FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ______________
Commission file number 814-00969
Venture Lending & Leasing VII, Inc.
(Exact Name of Registrant as specified in its charter)
Maryland | 45-5589518 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
104 La Mesa Drive, Suite 102 | Portola Valley, CA 94028 |
(Address of principal executive offices) | (Zip Code) |
(650) 234-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and "smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [x] | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class | Outstanding as of August 12, 2016 | |
Common Stock, $.001 par value | 100,000 |
VENTURE LENDING & LEASING VII, INC.
INDEX
PART I — FINANCIAL INFORMATION | |
Item 1. | Financial Statements |
Condensed Statements of Assets and Liabilities (Unaudited) | |
As of June 30, 2016 and December 31, 2015 | |
Condensed Statements of Operations (Unaudited) | |
For the three and six months ended June 30, 2016 and 2015 | |
Condensed Statements of Changes in Net Assets (Unaudited) | |
For the six months ended June 30, 2016 and 2015 | |
Condensed Statements of Cash Flows (Unaudited) | |
For the six months ended June 30, 2016 and 2015 | |
Notes to Condensed Financial Statements (Unaudited) | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
PART II — OTHER INFORMATION | |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults Upon Senior Securities |
Item 4. | Mine Safety Issues |
Item 5. | Other Information |
Item 6. | Exhibits |
SIGNATURES |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VENTURE LENDING & LEASING VII, INC.
CONDENSED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
AS OF JUNE 30, 2016 AND DECEMBER 31, 2015
June 30, 2016 | December 31, 2015 | ||||||
ASSETS | |||||||
Investments: | |||||||
Loans, at estimated fair value | |||||||
(Cost of $359,075,269 and $393,028,200) | $ | 334,703,266 | $ | 380,437,931 | |||
Interest Rate Caps (Cost of $1,394,646 and $1,917,638) | 213,951 | 1,410,963 | |||||
Total Investments (Cost of $360,469,915 and $394,945,838) | 334,917,217 | 381,848,894 | |||||
Cash and cash equivalents | 20,194,303 | 8,303,171 | |||||
Other assets | 5,471,046 | 6,340,619 | |||||
Total assets | 360,582,566 | 396,492,684 | |||||
LIABILITIES | |||||||
Borrowings under debt facility | 161,000,000 | 182,000,000 | |||||
Accrued management fees | 2,253,641 | 2,478,079 | |||||
Accounts payable and other accrued liabilities | 1,713,033 | 1,523,293 | |||||
Total liabilities | 164,966,674 | 186,001,372 | |||||
NET ASSETS | $ | 195,615,892 | $ | 210,491,312 | |||
Analysis of Net Assets: | |||||||
Capital paid in on shares of capital stock | $ | 255,925,000 | $ | 250,925,000 | |||
Unrealized depreciation on investments | (25,552,698 | ) | (13,096,944 | ) | |||
Distribution in excess of net investment income | (34,756,410 | ) | (27,336,744 | ) | |||
Net assets (equivalent to $1,956.16 and $2,104.91 per share based on 100,000 shares of capital stock outstanding - See Note 6) | $ | 195,615,892 | $ | 210,491,312 | |||
Commitments & Contingent Liabilities: | |||||||
Unfunded unexpired commitments (See Note 4) | $ | 58,897,727 | $ | 68,700,000 |
See notes to condensed financial statements.
3
VENTURE LENDING & LEASING VII, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
For the Three Months Ended June 30, 2016 | For the Three Months Ended June 30, 2015 | For the Six Months Ended June 30, 2016 | For the Six Months Ended June 30, 2015 | ||||||||||||
INVESTMENT INCOME: | |||||||||||||||
Interest on loans | $ | 16,681,666 | $ | 16,514,666 | $ | 32,849,463 | $ | 30,287,179 | |||||||
Other interest and other income | 100,255 | 545 | 113,828 | 108,536 | |||||||||||
Total investment income | 16,781,921 | 16,515,211 | 32,963,291 | 30,395,715 | |||||||||||
EXPENSES: | |||||||||||||||
Management fees | 2,253,641 | 2,522,199 | 4,609,543 | 4,720,821 | |||||||||||
Interest expense | 2,034,256 | 1,793,270 | 4,032,960 | 3,218,819 | |||||||||||
Banking and professional fees | 152,258 | 119,533 | 243,154 | 202,672 | |||||||||||
Other operating expenses | 25,933 | 22,944 | 51,867 | 47,025 | |||||||||||
Total expenses | 4,466,088 | 4,457,946 | 8,937,524 | 8,189,337 | |||||||||||
Net investment income | 12,315,833 | 12,057,265 | 24,025,767 | 22,206,378 | |||||||||||
Net realized loss from investments | (1,058,795 | ) | (286,920 | ) | (2,140,320 | ) | (1,303,508 | ) | |||||||
Net change in unrealized loss from investments | (5,572,461 | ) | (1,422,700 | ) | (11,781,734 | ) | (1,150,697 | ) | |||||||
Net change in unrealized gain (loss) from hedging activities | (52,825 | ) | 103,682 | (674,020 | ) | (442,458 | ) | ||||||||
Net realized and change in unrealized loss from investments and hedging activities | (6,684,081 | ) | (1,605,938 | ) | (14,596,074 | ) | (2,896,663 | ) | |||||||
Net increase in net assets resulting from operations | $ | 5,631,752 | $ | 10,451,327 | $ | 9,429,693 | $ | 19,309,715 | |||||||
Amount per common share: | |||||||||||||||
Net increase in net assets resulting from operations per share | $ | 56.32 | $ | 104.51 | $ | 94.30 | $ | 193.10 | |||||||
Weighted average shares outstanding | 100,000 | 100,000 | 100,000 | 100,000 |
See notes to condensed financial statements.
4
VENTURE LENDING & LEASING VII, INC.
CONDENSED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
For the Six Months Ended June 30, 2016 | For the Six Months Ended June 30, 2015 | ||||||
Net increase in net assets resulting from operations: | |||||||
Net investment income | $ | 24,025,767 | $ | 22,206,378 | |||
Net realized loss from investments | (2,140,320 | ) | (1,303,508 | ) | |||
Net change in unrealized loss from investments | (11,781,734 | ) | (1,150,697 | ) | |||
Net change in unrealized loss from hedging activities | (674,020 | ) | (442,458 | ) | |||
Net increase in net assets resulting from operations | 9,429,693 | 19,309,715 | |||||
Distributions of income to shareholder | (21,885,447 | ) | (17,128,187 | ) | |||
Return of capital to shareholder | (7,419,666 | ) | — | ||||
Contributions from shareholder | 5,000,000 | 53,500,000 | |||||
Increase (decrease) in capital transactions | (24,305,113 | ) | 36,371,813 | ||||
Total increase (decrease) in net assets | (14,875,420 | ) | 55,681,528 | ||||
Net assets | |||||||
Beginning of period | 210,491,312 | 163,495,508 | |||||
End of period (Undistributed net investment income of $0 and $0) | $ | 195,615,892 | $ | 219,177,036 |
See notes to condensed financial statements.
5
VENTURE LENDING & LEASING VII, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
For the Six Months Ended June 30, 2016 | For the Six Months Ended June 30, 2015 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net increase in net assets resulting from operations | $ | 9,429,693 | $ | 19,309,715 | |||
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 | 2,140,320 | 1,303,508 | |||||
Net change in unrealized loss from investments | 11,781,734 | 1,150,697 | |||||
Net change in unrealized loss from hedging activities | 674,020 | 442,458 | |||||
Amortization of deferred costs and fees related to borrowing facility | 866,764 | 788,216 | |||||
Net (increase) decrease in other assets | 525,801 | (1,325,179 | ) | ||||
Net increase (decrease) in accounts payable, other accrued liabilities, and accrued management fees | (34,698 | ) | 1,146,836 | ||||
Origination of loans | (59,577,273 | ) | (175,387,500 | ) | |||
Principal payments on loans | 89,887,020 | 66,275,089 | |||||
Acquisition of equity securities | (3,902,249 | ) | (11,815,737 | ) | |||
Net cash provided by (used in) operating activities | 51,791,132 | (98,111,897 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Cash distributions to shareholder | (23,900,000 | ) | (5,000,000 | ) | |||
Contributions from shareholder | 5,000,000 | 53,500,000 | |||||
Borrowings under debt facility | — | 65,000,000 | |||||
Repayment of debt facility | (21,000,000 | ) | — | ||||
Payment of bank facility costs and fees | — | (812,023 | ) | ||||
Net cash provided by (used in) financing activities | (39,900,000 | ) | 112,687,977 | ||||
Net increase in cash and cash equivalents | 11,891,132 | 14,576,080 | |||||
CASH AND CASH EQUIVALENTS: | |||||||
Beginning of period | 8,303,171 | 7,329,177 | |||||
End of period | $ | 20,194,303 | $ | 21,905,257 | |||
SUPPLEMENTAL DISCLOSURES: | |||||||
CASH PAID DURING THE PERIOD: | |||||||
Interest | $ | 3,136,145 | $ | 2,316,504 | |||
NON-CASH ACTIVITIES: | |||||||
Distributions of equity securities to shareholder | $ | 5,405,113 | $ | 12,128,187 | |||
Receipt of equity securities as repayment of loans | $ | 1,502,864 | $ | 312,450 |
See notes to condensed financial statements.
6
VENTURE LENDING & LEASING VII, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. | ORGANIZATION AND OPERATIONS OF THE FUND |
Venture Lending & Leasing VII, Inc. (the “Fund”), was incorporated in Maryland on June 21, 2012 as a non-diversified closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940, as amended ("1940 Act") and is managed by Westech Investment Advisors, LLC, (“Manager” or “Management”). The Fund will be dissolved on December 31, 2022 unless an election is made to dissolve earlier by the Board of Directors of the Fund (the "Board"). One hundred percent of the stock of the Fund is held by Venture Lending & Leasing VII, LLC (the “Company”). Prior to commencing its operations on December 18, 2012, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000 in July 2012. This issuance of stock was a requirement in order to apply for a finance lender's license from the California Commissioner of Corporations, which was obtained on September 20, 2012.
The Fund's investment objective is to achieve a superior risk-adjusted investment return. In the Manager's opinion, the accompanying financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for interim periods. Certain information and note disclosures normally included in audited annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted; however, the Fund believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the six months ended June 30, 2016 are not necessarily indicative of what the results would be for a full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Fund's Annual Report on Form 10-K for the year ended December 31, 2015.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Accounting
The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market mutual funds with maturities of 90 days or less. Money market mutual funds held as cash equivalents are valued at their most recently traded net asset value.
Interest Income
Interest income on loans is recognized using the effective interest method including amounts from the amortization of discounts attributable to equity securities received as part of the loan transaction. Additionally, fees received as part of the transaction are added to the loan discount and amortized over the life of the loan.
Valuation Procedures
The Fund accounts for loans at fair value in accordance with the “Valuation Methods” below. All valuations are determined under the direction of the Manager, in accordance with the Valuation Methods.
7
The Fund's loans are valued in connection with the issuance of its periodic financial statements, the issuance or repurchase of the Fund's shares at a price equivalent to the current net asset value per share, and at such other times as required by law. On a quarterly basis, Management submits to the Board a "Valuation Report" and "Valuation Notes", which details the rationale for the valuation of investments.
As of June 30, 2016 and December 31, 2015, the financial statements include nonmarketable investments of $334.7 million and $380.4 million, respectively (or 93% and 96% of total assets, respectively), with fair values determined by the Manager in the absence of readily determinable market values. Because of the inherent uncertainty of these valuations, estimated fair values of such investments may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Below is the information used by the Manager in making these estimates.
Loans
The Fund defines fair value as the price that would be received to sell an asset or paid to lower a liability in an orderly transaction between market participants at the measurement date. There is no secondary market for the loans made by the Fund to borrowers, hence Management determines fair value based on hypothetical markets. Venture loans are generally held to maturity and are recorded at estimated fair value. The determination of fair value is based on a number of factors including the amount for which an investment could be exchanged in a current sale, which assumes an orderly disposition over a reasonable period other than in a forced sale. Management also considers the fact that no ready market exists for substantially all of the investments held by the Fund. Management determines whether to adjust the estimated fair value of a loan based on a number of factors including but not limited to the borrower's payment history, available cash and “burn rate,” revenues, net income or loss, the likelihood that the borrower will be able to secure additional financing in the future, as well as an evaluation of the general interest rate environment. The amount of any valuation adjustment considers liquidation analysis and is determined based upon a credit analysis of the borrower and an analysis of the expected recovery from the borrower, including consideration of factors such as the nature and quality of the Fund's security interests in collateral, the estimated value of the Fund's collateral, the size of the loan, and the estimated time that will elapse before the Fund achieves a recovery. Management has evaluated these factors and has concluded that the effect of deterioration in the quality of the underlying collateral, increase in the estimated time to recovery and increase in the hypothetical market coupon rate would have the effect of lowering the value of the current portfolio of loans.
Non-accrual Loans
The Fund's policy is to place a loan on non-accrual status when the loan stops performing and Management deems that it is unlikely that the loan will return to performing status. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed for the quarter in which the loan was placed on non-accrual status. Any uncollected interest related to quarters prior to when the loan was placed on non-accrual status is added to the principal balance, and the aggregate balance of the principal and interest is evaluated in accordance with the policy for valuation of loans in determining Management's best estimate of fair value. Interest received by the Fund on non-accrual loans will be recorded if and when the proceeds exceed the book value of the loans.
If a borrower of a non-accrual loan resumes making regular payments and Management deems that the borrower has sufficient resources that it is unlikely the loan will return to non-accrual status, the loan is 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, and thus changing the effective interest rate.
As of June 30, 2016, loans with a cost basis of $28.2 million and a fair value of $6.6 million have been classified as non-accrual. As of December 31, 2015 loans with a cost basis of $10.9 million and a fair value of $4.6 million have been classified as non-accrual.
8
Warrants, Stock and Convertible Notes
Warrants, stock and convertible notes that are received in connection with loan transactions generally will be assigned a fair value at the time of acquisition. These securities are then distributed by the Fund to its shareholder at the assigned value. Warrants are valued based on a modified Black-Scholes option pricing model which takes into account factors underlying stock value, expected term, volatility, and the risk-free interest rate, among other factors.
Underlying asset value is estimated based on information available, including information regarding recent rounds of funding of the portfolio company, or the publicly-quoted stock price at the end of the financial reporting period for warrants for comparable publicly-quoted securities.
Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on an index of publicly traded companies grouped by industry and which are similar in nature to the underlying portfolio companies issuing the warrant (“Industry Index”). The volatility assumption for each Industry Index is based on the average volatility for individual public companies within the portfolio company's industry for a period of time approximating the expected life of the warrants. A hypothetical increase in the volatility of the warrants used in the modified Black-Scholes option pricing model would have the effect of increasing the value of the warrants.
The remaining expected lives of warrants are based on historical experience of the average life of the warrants, as warrants are often exercised in the event of acquisitions, mergers, or initial public offerings and terminated due to events such as bankruptcies, restructuring activities, or additional financings. These events cause the expected term to be less than the remaining contractual term of the warrants. For the six months ended June 30, 2016 and June 30, 2015, the Fund assumed the average duration of a warrant is 3.5 years. The effect of a hypothetical increase in the estimated initial term of the warrants used in the modified Black-Scholes option pricing model would have the effect of increasing the value of the warrants.
The risk-free interest rate is derived from the constant maturity tables issued by the U.S. Treasury Department. The effect of a hypothetical increase in the estimated risk-free rate used in the modified Black-Scholes option pricing model would have the effect of increasing the value of the warrants.
The Fund engages an independent valuation company to provide valuation assistance including the evaluations of the Fund's valuation methodology and the reasonableness of the assumptions used from the perspective of a market participant. They calculate several of the inputs used such as volatility and risk-free rate. Upon the receipt of such data from the valuation company, a sample test is performed to ensure the accuracy of their calculations and that the source of data is reliable and consistent with the way in which the calculations were made in prior periods. Such inputs are entered into the database with a second review to ensure the accuracy of the input information. All calculations of warrant values are performed by one employee and reviewed by a second employee. The inputs of the modified Black-Scholes option pricing model are reevaluated every quarter.
Other Assets and Liabilities
Other Assets include costs incurred in conjunction with borrowings under the Fund's debt facility and are stated at initial cost. The costs are amortized over the term of the facility.
As of June 30, 2016 and December 31, 2015, the fair values of Other Assets and Liabilities are estimated at their carrying values because of their short-term nature of these assets or liabilities.
As of June 30, 2016 and December 31, 2015, based on borrowing rates available to the Fund, which are Level 2 inputs, the estimated fair values of the borrowings under the debt facility were $161.0 million and $182.0 million, respectively.
9
Commitment Fees
Unearned income and commitment fees on loans are recognized as additional interest on loans using the effective interest method over the term of the loan. Commitment fees are carried as liabilities when received for commitments upon which no draws have been made. When the first draw is made, the fee is treated as unearned income and is recognized as described above. If a draw is never made, the forfeited commitment fee less any applicable legal costs becomes recognized as other income after the commitment expires.
Deferred Bank Fees
Through June 30, 2016, the deferred bank fees and costs associated with the debt facility have been capitalized and will be allocated over the estimated life of the facility, which currently is through November 7, 2017. The amortization of these costs is recorded as interest expense in the Condensed Statements of Operations (see Note 7).
Interest Rate Cap Agreements
The Fund has entered into interest rate cap agreements which are primarily valued on the basis of the future expected interest rates on the notional principal balance remaining, which is comparable to what a prospective acquirer would pay on the measurement date. Valuation pricing models consider inputs such as forward rates, anticipated interest rate volatility relating to the reference rate, as well as time value and other factors underlying cap instruments. The contracts are recorded at fair value in interest rate caps in the Condensed Statements of Assets and Liabilities. The changes in fair value are recorded in the Net change in unrealized gain (loss) from hedging activities in the Condensed Statements of Operations. The quarterly interest received on the interest rate cap contracts, if any, will be recorded in Net change in realized gain (loss) from hedging activities in the Condensed Statements of Operations. Since inception through June 30, 2016, there has been no interest received on interest rate cap contracts.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") 2015-03 Interest-Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Debt issuance costs related to lines of credit and revolving debt facilities are not required to be deducted from the carrying amount of that debt liability. The amended guidance is effective for the Fund’s interim and annual periods beginning on January 1, 2016. The adoption of this guidance did not significantly impact the Fund’s financial position or results of operations.
Tax Status
The Fund has elected to be treated as a Regulated Investment Company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code") and operates in a manner so as to qualify for the tax treatment applicable to RICs. Failing to maintain at least 70% of total assets in “qualifying assets” will result in the loss of BDC status, resulting in losing its favorable tax treatment as a RIC. As of June 30, 2016, the Fund has met the BDC and RIC requirements.
In order to qualify for favorable tax treatment as a RIC, the Fund is required to distribute annually to its sole shareholder at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Fund must distribute annually at least 98% of its ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Fund, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Fund chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to the sole shareholder. The Fund will accrue excise tax on estimated undistributed taxable income as required. Below is a table summarizing the cost (on GAAP and tax basis) and the appreciation and depreciation of the investments reported on the Schedule of Investments in Note 3 below.
10
As of June 30, 2016
Asset | Cost | Unrealized Appreciation | Unrealized Depreciation | Net Appreciation (Depreciation) | Fair Value | ||||||||||
Loans | $ | 359,075,269 | $ | — | $ | (24,372,003 | ) | $ | (24,372,003 | ) | $ | 334,703,266 | |||
Interest Rate Cap | $ | 1,394,646 | $ | — | $ | (1,180,695 | ) | $ | (1,180,695 | ) | $ | 213,951 | |||
Total | $ | 360,469,915 | $ | — | $ | (25,552,698 | ) | $ | (25,552,698 | ) | $ | 334,917,217 |
As of December 31, 2015
Asset | Cost | Unrealized Appreciation | Unrealized Depreciation | Net Appreciation (Depreciation) | Fair Value | ||||||||||
Loans | $ | 393,028,200 | $ | — | $ | (12,590,268 | ) | $ | (12,590,268 | ) | $ | 380,437,932 | |||
Interest Rate Cap | $ | 1,917,638 | $ | — | $ | (506,675 | ) | $ | (506,675 | ) | $ | 1,410,963 | |||
Total | $ | 394,945,838 | $ | — | $ | (13,096,943 | ) | $ | (13,096,943 | ) | $ | 381,848,895 |
Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Fund's annual RIC tax return.
Through June 30, 2016, the Fund had no undistributed earnings. Additionally, for the six months ended June 30, 2016, distributions were made in excess of distributable earnings by $7.4 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. As of June 30, 2016, the Fund had no uncertain tax positions. As of June 30, 2016, the Fund had no capital loss carry forwards.
The Fund's tax years open to examination by federal tax authorities and California tax authorities are for years 2012 and forward.
Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are reclassified among the Fund's capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
3. | SCHEDULES OF INVESTMENTS |
As of June 30, 2016, all loans were made to non-affiliates as follows (unaudited):
Borrower | Percentage of Net Assets | Estimated Fair Value 06/30/2016 | Par Value 3/31/2016 | Final Maturity Date | |||||
Biotechnology | |||||||||
Phylagen, Inc. | $ | 225,904 | $ | 225,904 | 7/1/2019 | ||||
Subtotal: | 0.1% | $ | 225,904 | $ | 225,904 | ||||
11
Computers & Storage | |||||||||
Canary Connect, Inc. | $ | 4,924,845 | $ | 4,924,845 | 12/1/2018 | ||||
Clustrix, Inc. | 765,382 | 765,382 | 5/1/2017 | ||||||
D-Wave Systems, Inc. ** | 630,752 | 630,752 | 2/1/2017 | ||||||
Electric Objects, Inc. | 1,159,958 | 1,159,958 | 9/1/2019 | ||||||
HyperGrid, Inc. | 631,956 | 631,956 | 6/1/2017 | ||||||
Rigetti & Co., Inc. | $ | 711,486 | $ | 711,486 | 1/1/2019 | ||||
Subtotal: | 4.5% | $ | 8,824,379 | $ | 8,824,379 | ||||
Enterprise Networking | |||||||||
Apprion, Inc. | $ | 72,266 | $ | 144,533 | * | ||||
Subtotal: | —% | $ | 72,266 | $ | 144,533 | ||||
Internet | |||||||||
Allbirds, Inc. | $ | 230,562 | $ | 230,562 | 12/1/2018 | ||||
Biotechnology | 1,390,241 | 1,390,241 | 11/1/2019 | ||||||
Apsalar, Inc. | 694,560 | 694,560 | 3/1/2019 | ||||||
Betaworks Studio, LLC.** | 7,430,954 | 7,430,954 | 7/1/2018 | ||||||
Blitsy, Inc. | 474,873 | 474,873 | 2/1/2019 | ||||||
Bloom That, Inc. | 638,719 | 638,719 | 9/1/2018 | ||||||
Bonobos, Inc.*** | 10,509,429 | 10,509,429 | 12/1/2018 | ||||||
CapLinked, Inc. | 468,372 | 468,372 | 1/1/2019 | ||||||
CustomMade Ventures Corp. | 687,276 | 687,276 | * | ||||||
Deja Mi, Inc. | 1,308,781 | 1,308,781 | 9/1/2018 | ||||||
Digital Caddies, Inc. ** | — | 987,584 | * | ||||||
Dinner Lab, Inc. | — | 280,394 | * | ||||||
Eloquii Design, Inc. | 1,570,753 | 1,570,753 | 9/1/2018 | ||||||
Flowplay, Inc. | 1,123,851 | 1,123,851 | 12/1/2017 | ||||||
FLYR, Inc. | 513,724 | 513,724 | 6/1/2018 | ||||||
Giddy Apps, Inc. | 499,454 | 999,454 | * | ||||||
Giveforward, Inc. | 190,505 | 358,380 | * | ||||||
Glide, Inc.** | 4,723,173 | 4,723,173 | 6/1/2018 | ||||||
HEXAGRAM49, Inc. | 715,301 | 715,301 | 6/1/2019 | ||||||
Homelight, Inc. | 783,282 | 783,282 | 9/1/2018 | ||||||
Hotel Tonight, Inc. | 9,299,875 | 9,299,875 | 1/1/2019 | ||||||
JewelScent, Inc. | 289,933 | 289,933 | 12/1/2017 | ||||||
Kiwi Crate, Inc. | 702,629 | 702,629 | 4/1/2018 | ||||||
Monetate, Inc. | 2,029,245 | 2,029,245 | 6/1/2018 | ||||||
Move Loot, Inc. | 288,082 | 1,440,412 | * | ||||||
Next Step Living, Inc. | — | 10,765,066 | * | ||||||
Osix Corp. | 17,882 | 17,882 | 10/1/2016 | ||||||
PerformLine, Inc. | 947,458 | 947,458 | 6/1/2019 | ||||||
Piryx, Inc. | 525,245 | 885,245 | * | ||||||
Pixalate, Inc. | 334,374 | 334,374 | 6/1/2017 | ||||||
Placester, Inc. | 2,494,814 | 2,494,814 | 10/1/2019 | ||||||
Playstudios, Inc. | 1,656,220 | 1,656,220 | 6/1/2018 |
12
Primary Kids, Inc. | 590,048 | 590,048 | 6/1/2018 | ||||||
Quantcast Corp. | 2,222,597 | 2,222,597 | 4/1/2017 | ||||||
Quri, Inc. | 1,347,894 | 1,347,894 | 6/1/2018 | ||||||
Radius Intelligence, Inc. | 950,241 | 950,241 | 10/1/2017 | ||||||
Relay Network, LLC | 1,508,036 | 1,508,036 | 6/1/2018 | ||||||
Schoola, Inc. | 54,184 | 54,184 | 12/1/2016 | ||||||
Schooltube | — | 108,222 | * | ||||||
Sociable Labs, Inc. | 40,513 | 80,909 | * | ||||||
SocialChorus, Inc. | 1,594,516 | 1,594,516 | 9/1/2018 | ||||||
Striking, Inc. | 465,515 | 465,515 | 6/1/2019 | ||||||
Super Home, Inc. | 225,130 | 225,130 | 3/1/2019 | ||||||
THECLYMB | 775,770 | 775,770 | 10/1/2017 | ||||||
Thrive Market, Inc. | 7,080,839 | 7,080,839 | 9/1/2019 | ||||||
TouchofModern, Inc. | 5,670,308 | 5,670,308 | 5/1/2020 | ||||||
Traackr, Inc. | 703,304 | 703,304 | 4/1/2019 | ||||||
Viyet, Inc. | 216,395 | 216,395 | 1/1/2019 | ||||||
Weddington Way, Inc. | 2,698,085 | 2,698,085 | 12/1/2018 | ||||||
WHI, Inc. | 593,999 | 1,200,999 | * | ||||||
YouDocs Beauty, Inc. | 41.1% | $ | 1,182,986 | $ | 1,192,024 | * | |||
Subtotal: | $ | 80,459,927 | $ | 95,437,832 | |||||
Medical Devices | |||||||||
AxioMed, Inc. | $ | 14,238 | $ | 1,560,238 | * | ||||
Blockade Medical, LLC | 258,187 | 258,187 | 9/1/2017 | ||||||
JustRight Surgical LLC | 1,328,662 | 1,328,662 | 1/1/2019 | ||||||
MyoScience, Inc. | 7,520,357 | 7,520,357 | 7/1/2018 | ||||||
Subtotal: | 4.7% | $ | 9,121,444 | $ | 10,667,444 | ||||
Other Healthcare | |||||||||
Anutra Medical, Inc. | $ | 1,123,014 | $ | 1,123,014 | 8/1/2018 | ||||
Caredox, Inc. | 709,606 | 709,606 | 1/1/2019 | ||||||
Cogito Corporation | 648,469 | 648,469 | 9/1/2019 | ||||||
Health Integrated, Inc. | 2,598,736 | 2,598,736 | 5/1/2018 | ||||||
Hello Doctor, Ltd.** | 149,628 | 149,628 | 3/1/2019 | ||||||
Hi.Q, Inc. | 2,858,946 | 2,858,946 | 5/1/2020 | ||||||
Lean Labs, Inc. | 232,147 | 232,147 | 12/1/2018 | ||||||
Mulberry Health, Inc. | 2,683,524 | 2,683,524 | 12/1/2017 | ||||||
Physician Software Systems, LLC | 227,382 | 227,382 | 7/1/2017 | ||||||
Practice Fusion, Inc. | 15,571,717 | 15,571,717 | 9/1/2018 | ||||||
Project Healthy Living, Inc. | 2,607,682 | 2,607,682 | 12/1/2018 | ||||||
Seven Bridges Genomics, Inc. | 2,708,465 | 2,708,465 | 7/1/2018 | ||||||
Skulpt, Inc. | 945,599 | 945,599 | 3/1/2019 | ||||||
Symphony Performance Health, Inc. | 9,051,433 | 9,051,433 | 11/1/2017 | ||||||
Trio Health Advisory Group, Inc. | 925,641 | 925,641 | 2/1/2019 | ||||||
Urgent Care Centers of New England, Inc. | 2,509,394 | 2,509,394 | 9/1/2018 | ||||||
Wellist PBC, Inc. | 173,996 | 173,996 | 3/1/2019 | ||||||
Subtotal: | 23.4% | $ | 45,725,379 | $ | 45,725,379 |
13
Other Technology | |||||||||
21, Inc. | $ | 2,524,645 | $ | 4,564,645 | 8/1/2019 | ||||
AltspaceVR, Inc. | 370,447 | 370,447 | 8/1/2017 | ||||||
Asset Avenue, Inc.** | 835,958 | 835,958 | 10/1/2018 | ||||||
Automatic Labs, Inc. | 3,055,444 | 3,055,444 | 12/1/2018 | ||||||
Beeline Bikes, Inc. | 62,244 | 62,244 | 6/1/2017 | ||||||
Candy Club Holdings, Inc. | 776,000 | 776,000 | 9/1/2018 | ||||||
CommunityCo, LLC | 256,297 | 256,297 | 3/1/2019 | ||||||
Crew Ventures, Inc. | 25,000 | 1,000,000 | * | ||||||
Daylight Solutions, Inc. | 1,774,449 | 1,774,449 | 12/1/2018 | ||||||
Ensyn Corporation | 2,783,354 | 2,783,354 | 6/1/2019 | ||||||
Eponym, Inc. | 708,895 | 708,895 | 12/1/2018 | ||||||
Faster Faster, Inc. | 1,662,415 | 1,662,415 | 1/1/2019 | ||||||
Flo Water, Inc. | 193,201 | 193,201 | 8/1/2018 | ||||||
Gap Year Global, Inc. | 225,882 | 225,882 | 10/1/2018 | ||||||
General Assembly, Inc. | 13,772,814 | 13,772,814 | 6/1/2019 | ||||||
Greats Brand, Inc. | 210,024 | 210,024 | 7/1/2019 | ||||||
Hyperloop Technologies, Inc. | 7,112,384 | 7,112,384 | 6/1/2019 | ||||||
ICON Aircraft, Inc. | 12,694,159 | 12,694,159 | 9/1/2019 | ||||||
InsideTrack, Inc. | 640,454 | 640,454 | 9/1/2017 | ||||||
Lumo BodyTech, Inc. | 765,431 | 765,431 | 12/1/2017 | ||||||
Mark One Lifestyle, Inc. | 123,247 | 123,247 | 8/1/2016 | ||||||
Neuehouse, LLC | 6,286,697 | 6,286,697 | 6/1/2019 | ||||||
New Frontier Foods, Inc. | 559,641 | 559,641 | 8/1/2018 | ||||||
nWay, Inc. | 611,340 | 1,745,340 | * | ||||||
One Financial Holdings Group, Inc. | 709,478 | 709,478 | 4/1/2019 | ||||||
Owlet Baby Care, Inc. | 924,658 | 924,658 | 3/1/2019 | ||||||
Pinnacle Engines, Inc. | 647,330 | 647,330 | 12/1/2017 | ||||||
Planet Labs, Inc. | 23,977,202 | 23,977,202 | 3/1/2019 | ||||||
Plethora, Inc | 1,406,283 | 1,406,283 | 3/1/2019 | ||||||
Prana Holdings, Inc. | 763,019 | 1,525,019 | 3/1/2017 | ||||||
Scoot Networks, Inc. | 399,619 | 399,619 | 12/1/2017 | ||||||
Securiforest S.L. LLC ** | — | 2,383,612 | * | ||||||
Seriforge, Inc. | 200,403 | 200,403 | 9/1/2018 | ||||||
Skully, Inc. | 2,418,391 | 2,418,391 | 12/1/2018 | ||||||
Stratos Technologies, Inc. | 281,024 | 313,024 | * | ||||||
Theatro Labs, Inc. | 2,223,774 | 2,223,774 | 3/1/2019 | ||||||
Tribogenics, Inc. | 68,598 | 68,598 | 9/1/2016 | ||||||
VentureBeat, Inc. | 718,448 | 718,448 | 11/1/2017 | ||||||
Virtuix Holdings, Inc. | 516,163 | 516,163 | 9/1/2017 | ||||||
Wine Plum, Inc. | 930,980 | 930,980 | 9/1/2019 | ||||||
Subtotal: | 48.2% | $ | 94,215,792 | $ | 101,542,404 | ||||
Security | |||||||||
Agari Data, Inc. | $ | 542,773 | $ | 542,773 | 9/1/2017 | ||||
Bottlenose, Inc. | $ | 1,393,912 | $ | 1,393,912 | 12/1/2018 |
14
Guardian Analytics, Inc. | 5,312,908 | 5,312,908 | 2/1/2019 | ||||||
Kryptnostic, Inc. | 471,242 | 471,242 | 6/1/2019 | ||||||
Subtotal: | 3.9% | $ | 7,720,835 | $ | 7,720,835 | ||||
Semiconductors & Equipment | |||||||||
ETA Compute, Inc. | $ | 231,795 | $ | 231,795 | 10/1/2019 | ||||
Subtotal: | 0.1% | $ | 231,795 | $ | 231,795 | ||||
Software | |||||||||
Addepar, Inc. | $ | 4,817,759 | $ | 4,817,759 | 6/1/2018 | ||||
Apptimize, Inc. | 911,094 | 911,094 | 3/1/2019 | ||||||
Atigeo Corporation | 1,553,506 | 1,553,506 | 9/1/2017 | ||||||
Beanstock Media, Inc. | 100,000 | 1,322,744 | * | ||||||
Beep, Inc. | 305,871 | 305,871 | 12/1/2017 | ||||||
BlazeMeter, Inc.** | 519,961 | 519,961 | 1/1/2018 | ||||||
Bloomboard, Inc. | 1,895,112 | 1,895,112 | 8/1/2019 | ||||||
Bounce Exchange, Inc. | 3,360,142 | 3,360,142 | 12/1/2019 | ||||||
Clypd, Inc. | 136,849 | 136,849 | 11/1/2016 | ||||||
DocSend, Inc. | 486,688 | 486,688 | 6/1/2018 | ||||||
ElasticBeam, Inc. | 1,303,704 | 1,303,704 | 9/1/2018 | ||||||
Encoding.com, Inc. | 82,372 | 82,372 | 11/1/2016 | ||||||
FieldAware US, Inc. | 9,579,418 | 9,579,418 | 3/1/2019 | ||||||
FoxCommerce, Inc. | 1,421,777 | 1,421,777 | 1/1/2019 | ||||||
Interset Software, Inc.** | 1,182,772 | 1,182,772 | 10/1/2019 | ||||||
Mconcierge System, Inc. | 652,738 | 652,738 | 2/1/2018 | ||||||
MediaPlatform, Inc. | 28,090 | 28,090 | 9/1/2016 | ||||||
Metric Insights, Inc. | 954,162 | 954,162 | 1/1/2019 | ||||||
Mintigo, Inc.** | 821,902 | 821,902 | 1/1/2018 | ||||||
Nectar Holdings, Inc. | 642,834 | 642,834 | 12/1/2017 | ||||||
Norse Networks, Inc. | 3,466,232 | 3,466,232 | 12/1/2018 | ||||||
OrderGroove, Inc. | 553,088 | 553,088 | 12/1/2017 | ||||||
SCVNGR, Inc. | 368,052 | 368,052 | 10/1/2016 | ||||||
SoundHound, Inc. | 1,209,928 | 1,209,928 | 5/1/2017 | ||||||
StreetLight Data, Inc. | 235,576 | 235,576 | 4/1/2017 | ||||||
Swift Pursuits, Inc. | 769,876 | 769,876 | 7/1/2018 | ||||||
Swrve, Inc. | 4,037,721 | 4,037,721 | 9/1/2018 | ||||||
Takipi, Inc. | 1,318,798 | 1,318,798 | 3/1/2018 | ||||||
Toast, Inc. | 476,012 | 476,012 | 1/1/2019 | ||||||
Truss Technology | 173,275 | 2,000,000 | * | ||||||
Viewpost Holdings, LLC. | 12,150,973 | 12,150,973 | 11/1/2018 | ||||||
Vuemix, Inc. | 156,274 | 156,274 | 9/1/2017 | ||||||
Workspot, Inc. | 697,520 | 697,520 | 2/1/2019 | ||||||
Xeeva | 2,365,223 | 2,365,223 | 6/1/2019 | ||||||
ZeroTurnaround USA, Inc.** | 4,886,389 | 4,886,389 | 6/1/2019 | ||||||
Zodiac, Inc. | 713,497 | 713,497 | 7/1/2019 | ||||||
Subtotal: | 32.9% | $ | 64,335,185 | $ | 67,384,654 | ||||
15
Technology Services | |||||||||
Akademos, Inc. *** | $ | 426,028 | $ | 426,028 | 6/1/2017 | ||||
Amped, Inc. | 768,269 | 768,269 | 11/1/2017 | ||||||
Ascend Consumer Finance, Inc.** | 473,742 | 473,742 | 3/1/2019 | ||||||
Blazent, Inc. | 1,171,462 | 1,171,462 | 8/1/2019 | ||||||
Blue Technologies Limited ** | 313,807 | 313,807 | 6/1/2017 | ||||||
BountyJobs, Inc. | 244,171 | 244,171 | 10/1/2017 | ||||||
Callisto Media, Inc. | 7,397,309 | 7,397,309 | 6/1/2018 | ||||||
Fluxx Labs | 3,537,284 | 3,537,284 | 12/1/2018 | ||||||
FSA Store, Inc. | 1,862,214 | 1,862,214 | 9/1/2018 | ||||||
Getable, Inc. | 239,158 | 239,158 | 8/1/2017 | ||||||
Grassroots Unwired, Inc. | 4,719 | 4,719 | 8/1/2016 | ||||||
Iris.tv, Inc. | 231,171 | 231,171 | 4/1/2019 | ||||||
Maxi Mobility, Inc. ** | 9,476 | 9,476 | 7/1/2016 | ||||||
ParkJockey Global, Inc. | 449,079 | 449,079 | 6/1/2019 | ||||||
PayJoy, Inc.** | 472,012 | 472,012 | 8/1/2019 | ||||||
Rated People, Ltd. ** | 370,468 | 510,468 | * | ||||||
Sixup PBC, Inc.** | 578,653 | 578,653 | 6/1/2019 | ||||||
TiqIQ, Inc. | 127,972 | 127,972 | 7/1/2017 | ||||||
Subtotal: | 9.5% | $ | 18,676,994 | $ | 18,816,994 | ||||
Wireless | |||||||||
Bluesmart, Inc. | $ | 1,888,476 | $ | 1,888,476 | 9/1/2019 | ||||
GPShopper, LLC | 228,440 | 228,440 | 7/1/2017 | ||||||
InfoReach, Inc. | 170,454 | 170,454 | 3/1/2017 | ||||||
InVenture Capital Corporation** | 697,091 | 697,091 | 3/1/2019 | ||||||
Juvo Mobile, Inc.** | 454,215 | 454,215 | 9/1/2019 | ||||||
Karma Technology Holdings, Inc. | 292,254 | 292,254 | 11/1/2017 | ||||||
Kicksend Holdings, Inc. | — | 61,475 | * | ||||||
LLJ, Inc. | 421,651 | 421,651 | 4/1/2018 | ||||||
Redwood Apps | 940,785 | 1,000,000 | * | ||||||
Subtotal: | 2.7% | $ | 5,093,366 | $ | 5,214,056 | ||||
Total Loans (Cost of $359,075,269) | 171.1% | $ | 334,703,266 | $ | 361,936,209 | ||||
Interest Rate Caps (Cost of $1,394,646) | 0.1% | $ | 213,951 | $ | 1,394,646 | ||||
Total Investments (Cost of $360,469,915) | 171.2% | $ | 334,917,217 | $ | 363,330,855 |
*As of June 30, 2016, loans with a cost basis of $28.2 million and a fair value of $6.6 million were classified as non-accrual.
** Indicates assets that the Fund deems “non-qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Fund’s total assets at the time of acquisition of any additional non-qualifying assets. As of June 30, 2016, 6.8% of the Fund’s assets represented non-qualifying assets. As part of this calculation, the denominator consists of all eligible portfolio companies as defined in Section 2(a)(46); the numerator consists of total assets less the assets described in Section 55(a)(7).
*** Indicates assets that are not senior loans.
16
As of December 31, 2015, all loans were made to non-affiliates as follows:
Borrower | Percentage of Net Assets | Estimated Fair Value 12/31/2015 | Par Value 12/31/2015 | Final Maturity Date | |||||
Computers & Storage | |||||||||
Canary Connect, Inc. | $ | 5,724,890 | $ | 5,724,890 | 12/01/2018 | ||||
Clustrix, Inc. | 1,258,439 | 1,258,439 | 05/01/2017 | ||||||
D-Wave Systems, Inc. ** | 1,003,360 | 1,003,360 | 02/01/2017 | ||||||
Electric Objects, Inc. | 953,715 | 953,715 | 12/01/2018 | ||||||
Gridstore, Inc. | 913,030 | 913,030 | 06/01/2017 | ||||||
Rigetti & Co., Inc. | 702,377 | 702,377 | 01/01/2019 | ||||||
Subtotal: | 5.0% | $ | 10,555,811 | $ | 10,555,811 | ||||
Enterprise Networking | |||||||||
Apprion, Inc. | $ | 147,799 | $ | 147,799 | 04/01/2016 | ||||
Subtotal: | 0.1% | $ | 147,799 | $ | 147,799 | ||||
Internet | |||||||||
Apartment List, Inc | $ | 1,362,110 | $ | 1,362,110 | 11/01/2019 | ||||
Betaworks Studio, LLC. ** | 8,865,095 | 8,865,095 | 07/01/2018 | ||||||
Blitsy, Inc. | 469,038 | 469,038 | 02/01/2019 | ||||||
Bloom That, Inc. | 688,589 | 688,589 | 09/01/2018 | ||||||
Bonobos, Inc. *** | 11,282,608 | 11,282,608 | 12/01/2018 | ||||||
CapLinked, Inc. | 218,415 | 218,415 | 12/01/2018 | ||||||
CustomMade Ventures Corp. | 687,276 | 687,276 | * | ||||||
Deja Mi, Inc. | 1,420,241 | 1,420,241 | 09/01/2018 | ||||||
Digital Caddies, Inc. ** | — | 987,584 | * | ||||||
Dinner Lab, Inc. | 335,500 | 335,500 | 09/01/2017 | ||||||
Eloquii Design, Inc. | 1,763,949 | 1,763,949 | 09/01/2018 | ||||||
Flowplay, Inc. | 1,473,235 | 1,473,235 | 12/01/2017 | ||||||
FLYR, Inc. | 619,132 | 619,132 | 06/01/2018 | ||||||
Giddy Apps, Inc. | 1,063,297 | 1,063,297 | 12/01/2017 | ||||||
Giveforward, Inc. | 406,113 | 406,113 | 07/01/2017 | ||||||
Glide, Inc. ** | 5,708,102 | 5,708,102 | 06/01/2018 | ||||||
Grovo Learning, Inc. | 7,679,550 | 7,679,550 | 06/01/2018 | ||||||
Homelight, Inc. | 903,035 | 903,035 | 09/01/2018 | ||||||
Hotel Tonight, Inc. | 9,116,138 | 9,116,138 | 01/01/2019 | ||||||
InsideVault, Inc. | 259,715 | 259,715 | 05/01/2017 | ||||||
Jet.com, Inc. | 9,397,239 | 9,397,239 | 12/01/2018 | ||||||
JewelScent, Inc. | 366,642 | 366,642 | 12/01/2017 | ||||||
Kitsy Lane, Inc. | 39,441 | 169,441 | * | ||||||
Kiwi Crate, Inc. | 814,731 | 814,731 | 04/01/2018 | ||||||
Madison Reed, Inc. | 2,706,104 | 2,706,104 | 03/01/2019 | ||||||
Monetate, Inc. | 2,475,198 | 2,475,198 | 06/01/2018 | ||||||
Move Loot, Inc. | 1,788,169 | 1,788,169 | 10/01/2018 | ||||||
Next Step Living, Inc. | 5,401,979 | 11,401,979 | 05/01/2018 | ||||||
Osix Corp. | 42,414 | 42,414 | 10/01/2016 |
17
PerformLine, Inc. | 329,776 | 329,776 | 12/01/2018 | ||||||
Piryx, Inc. | 715,245 | 885,245 | * | ||||||
Pixalate, Inc. | 526,140 | 526,140 | 06/01/2017 | ||||||
Placester, Inc. | 1,164,036 | 1,164,036 | 12/01/2017 | ||||||
Playstudios, Inc. | 2,065,680 | 2,065,680 | 06/01/2018 | ||||||
Primary Kids, Inc. | 699,102 | 699,102 | 06/01/2018 | ||||||
Quantcast Corp. | 3,404,740 | 3,404,740 | 04/01/2017 | ||||||
Quri, Inc. | 1,696,743 | 1,696,743 | 06/01/2018 | ||||||
Radius Intelligence, Inc. | 1,257,560 | 1,257,560 | 10/01/2017 | ||||||
Relay Network, LLC | 1,827,350 | 1,827,350 | 06/01/2018 | ||||||
Schoola, Inc. | 102,300 | 102,300 | 12/01/2016 | ||||||
SchoolTube, Inc. | — | 108,222 | * | ||||||
Smart Lunches, Inc. | 63,640 | 63,640 | 06/01/2016 | ||||||
Sociable Labs, Inc. | 113,422 | 113,422 | 07/01/2016 | ||||||
SocialChorus, Inc. | 1,826,903 | 1,826,903 | 09/01/2018 | ||||||
THECLYMB | 870,456 | 870,456 | 10/01/2017 | ||||||
Thrive Market, Inc. | 4,597,636 | 4,597,636 | 09/01/2019 | ||||||
Viyet, Inc. | 206,942 | 206,942 | 01/01/2019 | ||||||
Weddington Way, Inc. | 3,161,421 | 3,161,421 | 12/01/2018 | ||||||
WHI, Inc. | 1,160,565 | 1,160,565 | 07/01/2017 | ||||||
YouDocs Beauty, Inc. *** | 1,061,305 | 1,192,024 | * | ||||||
Yourmechanic, Inc. | 151,324 | 151,324 | 07/01/2017 | ||||||
Subtotal: | 49.6% | $ | 104,355,341 | $ | 111,881,866 | ||||
Medical Devices | |||||||||
AxioMed, Inc. | $ | 14,238 | $ | 1,560,238 | * | ||||
Blockade Medical, LLC | 347,432 | 347,432 | 09/01/2017 | ||||||
MyoScience, Inc. | 9,006,754 | 9,006,754 | 07/01/2018 | ||||||
Subtotal: | 4.5% | $ | 9,368,424 | $ | 10,914,424 | ||||
Other Healthcare | |||||||||
Anutra Medical, Inc. | $ | 1,314,818 | $ | 1,314,818 | 08/01/2018 | ||||
Caredox, Inc. | 699,772 | 699,772 | 01/01/2019 | ||||||
Cogito Health, Inc. | 309,223 | 309,223 | 04/01/2017 | ||||||
Health Integrated, Inc. | 3,419,742 | 3,419,742 | 05/01/2018 | ||||||
HealthEquityLabs, Inc. | 949,393 | 949,393 | 06/01/2018 | ||||||
Lean Labs, Inc. | 227,272 | 227,272 | 12/01/2018 | ||||||
Mulberry Health, Inc. | 3,436,073 | 3,436,073 | 12/01/2017 | ||||||
Physician Software Systems, LLC | 321,221 | 321,221 | 07/01/2017 | ||||||
Practice Fusion, Inc. | 19,654,665 | 19,654,665 | 09/01/2018 | ||||||
Project Healthy Living, Inc. | 3,244,296 | 3,244,296 | 12/01/2018 | ||||||
Seven Bridges Genomics, Inc. | 3,212,604 | 3,212,604 | 07/01/2018 | ||||||
Symphony Performance Health, Inc. | 19,133,115 | 19,133,115 | 03/01/2019 | ||||||
Urgent Care Centers of New England, Inc. | 3,050,202 | 3,050,202 | 09/01/2018 | ||||||
Wellist PBC, Inc. | 168,014 | 168,014 | 03/01/2019 | ||||||
Subtotal: | 28.1% | $ | 59,140,410 | $ | 59,140,410 | ||||
18
Other Technology | |||||||||
21, Inc. | $ | 10,680,985 | $ | 10,680,985 | 09/01/2017 | ||||
AltspaceVR, Inc. | 512,111 | 512,111 | 08/01/2017 | ||||||
Automatic Labs, Inc. | 3,210,960 | 3,210,960 | 12/01/2018 | ||||||
Beeline Bikes, Inc. | 89,107 | 89,107 | 06/01/2017 | ||||||
Candy Club Holdings, Inc. | 912,007 | 912,007 | 09/01/2018 | ||||||
CRRW, Inc. | 937,305 | 937,305 | 07/01/2018 | ||||||
Daylight Solutions, Inc. | 2,091,806 | 2,091,806 | 12/01/2018 | ||||||
eco.logic brands, Inc. | 375,524 | 375,524 | 06/01/2017 | ||||||
Faster Faster, Inc. | 1,852,870 | 1,852,870 | 01/01/2019 | ||||||
Flo Water, Inc. | 211,622 | 211,622 | 08/01/2018 | ||||||
Gap Year Global, Inc. | 236,385 | 236,385 | 10/01/2018 | ||||||
General Assembly, Inc. | 14,126,004 | 14,126,004 | 06/01/2019 | ||||||
ICON Aircraft, Inc. | 13,879,383 | 13,879,383 | 09/01/2019 | ||||||
InsideTrack, Inc. | 906,178 | 906,178 | 09/01/2017 | ||||||
Lumo BodyTech, Inc. | 987,135 | 987,135 | 12/01/2017 | ||||||
Mark One Lifestyle, Inc. | 328,216 | 628,216 | 08/01/2016 | ||||||
Neuehouse, LLC | 2,609,757 | 2,609,757 | 07/01/2017 | ||||||
New Frontier Foods, Inc. | 662,391 | 662,391 | 08/01/2018 | ||||||
nWay, Inc. | 2,445,447 | 2,445,447 | 07/01/2018 | ||||||
Owlet Baby Care, Inc. | 906,998 | 906,998 | 03/01/2019 | ||||||
Pinnacle Engines, Inc. | 870,363 | 870,363 | 12/01/2017 | ||||||
Planet Labs, Inc. | 23,772,164 | 23,772,164 | 03/01/2019 | ||||||
Prana Holdings, Inc. | 2,280,795 | 2,280,795 | 07/01/2016 | ||||||
Scoot Networks, Inc. | 559,373 | 559,373 | 12/01/2017 | ||||||
Securiforest S.L. ** | 1,183,612 | 2,383,612 | * | ||||||
Seriforge, Inc. | 212,260 | 212,260 | 09/01/2018 | ||||||
Skully, Inc. | 2,509,869 | 2,509,869 | 12/01/2018 | ||||||
Sproutling, Inc. | 483,238 | 483,238 | 09/01/2017 | ||||||
Stratos Technologies, Inc. | 329,301 | 329,301 | 08/01/2017 | ||||||
Theatro Labs, Inc. | 2,376,079 | 2,376,079 | 03/01/2019 | ||||||
Tribogenics, Inc. | 198,399 | 198,399 | 09/01/2016 | ||||||
VentureBeat, Inc. | 933,065 | 933,065 | 11/01/2017 | ||||||
Virtuix Holdings, Inc. | 695,183 | 695,183 | 09/01/2017 | ||||||
Subtotal: | 44.8% | $ | 94,365,892 | $ | 95,865,892 | ||||
Security | |||||||||
Agari Data, Inc. | $ | 734,959 | $ | 734,959 | 09/01/2017 | ||||
Bottlenose, Inc. | 1,364,114 | 1,364,114 | 12/01/2018 | ||||||
Guardian Analytics, Inc. | 5,160,972 | 5,160,972 | 02/01/2019 | ||||||
Uplogix, Inc. | 369,234 | 979,234 | * | ||||||
Subtotal: | 3.6% | $ | 7,629,279 | $ | 8,239,279 | ||||
Software | |||||||||
3Scale, Inc. | $ | 594,565 | $ | 594,565 | 09/01/2017 | ||||
Addepar, Inc. | 4,762,615 | 4,762,615 | 06/01/2018 | ||||||
Apptimize, Inc. | 458,467 | 458,467 | 09/01/2018 |
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Atigeo Corporation | 2,088,385 | 2,088,385 | 09/01/2017 | ||||||
Beanstock Media, Inc. *** | 85,000 | 1,322,744 | * | ||||||
Beep, Inc. | 394,269 | 394,269 | 12/01/2017 | ||||||
BlazeMeter, Inc. ** | 697,581 | 697,581 | 01/01/2018 | ||||||
Bloomboard, Inc. | 910,846 | 910,846 | 08/01/2019 | ||||||
Bounce Exchange, Inc. | 2,947,711 | 2,947,711 | 06/01/2018 | ||||||
ClearPath, Inc. | 95,856 | 95,856 | 05/01/2016 | ||||||
Clypd, Inc. | 291,458 | 291,458 | 11/01/2016 | ||||||
DocSend, Inc. | 586,828 | 586,828 | 06/01/2018 | ||||||
ElasticBeam, Inc. | 1,401,014 | 1,401,014 | 09/01/2018 | ||||||
Encoding.com, Inc. | 239,707 | 239,707 | 11/01/2016 | ||||||
FieldAware US, Inc. | 9,450,272 | 9,450,272 | 03/01/2019 | ||||||
Mconcierge System, Inc. | 879,888 | 879,888 | 02/01/2018 | ||||||
MediaPlatform, Inc. | 165,244 | 165,244 | 09/01/2016 | ||||||
Metric Insights, Inc. | 943,266 | 943,266 | 01/01/2019 | ||||||
Mintigo, Inc. ** | 1,048,984 | 1,048,984 | 01/01/2018 | ||||||
Nectar Holdings, Inc. | 872,439 | 872,439 | 12/01/2017 | ||||||
Norse Corporation | 4,449,830 | 4,449,830 | 12/01/2017 | ||||||
OrderGroove, Inc. | 704,374 | 704,374 | 12/01/2017 | ||||||
Palantir Technologies, Inc. | 1,865,160 | 1,865,160 | 04/01/2016 | ||||||
SCVNGR, Inc. | 887,926 | 887,926 | 10/01/2016 | ||||||
SoundHound, Inc. | 2,026,388 | 2,026,388 | 05/01/2017 | ||||||
StreetLight Data, Inc. | 378,297 | 378,297 | 04/01/2017 | ||||||
Swift Pursuits, Inc. | 880,921 | 880,921 | 07/01/2018 | ||||||
Swrve, Inc. | 4,769,860 | 4,769,860 | 09/01/2018 | ||||||
Takipi, Inc. | 1,668,443 | 1,668,443 | 03/01/2018 | ||||||
Toast, Inc. | 466,745 | 466,745 | 01/01/2019 | ||||||
Top Hat Monocle Corp. ** | 253,954 | 253,954 | 07/01/2016 | ||||||
Viewpost Holdings, LLC. | 13,735,095 | 13,735,095 | 05/01/2018 | ||||||
Vuemix, Inc. | 210,948 | 210,948 | 09/01/2017 | ||||||
Workspot, Inc. | 78,658 | 78,658 | 09/01/2016 | ||||||
ZeroTurnaround USA, Inc. ** | 5,076,358 | 5,076,358 | 06/01/2019 | ||||||
Subtotal: | 31.5% | $ | 66,367,352 | $ | 67,605,096 | ||||
Technology Services | |||||||||
Akademos, Inc. *** | $ | 598,955 | $ | 598,955 | 06/01/2017 | ||||
Amped, Inc. | 1,036,377 | 1,036,377 | 11/01/2017 | ||||||
BandPage, Inc. | 1,548,738 | 1,548,738 | 12/01/2017 | ||||||
BidPal, Inc. | 229,075 | 229,075 | 07/01/2016 | ||||||
Blazent, Inc. | 184,686 | 184,686 | 05/01/2016 | ||||||
Blue Technologies Limited ** | 453,140 | 453,140 | 06/01/2017 | ||||||
BountyJobs, Inc. | 332,991 | 332,991 | 10/01/2017 | ||||||
Callisto Media, Inc. | 7,558,697 | 7,558,697 | 06/01/2018 | ||||||
Classy, Inc. | 1,519,617 | 1,519,617 | 03/01/2018 | ||||||
Fluxx Labs | 3,775,161 | 3,775,161 | 12/01/2018 | ||||||
FSA Store, Inc. | 2,298,913 | 2,298,913 | 09/01/2018 | ||||||
Getable, Inc. | 326,600 | 326,600 | 08/01/2017 |
20
Grassroots Unwired, Inc. | 27,182 | 27,182 | 08/01/2016 | ||||||
Maxi Mobility, Inc. ** | 63,044 | 63,044 | 07/01/2016 | ||||||
Rated People, Ltd. ** | 389,410 | 529,410 | * | ||||||
Stackstorm, Inc. | 211,072 | 211,072 | 01/01/2018 | ||||||
TiqIQ, Inc. | 172,041 | 172,041 | 07/01/2017 | ||||||
Subtotal: | 9.8% | $ | 20,725,699 | $ | 20,865,699 | ||||
Wireless | |||||||||
Bluesmart, Inc. | $ | 657,366 | $ | 657,366 | 09/01/2019 | ||||
Flint Mobile, Inc. | 1,473,052 | 1,473,052 | 03/01/2018 | ||||||
GPShopper, LLC | 317,990 | 317,990 | 07/01/2017 | ||||||
InfoReach, Inc. | 264,276 | 264,276 | 03/01/2017 | ||||||
Karma Technology Holdings, Inc. | 382,259 | 382,259 | 11/01/2017 | ||||||
Kicksend Holdings, Inc. | 31,475 | 61,475 | * | ||||||
LLJ, Inc. | 508,013 | 508,013 | 04/01/2018 | ||||||
SpiderCloud Wireless, Inc. | 4,147,493 | 4,147,493 | 07/01/2017 | ||||||
Subtotal: | 3.7% | $ | 7,781,924 | $ | 7,811,924 | ||||
Total Loans (Cost of $393,028,200) : | 180.7% | $ | 380,437,931 | $ | 393,028,200 | ||||
Interest Rate Caps (Cost of $1,917,638) | 0.7% | $ | 1,410,963 | $ | 1,917,638 | ||||
Total Investments (Cost of $394,945,838) | 181.4% | $ | 381,848,894 | $ | 394,945,838 |
*As of December 31, 2015, loans with a cost basis of $10.9 million and a fair value of $4.6 million were classified as non-accrual.
** Indicates assets that the Fund deems “non-qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Fund’s total assets at the time of acquisition of any additional non-qualifying assets. As of December 31, 2015, 6.4% of the Fund’s assets represented non-qualifying assets. As part of this calculation, the denominator consists of all eligible portfolio companies as defined in Section 2(a)(46); the numerator consists of total assets less the assets described in Section 55(a)(7).
*** Indicates assets that are not senior loans.
4. | FAIR VALUE DISCLOSURES |
Loans generally are made to borrowers pursuant to commitments whereby the Fund agrees to finance assets and provide working or growth capital up to a specified amount for the term of the commitment, upon the terms and subject to the conditions specified by such commitment. As of June 30, 2016, the Fund's investments in loans were primarily to companies based within the United States and were diversified among borrowers in the industry segments shown below. The percentage of net assets that each industry group represents is shown with the industry totals below (the sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans). All loans are senior to unsecured creditors except for Akademos, Inc. and Bonobos, Inc., which are subordinate.
The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies. These loans are generally secured by assets of the borrowers. As a result, the Fund is generally subject to general credit risk associated with such companies.
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The Fund defines fair value as the price that would be received to sell an asset or paid to settle a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability was exchanged in an orderly transaction; it was not a forced liquidation or distressed sale.
Loan balances are summarized by borrower. Typically a borrower's balance will be composed of several loans drawn under a commitment made by the Fund with the interest rate on each loan fixed at the time each loan is funded. Each loan drawn under a commitment may have a different maturity date and amount. For the three and six months ended June 30, 2016 , the weighted-average interest rate on performing loans was 19.58% and 18.49%, respectively. For the three and six months ended June 30, 2015, the weighted-average interest rate on performing loans was 18.93% and 18.66%, respectively. This rate is inclusive of both cash and non-cash interest income. For the three and six months ended June 30, 2016 , the weighted-average interest rate on the cash portion of the interest income was 15.38% and 14.48%, respectively. For the three and six months ended June 30, 2015, the weighted-average interest rate on the cash portion of the interest income was 14.52% and 14.24%, respectively. Interest is calculated using the effective interest method, and rates earned by the Fund will fluctuate based on many factors including early payoffs, volatility of values ascribed to warrants and new loans funded during the period.
The risk profile of a loan changes when events occur that impact the credit analysis of the borrower and loan as described in our loan accounting policy. Such changes result in the fair value adjustment made to the individual loans.Where the risk profile is consistent with the original underwriting, which is primarily the case for this loan portfolio, the par value of the loan will approximate fair value.
All loans as of June 30, 2016 and 2015 were pledged as collateral for the debt facility, and the Fund's borrowings are subsequently collateralized by all assets of the Fund.
As of June 30, 2016 and December 31, 2015, the Fund had unexpired unfunded commitments to borrowers of $58.9 million and $68.7 million, respectively.
Valuation Hierarchy
Under the FASB Accounting Standards Codification ("ASC") 820-10 "Fair Value Measurement", the Fund categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Fund's valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 | Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date. | |
Level 2 | Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities. | |
Level 3 | Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
Transfers of investments between levels of the fair value hierarchy are recorded on the actual date of the event or change in circumstances that caused the transfer. There were no transfers in and out of Level 1, 2, and 3 during the period ended June 30, 2016.
The Fund's cash equivalents were valued at the traded net asset value of the money market mutual fund. As a result, these measurements are classified as Level 1. The Fund’s investments in the interest rate cap are based on quotes from the market makers that derive fair values from market data, and therefore, are classified as Level 2.
The Fund uses estimated exit values when determining the value of its investments. Because loan transactions are individually negotiated and unique, and there is no market in which these assets trade, the inputs for these assets, which are discussed in the Valuation Methods listed above, are classified as Level 3.
22
The following tables provide quantitative information about the Fund's Level 3 fair value measurements of its investments as of June 30, 2016 and December 31, 2015. In addition to the techniques and inputs noted in the tables below, the Fund may also use other valuation techniques and methodologies when determining its fair value measurements.
Investment Type - Level 3 | ||||||||||
Debt Investments | Fair Value at 6/30/2016 | Valuation Techniques / Methodologies | Unobservable Input | Weighted Average / Amount Or Range | ||||||
Computers and Storage | $ | 8,824,379 | Hypothetical market analysis | Hypothetical market coupon rate | 15% | |||||
Internet | $ | 80,459,927 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $0 - $1,182,986 | ||||||||
Medical Devices | $ | 9,121,444 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $14,238 | ||||||||
Other Healthcare | $ | 45,725,379 | Hypothetical market analysis | Hypothetical market coupon rate | 17% | |||||
Other Technology | $ | 94,215,792 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $0 - $611,340 | ||||||||
Security | $ | 7,720,835 | Hypothetical market analysis | Hypothetical market coupon rate | 18% | |||||
Software | $ | 64,335,185 | Hypothetical market analysis | Hypothetical market coupon rate | 15% | |||||
Liquidation | Investment Collateral | $100,000 - $173,275 | ||||||||
Technology Services | $ | 18,676,994 | Hypothetical market analysis | Hypothetical market coupon rate | 14% | |||||
Liquidation | Investment Collateral | $370,468 | ||||||||
Wireless | $ | 5,093,366 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $0 - $940,785 | ||||||||
Other* | $ | 529,965 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $72,266 | ||||||||
$ | 334,703,266 |
* Other loans as of June 30,2016 were comprised of companies in the Biotechnology, Enterprise Networking and Semiconductor.
23
Investment Type - Level 3 | ||||||||||
Debt Investments | Fair Value at 12/31/2015 | Valuation Techniques / Methodologies | Unobservable Input | Weighted Average / Amount or Range | ||||||
Computers and Storage | $ | 10,555,811 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Internet | $ | 104,355,341 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $0 - $1,061,305 | ||||||||
Other Healthcare | $ | 59,140,410 | Hypothetical market analysis | Hypothetical market coupon rate | 15% | |||||
Other Technology | $ | 94,365,892 | Hypothetical market analysis | Hypothetical market coupon rate | 15% | |||||
Liquidation | Investment Collateral | $1,183,612 | ||||||||
Software | $ | 66,367,352 | Hypothetical market analysis | Hypothetical market coupon rate | 15% | |||||
Liquidation | Investment Collateral | $85,000 | ||||||||
Technology Services | $ | 20,725,699 | Hypothetical market analysis | Hypothetical market coupon rate | 14% | |||||
Liquidation | Investment Collateral | $389,410 | ||||||||
Wireless | $ | 7,781,924 | Hypothetical market analysis | Hypothetical market coupon rate | 17% | |||||
Liquidation | Investment Collateral | $31,475 | ||||||||
Other * | $ | 17,145,502 | Hypothetical market analysis | Hypothetical market coupon rate | 16% | |||||
Liquidation | Investment Collateral | $14,238 - $369,234 | ||||||||
$ | 380,437,931 |
* Other loans, as of December 31, 2015, were comprised of companies in the Enterprise Networking, Medical Device and Security industries.
The following table presents the balances of assets as of June 30, 2016 and December 31, 2015 measured at fair value on a recurring basis:
As of June 30, 2016 | |||||||||||||||
ASSETS: | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Loans* | $ | — | $ | — | $ | 334,703,266 | $ | 334,703,266 | |||||||
Interest Rate Caps | — | 213,951 | — | 213,951 | |||||||||||
Cash equivalents | 20,194,303 | — | — | 20,194,303 | |||||||||||
Total | $ | 20,194,303 | $ | 213,951 | $ | 334,703,266 | $ | 355,111,520 |
24
As of December 31, 2015 | |||||||||||||||
ASSETS: | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Loans* | $ | — | $ | — | $ | 380,437,931 | $ | 380,437,931 | |||||||
Interest rate cap | — | 1,410,963 | — | 1,410,963 | |||||||||||
Cash equivalents | 8,303,171 | — | — | 8,303,171 | |||||||||||
Total | $ | 8,303,171 | $ | 1,410,963 | $ | 380,437,931 | $ | 390,152,065 |
*For a detailed listing of borrowers comprising this amount, please refer to Note 3, Schedules of Investments.
The following table provides a summary of changes in Level 3 assets measured at fair value on a recurring basis:
For the Three Months Ended June 30, 2016 | |||||||||||||||
Loans | Warrants | Stock | Convertible Note | ||||||||||||
Beginning balance | $ | 357,273,958 | $ | — | $ | — | $ | — | |||||||
Acquisitions and originations | 30,612,500 | 2,364,162 | 778,249 | 83,408 | |||||||||||
Principal reductions | (46,551,936 | ) | — | — | — | ||||||||||
Distribution to shareholder | — | (2,364,162 | ) | (778,249 | ) | (83,408 | ) | ||||||||
Net change in unrealized loss from investments | (5,572,461 | ) | — | — | — | ||||||||||
Net realized loss from investments | (1,058,795 | ) | — | — | — | ||||||||||
Ending balance | $ | 334,703,266 | $ | — | $ | — | $ | — | |||||||
Net change in unrealized loss on investments relating to investments still held at June 30, 2016 | $ | (6,422,461 | ) |
For the Six Months Ended June 30, 2016 | |||||||||||||||
Loans | Warrants | Stock | Convertible Note | ||||||||||||
Beginning balance | $ | 380,437,931 | $ | — | $ | — | $ | — | |||||||
Acquisitions and originations | 59,577,273 | 4,543,456 | 778,249 | 83,408 | |||||||||||
Principal reductions | (91,389,884 | ) | — | — | |||||||||||
Distribution to shareholder | — | (4,543,456 | ) | (778,249 | ) | (83,408 | ) | ||||||||
Net change in unrealized loss from investments | (11,781,734 | ) | — | — | — | ||||||||||
Net realized loss from investments | (2,140,320 | ) | — | — | — | ||||||||||
Ending balance | $ | 334,703,266 | $ | — | $ | — | $ | — | |||||||
Net change in unrealized loss on investments relating to investments still held at June 30, 2016 | $ | (12,521,734 | ) |
25
For the Three Months Ended June 30, 2015 | |||||||
Loans | Warrants | ||||||
Beginning balance | $ | 319,553,172 | $ | — | |||
Acquisitions and originations | 91,425,000 | 5,797,719 | |||||
Principal reductions | (35,930,142 | ) | — | ||||
Distribution to shareholder | — | (5,797,719 | ) | ||||
Net change in unrealized gain from investments | (1,422,700 | ) | — | ||||
Net realized loss from investments | (286,920 | ) | — | ||||
Ending balance | $ | 373,338,410 | $ | — | |||
Net change in unrealized loss on investments relating to investments still held at June 30, 2015 | $ | (1,780,000 | ) |
For the Six Months Ended June 30, 2015 | |||||||||||
Loans | Warrants | Convertible Note | |||||||||
Beginning balance | $ | 266,992,654 | $ | — | $ | — | |||||
Acquisitions and originations | 175,387,500 | 11,878,187 | 250,000 | ||||||||
Principal reductions | (66,587,539 | ) | — | ||||||||
Distribution to shareholder | — | (11,878,187 | ) | (250,000 | ) | ||||||
Net change in unrealized gain from investments | (1,150,697 | ) | — | ||||||||
Net realized loss from investments | (1,303,508 | ) | — | ||||||||
Ending balance | $ | 373,338,410 | $ | — | $ | — | |||||
Net change in unrealized loss on investments relating to investments still held at June 30, 2015 | $ | (3,030,479 | ) |
Net change in unrealized loss from investments and Net realized loss from investments are recorded in Net change in unrealized loss from investments and Net realized loss from investments in the Statement of Operations.
5. | EARNINGS PER SHARE |
Basic earnings per share are computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average common shares outstanding. Diluted earnings per share are computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average common shares outstanding, including the dilutive effects of potential common shares (e.g., stock options). The Fund held no instruments that would be potential common shares; thus, reported basic and diluted earnings per share are the same.
6. | CAPITAL STOCK |
As of June 30, 2016 and December 31, 2015, the Fund had 10,000,000 shares of $0.001 par value common stock authorized, and 100,000 shares issued and outstanding. Total committed capital of the Company, as of June 30, 2016 and December 31, 2015, was $375.0 million, respectively. Total contributed capital to the Company through June 30, 2016 and December 31, 2015 was $300.0 million and $290.6 million, respectively of which $255.9 million and $250.9 million was contributed to the Fund, respectively.
26
The chart below shows the distributions of the Fund for the six months ended June 30, 2016 and 2015.
For The Six Months Ended | |||||||
June 30, 2016 | June 30, 2015 | ||||||
Cash distributions | $ | 23,900,000 | $ | 5,000,000 | |||
Distributions of equity securities | 5,405,113 | 12,128,187 | |||||
Total distributions to shareholder | $ | 29,305,113 | $ | 17,128,187 |
Final classification of the distributions as either a return of capital or a distribution of income is an annual determination made at the end of each year dependent upon the Fund's current year and cumulative earnings and profits.
7. DEBT FACILITY
The Fund has established a secured, syndicated revolving credit facility led by Wells Fargo, N.A. and MUFG Union Bank, N.A. in an initial amount of up to $125,000,000. In November 2014, the Fund increased the borrowing availability thereunder to $255,000,000. Loans under the facility may be, at the option of the Fund, either a Reference Rate Loan or a LIBOR Rate Loan. A Reference Rate Loan is defined as a loan bearing interest at the highest of: (a) the Federal Funds Rate for such day plus one half of one percent (0.50%), (b) the Prime Rate, and (c)LIBOR plus one percent (1%). A LIBOR Rate Loan is defined as a Loan bearing interest at the prevailing LIBOR rate for a period equal to the applicable LIBOR Loan Period which appears on Reuters Screen LIBOR01 Page (or any applicable successor page) at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of the applicable LIBOR Loan Period (rounded upward, if necessary, to the nearest 1/100th of 1%) ("LIBOR Rate"). As of June 30, 2016, all of the Fund’s borrowings were based on the LIBOR Rate.
The Fund will pay interest on its borrowings, and will also pay a fee on the unused portion of the facility.
The facility terminates on November 7, 2017, but can be accelerated in the event of default, such as failure by the Fund to make timely interest or principal payments. As of June 30, 2016 and December 31, 2015, $161.0 million and $182.0 million was outstanding under the facility, respectively.
Borrowings under the facility are collateralized by receivables under loans advanced by the Fund with assignment to the financial institution, plus all of other assets of the Fund. Such borrowings will bear interest at an annual rate of either the LIBOR Rate plus 2.75%, in the case of LIBOR Rate Loans or the Reference Rate plus 1.75%, in the case of Reference Rate Loans. The Fund pays an unused line fee of 0.50% of the total unused commitment amount on a quarterly basis. As of June 30, 2016, the LIBOR Rate is as follows:
1 Month LIBOR | 0.4651% |
3 Month LIBOR | 0.6541% |
Bank fees and other costs of $2.7 million were incurred in connection with the facility. The bank fees and other costs incurred have been capitalized and are amortized to interest expense on a straight line basis over the expected life of the facility. As of June 30, 2016, the remaining unamortized fees and costs of $0.9 million are being amortized over the expected life of the facility, which is expected to terminate on November 7, 2017.
The facility is revolving and as such does not have a specified repayment schedule, although advances are secured by the assets of the Fund and thus repayments will be required as assets decline. The facility contains various covenants including financial covenants related to: (i) minimum debt service coverage ratio, (ii) interest coverage ratio, (iii) maximum loan loss reserves, and (iv) unfunded commitment ratio. There are also various restrictive covenants, including limitations on (i) the incurrence of liens, (ii) consolidations, mergers and asset sales, and (iii) capital expenditures. As of June 30, 2016, Management believes that the Fund was in compliance with these covenants.
27
The following is the summary of the outstanding facility draws as of June 30, 2016:
Roll-Over Date | Amount | Maturity Date | All-In Interest Rate** | ||
May 26, 2016 | $ | 161,000,000 | 8/26/2016* | 3.42% | |
TOTAL OUTSTANDING | $ | 161,000,000 |
* On August 26, 2016, Management intends to roll the outstanding amount for a 90-day LIBOR loan, maturing on November 26, 2016.
** Inclusive of 2.75% applicable LIBOR margin plus LIBOR rate.
8. INTEREST RATE CAP AGREEMENT
The Fund entered into interest rate cap agreements with Union Bank, N.A. to cap floating interest rates at 0.7%. The purpose of the interest rate cap agreement is to protect the Fund against rising interest rates. The Fund continues to adjust the notional principal amount as the outstanding balance under the debt facility changes. As of June 30, 2016 and June 30, 2015, the Fund had five interest cap contracts respectively with the total notional principal amount of $170 million and $148 million, respectively. The Fund paid upfront fees of $3.2 million which are amortized on a straight line basis over the life of the instrument and receives from the counterparty, payment of interest amounts above the 0.7% cap based on 90-day LIBOR. Payments, if necessary are made quarterly and will terminate on November 7, 2017. As of June 30, 2016, the 90-days LIBOR rate was 0.6541%.
The average notional amount outstanding was $170.0 million and $170.0 million for the three and six months ended June 30, 2016 respectively. The average notional amount outstanding was $148.0 million and $124.5 million for the three and six months ended June 30, 2015, respectively.
As of June 30, 2016 and December 31, 2015, the fair value of the Fund's derivative financial instruments was as follows:
Asset Derivatives | ||||||||||||
June 30, 2016 | December 31, 2015 | |||||||||||
Derivatives: | Condensed statements of assets and liabilities | Fair Value | Condensed statements of assets and liabilities | Fair Value | ||||||||
Interest rate cap agreement | Interest Rate Caps | $ | 213,951 | Interest Rate Caps | $ | 1,410,963 |
For the three and six months ended June 30, 2016 and 2015, the derivative financial instruments had the following effect on the Condensed Statements of Operations:
For The Three Months Ended | ||||||||||
Derivatives: | Locations on Condensed statements of operations | June 30, 2016 | June 30, 2015 | |||||||
Interest rate cap agreement | Net change in unrealized gain from hedging activities | $ | (52,825 | ) | $ | 103,682 |
For The Six Months Ended | ||||||||||
Derivatives: | Locations on Condensed statements of operations | June 30, 2016 | June 30, 2015 | |||||||
Interest rate cap agreement | Net change in unrealized loss from hedging activities | $ | (674,020 | ) | $ | (442,458 | ) |
9. FINANCIAL HIGHLIGHTS
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GAAP requires disclosure of financial highlights of the Fund for the periods presented, the three and six months ended June 30, 2016 and 2015. The total rate of return is defined as the return based on the change in value during the period of a theoretical investment made at the beginning of the period. The total rate of return assumes a constant rate of return for the Fund during the period reported and weights each cash flow by the amount of time held in the Fund. This required methodology differs from an internal rate of return.
The ratios of expenses and net investment income to average net assets, calculated below, are annualized and are computed based upon the aggregate weighted average net assets of the Fund for the periods presented. Net investment income is inclusive of all investment income net of expenses, and excludes realized or unrealized gains and losses.
Beginning and ending net asset values per share are based on the beginning and ending number of shares outstanding. Other per share information is calculated based upon the aggregate weighted average net assets of the Fund for the periods presented.
The following per share data and ratios have been derived from the information provided in the financial statements:
For the Three Months Ended June 30, 2016 | For the Three Months Ended June 30, 2015 | For the Six Months Ended June 30, 2016 | For the Six Months Ended June 30, 2015 | ||||||||||||
Total return ** | 2.88 | % | 4.99 | % | 4.82 | % | 10.20 | % | |||||||
Per share amounts: | |||||||||||||||
Net asset value, beginning of period | $ | 1,988.10 | $ | 2,045.23 | $ | 2,104.91 | $ | 1,634.96 | |||||||
Net investment income | 123.16 | 120.57 | 240.26 | 222.06 | |||||||||||
Net realized and change in unrealized loss from investments and hedging activities | (66.84 | ) | (16.06 | ) | (145.96 | ) | (28.96 | ) | |||||||
Net increase in net assets from operations | 56.32 | 104.51 | 94.30 | 193.10 | |||||||||||
Distributions of income to shareholder | (112.57 | ) | (107.98 | ) | (218.85 | ) | (171.28 | ) | |||||||
Return of capital to shareholder | (25.69 | ) | — | (74.20 | ) | — | |||||||||
Contributions from shareholder | 50.00 | 150.00 | 50.00 | 535.00 | |||||||||||
Net asset value, end of period | $ | 1,956.16 | $ | 2,191.76 | $ | 1,956.16 | $ | 2,191.78 | |||||||
Net assets, end of period | $ | 195,615,892 | $ | 219,177,036 | $ | 195,615,892 | $ | 219,177,036 | |||||||
Ratios to average net assets: | |||||||||||||||
Expenses* | 9.06 | % | 8.38 | % | 8.93 | % | 8.28 | % | |||||||
Net investment income* | 24.99 | % | 22.65 | % | 23.99 | % | 22.45 | % | |||||||
Portfolio turnover rate | 0% | 0% | 0% | 0% | |||||||||||
Average debt outstanding | $ | 170,000,000 | $ | 166,000,000 | $ | 174,000,000 | $ | 147,000,000 | |||||||
* Annualized | |||||||||||||||
** Total return amounts presented above are not annualized. |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
In addition to the historical information contained herein, the information in this Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the securities laws. These forward-looking statements reflect the current view of the Fund with respect to future events and financial performance and are subject to a number of risks and uncertainties, many of which are beyond the Fund's control. All statements, other than statements of historical facts included in this report, regarding the strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of the Fund are forward-looking statements. When used in this report, the words “will”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. All forward-looking statements speak only as of the date of this report.
The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Fund's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments and competition. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Fund's business. The Fund does not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Fund is 100% owned by the Company. The Fund's shares of Common Stock, at $0.001 par value, were sold to its sole shareholder, the Company, under a stock purchase agreement. The Fund has issued 100,000 of the Fund's 10,000,000 authorized shares. The Company may make additional capital contributions to the Fund.
The Fund is a financial services company providing financing and advisory services to a variety of carefully selected venture-backed companies primarily throughout the United States with a focus on growth oriented companies. The Fund's portfolio is expected to become more diversified and consists of companies in the communications, information services, media, and technology, including software and technology-enabled business services, bio-technology, and medical devices industry sectors, among others. The Fund's capital is generally used by its portfolio companies to finance acquisitions of fixed assets and/or for working capital. On December 18, 2012, the Fund completed its first closing of capital contributions, made its first investments, and became a non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940. The Fund elected to be treated for federal income tax purposes as a RIC under the Code and has made the RIC election with the filing of its federal corporate income tax return for 2013. Pursuant to this election, the Fund generally will not have to pay corporate-level taxes on any income it distributes to the Company as dividends, allowing the Company to substantially reduce or eliminate its corporate-level tax liability.
The Fund will seek to meet the ongoing requirements, including the diversification requirements, to qualify as a RIC under the Code. If the Fund fails to meet these requirements, it would be taxed as an ordinary corporation on its taxable income for that year (even if that income is distributed to the Company) and all distributions out of its earnings and profits would be taxable to the Members of the Company as ordinary income; thus, such income would be subject to a double layer of tax. There is no assurance that the Fund will meet the ongoing requirements to qualify as a RIC for tax purposes.
The Fund's investment objective is to achieve superior risk adjusted investment returns. The Fund seeks to achieve its investment objective by providing debt financing to portfolio companies. Since inception, the Fund's investing activities have focused primarily on private debt securities. The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments. The Fund generally distributes these warrants 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.
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The portfolio investments of the Fund consist of debt financing to venture-capital backed companies. The borrower's ability to repay its loans may be adversely impacted by a number of factors, and as a result, the loan may not fully be repaid. Furthermore, the Fund's security interest in any collateral over the borrower's assets may be insufficient to make up any shortfall in payments.
Transactions with Venture Lending & Leasing VI, Inc. (“Fund VI”)
The Manager also serves as investment manager for Fund VI. The Fund's Board determined that so long as Fund VI had capital available to invest in loan transactions with final maturities earlier than December 31, 2020 (the date on which Fund VI will be dissolved), the Fund would invest in each portfolio company in which Fund VI invested (“Investments”). The amount of each Investment was allocated 50% to the Fund and 50% to Fund VI through June 28, 2014. As of June 28, 2014, Fund VI can no longer enter into new commitments to borrowers; and all previous commitments have expired.
To the extent that clients, other than Fund VI, advised by the Manager (but in which the Manager has no proprietary interest) invest in opportunities available to the Fund, the Manager will allocate such opportunities among the Fund and such other clients in a manner deemed fair and equitable considering all of the circumstances in accordance with procedures approved by the Fund's Board (including a majority of the disinterested directors).
Transactions with Venture Lending & Leasing VIII, Inc. (“Fund VIII”)
The Manager also serves as investment manager for Fund VIII. The Fund's Board determined that so long as the Fund has capital available to invest in loan transactions with final maturities earlier than December 31, 2022 (the date on which the Fund will be dissolved), the Fund would invest in each portfolio company in which Fund VIII invested (“Investments”). Initially the amount of each Investment is allocated 50% to the Fund and 50% to Fund VIII so long as the Fund has capital available to invest. Generally after December 2016, the Fund will be no longer permitted to enter into new commitments to borrowers; but, the Fund will be permitted to fund existing commitments. The Manager is permitted to extend the Fund's investment period by up two (2) additional calendar quarters in its sole and absolute discretion.
To the extent that clients, other than Fund VIII, advised by the Manager (but in which the Manager has no proprietary interest) invest in opportunities available to the Fund, the Manager will allocate such opportunities among the Fund and such other clients in a manner deemed fair and equitable considering all of the circumstances in accordance with procedures approved by the Fund's Board (including a majority of the disinterested directors).
Critical Accounting Policies
The Manager has identified the most critical accounting estimates upon which the financial statements depend and determined the critical accounting estimates by considering accounting policies that involve the most complex or subjective decisions or assessments. The two critical accounting policies relate to the valuation of loans and treatment of non-accrual loans.
Loans are held at fair value as determined by Management, in accordance with the valuation methods described in the valuation of loans section of Note 2 in the Fund's financial statements (Summary of Significant Accounting Policies). Critical factors in determining the fair value of a loan include payment history, collateral position, financial strength of the borrower, prospects for the borrower raising future equity rounds, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan, as well as an evaluation of the general interest rate environment. The actual value of the loans may differ from Management's estimates, which would affect net income as well as assets.
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Results of Operations - For the Three and Six Months Ended June 30, 2016 and 2015
Total investment income for the three months ended June 30, 2016 and 2015 was $16.8 million and $16.5 million, respectively which primarily consisted of interest on the venture loans outstanding. The remaining income consisted of interest and dividends on the temporary investment of cash and forfeited commitment fees and warrants. The income was primarily driven by the level of average loans outstanding for the three months ended June 30, 2016 and 2015 of $340.9 million and $348.2 million, respectively.
Total investment income for the six months ended June 30, 2016 and 2015 was $33.0 million and $30.4 million, respectively which primarily consisted of interest on the venture loans outstanding. The remaining income consisted of interest and dividends on the temporary investment of cash and forfeited commitment fees and warrants. The income was primarily driven by the level of average loans outstanding for the six months ended June 30, 2016 and 2015 of $352.8 million and $316.1 million, respectively.
Management fees for the three months ended June 30, 2016 and 2015 were $2.3 million and $2.5 million, respectively. Management fees are calculated as 2.5 percent of the Fund's total assets. Management fees decreased because of the decrease of the Fund's total assets during the three months ended June 30, 2016.
Management fees for the six months ended June 30, 2016 and 2015 were $4.6 million and $4.7 million, respectively. Management fees are calculated as 2.5 percent of the Fund's total assets. Management fees decreased because of the decrease of the Fund's total assets during the six months ended June 30, 2016.
Interest expense was $2.0 million and $1.8 million for the three months ended June 30, 2016 and 2015, respectively. Interest expense was comprised of amounts related to interest on debt amounts drawn down, unused line fees and amounts amortized from deferred fees incurred in conjunction with the debt line. Interest expense increased primarily because of the increase in average outstanding debt from $166.0 million for the three months ended June 30, 2015 to $170.0 million for the three months ended June 30, 2016.
Interest expense was $4.0 million and $3.2 million for the six months ended June 30, 2016 and 2015, respectively. Interest expense was comprised of amounts related to interest on debt amounts drawn down, unused line fees and amounts amortized from deferred fees incurred in conjunction with the debt line. Interest expense increased primarily because of the increase in average outstanding debt from $147.0 million for the six months ended June 30, 2015 to $174.0 million for the six months ended June 30, 2016.
The banking and professional fees were $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively. The banking and professional fees were comprised of legal, audit, banking and other professional fees. Fees for legal costs increased slightly from prior year.
The banking and professional fees were $0.2 million and $0.2 million for the six months ended June 30, 2016 and 2015, respectively. The banking and professional fees were comprised of legal, audit, banking and other professional fees.
Total other operating expenses were less than $0.1 million for the three months ended June 30, 2016 and 2015, respectively. Total other operating expenses were less than $0.1 million for the six months ended June 30, 2016 and 2015, respectively.
Net investment income for the three months ended June 30, 2016 and 2015 was $12.3 million and $12.1 million, respectively. Net investment income for the six months ended June 30, 2016 and 2015 was $24.0 million and $22.2 million, respectively.
Total net realized loss from investments was $1.1 million and $0.3 million for the three months ended June 30, 2016 and 2015, respectively. Total net realized loss from investments was $2.1 million and $1.3 million for the six months ended June 30, 2016 and 2015, respectively.
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Net change in unrealized loss from investments was $5.6 million and $1.4 million for the three months ended June 30, 2016 and 2015, respectively. The unrealized gain (loss) consists of fair market value adjustments to loans and the reversal of fair market value adjustments previously taken against loans now paid off.
Net change in unrealized loss from investments was $11.8 million and $1.2 million for the six months ended June 30, 2016 and 2015, respectively. The unrealized gain (loss) consists of fair market value adjustments to loans and the reversal of fair market value adjustments previously taken against loans now paid off.
Net change in unrealized gain (loss) from hedging activities was less than $(0.1) million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively. The Fund entered into interest rate cap transactions with Union Bank, N.A. to cap the floating rate liabilities at a fixed rate (see Note 8 in the Fund's financial statements). The change in value is primarily attributable to macro interest rate changes.
Net change in unrealized loss from hedging activities was $0.7 million and $0.4 million for the six months ended June 30, 2016 and 2015, respectively. The Fund entered into interest rate cap transactions with Union Bank, N.A. to cap the floating rate liabilities at a fixed rate (see Note 8 in the Fund's financial statements). The change in value is primarily attributable to macro interest rate changes.
Net increase in net assets resulting from operations for the three months ended June 30, 2016 and 2015 was $5.6 million and $10.5 million, respectively. On a per share basis, the net increase in net assets resulting from operations was $56.32 and $104.51 for the three months ended June 30, 2016 and 2015, respectively.
Net increase in net assets resulting from operations for the six months ended June 30, 2016 and 2015 was $9.4 million and $19.3 million, respectively. On a per share basis, the net increase in net assets resulting from operations was $94.30 and $193.10 for the six months ended June 30, 2016 and 2015, respectively.
Liquidity and Capital Resources – June 30, 2016 and December 31, 2015
Total capital contributed to the Fund was $255.9 million and $250.9 million as of June 30, 2016 and December 31, 2015, respectively. Committed capital to the Company as of June 30, 2016 and December 31, 2015 was $375.0 million, of which $300.0 million had been called as of June 30, 2016 and December 31, 2015, respectively. The remaining $75.0 million of committed capital outstanding as of June 30, 2016 is due to expire in December 2017 as the five year anniversary will have passed, at which time no further capital can be called.
The Fund has established a secured, syndicated revolving credit facility led by Wells Fargo, N.A. and Union Bank, N.A. in an initial amount of up to $125,000,000. In November 2014, the Fund increased the borrowing availability thereunder to $255,000,000. Borrowings by the Fund are collateralized by all of the assets of the Fund. Loans under the facility may be, at the option of the Fund, either a Reference Rate Loan or a LIBOR Rate Loan. The Fund will pay interest on its borrowings and will also pay a fee on the unused portion of the facility.
The facility terminates on November 7, 2017, but can be accelerated in the event of default, such as failure by the Fund to make timely interest or principal payments. As of June 30, 2016, $161.0 million is outstanding under the facility.
As of June 30, 2016 and December 31, 2015, 5.6% and 2.1%, respectively, of the Fund's assets consisted of cash and cash equivalents. The Fund invested its assets in venture loans during the six months ended June 30, 2016. Amounts disbursed under the Fund's loan commitments totaled approximately $59.6 million during the six months ended June 30, 2016. Net loan amounts outstanding after amortization decreased by approximately $45.7 million for the same period. Unexpired, unfunded commitments totaled approximately $58.9 million as of June 30, 2016.
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As of | Cumulative Amount Disbursed | Principal Reductions and Fair Market Adjustments | Balance Outstanding - Fair Value | Unexpired Unfunded Commitments |
June 30, 2016 | $657.9 million | $323.2 million | $334.7 million | $58.9 million |
December 31, 2015 | $598.3 million | $217.9 million | $380.4 million | $68.7 million |
Because venture loans are privately negotiated transactions, investments in these assets are relatively illiquid. It is the Fund's experience that not all unfunded commitments will be used by borrowers.
The Fund seeks to meet the ongoing requirements to qualify for the special pass-through status available to RICs under the Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes to the Company. To qualify as a RIC, the Fund must distribute to the Company for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income and net short-term capital gain) (“Distribution Requirement”). To the extent that the terms of the Fund's venture loans provide for the receipt by the Fund of additional interest at the end of the loan term or provide for the receipt by the Fund of a purchase price for the asset at the end of the loan term (“residual income”), the Fund would be required to accrue such residual income over the life of the loan, and to include such accrued undistributed income in its gross income for each taxable year even if it receives no portion of such residual income in that year. Thus, in order to meet the Distribution Requirement and avoid payment of income taxes or an excise tax on undistributed income, the Fund may be required in a particular year to distribute as a dividend an amount in excess of the total amount of income it actually receives. Those distributions will be made from the Fund's cash assets, from amounts received through amortization of loans or from borrowed funds.
As of June 30, 2016, the Fund has adequate cash reserves and approximately $163.6 million in scheduled receivable payments over the next year. Additionally, the Fund has access to uncalled capital of $75.0 million as a liquidity source and the unused portion of the revolving credit facility. These amounts are sufficient to meet the current commitment backlog and operational expenses of the Fund over the next year. The Fund constantly evaluates potential future liquidity resources and demands before making additional future commitments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Fund's business activities contain elements of risk. The Fund considers the principal types of market risk to be interest rate risk and credit risk. The Fund considers the management of risk essential to conducting its business and to maintaining profitability. Accordingly, the Fund's risk management procedures are designed to identify and analyze the Fund's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.
The Fund manages its market risk by maintaining a portfolio that is diverse by industry, size of investment, stage of development, and borrower. The Fund has limited exposure to public market price fluctuations as the Fund primarily invests in private business enterprises and the Fund generally distributes all equity securities upon receipt to the Company.
The Fund's investments are subject to market risk based on several factors, including, but not limited to, the borrower's credit history, available cash, support of the borrower's underlying investors, available liquidity, "burn rate", revenue income, security interest, secondary markets for collateral, the size of the loan, term of the loan, and the ability to exit via Initial Public Offering or Merger and Acquisition.
The Fund's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund utilizes various methods to assess interest rate risk in terms of the potential effect on interest income net of interest expense, the value of net assets and the value at risk in an effort to ensure that the Fund is insulated from any significant adverse effects from changes in interest rates. At June 30, 2016, the outstanding debt balance was $161.0 million with interest expense based on a weighted average rate of 0.67%, for which the Fund had an interest expense rate cap in place at 0.70% on $170.0 million of outstanding debt, leaving the
34
Fund's maximum exposure to interest rate sensitivity on the $161 million debt balance at 0.03%, which the Manager does not believe is material to the financial statements.
Because all of the Fund’s loans have a fixed interest rate upon funding, changes in interest rates will not directly affect interest income with regard to the portfolio of loans as of June 30, 2016, but could potentially change the Fund’s ability to originate loan commitments, acquire and renew bank facilities, and engage in other investment activities. Changes in interest rates could also affect interest rate expense, realized gain from hedging and interest on the Fund’s short-term investments.
Based the Fund’s our Condensed Statement of Assets and Liabilities as of June 30, 2016, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in investments, borrowings, cash balances, and interest rate hedges.
Effect of Interest rate change by | Other Interest and Other Income | Realized gain Hedge | Interest Expense | Total Income |
(0.50)% | $(100,972) | — | $805,000 | $704,028 |
1% | $201,943 | 1,649,000 | $(1,610,000) | $240,943 |
2% | $403,886 | 3,349,000 | $(3,220,000) | $532,886 |
3% | $605,829 | 5,049,000 | $(4,830,000) | $824,829 |
4% | $807,772 | 6,749,000 | $(6,440,000) | $1,116,772 |
5% | $1,009,715 | 8,449,000 | $(8,050,000) | $1,408,715 |
Additionally, a change in the interest rate may affect the value of the interest rate cap and Net Change in Unrealized Gain (Loss) from hedging activities. The amount of any such effect will be contingent upon market expectations for future interest rate changes. Any increases in expected future rates will increase the value of the interest rate cap while any rate decreases will decrease the value.
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, and plans to borrow in the future, its net investment income is to a great extent 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 attempts to limit its interest rate risk by acquiring interest rate caps, and anticipates that future borrowings will cause the Fund to hedge its interest rate exposure.
Item 4. Controls and Procedures:
Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this quarterly report on Form 10-Q, the Fund's chief executive officer and chief financial officer conducted an evaluation of the Fund's disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, the Fund's chief executive officer and chief financial officer concluded that the Fund's disclosure controls and procedures were effective in timely alerting them of any material information relating to the Fund that is required to be disclosed by the Fund in the reports it files or submits under the Securities Exchange Act of 1934.
35
Changes in Internal Controls:
There were no changes in the Fund's internal controls or in other factors that could materially affect these controls during the period covered by this quarterly report on Form 10-Q.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Fund may become party to certain lawsuits from time to time in the normal course of business. While the outcome of any legal proceedings cannot at this time be predicted with certainty, the Fund does not expect any such proceedings will have a material effect upon the Fund's financial condition or results of operation. Management is not aware of any pending legal proceedings involving the Fund.
Item 1A. Risk Factors
See item 1A - 'Risk Factors' in the Fund's 2015 Annual Report on Form 10-K for a detailed description of the risks attendant to the Fund and its business. There were no material changes to these factors during the three months ended June 30, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Prior to the Fund's commencement of operations on December 18, 2012, the Fund sold 100,000 shares to the Fund's sole shareholder, the Company, for $25,000 in July 2012. No other shares of the Fund have been sold; however, the Fund received an additional $255.9 million of paid in capital during the period from December 18, 2012 through June 30, 2016, which has been and is expected to be used to acquire venture loans and fund operations.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Issues
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit Number | Description |
3(i) | Articles of Incorporation of the Fund as filed with the Maryland Secretary of State on June 21, 2012, incorporated by reference to the Fund's Form 10 filed with the Securities and Exchange Commission on September 19, 2012. |
3(ii) | Bylaws of the Fund, incorporated by reference to the Fund's Form 10 filed with the Securities and Exchange Commission on September 19, 2012. |
4.1 | Form of Purchase Agreement between the Fund and the Company, incorporated by reference to the Fund's Registration Statement on Form 10 filed with the Securities and Exchange Commission on September 19, 2012. |
31.1-32.2 | Certifications pursuant to The Sarbanes-Oxley Act of 2002. (Rule 13a -14 and Section 1350 Certifications). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.
VENTURE LENDING & LEASING VII, INC.
(Registrant)
By: | /s/ Maurice C. Werdegar | By: | /s/ Martin D. Eng |
Maurice C. Werdegar | Martin D. Eng | ||
President and Chief Executive Officer | Chief Financial Officer | ||
Date: | August 12, 2016 | Date: | August 12, 2016 |
38
EXHIBIT INDEX
Exhibit Number | Description |
31.1-32.2 | Certifications pursuant to The Sarbanes-Oxley Act of 2002. |
39