Inc.
(Exact Name of Registrant as specified in its charter)
Maryland
27-1682622
(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 August 12, 2016
Common Stock, $.001 par value
 
100,000




VENTURE LENDING & LEASING VI, INC.
INDEX

PART I — FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
 
 
 
Condensed Statements of Assets and Liabilities (Unaudited)
 
As of June 30, 2016 and December 31, 2015
 
 
 
Condensed Statements of Operations (Unaudited)
 
For the three and six months ended June 30, 2016 and 2015
 
 
 
Condensed Statements of Changes in Net Assets (Unaudited)
 
For the six months ended June 30, 2016 and 2015
 
 
 
Condensed Statements of Cash Flows (Unaudited)
 
For the six months ended June 30, 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 VI, INC.

CONDENSED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
AS OF JUNE 30, 2016 AND DECEMBER 31, 2015

 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Investments:
 
 
 
    Loans, at estimated fair value
 
 
 
   (Cost of $67,182,044 and $109,048,869)
$
49,787,497

 
$
95,005,982

    Interest Rate Caps (Cost of $69,000 and $115,000)
2,388

 
25,340

Total Investments (Cost of $67,251,044 and $109,163,869)
49,789,885

 
95,031,322

Cash and cash equivalents
4,820,274

 
2,646,011

Other assets
1,240,444

 
1,963,441

 
 
 
 
Total assets
55,850,603

 
99,640,774

 
 
 
 
LIABILITIES
 
 
 
Borrowings under debt facility
13,600,000

 
40,400,000

Accrued management fees
349,066

 
622,755

Accounts payable and other accrued liabilities
45,658

 
112,819

 
 
 
 
Total liabilities
13,994,724

 
41,135,574

 
 
 
 
NET ASSETS
$
41,855,879

 
$
58,505,200

 
 
 
 
Analysis of Net Assets:
 
 
 
 
 
 
 
Capital paid in on shares of capital stock
$
241,525,000

 
$
241,525,000

Unrealized depreciation on investments
(17,461,159
)
 
(14,132,547
)
Distribution in excess of net investment income
(182,207,962
)
 
(168,887,253
)
Net assets (equivalent to $418.56 and $585.05 per share based on 100,000 shares of capital stock outstanding - See Note 6)
$
41,855,879

 
$
58,505,200

Commitments & Contingent Liabilities:
         Unfunded unexpired commitments (See Note 4)
$

 
$
1,750,000

 
 
 
 



See notes to condensed financial statements.



3



VENTURE LENDING & LEASING VI, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 
For the Three Months Ended June 30, 2016
 
For the Three Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
INVESTMENT INCOME:
 
 
 
 
 
 
 
Interest on loans
$
2,557,302

 
$
8,523,890

 
$
5,659,930

 
$
18,815,424

       Other interest and other income
2,426

 
1,602

 
6,148

 
59,830

Total investment income
2,559,728

 
8,525,492

 
5,666,078

 
18,875,254

 
 
 
 
 
 
 
 
EXPENSES:
 
 
 
 
 
 
 
Management fees
349,066

 
975,207

 
809,218

 
2,260,164

Interest expense
247,114

 
643,611

 
587,188

 
1,414,958

Banking and professional fees
108,216

 
93,224

 
196,448

 
247,789

Other operating expenses
28,474

 
15,595

 
53,072

 
42,550

Total expenses
732,870

 
1,727,637

 
1,645,926

 
3,965,461

Net investment income
1,826,858

 
6,797,855

 
4,020,152

 
14,909,793

 
 
 
 
 
 
 
 
Net realized gain (loss) from investments
7,960

 
(410,929
)
 
(1,034,131
)
 
(1,428,960
)
Net change in unrealized loss from investments
(3,187,001
)
 
(4,448,691
)
 
(3,351,660
)
 
(8,971,688
)
Net change in unrealized gain (loss) from hedging activities
18,655

 
1,201

 
23,048

 
(52,182
)
Net realized and change in unrealized loss from investments and hedging activities
(3,160,386
)
 
(4,858,419
)
 
(4,362,743
)
 
(10,452,830
)
 
 
 
 
 
 
 
 
Net increase (decrease) in net assets resulting from operations
$
(1,333,528
)
 
$
1,939,436

 
$
(342,591
)
 
$
4,456,963

Net increase (decrease) in net assets resulting from operations per share
$
(13.34
)
 
$
19.39

 
$
(3.42
)
 
$
44.57

Weighted average shares outstanding
100,000

 
100,000

 
100,000

 
100,000


See notes to condensed financial statements.


4



VENTURE LENDING & LEASING VI, INC.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

        
 
For the Six Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2015
Net increase in net assets resulting from operations:
 
 
 
Net investment income
$
4,020,152

 
$
14,909,793

Net realized loss from investments
(1,034,131
)
 
(1,428,960
)
Net change in unrealized loss from investments
(3,351,660
)
 
(8,971,688
)
Net change in unrealized gain (loss) from hedging activities
23,048

 
(52,182
)
 
 
 
 
Net increase (decrease) in net assets resulting from operations
(342,591
)
 
4,456,963

 
 
 
 
Distributions of income to shareholder
(2,986,021
)
 
(13,480,833
)
Return of capital to shareholder
(13,320,709
)
 
(40,975,355
)
  Decrease in capital transactions
(16,306,730
)
 
(54,456,188
)
 
 
 
 
Total decrease in net assets
(16,649,321
)
 
(49,999,225
)
 
 
 
 
Net assets

 
 
Beginning of period
58,505,200

 
137,015,488

 
 
 
 
End of period (undistributed net investment income of $0 and $0)
$
41,855,879

 
$
87,016,263







See notes to condensed financial statements.


5



VENTURE LENDING & LEASING VI, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 
For the Six Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net increase (decrease) in net assets resulting from operations
$
(342,591
)
 
$
4,456,963

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:
 
 
 
Net realized loss from investments
1,034,131

 
1,428,960

Net change in unrealized loss from investments
3,351,660

 
8,971,688

Net change in unrealized (gain) loss from hedging activities
(23,048
)
 
52,182

Amortization of deferred costs related to borrowing facility
113,997

 
113,997

Net decrease in other assets
655,000

 
1,506,357

Net decrease in accounts payable, other accrued liabilities, and accrued management fees
(340,850
)
 
(971,585
)
Origination of loans

 
(3,362,500
)
Principal payments on loans
40,525,964

 
77,088,757

Acquisition of equity securities

 
(86,967
)
Net cash provided by operating activities
44,974,263

 
89,197,852

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash distribution to shareholder
(16,000,000
)
 
(53,000,000
)
  Repayment of debt facility
(26,800,000
)
 
(38,750,000
)
Net cash used in financing activities
(42,800,000
)
 
(91,750,000
)
       Net increase (decrease) in cash and cash equivalents
2,174,263

 
(2,552,148
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
2,646,011

 
14,006,961

End of period
$
4,820,274

 
$
11,454,813

SUPPLEMENTAL DISCLOSURES:
 
 
 
CASH PAID DURING THE PERIOD:
   

 
 
Interest
$
563,969

 
$
1,407,939

NON-CASH ACTIVITIES:
   

 
 
Distributions of equity securities to shareholder
$
306,730

 
$
1,456,188

Receipt of equity securities as repayment of loans
$
306,730

 
$
1,369,221


See notes to condensed financial statements.


6



VENTURE LENDING & LEASING VI, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1.
ORGANIZATION AND OPERATIONS OF THE FUND

Venture Lending & Leasing VI, Inc. (the “Fund”), was incorporated in Maryland on January 11, 2010 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, formerly known as Westech Investment Advisors, Inc. (“Manager” or “Management”). The Fund will be dissolved on December 31, 2020 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 VI, LLC (the “Company”).  Prior to commencing its operations on June 29, 2010, 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 January 2010.  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 April 13, 2010.

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 six months ended June 30, 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.

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

7



required by law.  On a quarterly basis, Management submits to the Board a “Valuation Report” and "Valuation Notes" which detail the rationale for the valuation of investments.

As of June 30, 2016 and December 31, 2015, the financial statements include nonmarketable investments of $49.8 million and $95.0 million, respectively (or 89% and 95% 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 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 June 30, 2016, loans with a cost basis of $21.7 million and a fair value of $7.2 million, have been classified as non-accrual. As of December 31, 2015, loans with a cost basis of $20.9 million and a fair value of $7.0 million, have been classified as non-accrual.


8



Warrants and Stock

Warrants and stock 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 six months ended June 30, 2016 and June 30, 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 June 30, 2016 and December 31, 2015, the fair values of Other Assets and Liabilities are estimated at their carrying values because of the short-term nature of these assets or liabilities.
As of June 30, 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 $13.6 million and $40.4 million, respectively.



9



Commitment Fees

Unearned income and commitment fees on loans are recognized as additional 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.

Interest Rate Cap Agreements

On September 30, 2014, the Fund 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 Net change in unrealized gain (loss) from hedging activities in the Condensed Statements of Operations. The interest received on the interest rate cap contracts, if any, is recorded in Net realized gain (loss) from hedging activities in the Condensed Statements of Operations.

Deferred Bank Fees

The deferred bank fees and costs associated with the debt facility have been allocated over the estimated life of the facility, which was originally determined to be until January 2014. Starting in October 2011, the estimated life of the facility changed to September 2014. The debt facility was extended again on September 23, 2014 and then on September 30, 2014, it was amended, restated and renewed through March 23, 2017. Deferred bank fees and costs associated with the renewal of the debt facility are being amortized over the estimated life of the renewed facility through March 23, 2017. The amortization of these costs was recorded as interest expense in the Condensed Statement of Operations (see Note 7).

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 June 30, 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 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

10



be distributed to 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.

As of June 30, 2016:
Asset
Cost
Unrealized Appreciation
Unrealized Depreciation
Net Appreciation (Depreciation)
Fair Value
Loans
$
67,182,044

$

$
(17,394,547
)
$
(17,394,547
)
$
49,787,497

Interest Rate Caps
69,000


(66,612
)
(66,612
)
2,388

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
67,251,044

$

$
(17,461,159
)
$
(17,461,159
)
$
49,789,885


As of December 31, 2015:
Asset
Cost
Unrealized Appreciation
Unrealized Depreciation
Net Appreciation (Depreciation)
Fair Value
Loans
$
109,048,869

$

$
(14,042,887
)
$
(14,042,887
)
$
95,005,982

Interest Rate Caps
115,000


(89,660
)
(89,660
)
25,340

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
109,163,869

$

$
(14,132,547
)
$
(14,132,547
)
$
95,031,322


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.

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.

Through June 30, 2016, the Fund had no undistributed earnings. Additionally, for the six months ended June 30, 2016, distributions were made in excess of distributable earnings by $ 13.3 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 June 30, 2016, the Fund had no uncertain tax positions. As of June 30, 2016, the Fund had no capital loss carry forwards.

The Fund's tax years are open to examination by federal tax authorities for the years 2013 and forward and California tax authorities for the years 2012 and forward.

3.
SCHEDULES OF INVESTMENTS

As of June 30, 2016, all loans were made to non-affiliates as follows (unaudited):

 
Percentage
Estimated Fair
 
Par Value
Final
Borrower
of Net Assets
Value 6/30/2016
 
Value 6/30/2016
Maturity Date
Computers & Storage
 
 
 
 
 
Clustrix, Inc.
 
 $ 765,382

 
 $ 765,382

5/1/2017

11



D-Wave Systems, Inc. **
 
630,752

 
630,752

2/1/2017
HyperGrid, Inc.
 
631,956

 
631,956

6/1/2017
Veloxum, Inc.
 

 
                       416,093

*
Subtotal:
4.8%
 $ 2,028,090

 
 $ 2,444,183

 
 
 
 
 
 
 
Enterprise Networking
 
 
 
 
 
Apprion, Inc.
 
 $ 72,266

 
 $ 144,533

*
Subtotal:
0.2%
 $ 72,266

 
 $ 144,533

 
 
 
 
 
 
 
Internet
 
 
 
 
 
CustomMade Ventures Corp.
 
 $ 687,276

 
 $ 687,276

*
Digital Caddies, Inc. **
 

 
987,584

*
FanBridge, Inc.
 
453,896

 
643,896

*
Giddy Apps, Inc.
 
499,454

 
999,454

*
Giveforward, Inc.
 
190,505

 
358,380

*
Kiwi Crate, Inc.
 
702,629

 
702,629

4/1/2018
Lightside Games, Inc.
 

 
109,230

*
Monetate, Inc.
 
2,029,245

 
2,029,245

6/1/2018
Navigating Cancer, Inc.
 
23,812

 
23,812

7/1/2016
Osix Corp.
 
17,882

 
17,882

10/1/2016
Piryx, Inc.
 
877,196

 
1,467,196

*
Pixalate, Inc.
 
126,755

 
126,755

3/1/2017
Playstudios, Inc.
 
1,656,220

 
1,656,220

6/1/2018
Quantcast Corp.
 
2,222,597

 
2,222,597

4/1/2017
Quri, Inc.
 
1,347,894

 
1,347,894

6/1/2018
Radius Intelligence, Inc.
 
950,241

 
950,241

10/1/2017
Rivet Games, Inc.
 
21,082

 
115,082

*
Schooltube, Inc.
 

 
108,222

*
Schoola, Inc.
 
54,184

 
54,184

12/1/2016
Sociable Labs, Inc.
 
40,513

 
80,909

*
THECLYMB
 
775,770

 
775,770

10/1/2017
Weddington Way, Inc.
 
67,218

 
67,218

11/1/2016
WHI, Inc.
 
593,999

 
1,200,999

*
YouDocs Beauty, Inc.
 
                     1,182,986

 
                    1,192,024

*
Subtotal:
34.7%
 $ 14,521,354

 
 $ 17,924,699

 
 
 
 
 
 
 
Medical Devices
 
 
 
 
 
AxioMed, Inc.
 
 $ 14,238

 
 $ 1,560,238

*
Blockade Medical, LLC
 
258,187

 
258,187

9/1/2017
MimOSA, Inc.
 
113,001

 
213,000

6/1/2017
Redox Medical, Inc.
 
                        250,000

 
                    3,600,000

*
Subtotal:
1.5%
 $ 635,426

 
 $ 5,631,425

 
 
 
 
 
 
 
Other Healthcare
 
 
 
 
 
Cogito Corporation
 
 $ 192,818

 
 $ 192,818

4/1/2017
Health Integrated, Inc.
 
861,901

 
861,901

10/1/2017
Hi.Q, Inc.
 
961,435

 
961,435

6/1/2018
Mulberry Health, Inc.
 
2,683,524

 
2,683,524

12/1/2017

12



Physician Software Systems, LLC
 
227,382

 
227,382

7/1/2017
Project Healthy Living, Inc.
 
196,351

 
196,351

10/1/2016
Therapydia, Inc.
 
210,668

 
210,668

10/1/2017
Urgent Care Centers of New England, Inc.
 
                     2,509,394

 
                    2,509,394

9/1/2018
Subtotal:
18.7%
 $ 7,843,473

 
 $ 7,843,473

 
 
 
 
 
 
 
Other Technology
 
 
 
 
 
21, Inc.
 
 $ 2,524,645

 
 $ 4,564,645

8/1/2019
Automatic Labs, Inc.
 
198,704

 
198,704

12/1/2016
Beeline Bikes, Inc.
 
62,244

 
62,244

6/1/2017
Daylight Solutions, Inc.
 
973,659

 
973,659

8/1/2017
General Assembly, Inc.
 
540,524

 
540,524

12/1/2016
InsideTrack, Inc.
 
640,475

 
640,475

9/1/2017
LanzaTech New Zealand Ltd.**
 
188,479

 
188,479

7/1/2016
Lumo BodyTech, Inc.
 
765,431

 
765,431

12/1/2017
Neuehouse, LLC
 
1,775,619

 
1,775,619

7/1/2017
nWay, Inc.
 
252,702

 
722,702

*
Pinnacle Engines, Inc.
 
647,330

 
647,330

12/1/2017
Prana Holdings, Inc.
 
763,019

 
1,525,019

3/1/2017
Scoot Networks, Inc.
 
159,534

 
159,534

3/1/2017
Skully, Inc.
 
119,233

 
119,233

7/1/2017
Tribogenics, Inc.
 
68,598

 
68,598

9/1/2016
Zeachem
 

 
                    2,759,807

*
Subtotal:
23.1%
 $ 9,680,196

 
 $ 15,712,003

 
 
 
 
 
 
 
Security
 
 
 
 
 
Agari Data, Inc.
 
 $ 542,773

 
 $ 542,773

9/1/2017
Guardian Analytics, Inc.
 
                     2,184,458

 
                    2,184,458

2/1/2019
Subtotal:
6.5%
 $ 2,727,231

 
 $ 2,727,231

 
 
 
 
 
 
 
Software
 
 
 
 
 
Appconomy, Inc.
 

 
 $ 1,839,362

*
Atigeo Corporation
 
1,553,506

 
1,553,506

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

 
1,322,744

*
BlazeMeter, Inc. **
 
519,961

 
519,961

1/1/2018
Clypd, Inc.
 
136,849

 
136,849

11/1/2016
Corduro, Inc.
 
7,500

 
87,212

*
Encoding.com, Inc.
 
82,372

 
82,372

11/1/2016
gloStream, Inc.
 
700,066

 
1,000,066

*
Innerworkings, Inc.
 

 
326,744

*
MediaPlatform, Inc.
 
28,090

 
28,090

9/1/2016
Mintigo, Inc.**
 
821,902

 
821,902

1/1/2018
Nectar Holdings, Inc.
 
642,834

 
642,834

12/1/2017
OrderGroove, Inc.
 
553,088

 
553,088

12/1/2017
SCVNGR, Inc.
 
368,052

 
368,052

10/1/2016
SoundHound, Inc.
 
1,209,928

 
1,209,928

5/1/2017
StreetLight Data, Inc.
 
235,576

 
235,576

4/1/2017

13



Workspot, Inc.
 
27,713

 
27,713

9/1/2016
ZeroTurnaround USA, Inc.**
 
                     1,034,084

 
                    1,034,084

6/1/2018
Subtotal:
19.2%
 $ 8,021,521

 
 $ 11,790,083

 
 
 
 
 
 
 
Technology Services
 
 
 
 
 
Akademos, Inc.***
 
 $ 426,028

 
 $ 426,028

6/1/2017
Amped, Inc.
 
768,269

 
768,269

11/1/2017
Blue Technologies Limited**
 
313,807

 
313,807

6/1/2017
BountyJobs, Inc.
 
244,171

 
244,171

10/1/2017
Callisto Media, Inc.
 
51,204

 
51,204

9/1/2016
FSA Store, Inc.
 
622,498

 
622,498

9/1/2017
Grassroots Unwired, Inc.
 
4,719

 
4,719

8/1/2016
Maxi Mobility, Inc.
 
9,476

 
9,476

7/1/2016
Rated People, Ltd.**
 
1,001,214

 
1,346,214

*
TiqIQ, Inc.
 
                        127,971

 
                       127,971

7/1/2017
Subtotal:
8.5%
 $ 3,569,357

 
 $ 3,914,357

 
 
 
 
 
 
 
Wireless
 
 
 
 
 
Azumio, Inc.
 
 $ 289,689

 
 $ 389,689

*
GPShopper, LLC
 
228,440

 
228,440

7/1/2017
Kicksend Holdings
 

 
61,474

*
InfoReach, Inc.
 
                        170,454

 
                       170,454

3/1/2017
Subtotal:
1.7%
 $ 688,583

 
$
850,057

 
 
 
 
 
 
 
Total Loan (Cost of $67,182,044):
119.0%
49,787,497

 
68,982,044

 
Interest Rate Caps (Cost of $69,000)
0.0%
                           2,388

 
                        69,000

 
 
 
 
 
 
 
Total Investment (Cost of $67,251,044)
119.0%
 $ 49,789,885

 
$
69,051,044

 

*As of June 30, 2016, loans with a cost basis of $21.7 million and a fair value of $7.2 million were classified as non-accrual. These loans have been accelerated from their original maturity and are due in their entirety. During the period for which these loans have been on non-accrual status, no interest income has been recognized.

** Indicates assets that the Fund deems "non-qualifying assets” under section 55(a) of the 1940 Act, as amended. 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 June 30, 2016, 8.3% of the Fund’s assets represented non-qualifying assets. As part of this calculation, the denominator consists of all eligible portfolio companies as defined in Section 2(a)(46); the numerator consists of total assets less the assets described in Section 55(a)(7).

*** Indicates assets that are not senior loans.








14



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

 
Percentage
Estimated Fair
 
Par Value
Final
Borrower
of Net Assets
Value 12/31/15
 
Value12/31/15
Maturity Date
Computers & Storage
 
 
 
 
 
Clustrix, Inc.
 
 $ 1,258,439

 
 $ 1,258,439
5/1/2017
D-Wave Systems, Inc. **
 
1,003,360

 
1,003,360
2/1/2017
Gridstore, Inc.
 
913,030

 
913,030
6/1/2017
Veloxum, Inc.
 

 
               416,093
*
Subtotal:
5.4%
 $ 3,174,829

 
 $ 3,590,922
 
 
 
 
 
 
 
Enterprise Networking
 
 
 
 
 
Apprion, Inc.
 
 $ 147,799

 
 $ 147,799
4/1/2016
Subtotal:
0.3%
 $ 147,799

 
 $ 147,799
 
 
 
 
 
 
 
Internet
 
 
 
 
 
CustomMade Ventures Corp.
 
 $ 687,276

 
 $ 687,276
*
DailyFeats, Inc.
 
18,441

 
18,441
1/1/2016
Digital Caddies, Inc. **
 

 
987,584
*
FanBridge, Inc.
 
453,896

 
643,896
*
Giddy Apps, Inc.
 
1,063,297

 
1,063,297
12/1/2017
Giveforward, Inc.
 
406,113

 
406,113
7/1/2017
Grovo Learning, Inc.
 
522,397

 
522,397
3/1/2017
HEXAGRAM 49, Inc.
 
18,716

 
18,716
1/1/2016
InsideVault, Inc.
 
259,715

 
259,715
5/1/2017
Kitsy Lane, Inc.
 
39,441

 
169,441
*
Kiwi Crate, Inc.
 
814,731

 
814,731
4/1/2018
Lightside Games, Inc.
 
54,230

 
127,230
*
Madison Reed, Inc.
 
1,276,132

 
1,276,132
6/1/2018
Monetate, Inc.
 
2,475,198

 
2,475,198
6/1/2018
Navigating Cancer, Inc.
 
184,646

 
184,646
7/1/2016
Osix Corp.
 
57,340

 
57,340
10/1/2016
Piryx, Inc.
 
1,187,196

 
1,467,196
*
Pixalate, Inc.
 
227,339

 
227,339
3/1/2017
Playstudios, Inc.
 
2,065,680

 
2,065,680
6/1/2018
Quantcast Corp.
 
3,404,740

 
3,404,740
4/1/2017
Quri, Inc.
 
1,696,743

 
1,696,743
6/1/2018
Radius Intelligence, Inc.
 
1,257,560

 
1,257,560
10/1/2017
Rivet Games, Inc.
 
63,082

 
130,082
*
Schooltube, Inc.
 

 
108,222
*
Schoola, Inc.
 
102,300

 
102,300
12/1/2016
Smart Lunches, Inc.
 
63,640

 
63,640
6/1/2016
Sociable Labs, Inc.
 
113,422

 
113,422
7/1/2016
THECLYMB
 
870,456

 
870,456
10/1/2017
Weddington Way, Inc.
 
306,628

 
306,628
11/1/2016
WHI, Inc.
 
1,160,565

 
1,160,565
7/1/2017
YouDocs Beauty, Inc.***
 
1,061,305

 
1,192,024
*
Yourmechanic, Inc.
 
               151,324

 
               151,324
7/1/2017
Subtotal:
37.7%
 $ 22,063,549

 
 $ 24,030,073
 

15



 
 
 
 
 
 
Medical Devices
 
 
 
 
 
AxioMed, Inc.
 
 $ 14,238

 
 $ 1,560,238
*
Blockade Medical, LLC
 
347,432

 
347,432
9/1/2017
Hourglass Technology, Inc.
 

 
872,325
*
MimOSA, Inc.
 
109,833

 
209,833
12/1/2016
Redox Medical, Inc.
 
               250,000

 
            3,600,000
*
Subtotal:
1.2%
 $ 721,503

 
 $ 6,589,828
 
 
 
 
 
 
 
Other Healthcare
 
 
 
 
 
Cogito Health, Inc.
 
 $ 309,223

 
 $ 309,223
4/1/2017
Health Integrated, Inc.
 
1,305,577

 
1,305,577
10/1/2017
HealthEquityLabs, Inc.
 
949,393

 
949,393
6/1/2018
Mulberry Health, Inc.
 
3,436,073

 
3,436,073
12/1/2017
Physician Software Systems, LLC
 
321,221

 
321,221
7/1/2017
Practice Fusion, Inc.
 
1,604,096

 
1,604,096
6/1/2016
Project Healthy Living, Inc.
 
444,667

 
444,667
10/1/2016
Therapydia, Inc.
 
352,299

 
352,299
10/1/2017
Urgent Care Centers of New England, Inc.
 
            3,050,202

 
            3,050,202
9/1/2018
Subtotal:
20.1%
 $ 11,772,751

 
 $ 11,772,751
 
 
 
 
 
 
 
Other Technology
 
 
 
 
 
21, Inc.
 
 $ 10,680,985

 
 $ 10,680,985
9/1/2017
Automatic Labs, Inc.
 
401,358

 
401,358
12/1/2016
Beeline Bikes, Inc.
 
89,107

 
89,107
6/1/2017
Daylight Solutions, Inc.
 
1,338,564

 
1,338,564
8/1/2017
eco.logic brands, inc.
 
375,524

 
375,524
6/1/2017
General Assembly, Inc.
 
1,045,212

 
1,045,212
12/1/2016
InsideTrack, Inc.
 
906,204

 
906,204
9/1/2017
LanzaTech New Zealand Ltd.**
 
2,167,522

 
2,167,522
7/1/2016
Lumo BodyTech, Inc.
 
987,135

 
987,135
12/1/2017
Neuehouse, LLC
 
2,609,757

 
2,609,757
7/1/2017
nWay, Inc.
 
1,049,777

 
1,049,777
3/1/2018
Pinnacle Engines, Inc.
 
870,363

 
870,363
12/1/2017
Prana Holdings, Inc.
 
2,280,795

 
2,280,795
7/1/2016
Scoot Networks, Inc.
 
253,204

 
253,204
3/1/2017
Skully, Inc.
 
161,357

 
161,357
7/1/2017
Sproutling, Inc.
 
483,241

 
483,241
1/15/2016
Tribogenics, Inc.
 
471,201

 
471,201
9/1/2016
Zeachem
 

 
3,023,095
*
YPX Cayman Holdings Co. **
 
               177,626

 
               177,626
4/1/2016
Subtotal:
45.0%
 $ 26,348,932

 
 $ 29,372,028
 
 
 
 
 
 
 
 
 
 
 
 
 
Security
 
 
 
 
 
Agari Data, Inc.
 
 $ 734,959

 
 $ 734,959
9/1/2017
Guardian Analytics, Inc.
 
2,124,840

 
2,124,840
2/1/2019
Uplogix, Inc.
 
               421,843

 
            1,121,843
*
Subtotal:
5.6%
 $ 3,281,642

 
 $ 3,981,642
 
 
 
 
 
 
 

16



Software
 
 
 
 
 
3Scale, Inc.
 
 $ 594,565

 
 $ 594,565
9/1/2017
Appconomy, Inc.
 
400,000

 
1,839,362
*
Atigeo Corporation
 
2,088,385

 
2,088,385
9/1/2017
Beanstock Media, Inc. ***
 
85,000

 
1,322,744
*
BlazeMeter, Inc. **
 
697,581

 
697,581
1/1/2018
ClearPath, Inc.
 
95,856

 
95,856
5/1/2016
Clypd, Inc.
 
291,458

 
291,458
11/1/2016
Corduro, Inc.
 
12,212

 
102,212
*
Encoding.com, Inc.
 
239,707

 
239,707
11/1/2016
gloStream, Inc.
 
786,295

 
1,086,295
*
Innerworkings, Inc.
 

 
326,744
*
MediaPlatform, Inc.
 
165,244

 
165,244
9/1/2016
Mintigo, Inc.**
 
1,048,984

 
1,048,984
1/1/2018
Nectar Holdings, Inc.
 
872,439

 
872,439
12/1/2017
OrderGroove, Inc.
 
704,374

 
704,374
12/1/2017
Palantir Technologies, Inc.
 
1,865,160

 
1,865,160
4/1/2016
SCVNGR, Inc.
 
887,926

 
887,926
10/1/2016
SoundHound, Inc.
 
2,026,388

 
2,026,388
5/1/2017
STG-Impact Holdings Corp.
 
2,094,582

 
2,094,582
1/21/2016
StreetLight Data, Inc.
 
378,297

 
378,297
4/1/2017
Top Hat Monocle Corp.**
 
253,954

 
253,954
7/1/2016
Workspot, Inc.
 
78,658

 
78,658
9/1/2016
ZeroTurnaround USA, Inc.**
 
            1,252,981

 
            1,252,981
6/1/2018
Subtotal:
28.9%
 $ 16,920,046

 
 $ 20,313,896
 
 
 
 
 
 
 
Technology Services
 
 
 
 
 
Akademos, Inc.***
 
 $ 598,955

 
 $ 598,955
6/1/2017
Amped, Inc.
 
1,036,377

 
1,036,377
11/1/2017
BidPal, Inc.
 
229,075

 
229,075
7/1/2016
Blazent, Inc.
 
184,686

 
184,686
5/1/2016
Blue Technologies Limited**
 
453,140

 
453,140
6/1/2017
BountyJobs, Inc.
 
332,991

 
332,991
10/1/2017
Callisto Media, Inc.
 
248,078

 
248,078
9/1/2016
FSA Store, Inc.
 
833,766

 
833,766
9/1/2017
Grassroots Unwired, Inc.
 
27,182

 
27,182
8/1/2016
Maxi Mobility, Inc.
 
63,044

 
63,044
7/1/2016
Rated People, Ltd.**
 
1,050,689

 
1,395,689
*
Stackstorm, Inc.
 
211,072

 
211,072
1/1/2018
TiqIQ, Inc.
 
               172,041

 
               172,041
7/1/2017
Subtotal:
9.3%
 $ 5,441,096

 
 $ 5,786,096
 
 
 
 
 
 
 
Wireless
 
 
 
 
 
Azumio, Inc.
 
 $ 372,598

 
 $ 472,598
*
GPShopper, LLC
 
317,990

 
317,990
7/1/2017
InfoReach, Inc.
 
264,276

 
264,276
3/1/2017

17



Kicksend Holdings
 
31,476

 
61,475
*
SpiderCloud Wireless, Inc.
 
            4,147,495

 
            4,147,495
7/1/2017
Subtotal:
8.8%
$
5,133,835

 
 $ 5,263,834
 
 
 
 
 
 
 
Total Loan (Cost of $109,048,869)
162.4%
95,005,982

 
110,848,869
 
 
 
 
 
 
 
Interest Rate Caps (Cost of $115,000)
0.0%
               25,340

 
             115,000
 
 
 
 
 
 
 
Total Investment (Cost of $109,163,869)
162.4%
 $ 95,031,322

 
 $ 110,963,869
 

*As of December 31, 2015, loans with a cost basis of $20.9 million and a fair value of $7.0 million were classified as non-accrual. These loans have been accelerated from their original maturity and are due in their entirety. During the period for which these loans have been on non-accrual status, no interest income has been recognized.

** Indicates assets that the Fund deems "non-qualifying assets” under section 55(a) of the 1940 Act, as amended. 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, 8.3% of the Fund’s assets represented non-qualifying assets. As part of this calculation, the denominator consists of all eligible portfolio companies as defined in Section 2(a)(46); the numerator consists of total assets less the assets described in Section 55(a)(7).

*** 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 or growth 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 June 30, 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 that of Akademos, Inc. which is subordinate.

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 generally subject to credit risk associated with such companies.

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 June 30, 2016 and June 30, 2015, the weighted-average interest rate on the performing loans was 19.64% and 21.58%, respectively. For the six months ended June 30, 2016 and June 30, 2015, the weighted-average interest rate on the performing loans was 17.01% and 20.07%, respectively. These rates were inclusive of both cash and non-cash interest income. For the three months ended June 30, 2016 and June 30, 2015, the weighted-average interest rate on the cash portion of the interest income was 14.32% and 16.73%, respectively. For the six months ended June 30, 2016 and June 30, 2015, the weighted-average interest rate on the cash portion of the interest income was 12.50% and 15.36%, 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.


18



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 adjustment made to the individual loans. 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 June 30, 2016 were pledged as collateral for the debt facility, and the Fund's borrowings are subsequently collateralized by all assets of the Fund.

As of June 30, 2016 and December 31, 2015, the Fund had unexpired unfunded commitments to borrowers of $0 million and $1.8 million, respectively.


Valuation Hierarchy
 
Under 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 June 30, 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 June 30, 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.

19



Investment Type
 
 
 
 
 
 
 
 
- Level 3
 
Fair Value at
 
Valuation Techniques/
 
 
 
Weighted Average/
Debt Investments
 
6/30/2016
 
Methodologies
 
Unobservable Input
 
Amount/Range
Computer & Storage
 
$
2,028,090

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
20%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0
 
 
 
 
 
 
 
 
 
Enterprise Networking
$
72,266

 
Liquidation
 
Investment Collateral
 
$72,266
 
 
 
 
 
 
 
 
 
Internet
 
$
14,521,354

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0- $1,182,986
 
 
 
 
 
 
 
 
 
Medical Devices
 
$
635,426

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$14,238-$250,000
 
 
 
 
 
 
 
 
 
Other Healthcare
 
$
7,843,473

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
13%
 
 
 
 
 
 
 
 
 
Other Technology
 
$
9,680,196

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
20%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0-$252,702
 
 
 
 
 
 
 
 
 
Security
 
$
2,727,231

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
18%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software
 
$
8,021,521

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0-$700,066
 
 
 
 
 
 
 
 
 
Technology Services
 
$
3,569,357

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
17%
 
 
 
 
Liquidation
 
Investment Collateral
 
$1,001,214
 
 
 
 
 
 
 
 
 
Wireless
 
$
688,583

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0- $289,689
 
 
 
 
 
 
 
 
 
Total
 
$49,787,497
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Investment Type
 
 
 
 
 
 
 
 
- Level 3
 
Fair Value at
 
Valuation Techniques/
 
 
 
Weighted Average/
Debt Investments
 
12/31/2015
 
Methodologies
 
Unobservable Input
 
Amount/Range
 
 
 
 
 
 
 
 
 
Computer & Storage
 
3,174,829

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
20%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0
 
 
 
 
 
 
 
 
 
Internet
 
$22,063,549
 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0- $1,187,196
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Healthcare
 
11,772,751

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
14%
 
 
 
 
 
 
 
 
 
Other Technology
 
26,348,932

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0
 
 
 
 
 
 
 
 
 
Security
 
3,281,642

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
17%
 
 
 
 
Liquidation
 
Investment Collateral
 
$412,843
 
 
 
 
 
 
 
 
 
Software
 
$16,920,046
 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0- $786,295
 
 
 
 
 
 
 
 
 
Technology Services
 
5,441,096

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
16%
 
 
 
 
Liquidation
 
Investment Collateral
 
$1,050,689
 
 
 
 
 
 
 
 
 
Wireless
 
5,133,835

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$31,476-$372,598
 
 
 
 
 
 
 
 
 
Other (*)
 
869,302

 
Hypothetical Market Analysis
 
Hypothetical Market Coupon Rate
 
17%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0-$250,000
 
 
 
 
 
 
 
 
 
Total
 
95,005,982
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(*) Other loans are comprised of companies in Enterprise Networking and Medical Device industries.

20




The following table presents the balances of assets as of June 30, 2016 and December 31, 2015 measured at fair value on a recurring basis:

As of June 30, 2016
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS:
 
 
 
 
 
 
 
Loans*
$

 
$

 
$
49,787,497

 
$
49,787,497

Interest Rate Caps

 
2,388

 

 
2,388

Cash equivalents
4,820,274

 

 

 
4,820,274

Total
$
4,820,274

 
$
2,388

 
$
49,787,497

 
$
54,610,159

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

 
$

 
$
95,005,982

 
$
95,005,982

Interest Rate Caps

 
25,340

 

 
25,340

Cash equivalents
2,646,011

 

 

 
2,646,011

Total
$
2,646,011

 
$
25,340

 
$
95,005,982

 
$
97,677,333

 
 
 
 
 
 
 
 

*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 June 30, 2016
 
For the Six Months Ended June 30, 2016
 
Loans
Warrants
Stock
Conv. Note
 
Loans
Warrants
Stock
Conv. Note
Beginning balance
$
68,911,671

$

$

$

 
$
95,005,982

$

$

$

Acquisitions and originations

23,743

193,151

83,407

 

30,172

193,151

83,407

Principal reductions
(15,945,133
)



 
(40,832,694
)



Distribution to shareholder
 
(23,743
)
(193,151
)
(83,407
)
 

(30,172
)
(193,151
)
(83,407
)
Net change in unrealized loss from investments
(3,187,001
)



 
(3,351,660
)



Net realized loss from investments
7,960




 
(1,034,131
)



Ending balance
$
49,787,497

$

$

$

 
$
49,787,497

$

$

$

Net change in unrealized loss on investments relating to investments still held at June 30, 2016
$
(3,187,001
)
 
 
 
 
$
(5,053,986
)
 
 
 


21



 
For the Three Months Ended June 30, 2015
 
For the Six Months
Ended June 30, 2015
 
Loans
Warrants
 
Loans
Warrants
Stock
Conv. Note
Beginning balance
$
183,481,397

$

 
$
227,745,693

$

$

$

Acquisitions and originations
1,250,000

147,011

 
3,362,500

563,961

642,227

250,000

Principal reductions
(37,622,210
)

 
(78,457,978
)



Distribution to shareholder
 
(147,011
)
 

(563,961
)
(642,227
)
(250,000
)
Net change in unrealized loss from investments
(4,448,691
)

 
(8,971,688
)



Net realized loss from investments
(410,929
)

 
(1,428,960
)



Ending balance
$
142,249,567

$

 
$
142,249,567

$

$

$

Net change in unrealized loss on investments relating to investments still held at June 30, 2015
$
(4,925,000
)
 
 
$
(10,980,478
)
 
 
 

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 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 June 30, 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 June 30, 2016, was $294.0 million.  Total contributed capital to the Company through June 30, 2016 and December 31, 2015 was $279.3 million, of which $241.5 million was contributed to the Fund.  The remaining $14.7 million in committed capital as of June 30, 2016 expired in June 2015 as the five year anniversary passed. No further capital can be called.  

The chart below shows the distributions of the Fund for the six months ended June 30, 2016 and 2015.
 
For the Six Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2015
Cash distributions
$
16,000,000

 
$
53,000,000

Distributions of equity securities
306,730

 
1,456,188

 
 
 
 
Total distributions to shareholder
$
16,306,730

 
$
54,456,188


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.

22




7. DEBT FACILITY

The Fund established a secured revolving loan facility in an amount of up to $160 million with Union Bank, N.A., Wells Fargo Bank, N.A. and Bank Leumi USA on September 23, 2011 (the "Loan Agreement").  Borrowings under the Loan Agreement are collateralized by all of the assets of the Fund. The Fund will pay interest on its borrowings, and will also pay a fee on the unused portion of the facility.

The Loan Agreement was extended on September 23, 2014 and then amended and restated in its entirety on September 30, 2014, reducing the size to $120 million, and securing an initial 12-month repayment plan and a subsequent 18-month amortized repayment plan. The size of the facility was reduced to $84 million on April 15, 2015, $74 million on June 12, 2015, $64 million on July 21, 2015 and $54 million on August 20, 2015, and by $3 million per month from October 23, 2015 to April 23, 2016, by $10 million on May 18, 2016, by $2.1 million on May 23, 2016 and June 23, 2016. The facility was paid off and the Fund terminated the facility on August 5, 2016.

Amounts borrowed under the Loan Agreement may be, at the option of the Fund, either Reference Rate loans or LIBOR loans at an annual rate of either LIBOR plus 2.75% or the Reference Rate plus 1.75%. Reference Rate Loan is defined as a Loan bearing interest at the highest of: (a) the Federal Funds Rate for such day plus one percent (1.0%), and (b) the rate most recently announced by Union Bank, N.A at its corporate headquarters as the “Union Bank, N.A. Reference Rate”. LIBOR Rate Loan is defined as a Loan bearing interest at the prevailing LIBOR rate determined by Union Bank, N.A. to be the per annum rate (rounded upward to the nearest one-hundredth of one percent (1/100%)) at which Dollar deposits in immediately available funds and in lawful money of the United States would be offered to Union Bank, N.A., on behalf of Union Bank, N.A., Wells Fargo Bank, N.A. and Bank Leumi USA, outside of the United States at approximately 11:00 a.m. (LIBOR time) three (3) Business Days before the first day of such LIBOR Loan Period, in an amount approximately equal to the principal amount of, and for a length of time approximately equal to the LIBOR Loan Period for, the LIBOR Loan sought by the Fund. As of June 30, 2016, all of the Fund’s borrowings were based on the LIBOR rate.

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. The Fund pays an unused line fee of 0.325% of the total unused commitment amount on a quarterly basis. As of June 30, 2016, the LIBOR rate is as follows:
1 month LIBOR
0.4651
%
3 month LIBOR
0.6541
%

Bank fees of $280,000 and legal fees of $59,983 were incurred in connection with the renewal of the facility on September 30, 2014. The bank fees and other costs incurred are capitalized and amortized to interest expense on a straight line basis over the expected life of the facility. Fees and costs previously incurred under the facility have been fully amortized.

The following is the summary of the outstanding facility draws as of June 30, 2016:
Roll-Over Date
Amount
 
Maturity Date
All-In Interest Rate **
June 14, 2016
$
13,600,000

*
July 14, 2016
3.20%
TOTAL OUTSTANDING
$
13,600,000

 
 
 
* $9.3 million was paid on July 14, 2016 and the remaining $4.3 million loan amount was subsequently paid off on August 5, 2016.
** Inclusive of 2.75% applicable LIBOR margin plus LIBOR rate.




23



8. INTEREST RATE CAP AGREEMENT

On September 30, 2014, the Fund has entered into two interest rate cap contracts with MUFG Union Bank, N.A. and Wells Fargo Bank, N.A. to cap floating interest rates at 0.7%. The purpose of the interest rate cap contract is to protect the Fund against rising interest rates, as the Fund originates loans with fixed interest rates. There were not any additional contracts entered into since September 30, 2014. The notional principal amount decreases as the expected outstanding balance under the debt facility decreases. As of June 30, 2016, the notional principal amount was $18.0 million. The Fund paid upfront fees of $230,000 which are amortized on a straight line basis over the life of the instrument and receives from the counterparty a payment of interest amounts above the 0.7% cap based on 30-day LIBOR. Payments, if necessary are made monthly and will terminate on March 23, 2017. As of June 30, 2016, the 30 day LIBOR rate was 0.4651%.

The average notional amount outstanding was $21.3 million and $59.0 million for the three months ended June 30, 2016 and June 30, 2015. The average notional amount outstanding was $25.4 million and $66.3 million for the six months ended June 30, 2016 and June 30, 2015.

As of June 30, 2016 and December 31, 2015, the fair value of the Fund's derivative financial instruments was as follows:
 
 
Asset Derivatives
 
 
June 30, 2016
 
 
December 31, 2015
Derivatives:
 
Condensed Statement of Assets and Liabilities
 
Fair Value
 
 
Condensed Statement of Assets and Liabilities
 
Fair Value
Interest rate cap agreement
 
Interest Rate Caps
 
$
2,388

 
 
Interest Rate Caps
 
$
25,340



For the three and six months ended June 30, 2016 and June 30, 2015, the derivative financial instruments had the following effect on the Condensed Statements of Operations:

 
 
 
 
For the three months ended
 
For the six months ended
Derivatives
 
Condensed Statements of Operations
 
June 30, 2016
June 30, 2015
 
June 30, 2016
June 30, 2015
Interest rate cap agreement
 
Net change in unrealized loss from hedging activities
 
$18,655
$1,201
 
$23,048
$(52,182)

9.  FINANCIAL HIGHLIGHTS

GAAP requires disclosure of financial highlights of the Fund for the periods presented, the three and six months ended June 30, 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.


24



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 June 30, 2016
 
For the Three Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
Total return **
(3.07
)%
 
1.95
%
 
(1.33
)%
 
3.97
%
 
 
 
 
 
 
 
 
Per share amounts:
 
 
 
 
 
 
 
   Net asset value, beginning of period
$
434.90

 
$
1,162.24

 
$
585.05

 
$
1,370.15

   Net investment income
18.27

 
67.98

 
40.21

 
149.11

   Net realized and change in unrealized
 
 
 
 
 
 
 
   loss from investments and
 
 
 
 
 
 
 
   hedging activities
(31.61
)
 
(48.59
)
 
(43.63
)
 
(104.54
)
   Net increase (decrease) in net assets
(13.34
)
 
19.39

 
(3.42
)
 
44.57

   from operations
 
 
 
 
 
 
 
   Distributions of income to shareholder
(18.35
)
 
(63.87
)
 
(29.86
)
 
(134.81
)
   Return of capital to shareholder
15.35

 
(247.60
)
 
(133.21
)
 
(409.75
)
 
 
 
 
 
 
 
 
Net asset value, end of period
$
418.56

 
$
870.16

 
$
418.56

 
$
870.16

 
 
 
 
 
 
 
 
Net assets, end of period
$
41,855,879

 
$
87,016,263

 
$
41,855,879

 
$
87,016,263

 
 
 
 
 
 
 
 
Ratios to average net assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses*
6.74
 %
 
6.85
%
 
6.63
 %
 
6.91
%
Net investment income*
16.81
 %
 
26.94
%
 
16.19
 %
 
25.98
%
Portfolio turnover rate
0
 %
 
0
%
 
0
 %
 
0
%
Average debt outstanding
$
22,050,000

 
$
77,425,000

 
$
28,100,000

 
$
87,100,000

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

25



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 Venture Lending & Leasing VI, Inc. (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 Venture Lending & Leasing VI, LLC (the “Company”).  The Fund's shares of Common Stock, at $0.001 par value, were sold to its 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 will not make additional capital contributions to the Fund.

The Fund is a financial services company primarily providing financing and advisory services to a variety of carefully selected venture-backed companies primarily located throughout the United States with a focus on growth-oriented companies.  The Fund's portfolio is well 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 our portfolio companies to finance acquisitions of fixed assets and/or for working capital.  On June 29, 2010, 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 Regulated Investment Company ("RIC") under the Internal Revenue Code with the filing of its federal corporate income tax return for 2010.  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 Internal Revenue 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 were 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 distributes these warrants to its

26



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 primarily 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 V, Inc. (“Fund V”)

The Manager also served as investment manager for Fund V, which was dissolved on August 6, 2014 and no longer funded any commitments. However, prior to the dissolution of Fund V, the Fund's Board of Directors determined that so long as Fund V has capital available to invest in loan transactions with final maturities earlier than December 31, 2015 (the date on which Fund V was planned to be dissolved), the Fund will invest in each portfolio company in which Fund V invests (“Investments”). Initially the amount of each Investment was allocated 50% to the Fund and 50% to Fund V so long as Fund V had capital available to invest. After February 2011, Fund V was no longer permitted to enter into new commitments to borrowers. The Fund commenced its investment period on June 29, 2010 and after June 29, 2014, the Fund was no longer permitted to enter into new commitments to borrowers; and all commitments have expired.

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

The Manager also serves as investment manager for Fund VII. The Fund's Board of Directors determined that so long as the Fund has capital available to invest in loan transactions with final maturities earlier than December 31, 2020 (the date on which the Fund will be dissolved), the Fund had invested in each portfolio company in which Fund VII invested (“Investments”). Initially the amount of each Investment had been allocated 50% to the Fund and 50% to Fund VII so long as the Fund has capital available to invest. The Fund commenced its investment period on June 29, 2010 and after June 29, 2014, the Fund was no longer permitted to enter into new commitments to borrowers; and all commitments have expired.

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 change in net assets resulting from operations as well as assets.

Results of Operations - For the Three and Six Months Ended June 30, 2016 and 2015

Total investment income for the three months ended June 30, 2016 and 2015 was $2.6 million and $8.5 million, respectively, which primarily consisted of interest on the venture loans outstanding. Total investment income for the six months ended June 30, 2016 and 2015 was $5.7 million and $18.9 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, forfeited commitment fees, and fees earned from waivers to loan agreements. The decrease in investment income was due to the decrease in the average loans outstanding from $157.3 million for the

27



three months ended June 30, 2015 to $52.1 million for the three months ended June 30, 2016 and from $179.6 million for the six months ended June 30, 2015 to $64.6 million for the six months ended June 30, 2016. This decrease was also because of the decrease in average interest rates from 21.58% for the three months ended June 30, 2015 to 19.64% for the three months ended June 30, 2016 and from 20.07% for the six months ended June 30, 2015 to 17.01% for the six months ended June 30, 2016. Interest is calculated using the effective interest method, and rates earned by the Fund will fluctuate based on many factors including volatility of values ascribed to warrants, and new loans funded during the year and early payoffs.

Management fees for the three months ended June 30, 2016 and 2015 were $0.3 million and $1.0 million, respectively. Management fees for the six months ended June 30, 2016 and 2015 were $0.8 million and $2.3 million, respectively. Management fees are calculated as 2.5 percent of the Fund's total assets. Management fees decreased because assets under management as of June 30, 2016 were lower than assets as of June 30, 2015.

Total interest expense was $0.2 million and $0.6 million for the three months ended June 30, 2016 and 2015, respectively. Total interest expense was $0.6 million and $1.4 million for the six months ended June 30, 2016 and 2015, respectively. Interest expense decreased primarily due to the decreased average borrowings, which decreased from $77.4 million for the three months ended June 30, 2015 to $22.0 million for the three months ended June 30, 2016 and from $87.1 million for the six months ended June 30, 2015 to $28.1 million for the six months ended June 30, 2016. These decreases in interest expense is offset by the rise in interest expense percentage from 3.33% for the three months ended June 30, 2015 to 4.48% for the three months ended June 30, 2016, and from 3.25% for the six months ended June 30, 2015 to 4.18% for the six months ended June 30, 2016.

Total banking and professional fees were $0.1 million for the three months ended June 30, 2016 and 2015, respectively. Total banking and professional fees were $0.2 million for the six months ended June 30, 2016 and 2015, respectively. The banking and professional fees were comprised of legal, audit, banking and other professional fees. The decrease was primarily due to lower accounting and legal fees.

Total other operating expenses were less than $0.1 million for the three months ended June 30, 2016 and 2015. Total other operating expenses were less than $0.1 million for the six months ended June 30, 2016 and 2015.

Net investment income for the three months ended June 30, 2016 and 2015, was $1.8 million and $6.8 million, respectively. Net investment income for the six months ended June 30, 2016 and 2015, was $4.0 million and $14.9 million, respectively

Net realized gain (loss) from investments was less than $0.1 million and ($0.4 million) for the three months ended June 30, 2016 and 2015, respectively. Net realized loss from investments was $1.0 million and $1.4 million for the six months ended June 30, 2016 and 2015, respectively.

Net change in unrealized loss from investments was $3.2 million and $4.4 million for the three months ended June 30, 2016 and 2015, respectively. Net change in unrealized loss from investments was $3.4 million and $9.0 million for the six months ended June 30, 2016 and 2015, respectively. The unrealized loss consists of fair market value adjustments to loans.

Net change in unrealized gain from hedging activities was less than $0.1 million for the three months ended June 30, 2016 and 2015. Net change in unrealized gain (loss) from hedging activities was less than $0.1 million and ($0.1 million) for the six months ended June 30, 2016 and 2015, respectively. The unrealized gain (loss) consists of the unrealized losses from hedging activities. The Fund entered into interest rate swap transactions with Union Bank, N.A and Wells Fargo Bank, N.A. to convert floating rate liabilities to fixed rates, which terminated on September 23, 2014. On September 30, 2014, the Fund entered into interest rate cap transactions with Union Bank, N.A and Wells Fargo Bank, N.A. to cap the floating rate liabilities at a fixed rate (see Note 8 in the Fund's financial statements).


28



Net increase (decrease) in net assets resulting from operations for the three months ended June 30, 2016 and 2015 was $(1.3) million and $1.9 million, respectively. Net increase (decrease) in net assets resulting from operations for the six months ended June 30, 2016 and 2015 was $(0.3) million and $4.5 million, respectively. On a per share basis, the net increase (decrease) in net assets resulting from operations was $(13.34) and $19.39 for the three months ended June 30, 2016 and 2015, respectively. On a per share basis, the net increase (decrease) in net assets resulting from operations was $(3.42) and $44.57 for the six months ended June 30, 2016 and 2015, respectively.

Liquidity and Capital Resources – June 30, 2016 and December 31, 2015

Total capital contributed to the Fund was $241.5 million, prior to distribution of capital, as of June 30, 2016. Committed capital to the Company at June 30, 2016 was $294.0 million, of which $279.3 million had been called.  The remaining $14.7 million in committed capital as of June 30, 2016 expired in June 2015 as the five year anniversary passed. No further capital can be called.

The Fund established a secured revolving debt facility in an amount of up to $160 million with Union Bank, N.A., Wells Fargo Bank, N.A. and Bank Leumi USA. The facility was extended through March 23, 2017 and the amount available was reduced to $120 million. The size of the facility was further reduced to $19 million and $45 million as of June 30, 2016 and December 31, 2015 respectively. The Fund continued to reduce the facility because of borrowing base limits. As of June 30, 2016 and December 31, 2015, the outstanding balance under the facility was $13.6 million and $40.4 million, respectively. Subsequent to the quarter-end, the Fund paid off and terminated the facility effective August 5, 2016.

As of June 30, 2016 and December 31, 2015, 9% and 3%, respectively, of the Fund's assets consisted of cash and cash equivalents.  The Fund invested its assets in venture loans during the six months ended June 30, 2016. No loans were disbursed during the six months ended June 30, 2016.  Net loan amounts outstanding after amortization and fair market adjustment decreased by approximately $45.2 million for the same period.  There were no unexpired, unfunded commitments as of June 30, 2016.
 
 
 
 
 
 
 
 
As of
Cumulative Amount
Disbursed
Principal
Reductions and Fair
Market Adjustments
Balance
Outstanding - Fair
Value
Unexpired
Unfunded
Commitments
 
 
June 30, 2016
$715.4 million
$665.6 million
$49.8 million

 
 
December 31, 2015
$715.4 million
$620.4 million
$95.0 million
$1.8 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 requirements to qualify for the special pass-through status available to RICs under the Internal Revenue 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 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.


29



The Fund has adequate cash reserves and approximately $35.6 million in scheduled receivable payments over the next year.  These amounts are sufficient for operational expenses of the Fund over the next year.  Since the Fund is no longer making new commitments, liquidity demands will continue to decrease. 

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 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 distributes all equity investments 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. As of June 30, 2016, the outstanding debt balance was $13.6 million with interest based on a LIBOR interest rate of 0.45%, for which the Fund had an interest rate cap in place at 0.70% on a balance of $18.0 million.

Because all of the Fund’s loans have a fixed interest rate upon funding, changes in interest rates will not directly affect interest income with regard to the portfolio of loans as of June 30, 2016, but could potentially change the Fund’s ability to engage in investment activities. Changes in interest rates could also affect interest on the Funds short-term investments and realized gain (loss) from hedging.

Based on the Fund’s Condensed Statement of Assets and Liabilities as of June 30, 2016, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in investments and cash balances.

Effect of Interest rate change by

Other Interest and Other Income

Total Income

(0.5)%
$(24,101)
$(24,101)
1.0%
48,203
48,203
2.0%
96,405
96,405
3.0%
144,608
144,608
4.0%
192,811
192,811
5.0%
$241,014
$241,014

Additionally, a change in the interest rate may affect the value of the interest rate cap and Net Change in Unrealized Gain (Loss) from hedging activities.  The amount of any such effect will be contingent upon market expectations for future interest rate changes.  Any increases in expected future rates will increase the value of the interest rate cap while any rate decreases will decrease the value.


30



Because the Fund paid off its loan facility subsequent to June 30, 2016 and does not plan to borrow in the future, a significant change in market interest rates will not have a material effect on the Fund’s interest expense

Although we believe that the foregoing analysis is indicative of the Fund’s sensitivity to interest rate changes, it does not take into consideration potential changes in the credit market, credit quality, size and composition of the assets in the portfolio. It also does not assume any repayments from borrowers or defaults on borrowings. Accordingly, no assurances can be given that actual results would not differ materially from the table above.


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.  

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 six months ended June 30, 2016.

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

Prior to the Fund's commencement of operations on June 29, 2010, the Fund sold 100,000 shares to the Fund's sole shareholder, the Company, for $25,000 in January 2010.  No other shares of the Fund have been sold; however, the Fund received an additional $241.5 million of paid in capital during the period from June 29, 2010 through June 30, 2016 which was 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 January 11, 2010, incorporated by reference to the Fund's Form 10 filed with the Securities and Exchange Commission on February 9, 2010.
3(ii)
Bylaws of the Fund, incorporated by reference to the Fund's Form 10 filed with the Securities and Exchange Commission on February 9, 2010.
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 February 9, 2010.
31.1-32.2
Certifications pursuant to The Sarbanes-Oxley Act of 2002 (Rule 13a-14 and Section 1350 Certifications).


31



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 VI, 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:
August 12, 2016
Date:
August 12, 2016


32



EXHIBIT INDEX

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


          









33