Attached files

file filename
EX-32.2 - VLL7INC 10-K 12.31.17 EXHIBIT 32.2 - Venture Lending & Leasing VII, Inc.vll710k12312017ex322.htm
EX-32.1 - VLL7INC 10-K 12.31.17 EXHIBIT 32.1 - Venture Lending & Leasing VII, Inc.vll710k12312017ex321.htm
EX-31.2 - VLL7INC 10-K 12.31.17 EXHIBIT 31.2 - Venture Lending & Leasing VII, Inc.vll710k12312017ex312.htm
EX-31.1 - VLL7INC 10-K 12.31.17 EXHIBIT 31.1 - Venture Lending & Leasing VII, Inc.vll710k12312017ex311.htm


FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the year ended December 31, 2017
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
Commission File Number 814-00969
VENTURE LENDING & LEASING VII, INC.
(Exact name of registrant as specified in its charter)

Maryland
45-5589518
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

104 La Mesa Drive, Suite 102, Portola Valley, CA 94028
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:  (650) 234-4300

Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant has (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K: [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “accelerated filer, “large accelerated filer,” “smaller reporting company, and “emerging growth company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [x]
Smaller reporting company [ ]
Emerging growth company [x]

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





Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [ ] No [X]
As the registrant's shares are not publicly-traded, the aggregate market value of the voting stock held by non-affiliates of the registrant cannot be determined.
The number of shares outstanding of each of the issuer's classes of common stock, as of March 16, 2018 was 100,000.




Documents Incorporated by Reference
                                                                    
Document Description
 
10-K Part
Specifically Identified Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
May 9, 2018
III

3




PART I.
ITEM 1.
BUSINESS
Introduction.
Venture Lending & Leasing VII, Inc. (the “Fund”) was incorporated in Maryland on June 21, 2012, as a non-diversified, closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”). The Fund is a wholly owned subsidiary of Venture Lending & Leasing VII, LLC, a Delaware limited liability company (the “Company”). The Fund's investment objective is to achieve a superior risk-adjusted investment return. The Fund will primarily provide debt financing to carefully selected venture capital-backed companies, generally in the form of secured loans. Secondarily, the Fund may invest in special situations, which are expected to consist principally of convertible and subordinated debt instruments of public and late-stage private companies. In most cases, the Fund will receive warrants to acquire equity securities of the companies in which the Fund invests in connection with the Fund's loans. Prior to commencing its operations on December 18, 2012, the Fund had no operations other than the sale of 100,000 shares of common stock, at $0.001 par value to the Company for $25,000 in July 2012. As of December 31, 2017, the Fund meets the requirements, including diversification requirements, to qualify as a Regulated Investment Company (“RIC”) under the Internal Revenue Code of 1986.
The Fund's shares of Common Stock, $.001 par value (“Shares”) are held entirely by the Company. As capital is required to finance the acquisition of loans, additional capital is provided by the Company.
Investment Program.
General. The Fund's primary investment strategy is to provide debt financing, in the form of secured loans, to carefully selected companies backed by venture capital investors, microVC funds, strategic investors and angel investors. Secondarily, up to 20% of the aggregate cost of all investments of the Fund (determined cumulatively over the life of the Fund) may be used for special situation investments, which are expected to consist principally of convertible and subordinated debt financing to public and late-stage private companies. In most cases, the Fund will receive warrants to acquire equity securities in connection with its venture loans. The Fund also may directly purchase equity securities of venture-backed companies (including equity securities of companies whose loans are held by the Fund). The Fund also may make direct investments in equity securities having an aggregate cost of up to 10% of the aggregate amount of all investments of the Fund determined cumulatively over the life of the Fund. The Fund will make available significant managerial assistance through its officers to certain companies whose securities are held in the Fund’s portfolio, as described herein under the caption “Regulation.”
As a BDC, the Fund must invest at least 70% of its total assets in qualifying assets (“Qualifying Assets”) consisting of (a) interests in Eligible Portfolio Companies and (b) certain other assets including cash and cash equivalents. An "Eligible Portfolio Company" is a United States company that is not an investment company, as defined, or excluded from the definition of an investment company, in Section 3 of the 1940 Act, and that either: (i) does not have a class of securities listed on a national securities exchange, or does have a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million; or (ii) is actively controlled by a BDC and has an affiliate of a BDC on the Eligible Portfolio Company’s Board of Directors; or (iii) has total assets of not more than $4 million and capital and surplus of not less than $2 million; or (iv) meets such other criteria as may be established by the Securities and Exchange Commission ("SEC"). Control under the 1940 Act is presumed to exist where a BDC owns more than 25% of the outstanding voting securities of the Eligible portfolio company. Also included in Qualifying Assets are follow-on investments in a company that met the definition of Eligible Portfolio Company at the time of the Fund’s initial investment, but subsequently does not meet such definition because it has a class of securities listed on a national securities exchange, if, at the time of the follow-on investment, the Fund (a) owns at least 50% of (i) the greatest number of equity securities of such company, including securities convertible into or exchangeable for such securities, and (ii) the greatest amount of certain debt securities of such company held by the Fund at any time during the period when such company was an Eligible Portfolio Company, and (b) is one of the twenty largest holders of record of the company’s outstanding voting securities. The Fund may invest up to 30% of its total assets in non-Qualifying Assets, including interests in companies that are not Eligible Portfolio Companies (for example, because the company’s securities are quoted on the NASDAQ Global Market (“NASDAQ”)) and Eligible Portfolio Companies as to which the Fund does not offer to make available significant managerial assistance. As of December 31, 2017, the percentage of non-qualifying investments in the Fund was 7.0%.
BDCs cannot acquire any assets other than those Qualifying Assets described in subparagraphs (1) through (8) below unless, at the time of the acquisition, the assets described in subparagraphs (1) through (8) below represent at least 70% of the value of the BDC's total assets (the “70% basket”). Below is a general summary of Qualifying Assets in which the Fund may invest.
1.  Securities issued in transactions not involving a public offering from issuers which are Eligible Portfolio Companies (including affiliated persons or persons that have been affiliated persons within the preceding 13 months) or from any other person, subject to such rules and regulations as the Commission may prescribe.
2.  Securities purchased in transactions not involving any public offering from an issuer, or from any person who is an officer or employee of the issuer, if the issuer is a U.S. company that is not an investment company, but the issuer is not an Eligible Portfolio Company because it has issued a class of margin securities that is eligible for margin loans, and at the time of purchase the BDC owns at least 50% of (i) the greatest number of equity securities (on a fully diluted basis) of the issuer and (ii) the greatest amount of such issuer's debt securities

4



held by the BDC at any point in time during the period when such issuer was an Eligible Portfolio Company, and, (iii) the BDC is one of the 20 largest holders of the issuer's outstanding voting securities.
3.  Securities of any Eligible Portfolio Company that is controlled by the BDC (either alone or as part of a group acting together) and the BDC exercises a controlling influence over the management or policies, and has an affiliated person who is a director of, the Eligible Portfolio Company;
4.  Securities issued in transactions not involving a public offering from U.S. non-investment company issuers subject to bankruptcy, reorganization, insolvency or similar proceeding or otherwise unable to meet their obligations without assistance (purchase may be made from affiliated persons or persons that have been affiliated persons within the preceding 13 months or in limited circumstances other persons);
5.  Securities of an Eligible Portfolio Company purchased from any person in transactions not involving a public offering when no public market for the securities exists and the BDC owned at least 60% of the outstanding equity (on a fully diluted basis) of the issuer immediately prior to the purchase;
6.  Securities received in exchange for or distributed with respect to the foregoing securities (including securities obtained pursuant to the exercise of options, warrants or rights relating to such securities);
7.  Cash, cash items, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment; or
8.  Office furniture and equipment, interests in real estate, deferred organization and operating expenses, and other non-investment assets necessary and appropriate to the BDC's operations.
"Making available significant managerial assistance" is defined under the 1940 Act, in relevant part, as (i) an arrangement whereby the BDC, through its officers, directors, employees or general partners, offers to provide and, if accepted, does provide, significant guidance and counsel concerning the management, operations or business objectives of a portfolio company; or (ii) the exercise by a BDC of a controlling influence over the management or polices of the portfolio company by the BDC acting individually or as part of a group acting together which controls the portfolio company. The officers of the Fund intend to offer to provide managerial assistance, including advice on equipment acquisition and financing, cash flow and expense management, general financing opportunities, acquisition opportunities and opportunities to access the public securities markets, to the great majority of companies to whom the Fund provides venture loans. In some instances, directors of the Fund might serve on the Board of Directors or as officers of borrowers.
Venture Loans. Venture loans generally consist of a promissory note secured by the equipment or other assets of the borrower. The Fund generally obtains a security interest in the assets financed and receives periodic payments of interest and principal, and may receive a final payment constituting additional interest at the end of the transaction's term. The interest rate and amortization terms of venture loans are individually negotiated between the Fund and each borrower.  
Typically, loans are structured as commitments by the Fund to finance assets of the borrower over a specified period of time. The commitment of the Fund to finance future asset acquisitions is typically subject to the absence of any default under the loan and compliance by the borrower with requirements relating to, among other things, the type of assets to be financed. Although the Fund's commitments generally provide that the Fund is not required to continue to fund additional loans if there is a material adverse change in the borrower's financial condition, it is possible that a borrower's financial condition may not be as strong at the time a loan is funded as it was at the time the commitment was made.
In December 2016, the Westech Investment Advisors, LLC ("Managing Member") recommended and the Fund's board approved an extension of the Investment Period of the Fund by two quarters. Effective June 30, 2017, the Fund is no longer permitted to enter new commitments to borrowers; however, the Fund will be permitted to fund existing commitments. The last commitment expires on July 31, 2018.
Warrants and Equity Securities.  
The Fund generally acquires warrants to purchase equity securities of the borrower in connection with financings. It is anticipated that such warrants, generally, will be distributed by the Fund to the Company simultaneously with, or shortly following, their acquisition. The terms of the warrants, including the expiration date, exercise price and terms of the equity security for which the warrant may be exercised, are negotiated individually with each borrower. Substantially all the warrants and underlying equity securities are restricted securities under the Securities Act of 1933 (“1933 Act”) at the time of issuance; the Fund generally negotiates registration rights with the borrower that may provide (i) "piggyback" registration rights, which permit the Fund under certain circumstances to include some or all of the securities owned by it in a registration statement filed by the borrower or (ii) under rare circumstances, "demand" registration rights permitting the Fund under certain circumstances to require the borrower to register the securities under the 1933 Act (in some cases at the Fund's expense).  
The Fund also may make direct investments in equity securities having an aggregate cost of up to 10% of the aggregate cost of all investments of the Fund determined cumulatively over the life of the Fund (provided, however, that any amounts paid by the Fund to acquire equity securities pursuant to the receipt or exercise of warrants or stock received in connection with the Fund’s venture loans shall not be taken into account in determining whether such 10% threshold has been met). While such direct investments generally will be in the equity

5



securities of borrowers in the Fund’s portfolio, the equity securities of other companies could also be purchased. It is anticipated that such equity investments may be made while participating in a financing subsequent to the making of a loan. For example, the Fund may invest equity in a follow-on round of financing to maintain or increase its ownership stake. In some cases, equity investments may be made in companies where the Fund does not have an existing loan. It is likely that, as in the case of warrants, direct equity investments, if made by the Fund, generally will be distributed to the Company simultaneously with, or shortly following, their acquisition, although, in this case, as a result of U.S. federal income tax and 1940 Act requirements, such equity investments may be held by the Fund for a longer period of time prior to their distribution to the Company.
Investment Policies. For purposes of the investment policies and unless otherwise specified, references to the percentage of the Fund's total assets "invested" in securities of a company will be deemed to refer, in the case of financings in which the Fund commits to provide financing prior to funding the commitment, to the amount of the Fund's total assets represented by the value of the maximum amount of securities to be issued by the borrower of the Fund pursuant to such commitment; the Fund will not be required to divest securities in its portfolio or decline to fund an existing commitment because of a subsequent change in the value of securities the Fund has previously acquired or committed to purchase.
Diversification Standards. The Fund is classified as a "non-diversified" closed-end investment company under the 1940 Act. However, the Fund seeks to qualify as a RIC, and therefore, must meet diversification standards under the Internal Revenue Code.
To qualify as a RIC, the Fund must meet the issuer diversification standards under the Internal Revenue Code that require that, at the close of each quarter of the Fund's taxable year, (i) not more than 25% of the market value of its total assets is invested in the securities of a single issuer, and (ii) at least 50% of the market value of its total assets is represented by cash, cash items, government securities, securities of other RICs and other securities (with each investment in such other securities limited so that not more than 5% of the market value of the Fund's total assets is invested in the securities of a single issuer and the Fund does not own more than 10% of the outstanding voting securities of a single issuer). For purposes of the diversification requirements under the Internal Revenue Code, the percentage of the Fund's total assets "invested" in securities of a company will be deemed to refer, in the case of financings in which the Fund commits to provide financing prior to funding the commitment, to the amount of the Fund's total assets represented by the value of the securities issued by the borrower to the Fund at the time each portion of the commitment is funded.
Industry Segment Diversification. The Fund will generally seek to invest no more than 30% of its total assets in securities of companies in any single industry. The broad industry categories in which the Fund anticipates that most of its investments will fall (and within each of which there may be several "industries" for purposes of the industry diversification policy) include computers and storage, semiconductor and equipment, internet, medical devices, software, and several other categories.
Investment Guidelines. In selecting investments for the Fund's portfolio, Westech Investment Advisors LLC (the “Manager”) will endeavor to meet the investment guidelines established by the Fund's Board of Directors. The Fund may, however, make investments that do not conform to one or more of these guidelines when deemed appropriate by the Manager. Such investments might be made if the Manager believes that a failure to conform in one area is offset by exceptional strength in another or is compensated for by a higher yield, favorable warrant issuance or other attractive transaction terms or features.  
Stage of Development Guidelines. The Manager will seek to diversify the Fund's portfolio based on the development stage of the companies in which it invests. Generally, venture-backed companies fall into several categories:
Seed capital companies represent the earliest stage of development. These companies have raised relatively modest equity capital to prove a concept and qualify for start-up capital. Their activities generally are limited to product development, scientific and market research, recruiting a management team and developing a business plan. These companies likely do not have financial support from either venture capitalists or large companies making strategic investments.
Start-up stage companies are completing or have recently completed product development and initial marketing, but have not sold their products commercially. Generally such firms have made market studies, assembled key management, developed a business plan and are ready to commence operations.
Emerging growth stage companies have initiated or are about to initiate full-scale operations and sales, but may not be showing a profit.
Mezzanine stage companies are approaching or have attained break even or profitability and are continuing to expand. An acquisition or initial public offering may be imminent.

The Manager will refer to its investments in seed and start-up companies as “Early Stage” and investments in emerging growth companies and mezzanine companies as “Expansion Stage”. The Manager will seek to diversify its investments across stages. Classification of a company by stage of development involves a subjective judgment by the Manager, and it is possible that other investors or market analysts would classify a company differently than the classification used by the Fund.

Quality Guidelines. The Manager will seek to invest the majority of the Fund's aggregate investments (determined cumulatively over the life of the Fund) in investments that meet many of the following guidelines:

        

6



Company Guidelines

The company has a minimum capitalization of at least $1 million.
The company has at least six months' available cash to fund its operations or indications from its equity investors that they will make investments necessary to provide such cash.
At least two venture capital equity investors have indicated a current intention to make additional equity financing available to the company, or the company has a forecasted positive cash flow.
The company's business plan contemplates sales of at least $25 million within five years.
The company has previously closed equity venture capital financing, or will close equity venture capital financing prior to the funding of the loan.

Transaction Guidelines for Loans

The term of the loan does not exceed 60 months, and does not extend beyond December 31, 2022.
Debt service requirements of the loan are, in the opinion of the Manager, not likely to become an impediment to the company raising additional capital.
At least 75% of the assets to be financed are, in the opinion of the Manager, critical to the company's day-to-day operations or the loan is secured by all or substantially all of the assets of the borrower.

Equity Venture Capital Support Guidelines

At least two of the company's venture capital equity investors (including the lead investor) have (i) in the opinion of the Manager, significant venture capital industry experience and (ii) at least $50 million under management.
Special Situations. The Manager may invest up to 20% of the Fund's aggregate investments determined cumulatively over the life of the Fund in special situation investments. Such special situations could include investments targeted towards late‑stage or public companies seeking additional growth capital to expand product offerings, increase market penetration or fund strategic acquisitions of other companies or technology. The Manager will target companies whose cash flow from operations and cash reserves are expected to service the Fund's investment on a current basis. Investments may be structured as senior debt, convertible debt, or other debt/equity structures. In addition, special situations could include investments in a “troubled” company undergoing a restructuring or recapitalization of its existing debt or equity, and making investments in subordinated debt, providing bridge financing to a company which is in the process of raising additional private equity, planning an initial public offering or is seeking to enter into a business combination through which it would be acquired. From inception through December 31, 2017, the Fund has made no special situation investments.
International Investments. As a BDC, the Fund may invest up to 30% of its total assets in securities of companies which are not Eligible Portfolio Companies. An Eligible Portfolio Company must be organized under the laws of, and have its principal place of business in, the United States. Therefore, the Fund could invest up to 30% of its total assets in foreign based companies. If reasonably practicable, investments in foreign based companies would be secured by foreign based assets in addition to being secured by any assets located in the United States.
Leverage. The Fund intends to borrow money from and issue debt securities to banks, insurance companies and other lenders to obtain additional funds to originate loans (and possibly for special situation investments), if such borrowings are available on terms that are acceptable to the Manager and Board of Directors of the Fund. It is possible, due to potential future tightening of the credit markets, that the Fund may not be able to secure such borrowings on acceptable terms.
Temporary Investments. Pending investment, and until distributions to the stockholders are made, the Fund will invest excess cash in: (i) time deposits, certificates of deposit and similar instruments of highly-rated banks; (ii) securities issued or guaranteed by the U.S. government, its agencies or instrumentalities; (iii) repurchase agreements that are: (a) issued by highly-rated banks or securities dealers; and (b) fully collateralized by U.S. government securities; (iv) short-term high-quality debt instruments of U.S. corporations; and (v) money market funds and other pooled investment funds whose investments are restricted to those described above. The average maturity of such investments, weighted by their par value, will not exceed 90 days.
Other Investment Policies. The Fund will not sell securities short (except to the extent the Fund has a warrant for, or owns, shares equal to the number of shares which is the subject of the proposed short sale), purchase securities on margin (except to the extent the Fund’s permitted borrowings are deemed to constitute margin purchases), purchase or sell commodities or commodity contracts (except interest rate hedging transactions in connection with the Fund’s permitted borrowings), or purchase or sell real estate. The Fund may, however, write puts and calls, and acquire options, as a hedge for equity investments or to increase return through a covered call. The Fund will not underwrite the securities of other companies, except to the extent they may be deemed underwriters upon the disposition of restricted securities acquired in the ordinary course of their business. The Fund may, however, use borrowed funds for its lending activities. See the discussion herein under the caption “Risk Factors - General - Leverage.”
    
The Fund’s investment objectives, investment policies and investment guidelines (other than its intended status as a BDC) are not fundamental policies and may be changed by the Fund’s Board of Directors at any time.

7



Regulation. As a BDC, the Fund is required to invest in Eligible Portfolio Companies and (with certain exceptions) make available to them significant managerial assistance. Eligible portfolio companies, and the regulations governing assets a BDC can acquire, are described under the heading “Investment Program” above.  
The Fund, as a BDC, may sell its securities at a price that is below its net asset value per share, provided that a majority of the Fund's disinterested directors, or not interested parties of the Fund under Section 2(a)(19) of the Investment Act of 1940 (i.e., independent directors), has determined that such sale would be in the best interests of the Fund and its shareholder and upon the approval by the holders of a majority of its outstanding voting securities, including a majority of the voting securities held by non-affiliated persons, of such policy or practice within one year of such sale. A majority of the disinterested directors also must determine in good faith, in consultation with the underwriters of the offering if the offering is underwritten, that the price of the securities being sold is not less than a price which closely approximates market value of the securities, less any distribution discounts or commissions. As defined in the 1940 Act, the term "majority of the outstanding voting securities" of the Fund means the vote of (i) 67% or more of the Fund's Shares present at a meeting, if the holders of more than 50% of the outstanding Shares are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding Shares, whichever is less.
Many of the transactions involving a company and its affiliates (as well as affiliates of those affiliates) which were prohibited without the prior approval of the SEC under the 1940 Act prior to its amendment by the 1980 provisions are permissible for BDCs, including the Fund, upon the prior approval of a majority of the Fund's disinterested directors and a majority of the directors having no financial interest in the transactions. However, certain transactions involving certain persons related to the Fund, including its directors, officers, and the Managers, may still require the prior approval of the SEC. In general, (i) any person who owns, controls, or holds power to vote, more than 5% of the Fund's outstanding Shares; (ii) any director, executive officer, or general partner of that person; and (iii) any person who directly or indirectly controls, is controlled by, or is under common control with, that person, must obtain the prior approval of a majority of the Fund's disinterested directors, and, in some situations, the prior approval of the SEC, before engaging in certain transactions involving the person or any company controlled by the Fund. The 1940 Act generally does not restrict transactions between the Fund and its Eligible Portfolio Companies. While a BDC may change the nature of its business so as to cease being a BDC (and in connection therewith withdraw its election to be treated as a BDC) only if authorized to do so by a majority vote (as defined by the 1940 Act) of its outstanding voting securities, shareholder approval of changes in other fundamental investment policies of a BDC is not required (in contrast to the general 1940 Act requirement, which requires shareholder approval for a change in any fundamental investment policy).
Distributions. The Fund intends to distribute to the Company (its sole shareholder), all equity securities from portfolio companies simultaneously, or shortly following, their acquisition and substantially all of the Fund’s net investment income and net realized capital gains, if any, determined for tax purposes. Applicable law, including provisions of the 1940 Act, may limit the amount of dividends and other distributions payable by the Fund, and all such dividends and other distributions must be authorized by the Board of Directors of the Fund. Income distributions generally will be paid by the Fund to the Company on a quarterly basis. Substantially all of the Fund’s net capital gain (the excess of net long-term capital gain over net short-term capital loss) and net short-term capital gain, if any, will be distributed at least annually as determined by the Manager.
Until June 30, 2017 ("Investment Rampdown Date"; extended from December 31, 2016 by the Fund's board), the Manager sought to reinvest in new loans and equity investments the proceeds of matured, repaid or resold investments, net of required distributions to the Company, principal payments on borrowings and expenses or other obligations of the Fund. Following the Investment Rampdown Date, the Fund will distribute to the Company and the Company will distribute to the Members all proceeds received from principal payments and sales of investments, net of reserves and expenses, principal repayments on the Fund’s borrowings, amounts required to fund financing commitments entered into on or before such date, and any amounts paid on exercise of warrants or to otherwise protect the value of existing investments (for example, follow on equity investments made pursuant to pay-to-play provisions in a portfolio company’s charter documents, or in a “down round” of equity to avoid dilution).
Competition. Other entities and individuals compete for investments similar to those proposed to be made by the Fund, some of whom, with respect to investments in the form of loans, and many of whom, with respect to the equity investments and convertible and subordinated debt, may have greater resources than the Fund. Furthermore, competition could increase given the low barriers to entry in the industry. Additionally, the Fund’s need to comply with provisions of the 1940 Act pertaining to BDCs and, if the Fund continues to qualify as a RIC, provisions of the Internal Revenue Code pertaining to RICs, might restrict the Fund’s flexibility as compared with its competitors. The need to compete for investment opportunities may make it necessary for the Fund to offer borrowers or companies in which it makes equity investments more attractive terms than otherwise might be the case.
Employees. The Fund has no employees; all of its officers are officers and/or employees of the Manager, and all of its required services are performed by officers and employees of the Manager.
ITEM 1A.  
RISK FACTORS.
GENERAL
    
Reliance on Management. Pending investment, all cash that the Fund has received pursuant to capital calls from the Company will be committed to short-term, high-grade investments that present relatively low investment risk but provide a correspondingly lower return.

8



The Fund will be wholly dependent for the selection, structuring, closing and monitoring of its investments on the diligence and skill of the Manager, acting under the supervision of the Fund’s Board of Directors. Although the operating principals of the Manager have over a long history of combined experience in investing in venture lending transactions and equity investments, there can be no assurance that the Fund will attain its investment objective. Furthermore, the Manager does not have substantial experience investing in special situations such as convertible and subordinated debt of public and late-stage private companies. The officers of the Manager will have primary responsibility for the selection of the companies in which the Fund will invest, the negotiation of the terms of such investments and the monitoring of such investments after they are made. Although the officers of the Manager intend to devote such time as is necessary to the affairs of the Fund, they are not required to devote full time to the management of the Fund. Furthermore, there can be no assurance that any officer will remain associated with the Manager or that, if an officer ceased to be associated with the Manager, the Manager would be able to find a qualified person or persons to fill the position.
Illiquid and Long-Term Investment. After June 30, 2017, the Investment Rampdown Date, the Fund ceased making new equity investments as well as investments in venture loans (except pursuant to commitments made before the Investment Rampdown Date) and will distribute to its shareholder all proceeds received from principal payments and sales of: (i) reserves and expenses; (ii) principal repayments on the Fund's borrowings; (iii) amounts required to fund financing commitments entered into before the Investment Rampdown Date; and (iv) any amounts paid on exercise of warrants or otherwise paid to protect the value of existing investments (including, for example, pay-to-play provisions and purchases of equity securities in “down rounds” to avoid dilution). The Fund's Articles of Incorporation provide that, on December 31, 2022, the Fund automatically will be dissolved without any action by its shareholder. From and after such dissolution, the Fund's activities will be limited to the winding-up of its affairs, the liquidation of its remaining assets and the distribution of the net proceeds thereof to its shareholder. Although the Fund generally would not make any loan with a stated maturity date later than December 31, 2022, it is possible that, due to a default by a borrower or a transaction restructuring due to a borrower's financial difficulties, such a loan may remain outstanding in whole or in part beyond its original maturity date. Furthermore, the Fund may not be able to sell warrants it receives from borrowers, or the equity securities (including those received upon exercise of warrants or conversion of debt instruments or in connection with restructuring of a troubled loan), to the extent those investments were retained by the Fund and not distributed earlier to its shareholder, for a significant period of time due to legal or contractual restrictions on resale or the absence of a liquid secondary market. As a result, the liquidation process might not be completed for a significant period after the Fund's dissolution. In addition, it is possible that, if certain of the Fund's assets are not liquidated within a reasonable time after the Fund's dissolution, the Fund may elect to make a distribution in kind of all or part of such assets to its shareholders. In such case, the shareholders would bear any expenses attendant to the liquidation of such assets.
Although shares of the Fund have been registered under the 1934 Act, there will be no trading market for shares in the Fund (which are all owned by the Company), and thus shares of the Fund should be considered illiquid.
Competition. Other entities and individuals compete for investments similar to those made by the Fund, some of whom, with respect to investments in the form of loans, and many of whom, with respect to the equity investments and convertible and subordinated debt, have greater resources than the Fund. Furthermore, competition could increase given the low barriers to entry in the industry. Additionally, the Fund’s need to comply with provisions of the 1940 Act pertaining to BDCs and, if the Fund continues to qualify as a RIC, provisions of the Internal Revenue Code pertaining to RICs, might restrict the Fund’s flexibility as compared with its competitors. The need to compete for investment opportunities may make it necessary for the Fund to offer borrowers or companies in which it makes equity investments more attractive terms than otherwise might be the case.
Convertible Debt. Convertible debt instruments issued by public and late-stage private companies may comprise some of the special situations in which the Fund may invest. Convertible debt generally offers lower interest yields than non-convertible debt of similar quality. The market value of debt tends to decline as interest rates increase and, conversely, to increase as interest rates decline. The market value of convertible debt, however, often reflects the market price of common stock of the issuing company when that stock price is greater than the conversion price of the convertible debt. The conversion price is the predetermined price at which the debt instrument could be exchanged for the associated stock. As the market price of the underlying common stock declines, the price of the convertible debt tends to be influenced more by the yield of the debt instrument. Thus, it may not decline in price to the same extent as the underlying common stock.
Subordinated Debt. Part of the special situations in which the Fund may invest may consist of subordinated debt instruments, which tend to be predominantly high-yield non-convertible debt securities. Investments in high-yield securities involve substantial risk of loss. Sub-investment grade non-convertible debt securities, or comparable unrated securities, are commonly referred to as “junk debt” and are considered speculative with respect to the issuer’s ability to pay interest and principal, and are susceptible to default or decline in market value due to adverse economic or business developments. The market values for high-yield securities tend to be very volatile, and these securities are less liquid than investment grade debt securities.
Leverage. The Fund borrows money from and issues debt securities to banks, insurance companies and other lenders to obtain additional funds to originate venture loans. Under the 1940 Act, the Fund may not incur borrowings unless, immediately after the borrowing is incurred, such borrowings would have "Asset Coverage" of at least 200%. "Asset Coverage" means the ratio which the value of the Fund's total assets, less all liabilities not represented by (i) the borrowings and (ii) any other liabilities constituting "senior securities" under the 1940 Act, bears to the aggregate amount of such borrowings and senior securities. The practical effect of this limitation is to limit the Fund's borrowings and other senior securities to 50% of its total assets less its liabilities other than the borrowings and other senior securities. The 1940 Act also requires that, if the Fund borrows money, provision be made to prohibit the declaration of any dividend or other distribution on the shares (other than a dividend payable in shares), or the repurchase by the Fund of shares, if, after payment of such dividend or repurchase of shares, the Asset Coverage of such borrowings would be below 200%. If the Fund is unable to pay dividends or distributions in the amounts required under the Internal Revenue Code, it might not be able to qualify for the pass-through status as a RIC or, if qualified, to continue to so qualify.

9



The use of leverage increases investment risk. The Fund’s use of leverage is premised upon the expectation that the Fund’s all-in borrowing costs will be lower than the return the Fund achieves on its investments. To the extent the income or capital gains derived from investments purchased with borrowed funds exceeds the cost of borrowing, the Fund’s overall return will be greater than if leverage had not been used. Conversely, if the income or capital gain from the investments purchased with borrowed funds is not sufficient to cover the cost of borrowing, or if the Fund incurs capital losses, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution will be reduced or potentially eliminated. Furthermore, since the calculation of the investment management fee is based on a percentage of the managed assets, such fee will be higher if the Fund utilizes leverage than if no borrowings were incurred.
Lenders have required that the Fund pledge portfolio assets as collateral for borrowings, and have required that the Company provide guarantees or other credit enhancements. The Company, however, will not pledge its assets to secure such borrowings as this could result in unrelated business taxable income to its tax-exempt members. If the Fund is unable to service the borrowings, the Fund may risk the loss of such pledged assets.
Lenders are also expected to require that the Fund agree to loan covenants limiting the Fund’s ability to incur additional debt or otherwise limiting the Fund’s flexibility, and loan agreements may provide for acceleration of the maturity of the indebtedness if certain financial tests are not met. To minimize risks associated with borrowing money at floating rates and lending money at fixed rates, the Fund may enter into interest rate hedging transactions with respect to all or any portion of the Fund’s borrowings. There can be no assurance that such interest rate hedging transactions will be available in forms acceptable to the Fund. In addition, entering into interest rate hedging transactions raises costs to the Fund. Finally, it is possible that the Fund could incur losses from being “overhedged,” which would result if the debt that was hedged is repaid faster than expected.
Regulation. The Fund has elected to be treated as a BDC under the Small Business Incentive Act of 1980, which modified the 1940 Act. Although BDCs are not required to register under the 1940 Act and are relieved from compliance with a number of the provisions of the 1940 Act, there are now greater restrictions in some respects on permitted types of investments for BDCs. Moreover, the applicable provisions of the 1940 Act continue to impose numerous restrictions on the activities of the Fund, including restrictions on leverage and on the nature of its investments. While the Fund is not aware of any judicial rulings under, and is aware of only a few administrative interpretations of, the Small Business Incentive Act of 1980, there can be no assurance that such Act will be interpreted or administratively implemented in a manner consistent with the Fund’s objectives or manner of operation.
Litigation. The Fund could be subject to litigation by borrowers, based on theories of breach of contract to lend, “lender liability,” or otherwise in connection with its loan and investment transactions. The defense of such a lawsuit, even if ultimately determined to be without merit, could be costly and time-consuming to the Fund.
Tax Status. The Fund must meet several requirements, described herein under the caption “Federal Income Taxation,” to qualify for the pass-through status as a RIC and, if qualified, to continue to so qualify. For example, the Fund must meet specified asset diversification standards under the Internal Revenue Code which might prove difficult if the borrowers under some loans drew down their committed financing at a faster rate than other borrowers, particularly during the early periods of the Fund’s operations. If the Fund experiences difficulty in meeting the diversification requirement for any fiscal quarter of its taxable year, it might need to accelerate capital calls or, if available, borrowings in order to increase the portion of the Fund’s total assets represented by cash, cash items, and U.S. government securities as of the close of the following fiscal quarter and thus attempt to meet the diversification requirement. The Fund, however, would incur additional interest and other expenses in connection with any such accelerated borrowings, and increased investments by the Fund in cash, cash items, and U.S. government securities (whether the funds to make such investments are derived from called equity capital or from accelerated borrowings) are likely to reduce the Fund’s return. Furthermore, there can be no assurance that the Fund would be able to meet the diversification requirements through such actions. Failure to qualify as a RIC would deny the Fund pass-through status and, in a year in which the Fund has taxable income, would have a significant adverse effect on the return of the Fund. Tax laws are dynamic and either in the U.S. or foreign jurisdictions could change causing a different than expected outcome.
The Fund has received an opinion that, assuming the Fund’s election to be a BDC under Sections 6(f) and 54 of the 1940 Act will be valid and remain in effect and that the Fund otherwise meets the qualification requirements set forth in Section 851(b) and the distribution requirements in Section 852(a) of the Internal Revenue Code, if the Fund’s status as a RIC is challenged by the IRS in court and properly litigated, a court of competent jurisdiction will respect that status for federal income tax purposes. If the SEC were to disallow the Fund’s election to be treated as a BDC, then the Fund would not be eligible to be treated as a RIC and, therefore, would be subject to federal corporate tax on its income and gains. The opinion referred to above is based on the Internal Revenue Code, regulations thereunder, Internal Revenue Service (the “IRS”) rulings, procedures and pronouncements, court decisions and other applicable law as of the date hereof, and certain representations that the Fund has made to its legal counsel. Legal opinions, however, are not binding on the IRS or the courts, and no ruling has been or will be requested from the IRS. No assurance can be given that the IRS will concur with such opinion.
Allocation of Expenses. If the Fund is not deemed to be engaged in a trade or business, individuals and certain other persons who are members of the Company will be required to include in their gross income an amount of certain Fund expenses relating to the production of gross income that are allocable to the Company. These members, therefore, will be deemed to receive gross income from the Fund in excess of the distributions they actually receive. Such allocated expenses may be deductible by an individual Member as a miscellaneous itemized deduction, subject to the limitation on miscellaneous itemized deductions not exceeding 2.0% of adjusted gross income to the extent the Fund is not engaged in a trade or business.

10



Calculation of Investment Management Fee. As compensation for its services to the Fund, for the two-year period that commenced with the first capital closing, which took place on December 18, 2012, the Manager received a management fee (“Management Fee”) computed and paid at the end of each quarter at an annual rate of 2.5% of the Company's committed equity capital (regardless of when or if the capital was called) as of the last day of each fiscal quarter. Starting in December 2014, Management Fees are calculated and paid at the end of each quarter at an annual rate of 2.5% of the Fund's total assets (including amounts derived from borrowed funds) as of the last day of each quarter.
Risks Related to Cybersecurity. Increased reliance on technology by both the Fund and its service providers has increased the risks posed to their information systems. The Fund and its service providers are susceptible to cybersecurity risks including, among other things, theft, unauthorized monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks; unauthorized access to relevant systems; compromises to networks or devices that the Fund and its service providers use to service the Fund’s operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Fund and its service providers. Cyberattacks against or security breakdowns of the Fund or its service providers may adversely impact the Fund and its shareholders, potentially resulting in, among other things, financial losses; the inability of Fund shareholders to transact business and the Fund to process transactions; inability to calculate a Portfolio’s NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional compliance costs. The Fund may incur additional costs for cybersecurity risk management and remediation purposes. In addition, cybersecurity risks may also impact issuers of securities in which a Portfolio invests, which may cause a Portfolio’s investment in such issuers to lose value. There can be no assurance that the Fund or its service providers will not suffer losses relating to cyberattacks or other information security breaches in the future. 
INVESTMENT RISKS
International Investments. The Fund could invest up to, but not more than, 30% of its total assets in foreign based companies. Foreign investments are subject to most of the same risks as domestic investments, as well as the political, economic and other uncertainties associated with foreign activities, including the risk of war and political unrest, the impact of laws and policies of foreign governments and the United States affecting foreign investment, and the possibility of being subject to the jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States. Furthermore, there may be practical and local law impediments to cost-effective recovery against collateral located in a foreign country. Moreover, it is possible that taxes may be required to be withheld by the foreign company on dividend and interest payments received by the Fund with respect to such foreign investments. Although capital gains derived by the Fund with respect to such investments in such foreign company may often be exempt from non-U.S. income or withholding taxes, the treatment of capital gains varies among jurisdictions. If the income from such foreign investments is subject to non-U.S. income or withholding taxes, the Fund will attempt to negotiate offsetting gross-up payments from the foreign-based company. No assurances, however, can be given that the Fund would be able to negotiate such offsetting payments.
Foreign Currency & Exchange Rate Risks. Fund assets and income may be denominated in various currencies. Contributions and distributions, however, will be denominated in U.S. dollars. As a result, the return of the Fund on any investment may be adversely affected by fluctuations in currency exchange rates, any future imposed devaluations of local currencies, inflationary pressures, and the success of the investment itself. In addition, the Fund may incur costs related to conversions between various currencies.
Accounting & Disclosure Standards. Accounting, auditing, financial, and other reporting standards, practices, and disclosure requirements in countries in which the Fund may invest are not necessarily equivalent to those required under United States Generally Accepted Accounting Principles ("US GAAP"). Accordingly, less information may be available to investors.
Credit Risks. Most of the companies with which the Fund will enter into financing transactions will not have achieved profitability, may experience substantial fluctuations in their operating results or, in many cases, will not have significant operating revenues. The ability of any borrower to meet its obligations to the Fund, therefore, will depend to a significant extent on the willingness of such borrower’s venture capital equity investors or outside investors to provide additional equity financing, which in turn will depend on the borrower’s success in meeting its business plan, the market climate for venture capital investments generally, and many other factors. The companies to which the Fund will provide financing will frequently be engaged in the development of new products or technologies, and the success of these efforts, or the ability of the companies to successfully manufacture or market products or technologies developed, cannot be assured. These companies frequently face intense competition, including competition from companies with greater resources, and may face risks of product or technological obsolescence, non-acceptance in the market, or rapidly changing regulatory environments, any of which could adversely affect their prospects. The success of such companies often depends on the management talents and efforts of one person or small group of persons whose death, disability or resignation would adversely affect the company.

11



Remedies Upon Default. In the event of a default on a portfolio loan, the available remedies to the Fund would include legal action against the borrower and foreclosure or repossession of collateral given by the borrower. The Fund could experience significant delays in exercising its rights as a secured lender, and might incur substantial costs in taking possession of and liquidating its collateral and in taking other steps to protect its investment. The Fund generally will require that it have a first priority security interest in any equipment of a borrower financed with the proceeds of the Fund’s loans, although that security interest may extend to the borrower’s other assets in which another lender might have a senior or parity security interest. It is anticipated that the Fund will make loans to a borrower that has one or more other secured lenders. In such circumstances, the Fund may share all or a portion of its collateral with the other lender(s) and will enter into intercreditor agreements governing the respective rights of the Fund and such other lender(s), which could limit the Fund’s flexibility in pursuing its remedies as a secured creditor, and reduce the proceeds realized from foreclosing or taking possession of the collateral. In the case of growth capital or working capital loans (where the loan proceeds can be used by the company for general corporate purposes), the Fund will typically receive either a broader lien on substantially all of the borrower’s assets, including its intellectual property, or a lien on substantially all of the borrower’s assets, excluding intellectual property, and a negative pledge on such intellectual property.
As noted above, the Fund may utilize certain of its funds in investments that involve the financing of equipment assets. Equipment assets are often subject to rapid depreciation or obsolescence such that it is likely the value of the assets underlying a loan to finance such assets will depreciate during the term of the loan transaction below the amount of the borrower’s obligations. In addition, although borrowers will be required under the transaction documents to provide customary insurance for the assets underlying a loan, and will be prohibited from disposing of the assets without the Fund’s consent, compliance with these covenants cannot be assured and, in the event of non‑compliance, the assets could become unavailable to the Fund due to destruction, theft, sale or other circumstances. Realization of value from intellectual property collateral can also be time consuming and present special challenges, given the often unique nature and limited market for such assets. The Fund’s ability to obtain payment beyond the collateral underlying the loan from the borrower might be limited by bankruptcy or similar laws affecting creditors’ rights. In limited instances where the Fund takes security interests in a borrower’s assets located in a foreign country, there may be practical and local law impediments to cost-effective recovery against such collateral. Therefore, there can be no assurance that the Fund would ultimately collect the full amount owed on a defaulted loan.
Emerging Company Risks. The possibility that the companies in which the Fund invests will not be able to commercialize their technology or product concept presents significant risk. Additionally, although some of such companies may already have a commercially successful product or product line at the time of investment, technology products and services often have a more limited market or life span than products in other industries. Thus, the ultimate success of these companies may depend on their ability to continually innovate in increasingly competitive markets. Most of the companies in which the Fund invests will require substantial additional equity financing to satisfy their continuing growth and working capital requirements. Each round of venture financing is typically intended to provide a company with enough capital to reach the next stage of development. The circumstances or market conditions under which such companies will seek additional capital is unpredictable. It is possible that certain of such companies will not be able to raise additional financing or may be able to do so only at a price or on terms which are unfavorable.
Privately-held Company Risks. The Fund invests primarily in privately-held companies. Generally, very little public information exists about these companies and the Fund is required to rely on the ability of the Manager to obtain adequate information to evaluate the potential returns from investing in these companies. Moreover, these companies typically depend upon the management talents and efforts of a small group of individuals and the loss of one or more of these individuals could have a significant impact on the investment returns from a particular company. Also, these companies frequently have less diverse product lines and smaller market presence than larger companies. They are thus generally more vulnerable to economic downturns and may experience substantial variations in operating results.
Due diligence risks. Before making investments, the Manager intends to conduct a limited amount of due diligence that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence and making an assessment regarding an investment, the Manager will be required to rely on resources available to it, including information provided by the target of the investment and, in some circumstances, third party investigations. The due diligence process may at times be subjective with respect to newly organized companies for which only limited information is available. Accordingly, there can be no assurance that the due diligence investigation that the Manager will carry out with respect to any investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Further, there can be no assurance that such an investigation will result in an investment being successful.
Financial Market Risk.  The ability of the Fund to provide an acceptable return may be adversely affected by economic factors to which the market place is subject. Additionally, market turmoil could have a deleterious effect on the Company’s investors which could impede the ability to provide capital to the Fund. This could impair the Fund’s ability to honor commitments to lend, pay expenses of the Fund, or repay the Fund’s loans. The volatility in the global financial markets reached unprecedented levels during 2008 and 2009. These conditions continued for some period thereafter (albeit to a lesser extent) and may recur into the future. This and other types of market turmoil could have a material adverse effect on the Fund’s business and operations. The tightening of the credit markets could impair the Fund’s ability to either acquire or utilize leverage to maximize the return it achieves on investments.
    

12



It is possible that market conditions could decrease the demand for venture loans, especially where U.S. and global economic conditions deteriorated and remained weak for an extended period of time. Furthermore, market conditions could also adversely impact either or both the ability of the Fund’s borrowers to meet their obligations to the Fund and the value of the Fund’s direct investments in companies. Most of the companies in which the Fund will invest will not have achieved profitability and will require substantial equity financing to satisfy their continuing growth and working capital requirements. An economic downturn could decrease the demand for such borrower’s products and technology, thereby impairing such borrower’s financial condition and its ability to raise additional equity financing from outside investors. Should these events occur, there could be an increase in borrower defaults under their obligations to the Fund, or a decrease in the value of the Fund’s direct equity investments.
Other Global Economic Risks. In addition to the crisis in the financial markets discussed above, the ability of the Fund to provide an acceptable return may be adversely affected by other economic and business factors to which the U.S. market place is subject. These factors, which generally are beyond the control of the Manager, include: general economic conditions, such as inflation and fluctuations in general business conditions; the impact of terrorist attacks against the United States or other countries where investments are made; the effects of strikes, labor disputes and foreign political unrest; and uncertainty in the U.S. economy.
Speculative Nature of Warrants and Equity Investments. The value of the warrants that the Fund generally will receive and distribute to its shareholder in connection with its financing investments is dependent on the value of the equity securities for which the warrants can be exercised. The value of such warrants, direct equity investments, and equities received upon conversion of debt instruments is dependent primarily on the success of the company’s business strategy and the growth of its earnings, but also depends on general economic and equity market conditions. The prospects for achieving consistent profitability in the case of many companies in which the Fund invests are speculative. The warrants, equity securities for which the warrants can be exercised, direct equity investments, and equities received upon conversion of debt instruments generally will be restricted securities that cannot readily be sold for some period of time. If the value of the equity securities underlying a warrant does not increase above the exercise price during the life of the warrant, the Fund would permit the warrant to expire unexercised and the warrant would then have no value.
Illiquidity of Investments. Substantially all of the Fund's portfolio investments (other than short-term investments) will consist of securities that, at the time of acquisition, are subject to restrictions on sale and for which no ready market will exist. Restricted securities cannot be sold publicly without prior agreement with the issuer to register the securities under the 1933 Act, or by selling such securities under Rule 144 or other provisions of the 1933 Act which permit only limited sales under specified conditions. Venture loans and equity investments are privately negotiated transactions, and there is no established trading market in which such loans and equity investments can be sold. Convertible and subordinated debt investments may also be privately negotiated transactions. In the case of warrants or equity securities, the Fund generally will realize the value of such securities only if the issuer is able to make an initial public offering of its shares, or enters into a business combination with another company which purchases the Fund’s warrants or equity securities or exchanges them for publicly-traded securities of the acquiror. The feasibility of such transactions depends upon the entity’s financial results as well as general economic and equity market conditions. In the past, crises in the financial markets have dramatically reduced the volume of initial public offerings and mergers and acquisitions in the market place. If such a crisis recurs, the Fund’s ability to realize liquidity through its investments would likely be impaired. Furthermore, even if the restricted warrants or equity securities owned become publicly-traded, the Fund’s ability to sell such securities may be limited by the lack (or limited nature) of a trading market for such securities. If the Fund holds material nonpublic information regarding the issuer of the securities, the Fund’s ability to sell such securities may also be limited by insider trading laws. When restricted securities are sold to the public, the Fund, under certain circumstances, may be deemed an “underwriter” or a controlling person with respect thereto for the purposes of the 1933 Act, and be subject to liabilities as such under that Act.
Because of the illiquidity of the Fund’s investments, most of its assets will be carried at fair value as determined by the Manager, in accordance with the Fund's policy, as approved by the Fund's Board of Directors. This value will not necessarily reflect the amount ultimately realized upon a sale of the assets.
Non-Diversified Status. The Fund is classified as a “non-diversified” investment company under the 1940 Act. The Fund intends to continue to qualify as a RIC under the Internal Revenue Code and will thereafter seek to continually meet the diversification standards thereunder. Nevertheless, the Fund’s assets may be subject to a greater risk of loss than if its investments were more widely diversified.

CONFLICTS OF INTEREST

Transactions with Fund VI. The Manager also serves as the manager for Venture Lending & Leasing VI, Inc. ("Fund VI"). Prior to the end of Fund VI's investment period, the Fund’s Board of Directors determined that so long as Fund VI had capital available to invest in loan transactions with final maturities earlier than December 31, 2020 (the date on which Fund VI's existence automatically expires), the Fund would invest in each portfolio company in which Fund VI invests (“Investments”), so long as prior to any such Investment, the Boards of Directors of Fund VI and the Fund received a memorandum summarizing the proposed Investment and did not object to such Investment. The amount of each Investment was allocated between the Fund and Fund VI in accordance with the decisions of the respective Boards of Directors of Fund VI and the Fund. On June 29, 2014, Fund VI was no longer permitted to enter into new commitments to borrowers; and all commitments have expired.

    

13



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

Transactions with Fund VIII. The Manager also serves as the manager for Venture Lending & Leasing VIII, Inc. ("Fund VIII"). 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, 2022 (the date on which the Fund will be dissolved), the Fund would invest in each portfolio company in which Fund VIII invested (“Investments”), so long as prior to any such Investment, the Boards of Directors of Fund VIII and the Fund received a memorandum summarizing the proposed Investment and did not object to such Investment. Initially the amount of each Investment is allocated 50% to the Fund and 50% to Fund VIII so long as the Fund has capital available to invest. Effective June 30, 2017, the Fund is no longer permitted to enter into new commitments to borrowers; however, the Fund will be permitted to fund existing commitments. The last commitment expires July 31, 2018.

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

Intercreditor Agreements. In all transactions in which the Fund, Fund VI and Fund VIII invest or in which another lender has either invested or may later invest (or in the event a successor fund is raised, in which the Fund and the successor fund invest), it is expected that the Fund and Fund VI and / or Fund VIII (or the Fund and the successor fund as the case may be) will enter into an intercreditor agreement pursuant to which the Fund and Fund VI and / or Fund VIII (or the Fund and the successor fund) will cooperate in pursuing their remedies following a default by the common borrower. Generally, under such intercreditor agreements, each party would agree that its security interest would be treated in parity with the security interest of the other party, regardless of which security interest would have priority under applicable law. Accordingly, proceeds realized from the sale of any collateral or the exercise of any other creditor’s rights will be allocated between the Fund and Fund VI and / or Fund VIII pro rata in accordance with the amounts of their respective investments. An exception to the foregoing arrangement would occur in situations where, for example, one of the lenders financed specific items of equipment collateral; in that case, usually the lender who financed the specific assets will have a senior lien on that asset, and the other lender will have a junior priority lien (even though they may ratably share liens of equal priority on other assets of the common borrower).
    
As a result of such intercreditor agreements, the Fund may have less flexibility in pursuing its remedies following a default than it would have had had there been no intercreditor agreement, and the Fund may realize fewer proceeds. In addition, because the Fund and Fund VI and / or Fund VIII (or the Fund and a successor fund) invest at the same time in the same borrower, such borrower would be required to service two loans rather than one. Any additional administrative costs or burdens resulting therefrom may make the Fund a less attractive lender, and may make it more difficult for the Fund to acquire such loans.
Effect of Borrowings.  During the first two years of the Fund's investment operations, the Management Fee was calculated with reference to the committed equity capital of the Company, regardless of when or if all of such capital was called.  As of December 2014, the Management Fee is computed and paid quarterly, at an annual rate of 2.5% of the total value of the Fund's assets (including amounts derived from borrowed funds) as of the last day of each fiscal quarter.  Therefore, decisions by the Manager to cause the Fund to borrow additional funds may increase the quarterly fees payable to the Manager.  The Fund's overall borrowing limits, however, are set by the Fund's Board of Directors in light of its fiduciary obligations.
Valuation. Manager is responsible for valuing the Fund’s assets and liabilities, subject to oversight by the Fund's Board of Directors in the case of the Fund and has an inherent conflict in performing this function. The Fund does not intend to engage an independent valuation agent to value its assets and therefore is entirely reliant upon Manager and its delegates for valuing the assets. There is a conflict in that Manager will have an incentive to increase the value of the assets for its performance record and to increase the Investment Management Fees that it receives.
Indemnification and Exculpation. The organizational documents of the Fund provide for indemnification of directors, officers, employees, advisory board members and agents (including the Manager) of the Fund, generally to the full extent permitted by applicable state law and the 1940 Act, including the advance of expenses and reasonable counsel fees. The charter of the Fund also contains a provision eliminating personal liability of a Fund director or officer to the Fund or its stockholder for money damages, subject to specified exceptions. In addition, the Fund has entered into an indemnification agreement with its directors and officers. A successful claim for indemnification, including payment of any expenses and counsel fees, would reduce the Fund’s assets by the amounts paid. Furthermore, Fund assets are used to obtain insurance policies that generally protect the Fund's directors and officers from personal liability for actions taken in their roles as the Fund's directors and officers.
Disinterested Directors and Advisory Board Members. The members of the Fund’s Board of Directors will overlap with the members of the Company’s advisory board, with the members of the Company’s advisory board being the same as, or a subset of, the disinterested directors of the Fund. Although the Manager expects that, given the Company’s 100% ownership of the Fund, the interests of the two entities will not diverge, it is conceivable that a conflict of interest could exist between the Fund and the Company. In addition, as compensation for services, the disinterested directors will receive an annual fee of $20,000 (plus $1,000 per meeting attended in person and an additional $10,000 for the chair of the Audit Committee), and any change to the compensation to be paid to the disinterested directors will

14



be determined by the Nominating and Corporate Governance Committee of the Fund’s Board of Directors. Upon the liquidation of the Fund, the disinterested advisory board members will receive an annual fee in an amount determined by the Member (it is currently anticipated that such annual amount shall be $10,000). The disinterested directors and advisory board members will also be reimbursed for certain expenses. The payment of such fees may limit the objectivity and independence of the disinterested directors and the advisory board members on behalf of the Members.
Personal Trading. The Manager has a code of ethics that contains personal securities trading procedures that apply to its “access persons.” Access persons are required to report if they have an investment in a company in which the Fund is considering making an investment. Pre-approval is required before an access person may buy or sell securities in an initial public offering, private placement, or any security listed on a “restricted list” maintained by the Manager.
Interests in Potential Portfolio Companies. The officers, principals and employees of the Manager may be passive investors in companies in which the Fund is considering an investment, either directly or indirectly through an investment in a venture capital fund that, in turn, is an investor in such a company. The officers, principals and employees of the Manager may recommend that the Fund invests in a company in which such person may serve as a director or advisor. Such a relationship presents potential conflicts of interest in that the relationship could provide the principal or employee with an incentive to influence the Manager's decision to recommend an investment in the company in question. There is also a potential conflict of interest in such principal or employee could use information acquired through association with the Manager to influence or benefit his or her personal investment. The Manager addresses these potential conflicts through its policies and procedures that are designed to insulate its investment decision-making process from these incentives. For example, the policies require that principals with a prior direct investment in a company be recused from the investment decision-making process with respect to that company.
Principals that serve as advisors to unaffiliated funds may make investment recommendations to these unaffiliated funds, which may be the same investment that the Fund has made or may make. The Manager's policies and procedures require such principals to first offer an investment opportunity to the Fund prior to offering such opportunity to an unaffiliated fund.
ITEM 1B.  
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
PROPERTIES.
All of the Fund's office space is provided by the Manager. The executive offices are located at 104 La Mesa Drive, Suite 102, Portola Valley, CA 94028.
ITEM 3.
LEGAL PROCEEDINGS.
The Fund is not a party to any material legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.


15



PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Fund's common stock is not listed on any securities exchange, and all holders of the Fund's common stock are subject to agreements significantly restricting the transferability of their shares.
The number of holders of record of the Fund's common stock at March 16, 2018 was 1.
The Fund has a policy of distributing securities as acquired.  The Fund values these securities at fair value at the time of acquisition in accordance with the Fund's policy on valuation detailed in Note 2 to the financial statements.  In addition, some expenses of the Company may be paid by the Fund, and will be deemed as distributions to the Company.  The Fund has established a policy of declaring dividends on a quarterly basis to the extent that taxable income of the fund less applicable reserves exceeds warrant distributions and deemed distributions.  As of December 31, 2017, the Fund had distributed $189.2 million to date to its sole shareholder, of which $123.6 million was in cash.


16



ITEM 6.        SELECTED FINANCIAL DATA.
The following table summarizes certain financial data and should be read in conjunction with the “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included elsewhere in this Form 10-K. The selected financial data set forth below have been derived from the audited financial statements.
 
For the Year Ended
December 31, 2017
 
For the Year Ended
December 31, 2016
 
For the Year Ended
December 31, 2015
 
For the Year Ended
December 31, 2014
 
For the Period Ended
December 31, 2013
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Investment income:
 
 
 
 
 
 
 
 
 
Interest on loans
$
51,914,279

 
$
60,098,256

 
$
60,547,623

 
$
29,000,163

 
$
11,000,737

Other interest and other income
188,178

 
163,000

 
267,583

 
88,349

 
82,783

Total investment income
52,102,457

 
60,261,256

 
60,815,206

 
29,088,512

 
11,083,520

Expenses:
 
 
 
 
 
 
 
 
 
Management fees
8,966,110

 
8,638,289

 
9,640,495

 
9,285,557

 
9,376,726

Interest expense
7,769,389

 
7,847,826

 
7,064,969

 
3,241,092

 
538,930

Banking and professional fees
492,092

 
483,258

 
433,787

 
236,959

 
353,133

Other operating expenses
494,723

 
155,940

 
165,753

 
110,301

 
101,652

Total expenses
17,722,314

 
17,125,313

 
17,305,004

 
12,873,909

 
10,370,441

Net investment income
34,380,143

 
43,135,943

 
43,510,202

 
16,214,603

 
713,079

 
 
 
 
 
 
 
 
 
 
Net realized loss from investments
(8,408,466
)
 
(19,092,177
)
 
(2,503,328
)
 
(1,317,886
)
 

Net change in unrealized loss from investments
(9,971,471
)
 
(2,098,606
)
 
(9,316,942
)
 
(2,462,213
)
 
(1,317,789
)
Net realized and change in unrealized loss from investments
(18,379,937
)
 
(21,190,783
)
 
(11,820,270
)
 
(3,780,099
)
 
(1,317,789
)
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in net assets from operations
$
16,000,206

 
$
21,945,160

 
$
31,689,932

 
$
12,434,504

 
$
(604,710
)
 
 
 
 
 
 
 
 
 
 
AMOUNTS PER COMMON SHARE:
 
 
 
 
 
 
 
 
 
Net increase (decrease) in net assets from operations
$
160.00

 
$
219.45

 
$
316.90

 
$
124.35

 
$
(6.05
)
Weighted Average Shares Outstanding
100,000

 
100,000

 
100,000

 
100,000

 
100,000

 
 
 
 
 
 
 
 
 
 
 
As of December 31,
 
 
 
2017
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Loans
$
325,189,783

 
$
300,384,884

 
$
380,437,931

 
$
266,992,654

 
$
122,392,255

Net assets
$
212,657,017

 
$
183,522,710

 
$
210,491,312

 
$
163,495,508

 
$
85,768,515



17



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The Fund is a financial services company providing financing and advisory services to a variety of carefully selected venture-backed companies primarily throughout the United States with a focus on growth oriented companies. The Fund’s portfolio is 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 portfolio companies to finance acquisitions of fixed assets and working capital. On December 18, 2012, the Fund completed its first closing of capital, made its first investment, and became a non-diversified, closed-end investment company that elected to be treated as a BDC under the1940 Act. The Fund elected to be treated for federal income tax purposes as a RIC under the Internal Revenue Code with the filing of its federal corporate income tax return for 2013. Pursuant to this election, the Fund generally will not have to pay corporate-level taxes on any income distributed to our shareholder as dividends, allowing the Fund 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 will be taxed as an ordinary corporation on its taxable income for that year (even if that income is distributed to the Company) and all distributions out of its earnings and profits will be taxable to the Members of the Company as ordinary income; thus, such income will 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 a superior risk adjusted investment returns. The Fund seeks to achieve its investment objective by providing debt financing to portfolio companies. Since inception, the Fund's investing activities have focused primarily on private debt securities. The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments. The Fund generally distributes these warrants to its shareholder upon receipt. The Fund also has guidelines for the percentages of total assets which will be invested in different types of assets.

The portfolio investments of the Fund will primarily consist of debt financing to venture capital backed technology companies. The borrower's ability to repay its loans may be adversely impacted by several 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.
CRITICAL ACCOUNTING POLICIES

Critical Accounting Policies and Practices are those accounting policies and practices that are both the most important to the portrayal of the Fund’s net assets and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates of the on net assets or operating performance is material.

In evaluating the most critical accounting policies and estimates, the Manager has identified the estimation of fair value of the Fund's loan investments as the most critical accounting policies and accounting estimates applied to the Fund's reporting of net assets or operating performance. In accordance with U.S. GAAP, the Fund defines fair value as the price that would be received to sell an asset or paid to transfer 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. There is no readily available market price or secondary market for the loans made by the Fund to borrowers, hence Management determines fair value based on hypothetical market and the estimates are subject to high levels of judgment and uncertainty. The Fund’s loan investments are considered Level 3 fair value measurements in the fair value hierarchy due to the lack of observability over many of the important inputs used in determining fair value.

Critical judgments and inputs in determining the fair value of a loan include the timing and amount of future cash flows, probability of future payments, payment history, available cash and “burn rate,” revenues, net income or loss, operating results, financial strength of borrower, prospects for the borrower's raising future equity rounds, likelihood of sale or acquisition of the borrower, length of expected holding period of the loan, collateral position, the timing and amount of liquidation of collateral for loans that are experiencing significant credit deterioration and collection becomes collateral dependent as well as an evaluation of the general interest rate environment. Management has evaluated these factors and has concluded that the effect of a deterioration in the quality of the underlying collateral, increase in the size of the loan, increase in the estimated time to recovery, and increase in the hypothetical market coupon rate would have the effect of decreasing the fair value of loan investments. The risk profile of a loan changes when events occur that impact the credit analysis of the borrower and the loan. Such changes result in the fair value being adjusted from par value of the individual loan. Where the risk profile is consistent with the original underwriting, the par value of the loan often approximates fair value.


18



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 years ended December 31, 2017, 2016 and 2015
Total investment income for the years ended December 31, 2017, 2016 and 2015 was $52.1 million, $60.3 million and, $60.8 million respectively, which primarily consisted of interest on venture loans outstanding. The remaining income consisted of interest and dividends on the temporary investment of cash, and other income from commitment fees and warrants. The average gross outstanding performing loans calculated on a monthly basis was $324.4 million, $328.9 million and $343.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The average interest rate on gross outstanding performing loans was 15.88% , 18.22% and 17.41% for the same periods, 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 year.
Expenses for the years ended December 31, 2017, 2016 and 2015 were $17.7 million, $17.1 million and $17.3 million, respectively. Management fees for the Fund were $9.0 million, $8.6 million and $9.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Management fees were calculated as a percentage of Fund assets through August 2017 and increased in 2017 due to an increase in total assets.
Interest expense for the years ended December 31, 2017, 2016 and 2015 was $7.8 million, $7.8 million and $7.1 million, respectively. Interest expense was comprised of amounts related to interest on debt amounts drawn down, unused credit line fees and amounts amortized from deferred fees incurred in conjunction with the loan facility. Interest expense was flat between 2016 and 2017 as the impact of higher interest rates was negated by lower outstanding debt balances.
The banking and professional fees were $0.5 million, $0.5 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. The banking and professional fees were relatively stable through the years. Fees were largely unchanged between 2017 and 2016 as a decrease in legal fees was offset by higher audit fees.
Other operating expenses were $0.5 million, $0.2 million and $0.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. These expenses included director fees, custody fee, tax fees, and other expenses related to the operation of the Fund. The increase in 2017 was due primarily to an increase in expenses related to collection costs on certain non-accrual loans.

Net investment income for the years ended December 31, 2017, 2016 and 2015, was $34.4 million, $43.1 million and $43.5 million, respectively.

Net realized loss for the years ended December 31, 2017, 2016 and 2015, was $8.4 million, $19.1 million and $2.5 million, respectively. The realized losses for 2017 were primarily due to the write-off of five portfolio loans.
Net change in unrealized loss from investments was $10.0 million, $2.1 million and $9.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. The unrealized loss consists of fair value adjustments taken against loans as a result of a deterioration in certain portfolio companies' performance.  
Net increase in net assets resulting from operations for the years ended December 31, 2017, 2016 and 2015 was $16.0 million, $21.9 million and $31.7 million, respectively. On a per share basis, for the years ended December 31, 2017, 2016 and 2015 there was a net increase in net assets resulting from operations of $160.00, $219.45 and $316.90, respectively.
Liquidity and Capital Resources -- December 31, 2017 and 2016
The Fund is owned entirely by the Company. The Company is expected, but not required, to make further contributions to the capital of the Fund to the extent of the Company’s members’ capital commitment to the Company and excess cash balances of the Company. As of December 31, 2017 the Company had received subscriptions for capital in the amount of $375.0 million, all of which had been called and received.
In July 2013, the Fund established a secured syndicated loan facility in an initial amount of up to $125,000,000 led by Wells Fargo, N.A. and MUFG Union Bank, N.A. In November 2014, the borrowing availability thereunder was increased to $255,000,000. Borrowings by the Fund are collateralized by all the assets of the Fund. Loans under the facility may be, at the option of the Fund, either Reference Rate or LIBOR loans. The Fund will pay interest on its borrowings and will also pay a fee on the unused portion of the facility.
The loan facility was due to expire on November 7, 2017. However, the facility was renewed and amended on October 30, 2017. The amended facility has a term of three years and will expire on October 30, 2020. The borrowing availability under the renewed and amended loan facility was initially $200,000,000. Subsequent to year end, the Management elected to reduce the borrowing availability to $180,000,000, effective January 30, 2018. Borrowings by the Fund are collateralized by all the assets of the Fund. Loans under the facility may be, at the option of the Fund, either Reference Rate, LIBOR or LIBOR Market Index Rate Loans. The Fund will pay interest on its borrowings and will also pay a fee on the unused portion of the facility. As of December 31, 2017$121.0 million was outstanding under the facility.

19



As of December 31, 2017 and 2016, 1.5% and 2.8% of the Fund’s assets consisted of cash and cash equivalents. The Fund invested its assets in venture loans during the years ended December 31, 2017 and 2016. Amounts disbursed under the Fund’s loan commitments were $195.2 million and $115.7 million for the years ended December 31, 2017 and 2016, respectively. Net loan amounts outstanding after amortization and valuation adjustments were approximately $325.2 million and $300.4 million for the years ended December 31, 2017 and 2016, respectively. Unexpired unfunded commitments as of December 31, 2017 and 2016 were approximately $67.1 million and $78.2 million, respectively.
Year Ended
Cumulative Amount Disbursed
Principal Amortization and Fair Market Adjustment
Balance Outstanding – Fair Value
Unexpired
Unfunded Commitments
December 31, 2017
$909.2 million
$584.0 million
$325.2 million
$67.1 million
December 31, 2016
$714.0 million
$413.6 million
$300.4 million
$78.2 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 its shareholder. To qualify as a RIC, the Fund must distribute to its shareholder 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.
As of December 31, 2017, the Fund has adequate cash reserves of $4.9 million and approximately $146.3 million in scheduled loan receivable payments over the next year, which together with the Fund's borrowing capacity are sufficient to meet the current commitment backlog and operational expenses of the Fund over the next year. The Fund constantly evaluates potential future liquidity resources and demands before making additional future commitments.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Fund's business activities contain various elements of risk, of which Management considers interest rate and credit risk to be the principal types of market risk for the Fund. Because the Fund considers the management of risk essential to conducting its business and to maintaining profitability, the Fund's risk management procedures are designed to identify and analyze the 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 it primarily invests in private business enterprises and 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, "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 exposure to interest rate sensitivity is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund utilizes various methods to assess interest rate risk in terms of the potential effect on interest income net of interest expense, the value of net assets and the value at risk in an effort to ensure that the Fund is insulated from any significant adverse effects from changes in interest rates. At December 31, 2017, the outstanding debt balance was $121.0 million at a weighted average floating interest rate of 1.41%, for which the Fund had an interest rate swap in place at 1.90% on $102.6 million of the debt. Although management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it makes estimates to adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

Because all of the Fund’s loans all impose a fixed interest rate upon funding, changes in short-term interest rates will not affect interest income associated with the loan portfolio as of December 31, 2017. However, those changes could have the potential to change the Fund’s ability to originate loan commitments, acquire and renew bank facilities, and engage in other investment activities. Further changes in short-term interest rates could also affect interest rate expense, realized gain from investments and interest on the Fund’s short-term investments.


20



Based on the Fund’s Statement of Assets and Liabilities as of December 31, 2017, 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, borrowings, cash balances, and interest rate hedges.
 
Effect of Interest rate change by
Other Interest and Other Income (Loss)
Realized Gain/(Loss) Hedge
Interest Income (Expense)
Total Income / (Loss)
(0.50)%
$(24,656)
$(512,750)
$605,000
$67,594
1%
$49,311
$1,025,500
$(1,210,000)
$(135,189)
2%
$98,622
$2,051,000
$(2,420,000)
$(270,378)
3%
$147,933
$3,076,500
$(3,630,000)
$(405,567)
4%
$197,244
$4,102,000
$(4,840,000)
$(540,756)
5%
$246,555
$5,127,500
$(6,050,000)
$(675,945)
Additionally, a change in the interest rate may affect the value of the interest rate cap, interest rate swap and Net change in unrealized gain (loss) from investments. 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 and swap while any rate decreases will decrease the value.

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 new fundings to borrowers, repayments from borrowers or defaults on borrowings. Accordingly, no assurances can be given that actual results would not differ materially from the table above.

Because the Fund currently borrows, its net investment income is highly dependent upon the difference between the rate at which it borrows and the rate at which it invests the amounts borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on the Fund’s investment activities and net investment income. The Fund's exposure to movement in short-term interest rates stems from the Fund borrowing at a floating interest rate but then making loans with a fixed rate at the time the loans are extended. The Fund, therefore, attempts to limit its interest rate risk by acquiring interest rate caps or swaps to hedge its interest rate exposure.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Results
This information has been derived from unaudited financial statements that, in the opinion of management, include all normal recurring adjustments necessary for a fair presentation of such information. The operating results for any quarter are not necessarily indicative of results for any future year. The format of the statements has been modified, thus certain numbers have been combined in order to fit the format of the statements. Prior to commencing its operations on December 18, 2012, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000 in July 2012. This issuance of stock was a requirement in order to apply for a finance lender's license from the California Commissioner of Corporations, which was obtained on September 20, 2012.

21



December 31, 2017 (Unaudited)
 
Quarterly Information for the Three Months Ended
 
March 31, 2017
 
June 30, 2017
 
September 30, 2017
 
December 31, 2017
Investment Income:
 
 
 
 
 
 
 
Interest on loans
$
11,711,747

 
$
13,615,073

 
$
13,058,233

 
$
13,529,226

Other interest and other income
13,998

 
48,676

 
102,093

 
23,411

Total investment income
11,725,745

 
13,663,749

 
13,160,326

 
13,552,637

Expenses:
 
 
 
 
 
 
 
Management fees
2,242,984

 
2,313,852

 
2,307,583

 
2,101,691

Interest expense
1,867,355

 
2,004,659

 
2,202,837

 
1,694,538

Banking and professional fees
144,031

 
113,230

 
95,868

 
138,963

Other operating expenses
35,973

 
336,859

 
39,724

 
82,167

Total expenses
4,290,343

 
4,768,600

 
4,646,012

 
4,017,359

Net investment income
7,435,402

 
8,895,149

 
8,514,314

 
9,535,278

 
 
 
 
 
 
 
 
Net realized loss from investments
(3,604,891
)
 
(3,179,256
)
 
(297,497
)
 
(1,326,822
)
Net change in unrealized gain (loss) from investments
2,894,183

 
(3,224,533
)
 
(2,825,227
)
 
(6,815,894
)
Net realized and change in unrealized loss from investments
(710,708
)
 
(6,403,789
)
 
(3,122,724
)
 
(8,142,716
)
Net increase in net assets resulting from operations
$
6,724,694

 
$
2,491,360

 
$
5,391,590

 
$
1,392,562

 
 
 
 
 
 
 
 
Amount per common share:
 
 
 
 
 
 
 
Net increase in net assets resulting from operations
$
67.25

 
$
24.91

 
$
53.92

 
$
13.92

Weighted average shares outstanding
100,000

 
100,000

 
100,000

 
100,000
















22




December 31, 2016 (Unaudited)
 
Quarterly Information for the Three Months Ended
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
December 31, 2016
Investment Income:
 
 
 
 
 
 
 
Interest on loans
$
16,167,797

 
$
16,681,666

 
$
14,018,157

 
$
13,230,636

Other interest and other income
13,573

 
100,255

 
34,741

 
14,431

Total investment income
16,181,370

 
16,781,921

 
14,052,898

 
13,245,067

Expenses:
 
 
 
 
 
 
 
Management fees
2,355,902

 
2,253,641

 
2,062,608

 
1,966,138

Interest expense
1,998,704

 
2,034,256

 
1,935,102

 
1,879,764

Banking and professional fees
90,896

 
152,258

 
104,942

 
135,162

Other operating expenses
25,934

 
25,933

 
34,694

 
69,379

Total expenses
4,471,436

 
4,466,088

 
4,137,346

 
4,050,443

Net investment income
11,709,934

 
12,315,833

 
9,915,552

 
9,194,624

 
 
 
 
 
 
 
 
Net realized loss from investments
(1,081,525
)
 
(1,058,795
)
 
(3,438,522
)
 
(13,513,335
)
Net change in unrealized gain (loss) from investments
(6,830,468
)
 
(5,625,286
)
 
(1,551,652
)
 
11,908,800

Net realized and change in unrealized loss from investments
(7,911,993
)
 
(6,684,081
)
 
(4,990,174
)
 
(1,604,535
)
Net increase in net assets resulting from operations
$
3,797,941

 
$
5,631,752

 
$
4,925,378

 
$
7,590,089

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

 
$
56.32

 
$
49.25

 
$
75.90

Weighted average shares outstanding
100,000

 
100,000

 
100,000

 
100,000

















23



ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES.
At the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Fund’s disclosure controls and procedures were effective in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and in providing reasonable assurance that information required to be disclosed by the Fund in such reports is accumulated and communicated to the Fund’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There have not been any changes in the Fund’s internal control over financial reporting identified in connection with Management’s Report that occurred during the Fund’s fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway Commission 2013 ("COSO 2013") updated Internal Control - Integrated Framework. Based on our evaluation under the COSO 2013 Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This report of management on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.
Changes in Internal Controls
There were no significant changes in the Fund's internal controls or in other factors that could significantly affect these controls during the fiscal year ended December 31, 2017.
ITEM 9B.
OTHER INFORMATION
Not applicable.


24



PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Fund.  All officers serve at the pleasure of the Fund's Board of Directors.
Name and Position with Fund
Age
Occupation During Past Five Years
Ronald W. Swenson, Chairman, and Director
73
Chairman, Chief Executive Officer, Director, and other positions for Westech Investment Advisors since 1994
Maurice C. Werdegar, President and Chief Executive Officer
53
President, Chief Executive Officer, Chief Operating Officer, Director and other positions for Westech Investment Advisors since 2001
Jay L. Cohan, Vice President, Assistant Secretary
53
Vice President, Assistant Secretary and other positions for Westech Investment Advisors since 1999
Martin D. Eng, Vice President, Chief Financial Officer, Treasurer, and Secretary
66
Vice President, Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary for Westech Investment Advisors since 2005.
David R. Wanek, Vice President
45
Vice President and other positions for Westech Investment Advisors since 2001
The information required by this item concerning the directors of the Fund and Section 16(a) compliance will be contained in the Fund's Proxy Statement filed in connection with the Annual Meeting of Shareholders to be held on May 9, 2018 (“Proxy Statement”) under the captions “Proposal 1 -- To Elect Five Directors of the Fund” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
The Fund has adopted a Code of Ethics that is applicable to all of its officers.  A free copy of the Code of Ethics may be requested by contacting the Chief Financial Officer of the Fund.  
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be contained in the Fund's Proxy Statement under the caption “Proposal 1 -- To Elect Five Directors of the Fund” and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The information required by this item will be contained in the Fund's Proxy Statement under the caption “Annex A -- Beneficial Ownership of Fund Shares” and is incorporated herein by reference.
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be contained in the Fund's Proxy Statement under the captions: “Other Information -- Managers” and is incorporated herein by reference.
ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in the Fund's Proxy Statement under the captions: “Other Information - Independent Registered Public Accounting Firm.”


25



PART IV.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
1.     Index to Financial Statements and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm    
Statements of Assets and Liabilities as of December 31, 2017 and 2016
Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Statements of Changes in Net Assets for the years ended December 31, 2017, 2016 and 2015
Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Financial Statements 
No schedules are required because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the required information is included in the financial statements and the notes thereto.
(a)
2.    Exhibits
Exhibit    
Exhibit Title
 
 
3(i)

 
 
3(ii)
 
 
4.1
 
 
10.1
 
 
10.3
 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 


26



Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING VII, INC.
(Registrant)

By:
/S/Maurice C. Werdegar
By:
/S/Martin D. Eng
 
 
Maurice C. Werdegar
 
Martin D. Eng
 
 
President and Chief Executive Officer
 
Chief Financial Officer
 
 
Date:  
March 16, 2018
 
Date:
March 16, 2018
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
NAME
TITLE
DATE
 
 
 
 
 
 
By:
/S/ John Glynn
Director
March 16, 2018
 
 
John Glynn
 
 
 
 
 
 
 
 
By:
/S/ Scott Taylor
Director
March 16, 2018
 
 
Scott Taylor
 
 
 
 
 
 
 
 
By:
/S/ Ronald W. Swenson
Chairman & Director
March 16, 2018
 
 
Ronald W. Swenson
 
 
 
 
 
 
 
 
By:
/S/ Robert Hutter
Director
March 16, 2018
 
 
Robert Hutter
 
 
 
 
 
 
 
 
By:
/S/ Maurice C. Werdegar
President, CEO & Director
March 16, 2018
 
 
Maurice C. Werdegar
 
 
 


27





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholder and the Board of Directors of Venture Lending & Leasing VII, Inc

Opinion on the Financial Statements and Financial Highlights

We have audited the accompanying statement of assets and liabilities of Venture Lending & Leasing VII, Inc. (the "Fund"), including the schedules of investments presented in Note 3, as of December 31, 2017 and 2016, and the related statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2017, the financial highlights (presented in Note 12) for each of the five years in the period ended December 31, 2017, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of December 31, 2017 and 2016, and the results of its operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2017, and the financial highlights for each of the five years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of loans owned as of December 31, 2017, by correspondence with the borrowers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.


/s/ Deloitte & Touche LLP

March 16, 2018

San Francisco, California

We have served as the auditor of one or more Venture Lending & Leasing investment companies since 2001.




28



VENTURE LENDING & LEASING VII, INC.
Statements of Assets and Liabilities
As of December 31, 2017 and 2016
 
December 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Loans, at estimated fair value
 
 
 
   (cost of $350,356,204 and $315,360,767)
$
325,189,783

 
$
300,384,884

Interest rate caps (cost of $0 and $871,654)

 
651,988

Total investments (cost of $350,356,204 and $316,232,421 - See Note 3)
325,189,783

 
301,036,872

 
 
 
 
Cash and cash equivalents
4,931,102

 
8,779,375

Other assets
6,149,703

 
4,765,730

 
 
 
 
Total assets
336,270,588

 
314,581,977

 
 
 
 
LIABILITIES
 
 
 
Borrowings under debt facility
121,000,000

 
127,000,000

Accrued management fees
2,101,691

 
1,966,137

Accounts payable and other accrued liabilities
511,880

 
2,093,130

Total liabilities
123,613,571

 
131,059,267

 
 
 
 
NET ASSETS
$
212,657,017

 
$
183,522,710

 
 
 
 
Analysis of Net Assets:
 
 
 
 
 
 
 
Capital paid in on shares of capital stock
$
321,025,000

 
$
276,525,000

Unrealized depreciation on investments
$
(25,167,021
)
 
$
(15,195,549
)
Distribution in excess of net investment income
$
(83,200,962
)
 
$
(77,806,741
)
Net assets (equivalent to $2,126.57 and $1,835.23 per share based on 100,000 shares of capital stock outstanding - See Note 6 and Note 12)
$
212,657,017

 
$
183,522,710

 
 
 
 
Commitments & Contingent Liabilities:
 
 
 
Unfunded unexpired commitments (See Note 4)
$
67,050,000

 
$
78,187,500




See notes to financial statements.


29



VENTURE LENDING & LEASING VII, INC.
Statements of Operations
For the Years Ended December 31, 2017, 2016 and 2015
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
INVESTMENT INCOME:
 
 
 
 
 
Interest on loans
$
51,914,279

 
$
60,098,256

 
$
60,547,623

Other interest and other income
188,178

 
163,000

 
267,583

Total investment income
52,102,457

 
60,261,256

 
60,815,206

 
 
 
 
 
 
EXPENSES:
 
 
 
 
 
Management fees
8,966,110

 
8,638,289

 
9,640,495

Interest expense
7,769,389

 
7,847,826

 
7,064,969

Banking and professional fees
492,092

 
483,258

 
433,787

Other operating expenses
494,723

 
155,940

 
165,753

Total expenses
17,722,314

 
17,125,313

 
17,305,004

Net investment income
34,380,143

 
43,135,943

 
43,510,202

 
 
 
 
 
 
Net realized loss from investments
(8,408,466
)
 
(19,092,177
)
 
(2,503,328
)
Net change in unrealized loss from investments
(9,971,471
)
 
(2,098,606
)
 
(9,316,942
)
Net realized and change in unrealized loss from investments
(18,379,937
)
 
(21,190,783
)
 
(11,820,270
)
Net increase in net assets from operations
$
16,000,206

 
$
21,945,160

 
$
31,689,932

 
 
 
 
 
 
Amount per common share:
 
 
 
 
 
Net increase in net assets from operations per share
$
160.00

 
$
219.45

 
$
316.90

Weighted average shares outstanding
100,000

 
100,000

 
100,000



See notes to financial statements.


30



VENTURE LENDING & LEASING VII, INC.
Statements of Changes in Net Assets
For the Years Ended December 31, 2017, 2016 and 2015
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
Net increase (decrease) in net assets from operations:
 
 
 
 
 
Net investment income
$
34,380,143

 
$
43,135,943

 
$
43,510,202

Net realized loss from investments
(8,408,466
)
 
(19,092,177
)
 
(2,503,328
)
Net change in unrealized loss from investments
(9,971,471
)
 
(2,098,606
)
 
(9,316,942
)
Net increase in net assets from operations
16,000,206

 
21,945,160

 
31,689,932

 
 
 
 
 
 
Distributions of income to shareholder
(25,971,678
)
 
(24,043,766
)
 
(41,006,874
)
Return of capital to shareholder
(5,394,221
)
 
(50,469,996
)
 
(7,187,254
)
Contributions from shareholder
44,500,000

 
25,600,000

 
63,500,000

Net increase (decrease) in net assets
29,134,307

 
(26,968,602
)
 
46,995,804

 
 
 
 
 
 
Net assets
 
 
 
 
 
Beginning of year
183,522,710

 
210,491,312

 
163,495,508

 
 
 
 
 
 
End of year (Undistributed net investment income of $0, $0 and $0)
$
212,657,017

 
$
183,522,710

 
$
210,491,312




See notes to financial statements.

31



VENTURE LENDING & LEASING VII, INC.
Statements of Cash Flows
For the Years Ended December 31, 2017, 2016 and 2015
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net increase in net assets from operations
$
16,000,206

 
$
21,945,160

 
$
31,689,932

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
 
 
 
 
 
Net realized loss from investments
8,408,466

 
19,092,177

 
2,503,328

Net change in unrealized loss from investments
9,971,471

 
2,098,606

 
9,316,942

Amortization of deferred costs related to borrowing facility and interest rate cap agreements
1,510,477

 
1,733,528

 
1,654,980

Net (increase) decrease in other assets
(899,682
)
 
887,344

 
(1,585,373
)
Net increase (decrease) in accounts payable, other accrued
 
 
 
 
 
     liabilities, and accrued management fees
(1,446,295
)
 
57,895

 
773,428

Origination of loans
(195,202,500
)
 
(115,680,000
)
 
(247,337,500
)
Principal payments on loans
149,838,737

 
170,947,751

 
120,932,459

Acquisition of equity securities
(12,072,066
)
 
(6,858,458
)
 
(14,962,179
)
Net cash provided by (used in) operating activities
(23,891,186
)
 
94,224,003

 
(97,013,983
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Contributions from shareholder
44,500,000

 
25,600,000

 
63,500,000

Cash distribution to shareholder
(18,000,000
)
 
(64,400,000
)
 
(31,700,000
)
Borrowings under debt facility
64,500,000

 
26,000,000

 
75,000,000

Repayment of borrowings under debt facility
(70,500,000
)
 
(81,000,000
)
 
(8,000,000
)
Payment received from interest rate cap
683,483

 
52,201

 

Payment made for interest rate swap
(17,457
)
 

 

Payment of bank facility fees and costs
(1,123,113
)
 

 
(812,023
)
Net cash provided by (used in) financing activities
20,042,913

 
(93,747,799
)
 
97,987,977

Net increase (decrease) in cash and cash equivalents
(3,848,273
)
 
476,204

 
973,994

CASH AND CASH EQUIVALENTS:
 
 
 
 
 
Beginning of year
8,779,375

 
8,303,171

 
7,329,177

End of year
$
4,931,102

 
$
8,779,375

 
$
8,303,171

SUPPLEMENTAL DISCLOSURES:
 
 
 
 
 
CASH PAID DURING THE YEAR:
 
 
 
 
 
Interest
$
6,284,563

 
$
6,208,643

 
$
5,281,087

NON-CASH ACTIVITIES:
 
 
 
 
 
Distributions of equity securities to shareholder
$
13,365,899

 
$
10,113,762

 
$
16,494,128

Receipt of equity securities as repayment of loans
$
1,293,833

 
$
3,255,304

 
$
1,531,949

 
 
 
 
 
 



See notes to financial statements.


32



VENTURE LENDING & LEASING VII, INC.
Notes to Financial Statements for the Years Ended December 31, 2017 and 2016
1. ORGANIZATION AND OPERATIONS OF THE FUND
Venture Lending & Leasing VII, Inc. (the “Fund”) was incorporated in Maryland on June 21, 2012 as a non-diversified closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940, as amended ("1940 Act") and is managed by Westech Investment Advisors, LLC (“Manager” or “Management”). The Fund will be dissolved on December 31, 2022 unless the Board of Directors (the "Board") opts to elect early dissolution. The Manager was formed upon the conversion of Westech Investment Advisors, Inc. into a limited liability company. One hundred percent of the stock of the Fund is held by Venture Lending & Leasing VII, LLC (the “Company”). Prior to commencing its operations on December 18, 2012, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000 in July 2012. This issuance of stock was a requirement in order to apply for a finance lender's license from the California Commissioner of Corporations, which was obtained on September 20, 2012.

The Fund's investment objective is to achieve a superior risk-adjusted investment return and seeks to achieve that objective by providing debt financing to portfolio companies, most of which are private. The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments and generally distributes these warrants to its shareholder upon receipt. The Fund also has guidelines for the percentage of total assets which will be invested in different types of assets.

The portfolio investments of the Fund primarily consist of debt financing to early and late stage venture capital-backed technology companies.  
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States of America ("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. Certain prior year amounts have been reclassified to conform to the current year presentation.
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. Within cash and cash equivalents, as of December 31, 2017, the Fund held 4,931,102 units in the Blackrock Treasury Trust Institutional Fund at $1 per unit at a yield of 0.97%, which represents 2.32% of the net assets of the Fund.
Interest Income
Interest income on loans is recognized on an accrual basis 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.
Investment 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 coincident with the issuance of its periodic financial statements, the issuance or repurchase of the Fund's shares at a price equivalent to the current net asset value per share, and at such other times as required by law.  On a quarterly basis, Management will submit to the Board a valuation report and valuation notes, which details the rationale for the valuation of each investment.
As of December 31, 2017 and 2016, the financial statements include nonmarketable investments of $325.2 million and $300.4 million, respectively (or 96.7% and 95.5% of the 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.
    

33




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. Because there is no readily available market price and no secondary market for substantially all of the debt investments made by the Fund into borrowing portfolio companies, Management determines fair value based on hypothetical markets, and several factors related to each borrower, 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, and an evaluation of the general interest rate environment. The amount of any valuation adjustment considers estimated amount and timing of cash payments of principal and interest from the borrower and/or liquidation analysis and is determined based upon a credit analysis of the borrower and an analysis of the expected recovery from the borrower, including consideration of factors such as the nature and quality of the Fund's security interests in collateral, the estimated value of the Fund's collateral, the size of the loan, and the estimated time that will elapse before the Fund achieves a recovery. Management has evaluated these factors and has concluded that the effect of deterioration in the quality of the underlying collateral, increase in the size of the loan, increase in the estimated time to recovery, and increase in the hypothetical market coupon rate would have the effect of lowering the value of the current portfolio of loans.

Non-accrual Loans

The Fund's policy is to classify a loan as non-accrual when the portfolio company is delinquent for three consecutive months on its monthly loan payment, or, in the opinion of Management, either ceases or drastically curtails its operation 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 recognized as interest income if and when the proceeds exceed the book value of the respective loan.

If a borrower of a non-accrual loan resumes making regular payments and Management believes that such borrower has regained the ability to service the loan on a sustainable basis, the loan is reclassified 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 causing a change in the effective interest rate.

As of December 31, 2017 and 2016, loans with a cost basis of $35.5 million and $20.2 million and fair values of $11.4 million and $7.8 million were classified as non-accrual respectively.
Warrants and Stock

Warrants and equity securities that are received in connection with loan transactions will be measured at a fair value at the time of acquisition. Warrants are valued based on a modified Black-Scholes option pricing model which considers, among several factors, the underlying stock value, expected term, volatility, and risk-free interest rate. It is anticipated that such securities will be distributed by the Fund to the Company simultaneously with, or shortly following, their acquisition.

The 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 client 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. The Fund assumed the average duration of a warrant is 3 years prior to October 1, 2014 and 3.5 years from October 1, 2014 to December 31, 2017. 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.


34



The Fund engages an independent valuation company to provide valuation assistance with respect to the warrants received as part of loan consideration, including an evaluation of the Fund's valuation methodology and the reasonableness of the assumptions used from the perspective of a market participant. The independent valuation company calculates several of the inputs used such as volatility and risk-free rate.

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 December 31, 2017 and 2016, 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 December 31, 2017 and 2016, based on borrowing rates available to the Fund, which are Level 2 inputs, the estimated fair value of the borrowings under the debt facility was $121.0 million and $127.0 million, respectively.
Commitment Fees
Unearned income and commitment fees on loans are recognized using the effective-interest method over the term of the loan.  Commitment fees are carried as liabilities when received for commitments upon which no draws have been made. When the first draw is made, the fee is treated as unearned income and is recognized as described above. If a draw is never made, the forfeited commitment fee, less any applicable legal costs, becomes recognized as other income after the commitment expires.
Deferred Bank Fees
The deferred bank fees and costs associated with the debt facility are being allocated over the estimated life of the facility, which currently is through October 30, 2022. The amortization of these costs is recorded as interest expense in the Statements of Operations.
Interest Rate Cap Agreements

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 (See Note 9). 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 Statements of Assets and Liabilities. The changes in fair value are recorded in Net change in unrealized gain (loss) from investments in the Statements of Operations. The monthly interest received or paid on the interest rate cap contracts, if any, will be recorded in Net realized gain (loss) from investments in the Statements of Operations.
Interest Rate Swap Agreement

The Fund has entered into a cancellable interest rate swap agreement to hedge its interest rate on its expected borrowings under its loan facility (see Note 10). Cancellable interest rate swaps are primarily valued on the basis of quotes obtained from brokers and dealers and adjusted for counterparty risk and the optionality to terminate the swap early. The valuation of the swap agreement also considers 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 swap instruments. The contract is recorded at fair value in either Other assets or Other current liabilities in the Statements of Assets and Liabilities, depending on whether the value of the contract is in favor of the Fund or the counterparty. The changes in fair value are recorded in Net realized and change in unrealized gain (loss) from investments in the Statements of Operations. The interest rate swap agreement terminates on December 1, 2020 with an option to terminate the swap early on June 1, 2020.

    

    

35



3.  SCHEDULES OF INVESTMENTS
As of December 31, 2017, all loans were made to non-affiliates as follows:
Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2017
 
Par Value
12/31/2017
Final
Maturity
Date
 
 
 
 
 
 
Biotechnology
 
 
 
 
 
Phylagen, Inc.
 
$
349,718

 
$
349,718

03/01/2020
Subtotal:
0.2%
$
349,718

 
$
349,718

 
 
 
 
 
 
 
 
 
 
 
 
 
Computers & Storage
 
 
 
 
 
Canary Connect, Inc.
 
$
3,841,635

 
$
3,841,635

12/01/2020
HyperGrid, Inc.
 
983,652

 
983,652

12/01/2019
Rigetti & Co., Inc.
 
2,825,214

 
2,825,214

01/01/2020
Subtotal:
3.6%
$
7,650,501

 
$
7,650,501

 
 
 

 

 
Internet
 
 
 
 
 
Amino Payments, Inc.
 
$
718,898

 
$
718,898

03/01/2021
Apartment List, Inc.
 
969,280

 
969,280

11/01/2019
Betaworks Studio, LLC**
 
2,344,366

 
2,344,366

07/01/2018
Better Doctor, Inc.
 
1,313,150

 
1,313,150

12/01/2020
Bitfinder, Inc.
 
476,274

 
476,274

09/01/2020
Bombfell, Inc.
 
950,217

 
950,217

04/01/2021
CapLinked, Inc.
 
219,962

 
219,962

01/01/2019
ConnectedYard, Inc.
 
423,421

 
471,785

06/01/2020
Cowboy Analytics, LLC
 
196,411

 
380,000

*
CustomMade Ventures Corp.
 
688,026

 
688,026

*
DailyFeats, Inc.
 
3,434,717

 
3,434,717

12/01/2020
Deja Mi, Inc.
 
53,094

 
834,476

*
Digital Caddies, Inc.**
 

 
987,584

*
Dinner Lab, Inc.
 

 
282,894

*
DreamCloud Holdings, LLC
 
890,304

 
890,304

08/01/2020
Eloquii Design, Inc.
 
481,537

 
481,537

09/01/2018
Eventbite, Inc.
 
13,081,547

 
13,081,547

02/01/2022
FLYR, Inc.
 
143,795

 
143,795

06/01/2018
Giddy Apps, Inc.
 

 
999,454

*
Glide, Inc.**
 
253,989

 
4,422,705

*
Handy Technologies, Inc.
 
4,745,656

 
4,745,656

12/01/2020
Homelight, Inc.
 
871,559

 
871,559

12/01/2019
Honk Technologies, Inc.
 
2,124,520

 
2,124,520

05/01/2020
Hotel Tonight, Inc.
 
4,500,668

 
4,500,668

01/01/2019
Kiwi Crate, Inc.
 
147,652

 
147,652

04/01/2018
Leading ED, Inc.
 
1,000

 
1,515

*
Monetate, Inc.
 
455,394

 
455,394

06/01/2018
Node, Inc.
 
402,161

 
402,161

01/01/2020

36



Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2017
 
Par Value
12/31/2017
Final
Maturity
Date
Placester, Inc.
 
1,983,527

 
1,983,527

10/01/2019
Playstudios, Inc.
 
1,547,766

 
1,547,766

03/01/2021
Quri, Inc.
 
459,519

 
459,519

06/01/2018
Radius Intelligence, Inc.
 
6,975,493

 
6,975,493

10/01/2021
Relay Network, LLC
 
2,319,797

 
2,319,797

09/01/2020
ShipBob, Inc.
 
617,602

 
617,602

01/01/2020
SocialChorus, Inc.
 
475,330

 
475,330

09/01/2018
Spot.IM, Ltd.**
 
835,033

 
835,033

05/01/2020
Super Home, Inc.
 
126,831

 
126,831

03/01/2019
Tango Card, Inc.
 
1,448,020

 
1,448,020

11/01/2020
Thrive Market, Inc.
 
4,881,645

 
4,881,645

09/01/2019
Tictail, Inc.
 
1,086,519

 
1,086,519

05/01/2021
TouchofModern, Inc.
 
4,317,741

 
4,317,741

05/01/2020
Traackr, Inc.
 
364,673

 
364,673

04/01/2019
Viyet, Inc.
 
343,706

 
343,706

06/01/2020
WHI, Inc.
 
200,000

 
1,200,999

*
YouDocs Beauty, Inc.
 
1,192,024

 
1,192,024

*
Subtotal:
32.5%
$
69,062,824

 
$
77,516,321

 
 
 
 
 
 
 
Medical Devices
 
 
 
 
 
Anutra Medical, Inc.
 
$
624,708

 
$
624,708

12/01/2019
AxioMed, LLC
 
14,238

 
14,238

*
JustRight Surgical LLC
 
1,311,845

 
1,311,845

07/01/2019
Keystone Heart, Inc.**
 
2,709,462

 
2,709,462

11/01/2020
MyoScience, Inc.
 
2,343,407

 
2,343,407

07/01/2018
Renovia, Inc.
 
1,911,275

 
1,911,275

11/01/2020
Subtotal:
4.2%
$
8,914,935

 
$
8,914,935

 
 
 
 
 
 
 
Other Healthcare
 
 
 
 
 
4G Clinical LLC
 
$
942,135

 
$
942,135

07/01/2020
Caredox, Inc.
 
340,488

 
340,488

01/01/2019
Clover Health Investment Corp.
 
27,898,780

 
27,898,780

10/01/2022
Hello Doctor, Ltd. **
 
87,237

 
87,237

03/01/2019
Hi.Q, Inc.
 
2,199,285

 
2,199,285

05/01/2020
Lean Labs, Inc.
 
148,618

 
148,618

04/01/2019
MD Revolution, Inc.
 
1,069,491

 
1,069,491

03/01/2020
mPharma Data, Inc. **
 
717,609

 
717,609

03/01/2021
Myolex, Inc.
 
459,926

 
668,025

03/01/2019
Physician Software Systems, LLC
 

 
148,042

*
Project Healthy Living, Inc.
 
1,263,519

 
1,263,519

09/01/2019
Sparta Software Corporation
 
164,769

 
164,769

06/01/2020
Trio Health Advisory Group, Inc.
 
482,660

 
482,660

02/01/2019
Wellist PBC, Inc.
 
259,737

 
259,737

12/01/2019
Subtotal:
16.9%
$
36,034,254

 
$
36,390,395

 

37



Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2017
 
Par Value
12/31/2017
Final
Maturity
Date
 
 
 
 
 
 
Other Technology
 
 
 
 
 
AltSchool, PBC
 
$
4,447,010

 
$
4,447,010

06/01/2020
Asset Avenue, Inc.**
 
30,000

 
159,244

*
Astro, Inc.
 
84,108

 
280,359

*
BloomLife, Inc.
 
264,513

 
264,513

04/01/2020
Candy Club Holdings, Inc.
 
218,536

 
218,536

09/01/2018
CardLab, ApS**
 

 
140,954

*
CommunityCo, LLC
 
149,167

 
149,167

03/01/2019
Consumer Physics, Inc.**
 
1,429,161

 
1,429,161

03/01/2019
Ensyn Corporation
 
3,555,156

 
3,555,156

11/01/2019
Eponym, Inc.
 
100,000

 
1,357,124

*
ETN Media, Inc.
 
634,866

 
634,866

07/01/2020
Faster Faster, Inc.
 
918,653

 
918,653

01/01/2019
Flo Water, Inc.
 
376,147

 
376,147

05/01/2020
FMTwo Game, Inc.
 
18,900

 
500,000

*
Gap Year Global, Inc.
 
113,439

 
113,439

10/01/2018
Greats Brand, Inc.
 
351,973

 
351,973

12/01/2019
Heartwork, Inc.
 
479,714

 
479,714

09/01/2020
Hint, Inc.
 
4,728,235

 
4,728,235

07/01/2021
Hyperloop Technologies, Inc.
 
6,110,809

 
6,110,809

06/01/2019
ICON Aircraft, Inc.
 
6,604,519

 
6,604,519

09/01/2019
June Life, Inc.
 
2,020,813

 
2,020,813

03/01/2020
LanzaTech New Zealand Ltd.
 
8,048,027

 
8,048,027

03/01/2021
Mark One Lifestyle, Inc.
 

 
76,347

*
Neuehouse, LLC
 
3,340,451

 
3,340,451

06/01/2019
Noteleaf, Inc.
 
1,443,199

 
1,443,199

09/01/2020
nWay, Inc.
 
883,855

 
1,224,468

*
PDQ Enterprises LLC**
 
3,382,474

 
3,382,474

02/01/2021
Pinnacle Engines, Inc.
 
97,097

 
97,097

*
PLAE, Inc.
 
1,436,153

 
1,436,153

12/01/2020
Planet Labs, Inc.
 
25,639,534

 
25,639,534

11/01/2021
Plenty Unlimited, Inc.
 
5,558,137

 
5,558,137

09/01/2021
Plethora, Inc
 
1,347,776

 
1,347,776

03/01/2019
Prana Holdings, Inc.
 
175,000

 
470,066

*
Rosco & Benedetto Co.
 
258,808

 
258,808

09/01/2019
Seriforge, Inc.
 
78,000

 
78,000

09/01/2018
SkyKick, Inc.
 
2,386,323

 
2,386,323

11/01/2020
TAE Technologies, Inc.
 
11,701,080

 
11,701,080

04/01/2021
Theatro Labs, Inc.
 
1,113,286

 
1,113,286

03/01/2019
VentureBeat, Inc.
 
702,620

 
806,102

*
Virtuix Holdings, Inc.
 
711,821

 
711,821

07/01/2020
Wine Plum, Inc.
 
1,410,920

 
1,410,920

09/01/2019
Subtotal:
48.1%
$
102,350,280

 
$
105,370,461

 

38



Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2017
 
Par Value
12/31/2017
Final
Maturity
Date
 
 
 
 
 
 
Security
 
 
 
 
 
Guardian Analytics, Inc.
 
$
3,111,334

 
$
3,111,334

02/01/2019
Identiv, Inc.**
 
2,205,887

 
2,205,887

08/01/2020
Kryptnostic, Inc.
 
5,000

 
302,293

*
Nok Nok Labs, Inc.
 
634,666

 
634,666

12/01/2020
ThinAir Labs, Inc.
 
1,066,594

 
1,066,594

02/01/2020
Subtotal:
3.3%
$
7,023,481

 
$
7,320,774

 
 
 
 
 
 
 
Semiconductors & Equipment
 
 
 
 
 
ETA Compute, Inc.
 
$
425,658

 
$
425,658

08/01/2020
Subtotal:
0.2%
$
425,658

 
$
425,658

 
 
 
 
 
 
 
Software
 
 
 
 
 
Addepar, Inc.
 
$
1,333,487

 
$
1,333,487

06/01/2018
Apptimize, Inc.
 
420,545

 
420,545

03/01/2019
Aptible, Inc.
 
238,534

 
238,534

02/01/2021
Atigeo Corporation
 
1,001,669

 
1,170,880

*
Bloomboard, Inc.
 
751,755

 
2,001,360

*
BlueCart, Inc.
 
567,820

 
567,820

01/01/2020
DealPath, Inc.
 
1,552,176

 
1,552,176

05/01/2021
DemystData Limited
 
1,377,575

 
1,377,575

07/01/2020
DocSend, Inc.
 
135,959

 
135,959

06/01/2018
Drift Marketplace, Inc.
 
550,359

 
550,359

03/01/2020
Due, Inc.
 
93,277

 
932,772

*
ElasticBeam, Inc.
 
874,047

 
874,047

09/01/2018
Estify, Inc.
 
940,557

 
940,557

11/01/2020
FieldAware US, Inc.
 
8,533,001

 
8,533,001

07/01/2020
FoxCommerce, Inc.
 

 
803,790

*
Gearbox Software, LLC
 
2,712,251

 
2,712,251

09/01/2020
GoFormz, Inc.
 
1,165,642

 
1,165,642

11/01/2020
HealthPrize Technologies, LLC
 
195,364

 
195,364

12/01/2019
Highfive Technologies, Inc.
 
3,760,217

 
3,760,217

10/01/2021
IntelinAir, Inc.
 
147,247

 
147,247

06/01/2019
Interset Software, Inc. **
 
1,612,450

 
1,612,450

10/01/2020
Invoice2Go, Inc.
 
4,298,135

 
4,298,135

04/01/2021
JethroData, Inc. **
 
822,579

 
822,579

10/01/2019
Libre Wireless Technologies, Inc.
 
399,350

 
399,350

01/01/2020
Mconcierge System, Inc.
 
29,000

 
390,495

*
Meta Company
 
4,769,026

 
4,769,026

06/01/2021
Metric Insights, Inc.
 
633,139

 
633,139

07/01/2019
Mine.io **
 
462,139

 
462,139

07/01/2020
Mintigo, Inc. **
 
1,543,903

 
1,543,903

07/01/2021
Norse Networks, Inc.
 
357,386

 
3,445,429

*

39



Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2017
 
Par Value
12/31/2017
Final
Maturity
Date
Overops, Inc.
 
111,560

 
111,560

03/01/2018
PowerInbox, Inc.**
 
361,516

 
361,516

06/01/2020
Swrve, Inc.
 
3,218,971

 
3,218,971

05/01/2020
The/Studio Technologies, Inc.
 
683,418

 
683,418

06/01/2020
Truss Technology Corp.
 

 
2,000,000

*
Unmetric, Inc.
 
307,320

 
307,320

02/01/2020
VenueNext, Inc.
 
1,344,322

 
1,344,322

05/01/2020
Viewpost Holdings, LLC
 
4,518,457

 
11,195,621

*
Vuemix, Inc.
 
233,440

 
233,440

11/01/2020
Wayfare Interactive, Inc.
 
671,876

 
671,876

06/01/2021
Workspot, Inc.
 
357,047

 
357,047

02/01/2019
Xeeva
 
2,314,394

 
2,314,394

07/01/2020
Zodiac, Inc.
 
484,472

 
484,472

07/01/2019
Subtotal:
26.3%
$
55,885,382

 
$
71,074,185

 
 
 
 
 
 
 
Technology Services
 
 
 
 
 
AirHelp, Inc.
 
$
2,367,739

 
$
2,367,739

10/01/2020
Akademos, Inc.***
 
848,678

 
848,678

08/01/2020
Blazent, Inc.
 
2,791,267

 
2,791,267

08/01/2020
Blue Technologies Limited**
 
1,436,936

 
1,436,936

04/01/2020
Callisto Media, Inc.
 
7,043,550

 
7,043,550

03/01/2021
Dolly, Inc.
 
834,672

 
834,672

06/01/2020
Fluxx Labs, Inc.
 
1,360,520

 
1,360,520

12/01/2018
FSA Store, Inc.
 
2,811,705

 
2,811,705

12/01/2020
Iris.tv, Inc.
 
136,877

 
136,877

04/01/2019
ParkJockey Global, Inc.
 
614,843

 
614,843

06/01/2019
Particle Industries, Inc.
 
744,122

 
744,122

11/01/2019
PayJoy, Inc.**
 
307,612

 
307,612

08/01/2019
Sixup PBC, Inc.**
 
380,913

 
380,913

06/01/2019
TiqIQ, Inc.
 
6,831

 
6,831

03/01/2018
TrueFacet, Inc.
 
1,186,665

 
1,186,665

06/01/2021
Zeel Networks, Inc.
 
1,881,303

 
1,881,303

08/01/2020
Subtotal:
11.6%
$
24,754,233

 
$
24,754,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

40



Borrower
Percentage of Net Assets
Estimated Fair Value
12/31/2017
 
Par Value
12/31/2017
Final
Maturity
Date
Wireless
 
 
 
 
 
Bluesmart, Inc.
 
$
470,425

 
$
1,355,318

09/01/2019
InVenture Capital Corporation**
 
918,468

 
918,468

09/01/2019
Juvo Mobile, Inc.**
 
1,192,983

 
1,192,983

02/01/2020
Kicksend Holdings, Inc.
 

 
61,475

*
LLJ, Inc.
 
91,015

 
91,015

04/01/2018
Nextivity, Inc.
 
5,441,554

 
5,441,554

06/01/2021
Parallel Wireless, Inc.
 
4,624,072

 
4,624,072

10/01/2020
Subtotal:
6.0%
$
12,738,517

 
$
13,684,885

 
Total Loans (Cost of $350,356,204)
152.9%
$
325,189,783

 
$
353,452,066

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps (Cost of $0)
—%
$

 
$

 
 
 
 
 
 
 
 
 
 
 

 
Total Investments (Cost of $350,356,204)
152.9%
$
325,189,783

 
$
353,452,066

 

* As of December 31, 2017, loans with a cost basis of $35.5 million and a fair value of $11.4 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. 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, 2017, 7.0% 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) of the 1940 Act; the numerator consists of total assets less the assets described in Section 55(a)(7) of the 1940 Act.
*** Indicates assets that are not senior loans.

As of December 31, 2016, all loans were made to non-affiliates as follows:
Borrower
Percentage of Net Assets
 Estimated Fair Value
12/31/2016
 
 Par Value
12/31/2016
Final
Maturity
Date
 
 
 
 
 
 
Biotechnology
 
 
 
 
 
Phylagen, Inc.
 
$
458,705

 
$
458,705

03/01/2020
Subtotal
0.2%
$
458,705

 
$
458,705

 
 
 
 
 
 
 
Computers & Storage
 
 
 
 
 
Canary Connect, Inc.
 
$
5,477,403

 
$
5,477,403

12/01/2020
D-Wave Systems, Inc. **
 
197,224

 
197,224

02/01/2017
Electric Objects, Inc.
 
1,024,023

 
1,024,023

09/01/2019
Gridstore, Inc.
 
1,499,020

 
1,499,020

12/01/2019
Rigetti & Co., Inc.
 
3,456,371

 
3,456,371

01/01/2020
Subtotal:
6.4%
$
11,654,041

 
$
11,654,041

 
 
 
 
 
 
 
Internet
 
 
 
 
 
Apartment List, Inc.
 
$
1,376,349

 
$
1,376,349

11/01/2019
Apsalar, Inc.
 
945,893

 
945,893

11/01/2019
Betaworks Studio, LLC.**
 
5,873,357

 
5,873,357

07/01/2018
Blitsy, Inc.
 
422,582

 
422,582

02/01/2019

41



Borrower
Percentage of Net Assets
 Estimated Fair Value
12/31/2016
 
 Par Value
12/31/2016
Final
Maturity
Date
Bloom That, Inc.
 
516,286

 
516,286

09/01/2018
CapLinked, Inc.
 
397,321

 
397,321

01/01/2019
Cowboy Analytics, LLC
 
333,476

 
380,000

*
CustomMade Ventures Corp.
 
687,276

 
687,276

*
Deja Mi, Inc.
 
1,183,630

 
1,183,630

09/01/2018
Digital Caddies, Inc.**
 

 
987,584

*
Dinner Lab, Inc.
 
75,000

 
282,894

*
Eloquii Design, Inc.
 
1,224,047

 
1,224,047

09/01/2018
Finrise, Inc.
 
222,320

 
222,320

09/01/2019
Flowplay, Inc.
 
744,253

 
744,253

12/01/2017
FLYR, Inc.
 
399,850

 
399,850

06/01/2018
Giddy Apps, Inc.
 
10,000

 
999,454

*
GiveForward, Inc.
 

 
346,473

*
Glide, Inc.**
 
2,415,423

 
4,337,124

06/01/2018
HEXAGRAM49, Inc.
 
5,000

 
423,906

*
Homelight, Inc.
 
1,552,518

 
1,552,518

12/01/2019
Honk Technologies, Inc.
 
1,396,791

 
1,396,791

12/01/2019
Hotel Tonight, Inc.
 
8,021,828

 
8,021,828

01/01/2019
JewelScent, Inc.
 
204,015

 
204,015

12/01/2017
Kiwi Crate, Inc.
 
535,822

 
535,822

04/01/2018
Leading ED, Inc.
 
2,735

 
2,735

*
Monetate, Inc.
 
1,546,197

 
1,546,197

06/01/2018
Move Loot, Inc.
 
100,000

 
1,305,297

*
PerformLine, Inc.
 
857,624

 
857,624

06/01/2019
Pixalate, Inc.
 
136,183

 
136,183

06/01/2017
Placester, Inc.
 
2,542,991

 
2,542,991

10/01/2019
Playstudios, Inc.
 
2,380,153

 
2,380,153

03/01/2021
Quantcast Corp.
 
929,202

 
929,202

04/01/2017
Quri, Inc.
 
976,446

 
976,446

06/01/2018
Radius Intelligence, Inc.
 
617,379

 
617,379

10/01/2017
Relay Network, LLC
 
1,165,231

 
1,165,231

06/01/2018
ShipBob, Inc.
 
468,983

 
468,983

01/01/2020
SocialChorus, Inc.
 
1,252,215

 
1,252,215

09/01/2018
Spot.IM, Ltd.**
 
439,416

 
439,416

12/01/2019
Striking, Inc.
 
472,523

 
472,523

06/01/2019
Super Home, Inc.
 
209,758

 
209,758

03/01/2019
THECLYMB
 
618,808

 
618,808

10/01/2017
Thrive Market, Inc.
 
7,156,594

 
7,156,594

09/01/2019
Tictail, Inc.
 
356,102

 
356,102

07/01/2020
TouchofModern, Inc.
 
5,724,450

 
5,724,450

05/01/2020
Traackr, Inc.
 
628,107

 
628,107

04/01/2019
Viyet, Inc.
 
189,322

 
189,322

01/01/2019
WHI, Inc.
 
593,999

 
1,200,999

*
YouDocs Beauty, Inc.
 
1,192,024

 
1,192,024

*
Subtotal:
32.2%
$
59,099,479

 
$
65,830,312

 
 
 
 
 
 
 
 
 
 
 
 
 
Medical Devices
 
 
 
 
 

42



Borrower
Percentage of Net Assets
 Estimated Fair Value
12/31/2016
 
 Par Value
12/31/2016
Final
Maturity
Date
Anutra Medical, Inc.
 
$
1,110,877

 
$
1,110,877

12/01/2019
AxioMed, LLC
 
14,238

 
14,238

*
JustRight Surgical LLC
 
2,117,580

 
2,117,580

07/01/2019
MyoScience, Inc.
 
5,920,244

 
5,920,244

07/01/2018
Subtotal:
5.0%
$
9,162,939

 
$
9,162,939

 
 
 
 
 
 
 
Other Healthcare
 
 
 
 
 
Caredox, Inc.
 
$
610,141

 
$
610,141

01/01/2019
Cogito Corporation
 
772,065

 
772,065

09/01/2019
Hello Doctor, Ltd.**
 
141,167

 
141,167

03/01/2019
Hi.Q, Inc.
 
2,654,301

 
2,654,301

05/01/2020
Lean Labs, Inc.
 
214,224

 
214,224

12/01/2018
MD Revolution, Inc.
 
1,029,568

 
1,029,568

03/01/2020
Physician Software Systems, LLC
 
75,000

 
158,223

*
Project Healthy Living, Inc.
 
1,812,219

 
1,812,219

12/01/2018
Seven Bridges Genomics, Inc.
 
2,068,925

 
2,068,925

07/01/2018
Skulpt, Inc.
 
872,416

 
872,416

03/01/2019
Symphony Performance Health, Inc.
 
6,247,605

 
6,247,605

11/01/2017
Trio Health Advisory Group, Inc.
 
828,757

 
828,757

02/01/2019
Wellist PBC, Inc.
 
354,443

 
354,443

12/01/2019
Subtotal:
9.6%
$
17,680,831

 
$
17,764,054

 
 
 
 
 
 
 
Other Technology
 
 
 
 
 
AltspaceVR, Inc.
 
1,631,967

 
$
1,631,967

12/01/2019
Asset Avenue, Inc.**
 
375,000

 
663,823

*
Astro, Inc.
 
322,296

 
322,296

09/01/2019
Automatic Labs, Inc.
 
2,358,518

 
2,358,518

12/01/2018
Beeline Bikes, Inc.
 
32,635

 
32,635

06/01/2017
Candy Club Holdings, Inc.
 
605,561

 
605,561

09/01/2018
CardLab, ApS**
 
140,955

 
140,955

*
CommunityCo, LLC
 
241,801

 
241,801

03/01/2019
Daylight Solutions, Inc.
 
1,367,682

 
1,367,682

12/01/2018
Ensyn Corporation
 
5,248,499

 
5,248,499

11/01/2019
Eponym, Inc.
 
1,219,791

 
1,219,791

11/01/2019
Faster Faster, Inc.
 
1,582,902

 
1,582,902

01/01/2019
Flo Water, Inc.
 
482,791

 
482,791

05/01/2020
FMTwo Game, Inc.
 
193,300

 
500,000

*
Gap Year Global, Inc.
 
183,583

 
183,583

10/01/2018
General Assembly, Inc.
 
13,395,152

 
13,395,152

06/01/2019
Greats Brand, Inc.
 
459,163

 
459,163

12/01/2019
Hyperloop Technologies, Inc.
 
9,368,246

 
9,368,246

06/01/2019
ICON Aircraft, Inc.
 
11,052,163

 
11,052,163

09/01/2019
InsideTrack, Inc.
 
348,317

 
348,317

09/01/2017
June Life, Inc.
 
1,161,094

 
1,161,094

03/01/2020
Knockaway, Inc.
 
233,741

 
233,741

09/01/2019
Lumo BodyTech, Inc.
 
527,793

 
527,793

12/01/2017
Mark One Lifestyle, Inc.
 

 
126,347

*
Neuehouse, LLC
 
5,477,253

 
5,477,253

06/01/2019

43



Borrower
Percentage of Net Assets
 Estimated Fair Value
12/31/2016
 
 Par Value
12/31/2016
Final
Maturity
Date
New Frontier Foods, Inc.
 
448,043

 
448,043

08/01/2018
nWay, Inc.
 
640,806

 
1,666,735

*
One Financial Holdings Group, Inc.
 
662,491

 
662,491

04/01/2019
Owlet Baby Care, Inc.
 
855,802

 
855,802

03/01/2019
Pinnacle Engines, Inc.
 
404,280

 
404,280

12/01/2017
Planet Labs, Inc.
 
23,733,503

 
23,733,503

03/01/2019
Plethora, Inc.
 
2,195,301

 
2,195,301

03/01/2019
Prana Holdings, Inc.
 
256,816

 
1,188,816

*
Rosco & Benedetto Co.
 
345,735

 
345,735

09/01/2019
Scoot Networks, Inc.
 
223,390

 
223,390

12/01/2017
See Jane Farm, Inc.
 
1,281,788

 
1,281,788

01/01/2021
Seriforge, Inc.
 
163,971

 
163,971

09/01/2018
Skully, Inc.
 
250,000

 
2,491,791

*
Street League, Inc.
 
348,510

 
348,510

07/01/2020
Terralux, Inc.
 
1,238,167

 
1,238,167

03/01/2019
Theatro Labs, Inc.
 
1,878,263

 
1,878,263

03/01/2019
VentureBeat, Inc.
 
801,576

 
801,576

11/01/2017
Virtuix Holdings, Inc.
 
322,099

 
322,099

09/01/2017
Wine Plum, Inc.
 
1,428,346

 
1,428,346

09/01/2019
Subtotal:
52.0%
$
95,489,090

 
$
100,410,680

 
 
 
 
 
 
 
Security
 
 
 
 
 
Agari Data, Inc.
 
$
336,977

 
$
336,977

09/01/2017
Bottlenose, Inc.
 
700,000

 
1,182,135

*
Guardian Analytics, Inc.
 
5,287,261

 
5,287,261

02/01/2019
Kryptnostic, Inc.
 
477,043

 
477,043

06/01/2019
ThinAir Labs, Inc.
 
1,193,325

 
1,193,325

02/01/2020
Subtotal:
4.4%
$
7,994,606

 
$
8,476,741

 
 
 
 
 
 
 
Semiconductors & Equipment
 
 
 
 
 
ETA Compute, Inc.
 
$
235,020

 
$
235,020

10/01/2019
Subtotal:
0.1%
$
235,020

 
$
235,020

 
 
 
 
 
 
 
Software
 
 
 
 
 
Addepar, Inc.
 
$
3,736,495

 
$
3,736,495

06/01/2018
Apptimize, Inc.
 
788,144

 
788,144

03/01/2019
Atigeo Corporation
 
870,000

 
1,170,898

*
Beanstock Media, Inc.
 
100,000

 
1,322,744

*
Beep, Inc.
 
211,014

 
211,014

12/01/2017
Bloomboard, Inc.
 
1,933,735

 
1,933,735

08/01/2019
BlueCart, Inc.
 
467,675

 
467,675

01/01/2020
Bounce Exchange, Inc.
 
3,290,438

 
3,290,438

05/01/2020
DocSend, Inc.
 
378,593

 
378,593

06/01/2018
Drift Marketplace, Inc.
 
169,143

 
169,143

03/01/2020
ElasticBeam, Inc.
 
1,022,434

 
1,022,434

09/01/2018
FieldAware US, Inc.
 
8,904,091

 
8,904,091

09/01/2019
FoxCommerce, Inc.
 
1,223,270

 
1,223,270

01/01/2019
HealthPrize Technologies, LLC
 
231,169

 
231,169

12/01/2019

44



Borrower
Percentage of Net Assets
 Estimated Fair Value
12/31/2016
 
 Par Value
12/31/2016
Final
Maturity
Date
IntelinAir, Inc.
 
224,388

 
224,388

06/01/2019
Interset Software, Inc.**
 
1,192,711

 
1,192,711

10/01/2019
Invoice2Go, Inc.
 
866,019

 
866,019

06/01/2020
JethroData, Inc.**
 
1,063,724

 
1,063,724

10/01/2019
Mconcierge System, Inc.
 
45,000

 
447,442

*
Metric Insights, Inc.
 
930,019

 
930,019

07/01/2019
Mintigo, Inc.**
 
1,155,044

 
1,155,044

04/01/2020
Nectar Holdings, Inc.
 
381,833

 
381,833

12/01/2017
Norse Networks, Inc.
 
2,440,176

 
3,123,176

12/01/2018
OrderGroove, Inc.
 
386,343

 
386,343

12/01/2017
Redwood Apps, Inc.
 
500,000

 
1,000,000

*
SoundHound, Inc.
 
607,933

 
607,933

05/01/2017
StreetLight Data, Inc.
 
86,098

 
86,098

04/01/2017
Swift Pursuits, Inc.
 
1,059,951

 
1,059,951

04/01/2020
Swrve, Inc.
 
5,147,556

 
5,147,556

05/01/2020
Overops, Inc.
 
944,024

 
944,024

03/01/2018
Toast, Inc. ***
 
409,136

 
409,136

01/01/2019
Truss Technology Corp.
 
173,275

 
2,000,000

*
Unmetric, Inc.
 
334,047

 
334,047

02/01/2020
Viewpost Holdings, LLC.
 
12,401,517

 
12,401,517

05/01/2019
Vuemix, Inc.
 
97,293

 
97,293

09/01/2017
Workspot, Inc.
 
604,544

 
604,544

02/01/2019
Xeeva
 
2,391,497

 
2,391,497

06/01/2019
ZeroTurnaround USA, Inc.**
 
4,109,632

 
4,109,632

06/01/2019
Zodiac, Inc.
 
720,349

 
720,349

07/01/2019
Subtotal:
33.6%
$
61,598,310

 
$
66,534,119

 
 
 
 
 
 
 
Technology Services
 
 
 
 
 
Akademos, Inc. ***
 
$
232,217

 
$
232,217

06/01/2017
Ascend Consumer Finance, Inc.**
 
437,702

 
437,702

03/01/2019
Blazent, Inc.
 
1,915,129

 
1,915,129

01/01/2020
Blue Technologies Limited**
 
1,327,657

 
1,327,657

12/01/2019
BountyJobs, Inc.
 
148,292

 
148,292

10/01/2017
Callisto Media, Inc.
 
9,768,331

 
9,768,331

06/01/2020
Fluxx Labs, Inc.
 
2,866,248

 
2,866,248

12/01/2018
FSA Store, Inc.
 
1,399,047

 
1,399,047

09/01/2018
Getable, Inc.
 
143,067

 
143,067

08/01/2017
Iris.tv, Inc.
 
221,259

 
221,259

04/01/2019
ParkJockey Global, Inc.
 
954,941

 
954,941

06/01/2019
Particle Industries, Inc.
 
935,640

 
935,640

11/01/2019
PayJoy, Inc.**
 
463,591

 
463,591

08/01/2019
Rated People, Ltd.**
 
491,526

 
491,526

*
Sixup PBC, Inc.**
 
588,324

 
588,324

06/01/2019
TiqIQ, Inc.
 
80,696

 
80,696

07/01/2017
TrueFacet, Inc.
 
704,807

 
704,807

08/01/2020
Zeel Networks, Inc.
 
934,554

 
934,554

08/01/2020
Subtotal:
12.9%
$
23,613,028

 
$
23,613,028

 
 
 
 
 
 
 

45



Borrower
Percentage of Net Assets
 Estimated Fair Value
12/31/2016
 
 Par Value
12/31/2016
Final
Maturity
Date
Wireless
 
 
 
 
 
Bluesmart, Inc.
 
$
1,769,431

 
$
1,769,431

09/01/2019
InfoReach, Inc.
 
68,886

 
68,886

03/01/2017
InVenture Capital Corporation**
 
1,373,749

 
1,373,749

09/01/2019
Juvo Mobile, Inc.**
 
948,131

 
948,131

01/01/2020
Karma Technology Holdings, Inc.
 
195,688

 
195,688

11/01/2017
Kicksend Holdings, Inc.
 

 
61,475

*
LLJ, Inc.
 
324,322

 
324,322

04/01/2018
Nextivity, Inc.
 
5,425,716

 
5,425,716

06/01/2021
Parallel Wireless, Inc.
 
3,292,912

 
3,292,912

04/01/2020
Subtotal:
7.3%
$
13,398,835

 
$
13,460,310

 
 
 
 
 
 
 
Total Loans (Cost of $315,360,767) :
163.7%
$
300,384,884

 
$
317,599,949

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps (Cost of $871,654)
0.4%
$
651,988

 
$
871,654

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investments (Cost of $316,232,421)
164.1%
$
301,036,872

 
$
318,471,603

 

*As of December 31, 2016, loans with a cost basis of $20.2 million and a fair value of $7.8 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. 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, 2016, 7.4% 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) of the 1940 Act; the numerator consists of total assets less the assets described in Section 55(a)(7) of the 1940 Act.
*** Indicates assets that are not senior loans.
4. FAIR VALUE DISCLOSURES
The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies which are generally made to borrowers pursuant to commitments whereby the Fund agrees to finance assets and provide working capital 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. Even though these loans are generally secured by the assets of the borrowers, the Fund in most cases is subject to the credit risk of such companies. As of December 31, 2017, the Fund's investments in loans are 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 and other secured creditors, except as indicated in the Schedules of Investments above. Loans to Akademos, Inc. and Toast, Inc. are subordinated to other secured creditors.
The Fund defines fair value as the price that would be received to sell an asset or paid to transfer 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. Because there is no readily available market price and no secondary market for substantially all of the debt investments made by the Fund to borrowing portfolio companies, Management determines fair value (or estimated exit value) based on hypothetical markets, and several factors related to each borrower.

Loan balances in the tables above 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 has a different maturity date and amount.  For the year ended December 31, 2017, the weighted-average interest rate on performing loans was 15.88%, which was inclusive of both cash and non-cash interest income. For the same period, the weighted-average interest rate on the cash portion of the interest income was 12.62%. For the year ended December 31, 2016, the weighted-average interest rate on performing loans was 18.22% and the cash portion of the interest income was 14.37%.  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 year.

46



The risk profile of a loan changes when events occur that impact the credit analysis of the borrower and loan as discussed in the Fund's loan accounting policy. Such changes result in the fair value adjustment made to the individual loans, which in accordance with GAAP, would be based on 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. 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 often approximates fair value.

All loans as of December 31, 2017 and 2016 were pledged as collateral for the debt facility, and the Fund's borrowings are generally collateralized by all assets of the Fund. As of December 31, 2017 and 2016, the Fund had unexpired unfunded commitments to borrowers of $67.1 million and $78.2 million, respectively.

Valuation Hierarchy
Under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (ASC) 820-10, 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, or 3 during the years ended December 31, 2017 and 2016.
The Fund's cash equivalents were valued at the traded net asset value of the money market fund. As a result, these measurements are classified as Level 1. The Fund’s investments in the interest rate cap and swap are based on quotes from the market makers that derive fair values from market data, and therefore, are classified as Level 2 items. The Fund's loan transactions are individually negotiated and unique and because there is no market in which these assets trade, the inputs for these assets, which are valued using estimated exit values, are classified as Level 3.  
The following tables provide quantitative information about the Fund's Level 3 fair value measurements of the Fund's investments by industry as of December 31, 2017 and 2016. In addition to the techniques and inputs noted in the table below, the Fund may also use other valuation techniques and methodologies when determining its fair value measurements.
Investment Type - Level 3
 
 
 
 
 
 
 
 
Debt Investments
 
Fair Value at
12/31/2017
 
Valuation Techniques / Methodologies
 
Unobservable Input
 
Weighted
Average / Amount or Range
 
 
 
 
 
 
 
 
 
Computers and Storage
 
$
7,650,501

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
 
 
 
 
 
Internet
 
$
69,062,824

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$0 - $1,651,771

0% - 3%
 
 
 
 
 
 
 
 
 
Medical Devices
 
$
8,914,935

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$14,238

0%
 
 
 
 
 
 
 
 
 
Other Healthcare
 
$
36,034,254

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
14%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$0 - $849,088

0% - 2%

47



Investment Type - Level 3
 
 
 
 
 
 
 
 
Debt Investments
 
Fair Value at
12/31/2017
 
Valuation Techniques / Methodologies
 
Unobservable Input
 
Weighted
Average / Amount or Range
 
 
 
 
 
 
 
 
 
Other Technology
 
$
102,350,280

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$0 - $883,855

0% - 3%
 
 
 
 
 
 
 
 
 
Security
 
$
7,023,481

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
19%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$5,000

0%
 
 
 
 
 
 
 
 
 
Software
 
$
55,885,382

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$0 - $7,755,000

0% - 3%
 
 
 
 
 
 
 
 
 
Technology Services
 
$
24,754,233

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
14%
 
 
 
 
 
 
 
 
 
Wireless
 
$
12,738,517

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
13%
 
 
 
 
Income Approach
 
Expected amount and timing of cash flow payments

Discount Rate
 
$0 - $1,517,227

3%
 
 
 
 
 
 
 
 
 
Other *
 
$
775,376

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
14%
 
 
 
 
 
 
 
 
 
 
 
$
325,189,783

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Other loans, as of December 31, 2017, were comprised of companies in the Biotechnology and Semiconductor industries.
In accordance with ASC 820-10-50-2, adopted for the year ended 12/31/17, the Fund has implemented revised terminology regarding the valuation technique applied in the table above. Previously, the technique was referred to as ‘Liquidation’ with the unobservable input as ‘Investment Collateral.’ The Fund has revised this to be more specific, although the nature of the technique has not changed, and henceforward is referred to as ‘Income Approach,’ with the unobservable input reflecting the key estimates and judgment required to perform a discounted cash flow analysis. There has been no impact to the valuations of the underlying debt investments by the adoption of the change in terminology.




48



Investment Type - Level 3
 
 
 
 
 
 
 
 
Debt Investments
 
Fair Value at
12/31/2016
 
Valuation Techniques / Methodologies
 
Unobservable Input
 
Weighted
Average / Amount or Range
 
 
 
 
 
 
 
 
 
Computers and Storage
 
$
11,654,041

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
14%
 
 
 
 
 
 
 
 
 
Internet
 
$
59,099,479

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0 - $1,192,024
 
 
 
 
 
 
 
 
 
Medical Devices
 
$
9,162,939

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$14,238
 
 
 
 
 
 
 
 
 
Other Healthcare
 
$
17,680,831

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
20%
 
 
 
 
Liquidation
 
Investment Collateral
 
$75,000
 
 
 
 
 
 
 
 
 
Other Technology
 
$
95,489,090

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$0 - $640,806
 
 
 
 
 
 
 
 
 
Security
 
$
7,994,606

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
17%
 
 
 
 
Liquidation
 
Investment Collateral
 
$700,000
 
 
 
 
 
 
 
 
 
Software
 
$
61,598,310

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
Liquidation
 
Investment Collateral
 
$45,000 - $870,000
 
 
 
 
 
 
 
 
 
Technology Services
 
$
23,613,028

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
13%
 
 
 
 
Liquidation
 
Investment Collateral
 
$491,526
 
 
 
 
 
 
 
 
 
Wireless
 
$
13,398,835

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
14%
 
 
 
 
 
 
 
 
 
Other *
 
$
693,725

 
Hypothetical market analysis
 
Hypothetical market coupon rate
 
15%
 
 
 
 
 
 
 
 
 
 
 
$
300,384,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Other loans, as of December 31, 2016, were comprised of companies in the Biotechnology, Enterprise Networking, and Semiconductor industries.


As of December 31, 2017
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS:
 
 
 
 
 
 
 
Loans†
$

 
$

 
$
325,189,783

 
$
325,189,783

Cash equivalents
4,931,102

 

 

 
4,931,102

Total assets
$
4,931,102

 
$

 
$
325,189,783

 
$
330,120,885

 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
     Interest rate swap agreement
 
$
599

 
 
$
599

           Total liabilities
 
$
599

 
 
$
599

 
 
 
 
 
 
 
 


49



As of December 31, 2016
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS:
 
 
 
 
 
 
 
Loans†
$

 
$

 
$
300,384,884

 
$
300,384,884

     Interest rate cap

 
651,988

 

 
651,988

Cash equivalents
8,779,375

 

 

 
8,779,375

Total assets
$
8,779,375

 
$
651,988

 
$
300,384,884

 
$
309,816,247

† 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 Year Ended December 31, 2017
 
Loans
 
Warrants
 
Stock
 
Convertible Note
Beginning balance
$
300,384,884

 
$

 
$

 
$

Acquisitions and originations
195,202,500

 
13,308,431

 
39,962

 
17,507

Principal reductions and discount amortizations
(151,132,571
)
 

 

 

Distributions to shareholder

 
(13,308,431
)
 
(39,962
)
 
$
(17,507
)
Net change in unrealized loss from investments
(10,190,538
)
 

 

 

Net realized loss from investments
(9,074,492
)
 

 

 

Ending balance
$
325,189,783

 
$

 
$

 
$

Net change in unrealized loss on investments relating to investments still held at December 31, 2017
$
(16,548,670
)
 
 
 
 
 
 
 
For the Year Ended December 31, 2016
 
Loans
 
Warrants
 
Stock
 
Convertible Note
Beginning balance
$
380,437,931

 
$

 
$

 
$

Acquisitions and originations
115,680,000

 
7,884,727

 
883,110

 
1,345,925

Principal reductions and discount amortizations
(174,203,054
)
 

 

 

Distributions to shareholder

 
(7,884,727
)
 
(883,110
)
 
(1,345,925
)
Net change in unrealized loss from investments
(2,385,615
)
 

 

 

Net realized loss from investments
(19,144,378
)
 

 

 

Ending balance
$
300,384,884

 
$

 
$

 
$

Net change in unrealized loss on investments relating to investments still held at December 31, 2016
$
(10,603,836
)
 
 
 
 
 
 
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 (loss) per share are computed by dividing net income (loss) by the weighted average common shares outstanding, including the dilutive effects of potential common shares (e.g., stock options).  The Fund has no instruments that would be potential common shares; thus, reported basic and diluted earnings (loss) per share are the same.

50



6.  CAPITAL STOCK
As of December 31, 2017 and 2016, there were 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 is $375.0 million. Total contributed capital to the Company through December 31, 2017 and 2016 was $375.0 million and $328.1 million, of which $321.0 million and $276.5 million was contributed to the Fund, respectively.
The chart below shows the distributions of the Fund for the years ended December 31, 2017, 2016 and 2015.
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
Cash distributions
$
18,000,000

 
$
64,400,000

 
$
31,700,000

Distributions of equity securities and convertible notes
13,365,899

 
10,113,762

 
16,494,128

Total distributions to shareholder
$
31,365,899

 
$
74,513,762

 
$
48,194,128


7. DEBT FACILITY
In July 2013, the Fund established a secured revolving loan facility in an initial amount of up to $125,000,000 led by Wells Fargo, N.A. and MUFG Union Bank, N.A. In November 2014, the borrowing availability thereunder was increased to $255,000,000. On October 30, 2017, the Fund entered into an agreement with Wells Fargo Bank, N.A., Wells Fargo Securities, LLC, MUFG Union Bank, N.A. and ING Capital, LLC that (i) reduced the size of the facility to $200,000,000 and (ii) amended the interest rate options and commitment fee (the "First Amendment"). Loans under the facility may be, at the option of the Fund, either (i) a Reference Rate Loan, (ii) a LIBOR Rate Loan, or (iii) a LIBOR Market Index Rate Loan. A Reference Rate Loan is defined as a loan bearing interest at the highest of: (a) the Federal Funds Rate for such day plus one half of one percent (0.50%), (b) the Prime Rate, and (c) LIBOR plus one percent (1%). A LIBOR Rate Loan is defined as a loan bearing interest at the prevailing LIBOR rate for a period equal to the applicable LIBOR Loan Period which appears on Reuters Screen LIBOR01 Page (or any applicable successor page) at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of the applicable LIBOR Loan Period (rounded upward, if necessary, to the nearest 1/100th of 1%). A LIBOR Market Index Rate Loan is defined as a Loan bearing interest, for any day, a variable rate of interest equal to the one-month LIBOR Market Index Rate based on a minimum deposit of at least $5.0 million for a period equal to one month which appears on the Reuters Screen LIBOR01 Page (or any applicable successor page) at approximately 11:00 a.m. (London time) on such date of determination, or if not a business day, then the immediate preceding business day (rounded upward, if necessary to the nearest 1/100th of 1%). As of December 31, 2017, all of the Fund’s borrowings were based on the LIBOR rate.
The Fund will pay interest on its borrowings and will also pay a fee on the unused portion of the facility.
The First Amendment facility terminates on October 30, 2020, but can be accelerated in the event of default, such as failure by the Fund to make timely interest or principal payments. As of December 31, 2017$121.0 million was outstanding under the facility. Subsequent to year end, the Management elected to reduce the borrowing availability to $180,000,000, effective January 30, 2018.
Borrowings under the facility are collateralized by receivables under loans advanced by the Fund with assignment to the financial institution, plus all of the other assets of the Fund. Such borrowings will bear interest at an annual rate of either (i) the Reference Rate plus 1.75%, (ii) LIBOR plus 2.75% or (iii) LIBOR Market Index Rate plus 2.75%. When the Fund is using 50% or more of the maximum amount available under the Amended Loan Agreement, the applicable commitment fee is 0.25% of the unused portion of the loan facility; otherwise, the applicable commitment fee is 0.50% of the unused portion. As of December 31, 2017, the LIBOR rate is as follows:
1 Month LIBOR
1.5643%
3 Month LIBOR
1.6943%
Bank fees and other costs of $1.1 million were incurred in connection with the facility. The bank fees and other costs incurred have been capitalized and are amortized to interest expense on a straight-line basis over the expected life of the facility.  The amortization of bank fees and other costs from the prior facility of $2.7 million was completely amortized by November 2017. As of December 31, 2017, the remaining unamortized fees and costs of $1.1 million are being amortized over the expected life of the facility, which is expected to terminate on October 30, 2020.

The facility is revolving and as such does not have a specified repayment schedule, although advances are secured by the assets of the Fund and thus repayments will be required as assets decline. The facility contains various covenants including financial covenants related to: (i) minimum debt service coverage ratio, (ii) interest coverage ratio, (iii) maximum loan loss reserves, and (iv) unfunded commitment ratio. There are also various restrictive covenants, including limitations on (i) the incurrence of liens, (ii) consolidations, mergers and asset sales, and (iii) capital expenditures. As of December 31, 2017, Management believes that the Fund was in compliance with these covenants.

51



The following is the summary of the outstanding facility draws as of December 31, 2017:
Roll-Over/Draw Date
Amount
Maturity Date*
All-In Interest Rate**
December 7, 2017
$
121,000,000

1/8/2018
4.16%
TOTAL OUTSTANDING
$
121,000,000

 
 
* On January 8, 2018, Management elected to pay down $11.0 million and rolled over the remaining outstanding amount of $110.0 million for a 30-day LIBOR Rate Loan, maturing on February 8, 2018.
** Inclusive of 2.75% applicable LIBOR margin plus LIBOR rate

8. MANAGEMENT AND RELATED PARTIES
Management
As compensation for its services to the Fund, for the two-year period that commenced with the first capital closing, which took place on December 18, 2012, the Manager received a management fee (“Management Fee”) computed and paid at the end of each quarter at an annual rate of 2.5% of the Company's committed equity capital (regardless of when or if the capital was called) as of the last day of each fiscal quarter. Following this two-year period, starting in December 2014, Management Fees are calculated and paid at the end of each quarter at an annual rate of 2.5% of the Fund's total assets (including amounts derived from borrowed funds) as of the last day of each quarter.  Management Fees of $9.0 million, $8.6 million and $9.6 million and were recognized as expenses for the years ended December 31, 2017, 2016 and 2015, respectively.
Related Parties
Certain officers and directors of the Fund also serve as officers and directors of the Manager.  The Articles of Incorporation of the Fund provide for indemnification of directors, officers, employees, and agents (including the Manager) of the Fund to the full extent permitted by applicable state law and the 1940 Act, including the advance of expenses and reasonable counsel fees.  The Articles of Incorporation of the Fund also contain a provision eliminating personal liability of a Fund director or officer to the Fund or its shareholder for monetary damages for certain breaches of their duty of care. For this reason, the Fund has acquired a directors & officers insurance policy.
Transactions with Venture Lending & Leasing VI, Inc. (“Fund VI”)

The Manager also served as investment manager for Fund VI. Initially, the amount of each investment was allocated 50% to the Fund and 50% to Fund VI so long as the Fund VI had capital available to invest. After June 29, 2014, Fund VI was no longer permitted to enter into new commitments to borrowers. All commitments by the Fund and Fund VI to borrowers are now expired. Fund VI was liquidated and dissolved and terminated its status as a BDC under the 1940 Act on September 14, 2017. The remaining loans in Fund VI were distributed to its parent Venture Lending & Leasing VI, LLC.

Transactions with Venture Lending & Leasing VIII, Inc. (“Fund VIII”)  
The Manager also serves as the manager for Fund VIII. The Fund's Board of Directors determined that so long as Fund VIII has capital available to invest in loan transactions with final maturities earlier than December 31, 2022 (the date on which the Fund will be dissolved), the Fund would invest in each portfolio company in which Fund VIII invested (“Investments”). Initially the amount of each Investment is allocated 50% to the Fund and 50% to Fund VIII so long as the Fund has capital available to invest. Effective June 30, 2017, the Fund is no longer permitted to enter new commitments to borrowers; however, the Fund will be permitted to fund existing commitments. The last commitment expires on July 21, 2018.
To the extent that clients, other than Fund VIII, advised by the Manager (but in which the Manager has no proprietary interest) invest in opportunities available to the Fund, the Manager will allocate such opportunities among the Fund and such other clients in a manner deemed fair and equitable considering all of the circumstances in accordance with procedures approved by the Fund's Board (including a majority of the disinterested directors).

Intercreditor Agreements  
In all transactions in which the Fund and other funds managed by the Manager invest or those in which another lender has either invested or may later invest, it is expected that the Fund and other funds managed by the Manager or the other lender will enter into an intercreditor agreement pursuant to which the Fund and other funds managed by the Manager will cooperate, along with any predecessor Funds which still have a balance outstanding, in pursuing their remedies following a default by the common borrower. Generally, under such intercreditor agreements, each party would agree that its security interest would be treated in parity with the security interest of the other party, regardless of which security interest would have priority under applicable law.  Accordingly, proceeds realized from the sale of any collateral or the exercise of any other creditor's rights will be allocated between the Fund, and other funds managed by the Manager and any predecessor Funds as described above, pro rata in accordance with the amounts of their respective investments.  An exception to the foregoing arrangement would occur in situations where, for example, one of the lenders financed specific items of equipment collateral; in that case, usually the lender who financed the specific assets will have a senior lien on that asset, and the other lender will have a junior priority lien

52



(even though they may ratably share liens of equal priority on other assets of the common borrower).  As a result of such intercreditor agreements, the Fund may have less flexibility in pursuing its remedies following a default than it would have had there been no intercreditor agreement, and the Fund may realize fewer proceeds.  In addition, because the Fund and other funds managed by the Manager invest at the same time in the same borrower, such borrower would be required to service two loans rather than one.  Any additional administrative costs or burdens resulting from there may make the Fund a less attractive lender, and may make it more difficult for the Fund to acquire such loans.
9. INTEREST RATE CAP AGREEMENTS
The Fund entered into interest rate cap transactions with MUFG Union Bank, N.A. to cap floating interest rates at 0.7%. The purpose of the interest rate cap agreement is to protect the Fund against rising interest rates. On November 7, 2017, the five interest rate contracts expired and were not renewed. As of December 31, 2017 and  2016, the Fund had no interest cap contracts and five interest cap contracts with the total notional principal amount of $0 and $170.0 million, respectively. The Fund paid upfront fees of $3.2 million were completely amortized by November 2017 and received from the counterparty, payment of interest amounts above the 0.7% cap based on 90-day LIBOR.

The average notional amount outstanding was $170.0 million for the year ended December 31, 2016. There was no average notional amount outstanding for the year ended December 31, 2017 as all of the contracts expired in November 2017.

As of December 31, 2017 and 2016, the fair value of the Fund's derivative financial instruments was as follows:
 
 
Asset Derivatives
 
 
December 31, 2017
 
December 31, 2016
Derivatives:
 
Statements of Assets and Liabilities
 
Fair Value
 
Statements of Assets and Liabilities
 
Fair Value
Interest rate cap agreement
 
Interest Rate Caps
 
$

 
Interest Rate Caps
 
$
651,988


For the years ended December 31, 2017, 2016 and 2015, the derivative financial instruments had the following effect on our Statements of Operations:
Derivatives:
 
Location of Statements of Operations
 
For the Year Ended December 31, 2017
 
For the Year Ended December 31, 2016
 
For the Year Ended December 31, 2015
Interest rate cap agreement
 
Net change in unrealized loss from investments
 
$
219,666

 
$
287,009

 
$
(392,455
)
Interest rate cap agreement
 
Net realized loss from investments
 
$
683,483

 
$
52,201

 
$


10. CANCELLABLE INTEREST RATE SWAP AGREEMENT

On November 21, 2017, the Fund entered into a cancellable interest rate swap transaction with MUFG Union Bank, N.A. with a preliminary notional amount of $102.6 million, to convert floating liabilities to fixed rates. The purpose of the interest rate swap agreement is to protect the Fund against rising interest rates. The Fund continues to adjust the notional principal amount as the outstanding balance under the debt facility changes. As of December 31, 2017, the principal notional amount was $102.6 million. The Fund pays a fixed rate of 1.90% and receives from the counterparty a floating rate based upon a 30-day LIBOR. Payments are made monthly and will terminate on December 1, 2020. The agreement includes an option for the Fund to terminate the swap early on June 1, 2020. Payments to or from the counterparty are recorded to net realized gain (loss) from investments. As of December 31, 2017, the 90-day LIBOR rate was 1.6943%.

As of December 31, 2017 and 2016, the fair value of our derivative financial instrument was as follows:
 
 
Asset Derivatives
 
 
December 31, 2017
 
December 31, 2016
Derivatives:
 
Statements of Assets and Liabilities
 
Fair Value
 
Statements of Assets and Liabilities
 
Fair Value
Interest rate swap agreement
 
Accounts payable and other accrued liabilities
 
$
599

 
Accounts payable and other accrued liabilities
 
$


    

53



For the years ended December 31, 2017, 2016 and 2015, the derivative financial instruments had the following effect on our Statements of Operations:
Derivatives:
 
Location of Statements of Operations
 
For the Year Ended December 31, 2017
 
For the Year Ended December 31, 2016
 
For the Year Ended December 31, 2015
Interest rate swap agreement
 
Net change in unrealized loss from investments
 
$
(599
)
 
$

 
$

Interest rate swap agreement
 
Net realized loss from investments
 
$
17,457

 
$

 


11. 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.

               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 our ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Fund, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Fund chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to its 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 December 31, 2017
Asset
Cost
Unrealized Appreciation
Unrealized Depreciation
Net Appreciation (Depreciation)
Fair Value
Loans
$
350,356,204

$

$
(25,166,421
)
$
(25,166,421
)
$
325,189,783

Total
$
350,356,204

$

$
(25,166,421
)
$
(25,166,421
)
$
325,189,783



As of December 31, 2016
Asset
Cost
Unrealized Appreciation
Unrealized Depreciation
Net Appreciation (Depreciation)
Fair Value
Loans
$
315,360,767

$

$
(14,975,883
)
$
(14,975,883
)
$
300,384,884

Interest Rate Cap
$
871,654

$

$
(219,666
)
$
(219,666
)
$
651,988

Total
$
316,232,421

$

$
(15,195,549
)
$
(15,195,549
)
$
301,036,872

                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 December 2017, the Fund had no undistributed earnings. Additionally, for the year ended December 31, 2017, distributions were made in excess of distributable earnings by $5.4 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. Distributions in excess of net investment income were $83.2 million and $77.8 million of December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017, the Fund had no uncertain tax positions. As of December 31, 2017, the Fund had no capital loss carry forwards.
               
The Fund's tax years open to examination by federal tax authorities for the years 2014 and forward and California tax authorities for the years 2013 and forward.

54



12. FINANCIAL HIGHLIGHTS
Accounting principles generally accepted in the United States of America require disclosure of financial highlights of the Fund for the years ended December 31, 2017, 2016, 2015, 2014 and 2013.
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 periods 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.
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 period presented.
The following per share data and ratios have been derived from the information provided in the financial statements:
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
For the Year Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
Total return
8.37
%
 
12.50
%
 
16.75
%
 
12.72
%
 
(19.91
)%
 
 
 
 
 
 
 
 
 
 
Per share amounts:
 
 
 
 
 
 
 
 
 
Net asset value, beginning of year
$
1,835.22

 
$
2,104.91

 
$
1,634.96

 
$
857.69

 
$
72.27

Net investment income
343.80

 
431.36

 
435.10

 
162.15

 
7.13

Net realized and change in unrealized loss from investments
(183.80
)
 
(211.91
)
 
(118.21
)
 
(37.80
)
 
(13.18
)
Net increase (decrease) in net assets from operations
160.00

 
219.45

 
316.89

 
124.35

 
(6.05
)
Distributions of income to shareholder
(259.72
)
 
(240.44
)
 
(410.07
)
 
(148.97
)
 
(7.13
)
Return of capital to shareholder
(53.94
)
 
(504.70
)
 
(71.87
)
 
(103.11
)
 
(90.40
)
Contributions from shareholder
445.00

 
256.00

 
635.00

 
905.00

 
889.00

Net asset value, end of year
$
2,126.56

 
$
1,835.22

 
$
2,104.91

 
$
1,634.96

 
$
857.69

 
 
 
 
 
 
 
 
 
 
Net assets, end of year
$
212,657,017

 
$
183,522,710

 
$
210,491,312

 
$
163,495,508

 
$
85,768,515

 
 
 
 
 
 
 
 
 
 
Ratios to average net assets:
 
 
 
 
 
 
 
 
 
Expenses
8.80
%
 
9.05
%
 
8.42
%
 
12.51
%
 
17.09
 %
Net investment income
17.07
%
 
22.80
%
 
21.17
%
 
15.76
%
 
1.17
 %
Portfolio turn-over rate
0%

 
0.11
%
 
0.08%

 
0%

 
0%

Average debt outstanding
$
146,307,692

 
$
160,923,077

 
$
160,615,385

 
$
78,807,692

 
$
8,230,769

13. SUBSEQUENT EVENTS
Subsequent to year end, the Management elected to reduce the borrowing availability of the debt facility to $180,000,000, effective January 30, 2018.


55