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What changed in Hercules Capital, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Hercules Capital, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+432 added−435 removedSource: 10-K (2024-02-15) vs 10-K (2023-02-16)

Top changes in Hercules Capital, Inc.'s 2023 10-K

432 paragraphs added · 435 removed · 368 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

105 edited+13 added−15 removed228 unchanged
Biggest changeMoreover, to the extent that there is a possibility that we may (i) issue shares of our common stock at a price below the then current NAV of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we will provide to the SEC in a registration statement to which a prospectus will be a part) to suspend the offering of shares of our common stock pursuant to a prospectus if the NAV fluctuates by certain amounts in certain circumstances until such prospectus is amended, the Board or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such, events or to undertake to determine NAV within two days prior to any such sale to ensure that such sale will not be below our then current NAV, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine NAV to ensure that such undertaking has not been triggered.
Biggest changeMoreover, to the extent there is a possibility that we may issue shares of our common stock at a price below the then current NAV (and we do not have requisite shareholder authorization and Board approval to do so), the Board or a committee thereof will elect to either (i) postpone the offering until such time that there is no longer the possibility of issuing shares at a price below the then current NAV or (ii) to undertake to determine NAV within two days prior to any such sale to ensure that such sale will not be below our then current NAV.
However, if we subsequently acquire built-in gain assets from a C corporation in a carryover basis transaction, then we may be subject to taxes on the gains recognized by us on dispositions of such assets unless we make a special election to pay corporate-level taxes on such built-in gain at the time the assets are acquired.
However, if we subsequently acquire built-in gain assets from a C corporation in a carryover basis transaction, then we may be subject to taxes on the gains recognized by us on the dispositions of such assets unless we make a special election to pay corporate-level taxes on such built-in gain at the time the assets are acquired.
If a trading market in our debt securities is developed, it may not be maintained. • A downgrade, suspension, or withdrawal of the credit rating assigned by a rating agency to us or our debt securities, if any, or change in the debt markets could cause the liquidity or market value of our debt securities to decline significantly. • The indentures under which our debt securities were issued contain limited protections for the holders of the debt securities. • If we default on our obligations to pay our other indebtedness, we may not be able to make payments on our outstanding Notes and Credit Facilities. • We may not be able to prepay the Notes or Credit Facilities upon a change in control.
If a trading market in our debt securities is developed, it may not be maintained. • A downgrade, suspension, or withdrawal of the credit rating assigned by a rating agency to us or our debt securities, if any, or change in the debt markets could cause the liquidity or market value of our debt securities to decline significantly. • The indentures under which our debt securities were issued contain limited protections for the holders of the debt securities. • If we default on our obligations to pay our other indebtedness, we may not be able to make payments on our outstanding Notes and Credit Facilities. • We may not be able to prepay the Notes upon a change in control.
Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) convert distributions that would otherwise constitute qualified dividend income into ordinary income, (ii) treat distributions that would otherwise be eligible for deductions available to certain U.S. corporations under the Code as ineligible for such treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term capital gains into short-term capital gains or ordinary income, (v) convert short-term capital losses into long-term capital losses, (vi) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited), (vii) cause us to recognize income or gain without a corresponding receipt of cash, (viii) adversely alter the characterization of certain complex financial transactions, and (ix) produce gross income that will not constitute qualifying gross income for purposes of the 90% Income Test.
Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) convert distributions that would otherwise constitute qualified dividend income into ordinary income, (ii) treat distributions that would otherwise be eligible for deductions available to certain U.S. corporations under the Code as ineligible for such treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term capital gains into short-term capital gains or ordinary income, (v) convert short-term capital losses into long-term capital losses, (vi) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited), (vii) cause us to recognize income or gain without a corresponding receipt of cash, (viii) adversely alter the characterization of certain complex financial transactions, and (ix) produce gross income that will not constitute qualifying gross income for purposes of the Income Test.
Our Code of Business Conduct and Ethics establishes applicable policies, guidelines, and procedures that promote ethical practices and conduct by the Company and all its employees, officers, and directors. Upon joining and annually, all employs receive compliance training. Our Whistleblower Policy and Code of Business Conduct and Ethics Policy can be found on our website at investor.htgc.com/corporate-governance/governance-documents.
Our Code of Business Conduct and Ethics establishes applicable policies, guidelines, and procedures that promote ethical practices and conduct by the Company and all its employees, officers, and directors. Upon joining and annually, all employees receive compliance training. Our Whistleblower Policy and Code of Business Conduct and Ethics Policy can be found on our website at investor.htgc.com/corporate-governance/governance-documents.
In order to mitigate the risk that such income and fees would disqualify us as a RIC as a result of a failure to satisfy the 90% Income Test, we may be required to recognize such income and fees indirectly through one or more entities classified as corporations for U.S. federal income tax purposes.
In order to mitigate the risk that such income and fees would disqualify us as a RIC as a result of a failure to satisfy the Income Test, we may be required to recognize such income and fees indirectly through one or more entities classified as corporations for U.S. federal income tax purposes.
We do not disclose any non-public personal information about our stockholders or former stockholders, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent). 15 We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need for the information.
We do not disclose any non-public personal information about our stockholders or former stockholders, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent). We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need for the information.
Under our Whistleblower Policy, each director, officer, regular full-time, part-time and temporary employee of the Company has the ability to confidentially report any: questionable or improper accounting, internal controls, auditing matters, disclosure, or fraudulent business practices or other illegal or 12 unethical behavior.
Under our Whistleblower Policy, each director, officer, regular full-time, part-time and temporary employee of the Company has the ability to confidentially report any: questionable or improper accounting, internal controls, auditing matters, disclosure, or fraudulent business practices or other illegal or unethical behavior.
Because of the flexible structure of our investments and the extensive experience of our investment professionals, we believe we are well positioned to take advantage of these investment opportunities at all stages of prospective portfolio companies’ development. 6 Benefit from Our Efficient Organizational Structure.
Because of the flexible structure of our investments and the extensive experience of our investment professionals, we believe we are well positioned to take advantage of these investment opportunities at all stages of prospective portfolio companies’ development. Benefit from Our Efficient Organizational Structure.
For example: • pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the consolidated financial statements contained in our periodic reports; • pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and procedures; • pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report regarding its assessment of our internal control over financial reporting, which must be audited by our independent registered public accounting firm; • pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
For example: • pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the consolidated financial statements contained in our periodic reports; • pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and procedures; 17 Table of Contents • pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report regarding its assessment of our internal control over financial reporting, which must be audited by our independent registered public accounting firm; • pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
In addition, because financial sponsor-backed companies have reached a more mature stage prior to reaching a liquidity event, we believe our investments could provide the debt capital needed to grow or recapitalize during the extended period sometimes required prior to liquidity events. 5 OUR BUSINESS STRATEGY Our strategy to achieve our investment objective includes the following key elements: Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals .
In addition, because financial sponsor-backed companies have reached a more mature stage prior to reaching a liquidity event, we believe our investments could provide the debt capital needed to grow or recapitalize during the extended period sometimes required prior to liquidity events. 5 Table of Contents OUR BUSINESS STRATEGY Our strategy to achieve our investment objective includes the following key elements: Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals .
Risks Related To Our Investment Management Activities • Our executive officers and employees, through the Adviser Subsidiary, are expected to manage the Adviser Funds or separately managed accounts, which includes funds from External Parties, that operate in the same or a related line of business as we do, which may result in significant conflicts of interest. • Investments in the Adviser Funds managed by our Adviser Subsidiary may create conflicts of interests. • We, through the Adviser Subsidiary, derive revenues from managing third-party funds pursuant to management agreements that may be terminated, which could negatively impact our operating results. 23 Risks Related To BDCs • Failure to comply with applicable laws or regulations and changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy. • Failure to maintain our status as a BDC would reduce our operating flexibility. • Operating under the constraints imposed on us as a BDC and RIC may hinder the achievement of our investment objectives. • Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.
Risks Related To Our Investment Management Activities • Our executive officers and employees, through the Adviser Subsidiary, are expected to manage the Adviser Funds or separately managed accounts, which includes funds from External Parties, that operate in the same or a related line of business as we do, which may result in significant conflicts of interest. • Investments in the Adviser Funds managed by our Adviser Subsidiary may create conflicts of interests. • We, through the Adviser Subsidiary, derive revenues from managing third-party funds pursuant to management agreements that may be terminated, which could negatively impact our operating results. 24 Table of Contents Risks Related To BDCs • Failure to comply with applicable laws or regulations and changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy. • Failure to maintain our status as a BDC would reduce our operating flexibility. • Operating under the constraints imposed on us as a BDC and RIC may hinder the achievement of our investment objectives. • Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.
In connection with a senior debt investment, we may also provide the borrower with a working capital line-of-credit that will carry an interest rate generally referenced to Prime, SOFR, LIBOR, or a similar benchmark rate plus a spread with a floor, generally maturing in three to five years, and typically secured by accounts receivable and/or inventory.
In connection with a senior debt investment, we may also provide the borrower with a working capital line-of-credit that will carry an interest rate generally referenced to Prime, SOFR, BSBY, or a similar benchmark rate plus a spread with a floor, generally maturing in three to five years, and typically secured by accounts receivable and/or inventory.
General Risk Factors • We are currently operating in a period of capital markets disruption and economic uncertainty, and capital markets may experience periods of disruption and instability in the future.
General Risk Factors • We are currently operating in a period of economic and political uncertainty, and capital markets may experience periods of disruption and instability in the future.
SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. As of December 31, 2022, as a result of having sufficient capital as defined under the SBA regulations, our SBICs were in compliance with the terms of the SBA’s leverage requirements.
SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. As of December 31, 2023, as a result of having sufficient capital as defined under the SBA regulations, our SBICs were in compliance with the terms of the SBA’s leverage requirements.
As a RIC, we will be subject to a 4% non-deductible U.S. federal excise tax on certain undistributed income and gains unless we make distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the 1-year period ending October 31 of each such calendar year and (3) any ordinary income and capital gain net income realized, but not distributed, in preceding calendar years (“Excise Tax Avoidance Requirement”).
As a RIC, we will be subject to a 4% non-deductible U.S. federal excise tax on certain undistributed income and gains unless we make distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our 19 Table of Contents stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the 1-year period ending October 31 of each such calendar year and (3) any ordinary income and capital gain net income realized, but not distributed, in preceding calendar years (“Excise Tax Requirement”).
We have been investing in venture capital-backed and institutional-backed companies for over 19 years. Our investment professionals are led by individuals with extensive experience as venture capitalists, commercial lenders, and originators of Structured Debt and equity investments in technology-related companies.
We have been investing in venture capital-backed and institutional-backed companies for over 20 years. Our investment professionals are led by individuals with extensive experience as venture capitalists, commercial lenders, and originators of Structured Debt and equity investments in technology-related companies.
Because venture capital and private equity funds typically invest solely in the equity securities of their portfolio companies, we believe that our debt investments will be viewed as an attractive and complimentary source of capital, both by the portfolio company and by the portfolio company’s financial sponsor.
Because venture capital and private equity funds typically invest solely in the equity securities of their portfolio companies, we believe that our debt investments will be viewed as an attractive and complementary source of capital, both by the portfolio company and by the portfolio company’s financial sponsor.
Each indemnification agreement provides that we shall indemnify the director or executive officer who is a party to the agreement, or an “Indemnitee,” including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the maximum extent permitted by Maryland law and the 1940 Act.
Each indemnification agreement provides that we shall indemnify the director or executive 16 Table of Contents officer who is a party to the agreement, or an “Indemnitee,” including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the maximum extent permitted by Maryland law and the 1940 Act.
These market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations. • Terrorist attacks, acts of war, public health crises or natural disasters may affect any market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition. • We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends. • The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively. • We may be the target of litigation. 24
These market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations. • Terrorist attacks, acts of war, public health crises or natural disasters may affect any market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition. • We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends. • The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and business continuity planning could impair our ability to conduct business effectively. • We may be the target of litigation. 25 Table of Contents
Our Structured Debt with warrants carries an interest rate referenced to Prime, SOFR, LIBOR, or a similar benchmark rate plus a spread with a floor and may include an additional exit fee payment or contractual PIK interest arrangements.
Our Structured Debt with warrants carries an interest rate referenced to Prime, SOFR, BSBY, or a similar benchmark rate plus a spread with a floor and may include an additional exit fee payment or contractual PIK interest arrangements.
We will be subject to U.S. federal income taxes at regular corporate rates on any income or capital gains not distributed (or deemed distributed) as dividends for U.S. federal income tax purposes to our stockholders.
We will be subject to U.S. federal income taxes at regular corporate rates on any income or capital gains not distributed (or deemed distributed) and dividends for U.S. federal income tax purposes to our stockholders.
We intend to limit and/or manage our holdings in issuers that could be treated as CFCs in order to limit our tax liability or maximize our after-tax return from these investments. 20 Our functional currency, for U.S. federal income tax purposes, is the U.S. dollar.
We intend to 20 Table of Contents limit and/or manage our holdings in issuers that could be treated as CFCs in order to limit our tax liability or maximize our after-tax return from these investments. Our functional currency, for U.S. federal income tax purposes, is the U.S. dollar.
No attempt is made to present a detailed explanation of all U.S. federal income tax concerns affecting us and our stockholders (including stockholders subject to special rules under U.S. federal income tax law). The discussions set forth herein do not constitute tax advice.
No attempt is made to present a detailed explanation of all U.S. federal income tax concerns affecting us and our stockholders (including stockholders subject to special rules under U.S. federal income tax law). 18 Table of Contents The discussions set forth herein do not constitute tax advice.
The members of the underwriting team work together to conduct due diligence and understand the relationships among the prospective portfolio company’s business plan, operations and financial performance. As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for presentation to the investment committee.
The members of the underwriting team work together to conduct due diligence and understand the relationships among the prospective portfolio company’s business plan, operations and financial performance. 10 Table of Contents As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for presentation to the investment committee.
Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest more than 10% of the value of our total assets in the securities of such other investment companies in the aggregate.
Under these limits, we generally cannot acquire more than 3% of the voting stock of any 14 Table of Contents investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest more than 10% of the value of our total assets in the securities of such other investment companies in the aggregate.
Our Internet address where these documents and other information can be found is www.htgc.com . Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.
Our Internet address 4 Table of Contents where these documents and other information can be found is www.htgc.com . Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.
However, a RIC is not permitted to carry back or carry forward net operating losses, respectively, to prior and subsequent tax years, and such net operating losses would not pass through to the RIC’s stockholders. In addition, deductible expenses can only be used to offset investment company taxable income, and not any net capital gains recognized.
However, a RIC is not permitted to carry back or carry forward net operating losses, respectively, to prior and 21 Table of Contents subsequent tax years, and such net operating losses would not pass through to the RIC’s stockholders. In addition, deductible expenses can only be used to offset investment company taxable income, and not any net capital gains recognized.
Our investment team leverages established contacts with leading venture capital and private equity fund sponsors, public and private companies, research institutions and other industry participants, to identify and source our investments. We believe that leveraging the relationships that our investment teams have established will enable us to continue to identify and attract well-positioned prospective portfolio companies.
Our investment team leverages established contacts with leading venture capital and private equity fund sponsors, public and 12 Table of Contents private companies, research institutions and other industry participants, to identify and source our investments. We believe that leveraging the relationships that our investment teams have established will enable us to continue to identify and attract well-positioned prospective portfolio companies.
Accordingly, there can be no assurance that any such transaction would be consummated. Any of these transactions or funds may require significant management resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction.
Accordingly, there can be no assurance that any such transaction would be consummated. Any of these transactions or funds may require 3 Table of Contents significant management resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction.
We believe that this provides us with a broader range of potential investment opportunities than those available to many of our competitors, who generally focus their investments on a particular stage in a company’s development.
We believe that this provides us with a broader range of potential investment opportunities than those available to many of our competitors, who generally focus 6 Table of Contents their investments on a particular stage in a company’s development.
We expect that our investments will generally range from $15.0 million to $40.0 million, although we may make investments in amounts above or below this range. We typically structure our debt securities to provide for amortization of principal over the life of the loan, but may include a period of interest-only payments.
We expect that our investments will generally range from $25.0 million to $100.0 million, although we may make investments in amounts above or below this range. We typically structure our debt securities to provide for amortization of principal over the life of the loan, but may include a period of interest-only payments.
Certain of our wholly owned subsidiaries are licensed to operate as a small business investment company (a “SBIC” or “SBICs”) under the authority of the SBA. Through SBIC licensed vehicles we may access capital from the SBA debenture program. See “Regulation” for additional information related to our capital requirements. We are internally managed under the supervision of our Board.
Certain of our wholly owned subsidiaries are licensed to operate as a small business investment company (a “SBIC” or “SBICs”) under the authority of the SBA. Through SBIC licensed vehicles we may access capital from the SBA debenture program. See “Regulation” for additional information related to our capital requirements.
We may also make stand-alone direct equity investments into portfolio companies in which we may not have any debt investment in the company. As of December 31, 2022, we held warrant and equity securities in 168 portfolio companies. In addition to the characteristics described above, the table below compares the typical features of our investments.
We may also make stand-alone direct equity investments into portfolio companies in which we may not have any debt investment in the company. As of December 31, 2023, we held warrant and equity securities in 160 portfolio companies. In addition to the characteristics described above, the table below compares the typical features of our investments.
Under applicable Treasury regulations and other administrative guidance issued by the IRS, we are permitted to treat certain distributions payable in our stock as taxable distributions that will satisfy the Annual Distribution Requirement as well as the Excise Tax Avoidance Requirement provided that stockholders have the opportunity to elect to receive the distribution in cash.
Distribution Considerations Under applicable Treasury regulations and other administrative guidance issued by the IRS, we are permitted to treat certain distributions payable in our stock as taxable distributions that will satisfy the Distribution Requirements as well as the Excise Tax Requirement, provided that stockholders have the opportunity to elect to receive the distribution in cash.
Moreover, our ability to dispose of assets to meet the Distribution Requirements may be limited by (1) the illiquid nature of our portfolio, or (2) other requirements relating to our status as a RIC, including the Diversification Tests.
Moreover, our ability to dispose of assets to meet the Code Distributions may be limited by (1) the illiquid nature of our portfolio, or (2) other requirements relating to our status as a RIC, including the Diversification Tests.
Our investments are focused in companies that are active in a variety of technology industry sub-sectors or are characterized by products or services that require advanced technologies, including, but not limited to, computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, consumer and business services, telecommunications, telecommunications equipment, media, life sciences, and renewable or alternative energy.
We make investments in companies that are active across a variety of technology industry sub-sectors or are characterized by products or services that require advanced technologies, including, but not limited to, computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, consumer and business services, telecommunications, telecommunications equipment, media, life sciences, and renewable or alternative energy.
The Code provides some relief from RIC disqualification due to failures to comply with the 90% Income Test and the Diversification Tests, although there could be additional taxes due in such cases. We cannot assure you that we would qualify for any such relief should we fail the 90% Income Test or the Diversification Tests.
The Code provides some relief from RIC disqualification due to failures to comply with the Income Test and the Asset Test, although there could be additional taxes due in such cases. We cannot assure you that we would qualify for any such relief should we fail the Income Test or the Asset Test.
Failure to Qualify as a Regulated Investment Company If we were unable to qualify for treatment as a RIC and are unable to cure the failure, for example, by disposing of certain investments timely or raising additional capital to prevent the loss of RIC status, we generally would be subject to tax on all of our taxable income at regular corporate rates.
Failure to Qualify as a Regulated Investment Company If we were unable to qualify for treatment as a RIC and are unable to rectify the failure, for example, by disposing of certain investments timely or raising additional capital to prevent the loss of RIC status, we generally would be subject to U.S. federal income tax on all of our taxable income at regular corporate rates.
The scope of the services rendered by an independent valuation firm is at the discretion of the Board. Our Board is ultimately, and solely, responsible for determining the fair value of our investments in good faith.
The scope of the services 22 Table of Contents rendered by an independent valuation firm is at the discretion of the Board. Our Board is ultimately, and solely, responsible for determining the fair value of our investments in good faith.
Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act. 22 SUMMARY OF RISK FACTORS The risk factors described below are a summary of the principal risk factors associated with an investment in us.
Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act. 23 Table of Contents SUMMARY OF RISK FACTORS The risk factors described below are a summary of the principal risk factors associated with an investment in us.
Although we do not currently engage in hedging transactions, we may engage in hedging transactions in the future utilizing instruments such as forward contracts, currency options and interest rate swaps, caps, collars, and floors.
Although we generally do not engage in significant hedging transactions, we may engage in hedging transactions in the future utilizing instruments such as forward contracts, currency options and interest rate swaps, caps, collars, and floors.
CORPORATE STRUCTURE We are an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements.
CORPORATE STRUCTURE We are an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements.
Certain SBA regulations may restrict us from making distributions to us that may be necessary to maintain our status as a RIC. While we may request a waiver of the SBA's restrictions, we cannot assure you that the SBA will grant such waiver.
Certain SBA regulations may restrict us from making distributions from our SBICs that may be necessary to make RIC distributions in order to maintain our status as a RIC. While we may request a waiver of the SBA's restrictions, we cannot assure you that the SBA will grant such waiver.
Grade 5 loans will require the fair value of the loans be reduced to the amount, if any, we anticipate will be recovered. As of December 31, 2022, our investment portfolio had a weighted average investment grading of 2.23.
Grade 5 loans will require the fair value of the loans be reduced to the amount, if any, we anticipate will be recovered. As of December 31, 2023, our investment portfolio had a weighted average investment grading of 2.24.
(2) Securities of any portfolio company which we control. 13 (3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement. 21 DETERMINATION OF NET ASSET VALUE We determine the NAV per share of our common stock quarterly.
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Distribution Requirements. DETERMINATION OF NET ASSET VALUE We determine the NAV per share of our common stock quarterly.
We may invest in partnerships which may result in our being subject to state, local, or foreign income, franchise or other tax liabilities. In addition, some of the income and fees that we may recognize will not be qualifying income under the 90% Income Test.
Taxable Income Considerations We may invest in partnerships which may result in us being subject to state, local, or foreign income, franchise or other tax liabilities. In addition, some of the income and fees that we may recognize will not be qualifying income under the Income Test.
Our loans will typically be collateralized by a security interest in the borrower’s assets, although we may not have the first claim on these assets and the assets may not include intellectual property. Our debt investments carry fixed or variable contractual interest rates which generally ranged from approximately 6.0% to 15.0% as of December 31, 2022.
Our loans will typically be collateralized by a security interest in the borrower’s assets, although we may not have the first claim on these assets and the assets may not include intellectual property. Our debt investments carry fixed or variable contractual interest rates which generally ranged from approximately 8% to 18% as of December 31, 2023.
Because OID or PIK income recognized is generally required to be included in our taxable income in the tax year it is recognized, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.
Because OID or PIK income recognized is generally required to be included in our taxable income in the tax year it is recognized, we may be required to make a distribution to our stockholders in order to satisfy the Distribution Requirements or the Excise Tax Requirement even though we will not have received any corresponding cash amounts.
In addition, our team members have originated Structured Debt, senior debt, and equity investments in over 600 technology-related companies, representing more than $16.0 billion in commitments from inception to December 31, 2022, and have developed a network of industry contacts with investors and other participants within the venture capital and private equity communities.
In addition, our team members have originated Structured Debt, senior debt, and equity investments in over 600 technology-related companies, representing approximately $19.0 billion in commitments from inception to December 31, 2023, and have developed a network of industry contacts with investors and other participants within the venture capital and private equity communities.
We made the election to recognize built-in gains as of the effective date of our election to be treated as a RIC and therefore were not subject to any built-in gains tax when we sold those assets.
Taxation as a Regulated Investment Company Following our RIC election, we made the election to recognize built-in gains as of the effective date of our election to be treated as a RIC and therefore were not subject to any built-in gains tax when we sold those assets.
Should failure occur, not only would all our taxable income be subject to tax at regular corporate rates, we would not be able to deduct dividend distributions to stockholders, nor would they be required to be made.
Should failure occur, not only would all our taxable income be subject to U.S. federal income taxes at regular corporate rates, we would not be able to deduct dividend distributions to stockholders, nor would they be required to be made.
The Company was granted no-action relief by the staff of the Securities and Exchange Commission (“SEC”) to allow the Adviser Subsidiary to register as a registered investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”). See “— Regulation—No-action and Exemptive Relief Obtained” for additional information regarding our Adviser Subsidiary.
We were granted no-action relief by the staff of the Securities and Exchange Commission (“SEC”) to allow Hercules Adviser LLC (the “Adviser Subsidiary”) to register as a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). See “— Regulation—No-action and Exemptive Relief Obtained” for additional information regarding our Adviser Subsidiary.
Item 1. B usiness GENERAL Hercules Capital, Inc. is a specialty finance company focused on providing financing solutions to high-growth, innovative venture capital-backed and institutional-backed companies in a variety of technology, life sciences and sustainable and renewable technology industries.
Item 1. Business GENERAL Hercules Capital, Inc. is a specialty finance company with a focus on and a goal of providing financing solutions to high-growth, innovative venture capital-backed and institutional-backed companies in a variety of technology, life sciences, and sustainable and renewable technology industries.
We may, from time to time, receive fees for these services. In the event that such fees are received, they are incorporated into our operating income and are passed through to our stockholders, given the nature of our structure as an internally managed BDC.
We may, from time to time, receive fees for these services. In the event that such fees are received, they are incorporated into our operating income and are passed through to our stockholders, given the nature of our structure as an internally managed BDC. See “—Regulation—Significant Managerial Assistance” for additional information.
We do not pay management or advisory fees, but instead incur costs customary for an operating company. Some of those costs include recruiting and marketing expenses as well as the costs associated with employing management, investment and portfolio management professionals, and technology, secretarial and other support personnel.
As an internally managed BDC, we do not pay management or advisory fees, but instead incur costs customary for an operating company and are governed through supervision by the Board. Some of those costs include recruiting and marketing expenses as well as the costs associated with employing management, investment and portfolio management professionals, and technology, secretarial and other support personnel.
For a discussion of the risks associated with the resulting leverage, see “Item 1A.
For a discussion of the risks associated with the 15 Table of Contents resulting leverage, see “Item 1A.
Election to be Subject to Tax as a RIC Through December 31, 2005, we were subject to U.S. federal income tax as an ordinary corporation under Subchapter C of the Code.
Election to be Subject to Tax as a Regulated Investment Company Through December 31, 2005, we were subject to U.S. federal income tax as a corporation under Subchapter C of the Code.
As of December 31, 2022, approximately 97.9% of our total assets represented investments in portfolio companies whose fair value is determined in good faith by the Board.
As of December 31, 2023, approximately 95.1% of our total assets represented investments in portfolio companies whose fair value is determined in good faith by the Board.
In order to qualify as a RIC for U.S. federal income tax purposes and obtain the tax benefits of RIC status, in addition to satisfying the Annual Distribution Requirement, we must, among other requirements: • have in effect at all times during each taxable year an election to be regulated as a BDC under the 1940 Act; • derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, foreign currencies, or other income derived with respect to our business of investing in such stock or securities and (b) net income derived from an interest in a “qualified publicly traded partnership” (the “90% Income Test”); 18 • diversify our holdings so that at the end of each quarter of the taxable year: o at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and o no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities or securities of other RICs) of any one issuer, (ii) securities (other than U.S. government securities or securities of other RICs) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) securities of one or more “qualified publicly traded partnerships” (the “Diversification Tests”).
Qualifying as a Regulated Investment Company In order to qualify as a RIC for U.S. federal income tax purposes and obtain the tax benefits of our RIC status, we must, among other requirements: • have in effect at all times during each taxable year an election to be regulated as a BDC under the 1940 Act; • derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, foreign currencies, or other income derived with respect to our business of investing in such stock or securities and (b) net income derived from an interest in a “qualified publicly traded partnership” (the “Income Test”); • diversify our holdings so that at the end of each quarter of the taxable year: ◦ at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and ◦ no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities or securities of other RICs) of any one issuer, (ii) securities (other than U.S. government securities or securities of other RICs) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) securities of one or more “qualified publicly traded partnerships” (the “Asset Test”). • distribute to our stockholders, in respect of each taxable year, dividends for U.S. federal income tax purposes of an amount generally at least equal to 90% of our "investment company taxable income," which is generally equal to the sum of our net ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses, determined without regard to any deduction for distributions paid (the "Distribution Requirements").
All new loans are initially graded 2. Grade 3 The borrower may be performing below expectations, and the loan’s risk has increased materially since origination.
Grade 2 The borrower is performing as expected and the risk profile is neutral to favorable. All new loans are initially graded 2. Grade 3 The borrower may be performing below expectations, and the loan’s risk has increased materially since origination.
Approximately 95.3% of our loans were at floating rates or floating rates with a floor and 4.7% of the loans were at fixed rates as of December 31, 2022.
Approximately 95.9% of our loans were at floating rates or floating rates with a floor and 4.1% of the loans were at fixed rates as of December 31, 2023.
This department is responsible for documenting the transactions approved by our investment committee with a prospective portfolio company. This department negotiates loan documentation and, subject to appropriate approvals, final documents are prepared for execution by all parties.
This department is responsible for documenting the transactions approved by our investment committee with a prospective portfolio company. This department negotiates loan documentation and, subject to appropriate approvals, final documents are prepared for execution by all parties. The legal department generally uses the services of external law firms to complete the necessary documentation.
The investment committee members include our Chief Executive Officer and Chief Investment Officer, Chief Financial Officer, Chief Credit Officer, and Senior Managing Director of Risk Management. The investment committee meets on an as-needed basis. Documentation Our legal department administers the documentation process for our investments.
The investment committee members include our Chief Executive Officer and Chief Investment Officer, Chief Financial Officer, Chief Credit Officer, and certain other senior investment professionals. The investment committee meets on an as-needed basis. Documentation Our legal department administers the documentation process for our investments.
We may incur losses from our investing activities; however, we work with our troubled portfolio companies to recover as much of our investments as is practicable, including possibly taking control of the portfolio company. There can be no assurance that principal will be recovered.
We may incur losses from our investing activities; however, we work with our troubled portfolio companies to recover as much of our investments as is practicable, including possibly taking control of the portfolio company.
Regulation as a Business Development Company A BDC primarily focuses on investing in or lending to private companies and making significant managerial assistance available to them, while providing its stockholders with the ability to retain the liquidity of a publicly traded stock.
It does not purport to be a complete description of all of the laws and regulations affecting BDCs. Regulation as a Business Development Company A BDC primarily focuses on investing in or lending to private companies and making significant managerial assistance available to them, while providing its stockholders with the ability to retain the liquidity of a publicly traded stock.
The Adviser Subsidiary may be examined by the SEC from time to time for compliance with the Advisers Act. 17 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of certain material U.S. federal income tax considerations relating to our qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred stock or common stock, but does not purport to be a complete description of the income tax considerations relating thereto.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of certain material U.S. federal income tax considerations relating to our qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred stock or common stock, but does not purport to be a complete description of the income tax considerations relating thereto.
Additionally, our Structured Debt financings may include restrictive affirmative and negative covenants, default penalties, prepayment penalties, lien protection, equity calls, change-in-control provisions or board observation rights. • Senior Debt: We seek to invest a limited portion of our assets in senior debt. Senior debt may be collateralized by accounts receivable and/or inventory financing of prospective portfolio companies.
Additionally, our Structured Debt financings 7 Table of Contents may include restrictive affirmative and negative covenants, default penalties, prepayment penalties, lien protection, equity calls, change-in-control provisions or board observation rights. • Senior Debt: We seek to invest a limited portion of our assets in senior debt.
See “—Regulation—Significant Managerial Assistance” for additional information. 11 COMPETITION Our primary competitors provide financing to prospective portfolio companies and include non-bank financial institutions, federally or state-chartered banks, venture debt funds, financial institutions, venture capital funds, private equity funds, investment funds and investment banks.
COMPETITION Our primary competitors provide financing to prospective portfolio companies and include non-bank financial institutions, federally or state-chartered banks, venture debt funds, financial institutions, venture capital funds, private equity funds, investment funds and investment banks.
The legal department generally uses the services of external law firms to complete the necessary documentation. 10 Loan and Compliance Administration Our investment committee, supported by our investment team, credit team, and finance department, administers loans and tracks covenant compliance, if applicable, of our investments and oversees periodic reviews of our critical functions to ensure adherence with our internal policies and procedures.
Loan and Compliance Administration Our investment committee, supported by our investment team, credit team, and finance department, administers loans and tracks covenant compliance, if applicable, of our investments and oversees periodic reviews of our critical functions to ensure adherence with our internal policies and procedures.
To qualify for treatment as a RIC we must, among other requirements, meet certain source of income and asset diversification requirements (as described below).
To qualify for treatment as a RIC we must, among other requirements, meet certain source of income and asset diversification tests, as well as distribution requirements, which are described in the below section.
We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payments in cash. For example, certain of our debt investments may earn OID or PIK income, which we must include in taxable income regardless of whether cash representing such income is received by us in the same tax year.
For example, certain debt investments may earn OID or PIK income, which we must include in taxable income regardless of whether cash representing such income is received by us in the same tax year.
As of December 31, 2022, our investment origination team, which consists of approximately 55 investment professionals, is headed by our Chief Investment Officer and Chief Executive Officer.
As of December 31, 2023, our investment origination team, which consists of more than 50 investment professionals, is headed by our Chief Investment Officer and Chief Executive Officer.
In addition to our Company sponsored philanthropic initiatives, we also provide employees with paid days off to volunteer at organizations of their choice. Hercules supports a variety of non-profit organizations through corporate sponsorship and donations.
As a Company, we support local non-profit organizations by hosting annual fundraising, food, supply, and toy drives. In addition to our Company sponsored philanthropic initiatives, we also provide employees with paid days off to volunteer at organizations of their choice. Hercules supports a variety of non-profit organizations through corporate sponsorship and 13 Table of Contents donations.
Taxation as a Regulated Investment Company For any taxable year in which we: • qualify as a RIC; and • distribute dividends for U.S. federal income tax purposes to our stockholders of an amount at least equal to the Annual Distribution Requirement; We generally will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gains we distribute (or are deemed to distribute) as dividends for U.S. federal income tax purposes to stockholders with respect to that taxable year.
We generally will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gains we distribute (or are deemed to distribute) as dividends for U.S. federal income tax purposes to stockholders with respect to that taxable year.
For more information on our approach to social, governance, and environmental topics, please refer to our Environmental, Social and Governance Policy (“ESG Policy”), which can be found on our website at investor.htgc.com/esg. REGULATION We have elected to be regulated as a BDC under the 1940 Act.
For more information on our approach to social, governance, and environmental topics, please refer to our Environmental, Social and Governance Policy (“ESG Policy”), which can be found on our website at investor.htgc.com/esg.
The anticipated growth rate of a prospective portfolio company is a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities. 8 Operating Plan - We generally require that a prospective portfolio company, in addition to having potential access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise the additional capital necessary to cover its operating expenses and service its debt for a specific period.
Operating Plan - We generally require that a prospective portfolio company, in addition to having potential access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise the additional capital necessary to cover its operating expenses and service its debt for a specific period.
As of December 31, 2022, approximately 80.5% of the fair value of our portfolio was composed of investments in three industries: 38.8% was composed of investments in the "Drug Discovery & Development" industry, 26.9% was composed of investments in the "Software" industry, and 14.8% was composed of investments in the "Consumer & Business Services" industry.
As of December 31, 2023, approximately 78.5% of the fair value of our portfolio was composed of investments in three industries: 38.7% was composed of investments in the "Drug Discovery & Development" industry, 23.6% was composed of investments in the "Software" industry, and 16.2% was composed of investments in the "Consumer & Business Services" industry.
Our investment process is summarized in the following chart: 9 Origination The origination process for our investments includes sourcing, screening, preliminary due diligence and deal structuring and negotiation, all leading to an executed non-binding term sheet.
Investment Process We have organized our management team around the four key elements of our investment process: • Origination; • Underwriting; • Documentation; and • Loan and Compliance Administration. 9 Table of Contents Our investment process is summarized in the following chart: Origination The origination process for our investments includes sourcing, screening, preliminary due diligence and deal structuring and negotiation, all leading to an executed non-binding term sheet.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThe following table shows the fair value of the investments held in portfolio companies as of December 31, 2022, that represent greater than 5% of our net assets: (in thousands) December 31, 2022 Fair Value Percentage of Net Assets Corium, Inc. $ 135,619 9.7 % Worldremit Group Limited 94,031 6.7 % Phathom Pharmaceuticals, Inc. 94,017 6.7 % Axsome Therapeutics, Inc. 89,461 6.4 % Rocket Lab Global Services, LLC 87,933 6.3 % SeatGeek, Inc. 87,876 6.3 % Convoy, Inc. 73,862 5.3 % uniQure B.V. 73,408 5.2 % • Corium, Inc. develops, engineers, and manufactures drug delivery products and devices that utilize the skin and mucosa as a primary means of transport. • Worldremit Group Limited is a global online money transfer business. • Phathom Pharmaceuticals, Inc. is a biopharmaceutical company focused on the development and commercialization of novel treatments for gastrointestinal diseases and disorders. • Axsome Therapeutics, Inc. is a biopharmaceutical company developing novel therapies for the management of central nervous system disorders for which there are limited treatment options. • Rocket Lab Global Services, LLC is a commercial space provider of high-frequency, low-cost launches. • SeatGeek, Inc. is a mobile-focused ticket platform that enables users to buy and sell tickets for live sports, concerts and theater events. • Convoy, Inc. is a developer for on-demand shipment services. • uniQure B.V. is a leader in the field of gene therapy, developing proprietary therapies to treat patients with severe genetic diseases of the central nervous system and liver.
Biggest changeThe following table shows the fair value of the investments held in portfolio companies as of December 31, 2023, that represent greater than 5% of our net assets: (in thousands) December 31, 2023 Fair Value Percentage of Net Assets Axsome Therapeutics, Inc. $ 162,022 9.0 % Phathom Pharmaceuticals, Inc. 129,738 7.2 % Corium, Inc. 108,545 6.0 % SeatGeek, Inc. 108,053 6.0 % Worldremit Group Limited 96,020 5.3 % • Axsome Therapeutics, Inc. is a biopharmaceutical company developing novel therapies for the management of central nervous system disorders for which there are limited treatment options. • Phathom Pharmaceuticals, Inc. is a biopharmaceutical company focused on the development and commercialization of novel treatments for gastrointestinal diseases and disorders. • Corium, Inc. develops, engineers, and manufactures drug delivery products and devices that utilize the skin and mucosa as a primary means of transport. • SeatGeek, Inc. is a mobile-focused ticket platform that enables users to buy and sell tickets for live sports, concerts and theater events. • Worldremit Group Limited is a global online money transfer business.
Prior to Sale Following Sale Percentage Below NAV Below NAV Change Reduction to NAV Total Shares Outstanding 1,000,000 1,040,000 4.0 % NAV per share $ 10.00 $ 9.98 (0.2 )% Dilution to Existing Stockholder Shares Held by Stockholder A 10,000 10,000 (1) 0.0 % Percentage Held by Stockholder A 1.00 % 0.96 % (4.0 )% Total Interest of Stockholder A in NAV $ 100,000 $ 99,808 (0.2 )% (1) Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV.
Prior to Sale Below NAV Following Sale Below NAV Percentage Change Reduction to NAV Total Shares Outstanding 1,000,000 1,040,000 4.0 % NAV per share $ 10.00 $ 9.98 (0.2) % Dilution to Existing Stockholder Shares Held by Stockholder A 10,000 10,000 (1) 0.0 % Percentage Held by Stockholder A 1.00 % 0.96 % (4.0) % Total Interest of Stockholder A in NAV $ 100,000 $ 99,808 (0.2) % (1) Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV.
Because our Credit Facilities have, and any future credit facilities will likely have, customary cross-default and cross-acceleration provisions, if our outstanding Notes are accelerated, we may be unable to repay or finance the amounts due. We may not be able to prepay the Notes or Credit Facilities upon a change in control.
Because our Credit Facilities have, and any future credit facilities will likely have, customary cross-default and cross-acceleration provisions, if our outstanding Notes are accelerated, we may be unable to repay or finance the amounts due. We may not be able to prepay the Notes upon a change in control.
Among other things, these companies: • may have limited financial resources (including the inability to obtain additional equity or debt financing as needed) and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investment, as well as a corresponding decrease in the value of the equity components of our investments; • may require substantial additional financing to satisfy their continuing working capital and other cash requirements; • may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; • are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation, termination or significant under-performance of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; 26 • generally have less predictable operating results which may fluctuate suddenly and dramatically, may from time-to-time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, finance expansion or maintain their competitive position, and may have more limited access to capital and higher funding costs; • may be adversely affected by a lack of IPO or merger and acquisition opportunities; and • generally have less publicly available information about their businesses, operations and financial condition.
Among other things, these companies: • may have limited financial resources (including the inability to obtain additional equity or debt financing as needed) and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investment, as well as a corresponding decrease in the value of the equity components of our investments; • may require substantial additional financing to satisfy their continuing working capital and other cash requirements; • may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; • are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation, termination or significant under-performance of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; • generally have less predictable operating results which may fluctuate suddenly and dramatically, may from time-to-time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, finance expansion or maintain their competitive position, and may have more limited access to capital and higher funding costs; • may be adversely affected by a lack of IPO or merger and acquisition opportunities; and • generally have less publicly available information about their businesses, operations and financial condition.
To satisfy this requirement, at least 50% of the value of our assets must consist of cash, 43 cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status.
To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status.
In particular, the terms of the respective Notes indentures do not place any restrictions on our or our subsidiaries’ ability to: • issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would rank structurally senior to the Notes and (4) securities, indebtedness or other obligations issued or incurred by our subsidiaries that would be senior in right of payment to our equity interests in our subsidiaries and therefore would rank structurally senior in right of payment to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect to any exemptive relief granted to us by the SEC (currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% thereafter after such borrowings); • pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated indebtedness; • sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); • enter into transactions with affiliates; • create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; • make investments; or • create restrictions on the payment of distributions or other amounts to us from our subsidiaries.
In particular, the terms of the respective Notes indentures do not place any restrictions on our or our subsidiaries’ ability to: • issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would rank structurally senior to the Notes and (4) securities, indebtedness or other obligations issued or incurred by our subsidiaries that would be senior in right of payment to our equity interests in our subsidiaries and therefore would rank structurally senior in right of payment to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect to any exemptive relief granted to us by the SEC (currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% thereafter after such borrowings); • pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated indebtedness; • sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); • enter into transactions with affiliates; 44 Table of Contents • create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; • make investments; or • create restrictions on the payment of distributions or other amounts to us from our subsidiaries.
Any failure to do so could subject us to enforcement action by the SEC, cause us to fail to satisfy the requirements associated with RIC status and subject us to entity-level corporate income taxation, cause us to 37 fail the 70% test described above or otherwise have a material adverse effect on our business, financial condition or results of operations.
Any failure to do so could subject us to enforcement action by the SEC, cause us to fail to satisfy the requirements associated with RIC status and subject us to entity-level corporate income taxation, cause us to fail the 70% test described above or otherwise have a material adverse effect on our business, financial condition or results of operations.
A lack of IPO or merger and acquisition, or M&A, opportunities for private companies, including venture capital-backed and institutional-backed companies could lead to portfolio companies staying longer in our portfolio as private entities still requiring funding. IPO activity in particular has slowed significantly during 2022 and this trend may remain for the foreseeable future.
A lack of IPO or merger and acquisition, or M&A, opportunities for private companies, including venture capital-backed and institutional-backed companies could lead to portfolio companies staying longer in our portfolio as private entities still requiring funding. IPO activity in particular has slowed significantly during 2022-2023 and this trend may remain for the foreseeable future.
In the event that the United States economy contracts, it is likely that the financial results of small to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase 45 in defaults.
In the event that the United States economy contracts, it is likely that the financial results of small to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults.
See “Risk Factors — Risks Related to our Securities — Stockholders may incur dilution if we 38 sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock” for a discussion related to us issuing shares of our common stock below NAV.
See “Risk Factors — Risks Related to our Securities — Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock” for a discussion related to us issuing shares of our common stock below NAV.
General Risk Factors We are currently operating in a period of capital markets disruption and economic uncertainty, and capital markets may experience periods of disruption and instability in the future. These market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations.
General Risk Factors We are currently operating in a period of economic and political uncertainty, and capital markets may experience periods of disruption and instability in the future. These market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations.
As such, these limitations could inhibit our ability to grow, pursue our business plan and attract and retain professional talent, any or all of which may have a negative impact on our business, financial condition and results of operations. 25 Our business model depends to a significant extent upon strong referral relationships.
As such, these limitations could inhibit our ability to grow, pursue our business plan and attract and retain professional talent, any or all of which may have a negative impact on our business, financial condition and results of operations. Our business model depends to a significant extent upon strong referral relationships.
These factors include: • significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies; • changes in regulatory policies, accounting pronouncements or tax guidelines; • the exclusion of BDC common stock from certain market indices, such as what happened with respect to the Russell indices and the Standard and Poor’s indices, could reduce the ability of certain investment funds to own our common stock and limit the number of owners of our common stock and otherwise negatively impact the market price of our common stock; • inability to obtain any exemptive relief that may be required by us in the future from the SEC; • loss of our BDC or RIC status or our wholly owned subsidiary’s status as an SBIC; • changes in our earnings or variations in our operating results; • changes in the value of our portfolio of investments; • any shortfall in our investment income or net investment income or any increase in losses from levels expected by investors or securities analysts; • loss of a major funding source; • fluctuations in interest rates; • the operating performance of companies comparable to us; • departure of our key personnel; • proposed, or completed, offerings of our securities, including classes other than our common stock; • global or national credit market changes; and • general economic trends and other external factors.
These factors include: • significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies; 41 Table of Contents • changes in regulatory policies, accounting pronouncements or tax guidelines; • the exclusion of BDC common stock from certain market indices, such as what happened with respect to the Russell indices and the Standard and Poor’s indices, could reduce the ability of certain investment funds to own our common stock and limit the number of owners of our common stock and otherwise negatively impact the market price of our common stock; • inability to obtain any exemptive relief that may be required by us in the future from the SEC; • loss of our BDC or RIC status or our wholly owned subsidiary’s status as an SBIC; • changes in our earnings or variations in our operating results; • changes in the value of our portfolio of investments; • any shortfall in our investment income or net investment income or any increase in losses from levels expected by investors or securities analysts; • loss of a major funding source; • fluctuations in interest rates; • the operating performance of companies comparable to us; • departure of our key personnel; • proposed, or completed, offerings of our securities, including classes other than our common stock; • global or national credit market changes; and • general economic trends and other external factors.
Our investments are concentrated in certain technology-related industries, which subjects us to the risk of significant loss if any one or more of such industries experiences a downturn. We have invested and intend to continue investing in a limited number of companies that operate in technology-related industries.
Our investments are concentrated in certain technology-related industries, which subjects us to the risk of significant loss if any one or more of such industries experiences a downturn. We have invested and intend to continue investing in a number of companies that operate in technology-related industries.
Our officers and employees may dedicate more time or resources to the Adviser Funds or allocate more favorable investment opportunities to the Adviser Funds instead of us. The Adviser Funds will, at times, acquire, hold, 36 or sell investments that are also suitable for us. Investments allocated to the Adviser Funds may reduce the amount of investments available to us.
Our officers and employees may dedicate more time or resources to the Adviser Funds or allocate more favorable investment opportunities to the Adviser Funds instead of us. The Adviser Funds will, at times, acquire, hold, or sell investments that are also suitable for us. Investments allocated to the Adviser Funds may reduce the amount of investments available to us.
When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being 32 prepaid, and we could experience significant delays in reinvesting these amounts.
When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts.
The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively. Our business operations rely upon secure information technology systems for data processing, storage and reporting.
The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and business continuity planning could impair our ability to conduct business effectively. Our business operations rely upon secure information technology systems for data processing, storage and reporting.
If healthcare companies are unable to successfully expand their product lines through internal research and development and acquisitions, their business may be 29 materially and adversely affected. In addition, if these companies are unable to successfully grow their businesses through marketing partnerships and acquisitions, their business may be materially and adversely affected. • Sustainable and Renewable Technology Industry Risk.
If healthcare companies are unable to successfully expand their product lines through internal research and development and acquisitions, their business may be materially and adversely affected. In addition, if these companies are unable to successfully grow their businesses through marketing partnerships and acquisitions, their business may be materially and adversely affected. • Sustainable and Renewable Technology Industry Risk.
Our investments may include contractual PIK interest and exit fees. PIK interest represents contractual interest added to a loan's principal balance and is due in accordance with the loan's amortization terms. Exit fees represent a contractual fee accrued over the life 30 of the loan and is typically due at loan payoff.
Our investments may include contractual PIK interest and exit fees. PIK interest represents contractual interest added to a loan’s principal balance and is due in accordance with the loan’s amortization terms. Exit fees represent a contractual fee accrued over the life of the loan and is typically due at loan payoff.
Certain technology-related companies may face special risks that their 27 products or services may not prove to be commercially successful. Technology-related companies are also strongly affected by worldwide scientific or technological developments. As a result, their products may rapidly become obsolete.
Certain technology-related companies may face special risks that their products or services may not prove to be commercially successful. Technology-related companies are also strongly affected by worldwide scientific or technological developments. As a result, their products may rapidly become obsolete.
Illustration: Example of Dilutive Effect of the Issuance of Shares Below NAV . Assume that Company XYZ has 1,000,000 total shares outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The NAV per share of the common stock of 39 Company XYZ is $10.00.
Illustration: Example of Dilutive Effect of the Issuance of Shares Below NAV . Assume that Company XYZ has 1,000,000 total shares outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The NAV per share of the common stock of Company XYZ is $10.00.
In addition, we anticipate that approximately 50% of our warrants may not realize any exit or generate any returns. Furthermore, because of the financial reporting requirements under U.S. generally accepted accounting principles ("U.S.
In addition, we anticipate that approximately 50% of our warrants may not realize any exit or generate any returns. Furthermore, because of the financial reporting requirements under U.S. generally accepted accounting principles (“U.S.
If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised. 46 We depend heavily upon computer systems to perform necessary business functions.
If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised. We depend heavily upon computer systems to perform necessary business functions.
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming that we employ (1) our actual asset coverage ratio as of December 31, 2022, (2) a hypothetical asset coverage ratio of 200%, and (3) a hypothetical asset coverage ratio of 150% (each excluding our SBA debentures as permitted by our exemptive relief) each at various annual returns on our portfolio as of December 31, 2022, net of expenses.
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming that we employ (1) our actual asset coverage ratio as of December 31, 2023, (2) a hypothetical asset coverage ratio of 200%, and (3) a hypothetical asset coverage ratio of 150% (each excluding our SBA debentures as permitted by our exemptive relief) each at various annual returns on our portfolio as of December 31, 2023, net of expenses.
Therefore, changes in tax laws, regulations or administrative interpretations or any amendments 44 thereto could diminish the value of an investment in our shares or the value or the resale potential of our investments.
Therefore, changes in tax laws, regulations or administrative interpretations or any amendments thereto could diminish the value of an investment in our shares or the value or the resale potential of our investments.
As a result of these factors, operating results for any period should not be relied upon as being indicative of performance in future periods. Terrorist attacks, acts of war, public health crises or natural disasters may affect any market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition.
As a result of these factors, operating results for any period should not be relied upon as being indicative of performance in future periods. Terrorist attacks, acts of war, public health crises, climate change, or natural disasters may affect any market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition.
Future terrorist activities, military or security operations, public health crises, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition.
Future terrorist activities, military or security operations, public health crises, climate change, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition.
If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates.
When we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates.
Our secured credit facilities with Sumitomo Mitsui Banking Corporation (the “SMBC Facility”) and MUFG Union Bank, N.A., (the “MUFG Bank Facility”) and our letter of credit facility with Sumitomo Mitsui Banking Corporation entered into in January 2023 (the “SMBC LC Facility” and together with the SMBC Facility and MUFG Bank Facility, our “Credit Facilities”), as well as the July 2024 Notes, February 2025 Notes, June 2025 Notes, June 2025 3-Year Notes, March 2026 A Notes, March 2026 B Notes, September 2026 Notes, January 2027 Notes, 2031 Asset-Backed Notes and 2033 Notes (each term as is individually defined herein and collectively, the “Notes”) contain financial and operating covenants that could restrict our business activities, including our ability to declare dividend distributions if we default under certain provisions.
Our secured credit facilities with Sumitomo Mitsui Banking Corporation (the “SMBC Facility”) and MUFG Union Bank, N.A., (the “MUFG Bank Facility”) and our letter of credit facility with Sumitomo Mitsui Banking Corporation (the “SMBC LC Facility” and together with the SMBC Facility and MUFG Bank Facility, our “Credit Facilities”), as well as the July 2024 Notes, February 2025 Notes, June 2025 Notes, June 2025 3-Year Notes, March 2026 A Notes, March 2026 B Notes, September 2026 Notes, January 2027 Notes, 2031 Asset-Backed Notes and 2033 Notes (each term as is individually defined herein and collectively, the “Notes”) contain financial and operating covenants that could restrict our business activities, including our ability to declare dividend distributions if we default under certain provisions.
If that happens, we will be prohibited from issuing debt securities or preferred stock and/or borrowing money from banks or other financial institutions and may not be permitted to declare a dividend or make any distribution to stockholders or repurchase shares until such time as we satisfy this test. • Any amounts that we use to service our debt or make payments on preferred stock will not be available for dividends to our common stockholders. • It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility.
If that happens, we will be prohibited from issuing debt securities or preferred stock and/or borrowing money from banks or other financial institutions and may not be permitted to declare a dividend or make any distribution to stockholders or repurchase shares until such time as we satisfy this test. • Any amounts that we use to service our debt or make payments on preferred stock will not be available for dividends to our common stockholders. 40 Table of Contents • It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility.
To maintain RIC status under Subchapter M Part I of the Code, we must meet the following annual distribution, income source and asset diversification requirements: • The Annual Distribution Requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.
To maintain RIC status under Subchapter M Part I of the Code, we must meet the following distribution, income and asset requirements: • The Distribution Requirements for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.
The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes. 41 Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue.
The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes. Terms relating to redemption may materially adversely affect the return on any debt securities that we may issue.
The indentures governing the July 2024 Notes, February 2025 Notes, June 2025 Notes, June 2025 3-Year Notes, March 2026 A Notes, March 2026 B Notes, September 2026 Notes and January 2027 Notes require us to offer to prepay all of the issued and outstanding notes upon a change in control and election by the holders, which could have a material adverse effect on our business, financial condition and results of operations.
The indentures governing the July 2024 Notes, February 2025 Notes, June 2025 Notes, June 2025 3-Year Notes, March 2026 A Notes, March 2026 B Notes, September 2026 Notes and January 2027 Notes require us to offer to prepay all of the issued and outstanding notes upon a change in control and election by the holders, which could have a material 45 Table of Contents adverse effect on our business, financial condition and results of operations.
The following table illustrates the reduction to NAV, or NAV, and the dilution experienced by Stockholder A following the sale of 40,000 shares of the common stock of Company XYZ at $9.50 per share, a price below its NAV per share.
The following table illustrates the reduction to NAV, or NAV, and the dilution 42 Table of Contents experienced by Stockholder A following the sale of 40,000 shares of the common stock of Company XYZ at $9.50 per share, a price below its NAV per share.
As publicly traded companies, the securities of these companies may not trade at high volumes, and prices can be volatile, particularly during times of general market volatility, which may restrict our ability to sell our positions and may have a material adverse impact on us. In addition, our ability to invest in public companies may be limited in certain circumstances.
As publicly traded companies, the securities of these companies may not trade at high volumes, and prices can be volatile, particularly during times of general market volatility, which may restrict our ability to sell our positions and may have a material adverse impact on us. 28 Table of Contents In addition, our ability to invest in public companies may be limited in certain circumstances.
See "Note 5 – Debt." If we choose to redeem our Notes when the fair market value is above par value, you would experience a loss of any potential premium. If we default on our obligations imposed upon us by our indebtedness, we may not be able to make payments on our outstanding Notes and Credit Facilities.
See "Note 5 – Debt." If we choose to redeem our Notes when the fair market value is above par value, such noteholders would experience a loss of any potential premium. If we default on our obligations imposed upon us by our indebtedness, we may not be able to make payments on our outstanding Notes and Credit Facilities.
The values of companies in the pharmaceutical industry have been and will likely continue to be extremely volatile. • Biotechnology Industry Risk . The success of biotechnology companies is highly dependent on the development, procurement and/or marketing of drugs.
The values of companies in the pharmaceutical industry have been and will likely continue to be extremely volatile. • Biotechnology Industry Risk . The success of biotechnology companies is highly dependent on the development, procurement and/or marketing of drugs, products, and/or technologies.
Item 1A. R isk Factors Investing in our securities involves a number of significant risks. In addition to the other information contained in this Annual Report on Form 10-K, you should carefully consider the following information before making an investment in our securities. The risks set forth below are not the only risks we face.
Item 1A. Risk Factors Investing in our securities involves a number of significant risks. In addition to the other information contained in this Annual Report on Form 10-K, you should carefully consider the following information before making an investment in our securities. The risks set forth below are not the only risks we face.
Government shutdowns or austerity measures that certain countries may agree to as part of any debt crisis or disruptions to major financial trading markets may adversely affect world economic conditions, our business and the businesses of our portfolio companies. Additionally, the Federal Reserve may raise the Federal Funds Rate in 2023.
Government shutdowns or austerity measures that certain countries may agree to as part of any debt crisis or disruptions to major financial trading markets may adversely affect world economic conditions, our business and the businesses of our portfolio companies. Additionally, the Federal Reserve may continue to raise the Federal Funds Rate in 2024.
Investing in publicly traded companies can involve a high degree of risk and can be speculative. A portion of our portfolio is invested in publicly traded companies or companies that are in the process of completing their IPO.
Investing in publicly traded companies can involve a high degree of risk and can be speculative. A portion of our portfolio is invested in publicly traded companies or companies that are in the process of completing an IPO.
Failure of pharmaceutical companies to comply with applicable laws and regulations can result in the imposition of civil and criminal fines, penalties and, in some instances, exclusion of participation in government sponsored programs such as Medicare and Medicaid. Pharmaceutical companies may be adversely affected by government regulation and changes in reimbursement rates.
Failure of pharmaceutical companies to comply with 29 Table of Contents applicable laws and regulations can result in the imposition of civil and criminal fines, penalties and, in some instances, exclusion of participation in government sponsored programs such as Medicare and Medicaid. Pharmaceutical companies may be adversely affected by government regulation and changes in reimbursement rates.
Without such regulatory policies, investments in sustainable and renewable technology companies may not be economical and financing for sustainable and renewable technology companies may become unavailable. Further, industries within the energy sector are cyclical with fluctuations in commodity prices and demand for, and production of commodities driven by a variety of factors.
Without such regulatory policies, investments in sustainable and renewable 31 Table of Contents technology companies may not be economical and financing for sustainable and renewable technology companies may become unavailable. Further, industries within the energy sector are cyclical with fluctuations in commodity prices and demand for, and production of commodities driven by a variety of factors.
We, through the Adviser Subsidiary, derive revenues from managing third-party funds pursuant to management agreements that may be termina ted, which could negatively impact our operating results. We will derive our revenues related to the Adviser Subsidiary primarily from dividend income, which the Adviser Subsidiary will pay from net profits generated from advisory fees charged to the Adviser Funds.
We, through the Adviser Subsidiary, derive revenues from managing third-party funds pursuant to management agreements that may be terminated, which could negatively impact our operating results. We will derive our revenues related to the Adviser Subsidiary primarily from dividend income, which the Adviser Subsidiary will pay from net profits generated from advisory fees charged to the Adviser Funds.
Such conditions may occur for a prolonged period of time again, and may materially worsen in the future, including as a result of U.S. government shutdowns, or future downgrades to the U.S. government's sovereign credit rating or the perceived credit worthiness of the U.S. or other large global economies.
Such 48 Table of Contents conditions may occur for a prolonged period of time again, and may materially worsen in the future, including as a result of U.S. government shutdowns, or future downgrades to the U.S. government's sovereign credit rating or the perceived credit worthiness of the U.S. or other large global economies.
GAAP"), of those approximately 50% of warrants that we do not realize any exit, the assigned costs to the initial warrants may lead to realized losses when the warrants either expire or are not exercised. We may expose ourselves to risks if we engage in hedging transactions.
GAAP”), of those approximately 50% of warrants that we do not realize any exit, the assigned costs to the initial warrants may lead to realized losses when the warrants either expire or are not exercised. We may expose ourselves to risks when we engage in hedging transactions.
(3) Assumes $4.4 billion in total assets including debt issuance costs on a pro forma basis, $3.0 billion in debt outstanding, $1.4 billion in stockholders’ equity, and an average cost of funds of 4.2% , which is the approximate average cost of our Notes and Credit Facilities for the period ended December 31, 2022, along with the hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 150% asset coverage.
(2) Assumes $3.8 billion in total assets including debt issuance costs on a pro forma basis, $2.0 billion in debt outstanding, $1.8 billion in stockholders’ equity, and an average cost of funds of 4.8%, which is the approximate average cost of our Notes and Credit Facilities for the period ended December 31, 2023, along with the hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 200% asset coverage.
Business — Regulation.” Additionally, as an internally managed BDC, our ability to offer more competitive and flexible compensation structures, such as offering both a profit-sharing plan and an equity incentive plan, is subject to the limitations imposed by the 1940 Act, which limits our ability to attract and retain talented investment management professionals.
Business — Regulation.” 26 Table of Contents Additionally, as an internally managed BDC, our ability to offer more competitive and flexible compensation structures, such as offering both a profit-sharing plan and an equity incentive plan, is subject to the limitations imposed by the 1940 Act, which limits our ability to attract and retain talented investment management professionals.
Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims.
Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or 43 Table of Contents other liabilities of any such subsidiary senior to our claims.
Our stockholders have authorized us to issue warrants, options or rights to subscribe for, convert to, or purchase shares of our common stock at a price per share below the NAV per share, subject to the applicable requirements of the 1940 Act.
Our stockholders have also authorized us to issue warrants, options or rights to subscribe for, convert to, or purchase shares of our common stock at a price per share below the then-current NAV per share, subject to the applicable requirements of the 1940 Act.
If we are unable to obtain cash from other sources, we could fail to qualify as a RIC and thus become subject to U.S. federal income tax. • The source-of-income requirement will be satisfied if we obtain at least 90% of our gross income for each year from distributions, interest, gains from the sale of stock or securities or similar sources. • The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year.
If we are unable to obtain cash from other sources, we could fail to qualify as a RIC and thus become subject to U.S. federal income tax. • The Income Test will be satisfied if we obtain at least 90% of our gross income for each year from dividends, interest, gains from the sale of stock or securities or similar sources. • The Asset Test will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year.
Since, in certain cases, we may recognize taxable income before or without receiving cash representing such income, we may have difficulty meeting the Annual Distribution Requirement necessary to maintain RIC status under the Code.
Since, in certain cases, we may recognize taxable income before or without receiving cash representing such income, we may have difficulty meeting the Distribution Requirements necessary to maintain RIC status under the Code.
As a result, we do not expect to achieve liquidity in our investments in the near-term. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments.
As a result, we do not expect to achieve liquidity in our investments in the near-term. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because 32 Table of Contents there is usually no established trading market for such investments.
These companies also may be affected adversely by changes in technology, consumer and business purchasing patterns, short product cycles, falling prices and profits, government regulation, lack of standardization or compatibility with existing technologies, intense competition, aggressive pricing, dependence on copyright and/or patent protection and/or obsolete products or services.
These companies also may be affected adversely by changes in technology, consumer and business purchasing patterns, short product cycles, falling prices and profits, government regulation, lack of standardization or compatibility with existing technologies, intense competition, aggressive pricing, advances in artificial intelligence and machine learning, dependence on copyright and/or patent protection and/or obsolete products or services.
In addition, the current U.S. political environment and the resulting uncertainties regarding actual and potential shifts in U.S. foreign investment, trade, taxation, economic, environmental and other policies under the current Administration, as well as the impact of geopolitical tension, such as a deterioration in the bilateral relationship between the U.S. and China or an escalation in conflict between Russia and Ukraine, could lead to disruption, instability and volatility in the global markets.
In addition, the current U.S. political environment and presidential election and the resulting uncertainties regarding actual and potential shifts in U.S. foreign investment, trade, taxation, economic, environmental and other policies, as well as the impact of geopolitical tension, such as a deterioration in the bilateral relationship between the U.S. and China or an escalation in conflict between Russia and Ukraine or in the Middle East, could lead to disruption, instability and volatility in the global markets.
In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt securities being redeemed. We may redeem our Notes at a redemption price set forth under the terms of the individual indentures.
In this circumstance, such noteholders may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as those debt securities being redeemed. We may redeem our Notes at a redemption price set forth under the terms of the individual indentures.
Depending on funding requirements, we may need to raise additional capital to meet our unfunded commitments through additional borrowings. As of December 31, 2022, we had approximately $628.9 million of available unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by milestones. Our unfunded contractual commitments may be significant from time-to-time.
Depending on funding requirements, we may need to raise additional capital to meet our unfunded commitments through additional borrowings. As of December 31, 2023, we had approximately $335.3 million of available unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by milestones. Our unfunded contractual commitments may be significant from time-to-time.
We may have to request a waiver of the SBA’s restrictions for HC IV to make certain distributions to maintain our eligibility for RIC status.
We may have to request a waiver of the SBA’s restrictions for HC IV to make certain distributions to maintain our eligibility 46 Table of Contents for RIC status.
We may seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer; 33 however, we may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.
We may seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer; however, we may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial 35 Table of Contents distress.
Our investments in foreign securities or investments denominated in foreign currencies may involve significant risks in addition to the risks inherent in U.S. and U.S.-denominated investments. Our investment strategy contemplates potential investments in securities of foreign companies. Our total investments at value in foreign companies were approximately $293.4 million or 9.9% of total investments as of December 31, 2022.
Our investments in foreign securities or investments denominated in foreign currencies may involve significant risks in addition to the risks inherent in U.S. and U.S.-denominated investments. Our investment strategy contemplates potential investments in securities of foreign companies. Our total investments at value in foreign companies were approximately $386.4 million or 11.9% of total investments as of December 31, 2023.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer, which may subject us to a risk of significant loss if any such issuer experiences a downturn. 31 We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer, which may subject us to a risk of significant loss if any such issuer experiences a downturn.
This risk is somewhat greater where we exercise control or significant influence over a portfolio company’s direction. Any litigation could result in substantial costs and divert management’s attention and resources from our business and cause a material adverse effect on our business, financial condition and results of operations.
This risk is somewhat greater where we exercise control or significant influence over a portfolio company’s direction. Any litigation could result in substantial costs and divert management’s attention and resources from our business and cause a material adverse effect on our business, financial condition and results of operations. Item 1B. Unresolved Staff Comments None.
Increases to budget deficits, which have been exacerbated by the COVID-19 pandemic, or direct and contingent sovereign debt may create concerns about the ability of certain nations to service their sovereign debt obligations and any risks resulting from any such debt crisis in Europe, the U.S. or elsewhere could have a detrimental impact on the global economy, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally.
Increases to budget deficits or direct and contingent sovereign debt may create concerns about the ability of certain nations to service their sovereign debt obligations and any risks resulting from any such debt crisis in Europe, the U.S. or elsewhere could have a detrimental impact on the global economy, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally.
These developments, along with the United States government’s debt ceiling, budget, credit, and deficit concerns, global economic uncertainties and market volatility and the impacts of COVID-19, could cause interest rates to be volatile, which may negatively impact our ability to access the capital markets on favorable terms.
These developments, along with the United States government’s debt ceiling, budget, credit, and deficit concerns, presidential election, and global economic uncertainties and market volatility, could cause interest rates to be volatile, which may negatively impact our ability to access the capital markets on favorable terms.
During the year ended December 31, 2022, we received early principal payments and early payoffs on our debt investments of approximately $373.3 million. We are subject to the risk that the debt investments we make in our portfolio companies may be repaid prior to maturity.
During the year ended December 31, 2023, we received early principal payments and early payoffs on our debt investments of approximately $925.1 million. We are subject to the risk that the debt investments we make in our portfolio companies may be repaid prior to maturity.
In some instances, we may control our portfolio companies or provide our portfolio companies with significant managerial assistance. However, we do not, and do not expect to, control the ultimate decision making in most of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants.
However, we do not, and do not expect to, control the ultimate decision making in most of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants.
We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company might be. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for portfolio diversification, and our investments could be concentrated in relatively few portfolio companies.
We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company might be. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for portfolio diversification, and our investments could be concentrated in relatively few portfolio companies. See “Risk Factors – Risks Related to Operating as a RIC and U.S.
As of December 31, 2022, portfolio investments, whose fair value is determined in good faith by our Valuation Committee and approved by the Board were approximately 97.9% of our total assets.
As of December 31, 2023, portfolio investments, whose fair value is determined in good faith by our Valuation Committee and approved by the Board were approximately 95.1% of our total assets.
Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes and may divert management's attention. We may experience fluctuations in our quarterly operating results.
Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes and may divert management's attention.
Actual interest payments may be different. 35 (2) Assumes $3.0 billion in total assets including debt issuance costs on a pro forma basis, $1.6 billion in debt outstanding, $1.4 billion in stockholders’ equity, and an average cost of funds of 4.2%, which is the approximate average cost of our Notes and Credit Facilities for the period ended December 31, 2022, along with the hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 200% asset coverage.
(3) Assumes $5.6 billion in total assets including debt issuance costs on a pro forma basis, $3.8 billion in debt outstanding, $1.8 billion in stockholders’ equity, and an average cost of funds of 4.8%, which is the approximate average cost of our Notes and Credit Facilities for the period ended December 31, 2023, along with the hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 150% asset coverage.
In addition, if you are holding debt securities issued by us and such securities are subject to mandatory redemption, we may be required to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities.
In addition, with respect to debt securities issued by us that are subject to mandatory redemption, we may be required to redeem such debt securities at times when prevailing interest rates are lower than the interest rate paid on such debt securities.
Business – Regulation.” Moreover, qualification for taxation as a RIC requires satisfaction of source-of-income, asset diversification and distribution requirements. Operating under these constraints may hinder our ability to take advantage of attractive investment opportunities and to achieve our investment objective.
Business – Regulation.” Moreover, qualification for taxation as a RIC requires satisfaction of source-of-income, asset diversification and distribution requirements. See “Certain United States Federal Income Tax Considerations — Qualifying as a Regulated Investment Company.” Operating under these constraints may hinder our ability to take advantage of attractive investment opportunities and to achieve our investment objective.
Business — Certain United States Federal Income Tax Considerations – Taxation as a Regulated Investment Company.” We may in the future choose to pay distributions in our own stock, in which case you may be required to pay tax in excess of the cash you receive. We may distribute taxable dividends that are payable in part in our stock.
Business — Certain United States Federal Income Tax Considerations – Taxation as a Regulated Investment Company.” 47 Table of Contents We may in the future choose to pay distributions in our own stock, in which case you may be required to pay tax in excess of the cash you receive.
Biotechnology companies may be adversely affected by government regulation and changes in reimbursement rates. Healthcare providers, principally hospitals, that transact with biotechnology companies, often rely on third party payors, such as Medicare, Medicaid, private health insurance plans and health maintenance organizations to reimburse all or a portion of the cost of healthcare related products or services.
Healthcare providers, principally hospitals, that transact with biotechnology companies, often rely on third party payors, such as Medicare, Medicaid, private health insurance plans and health maintenance organizations to reimburse all or a portion of the cost of healthcare related products or services.
If you are holding debt securities issued by us and such securities are redeemable at our option, we may choose to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities.
With respect to debt securities issued by us that are redeemable at our option, we may choose to redeem such debt securities at times when prevailing interest rates are lower than the interest rate paid on such debt securities.
As of December 31, 2022, approximately 95.3% of our debt investments were at floating rates or floating rates with a floor, and 4.7% of our debt investments were at fixed rates.
As of December 31, 2023, approximately 95.9% of our debt investments were at floating rates or floating rates with a floor, and 4.1% of our debt investments were at fixed rates.
These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Closed commitments generally fund 50-80% of the committed amount in aggregate over the life of the commitment.
These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not 36 Table of Contents necessarily represent future cash requirements.
We believe that our assets provide adequate cover to satisfy all of our unfunded commitments and we intend to use cash flow from operations and early principal repayments and proceeds from borrowings and notes to fund these commitments.
Closed commitments generally fund 50-80% of the committed amount in aggregate over the life of the commitment. We believe that our assets provide adequate cover to satisfy all of our unfunded commitments and we intend to use cash flow from operations and early principal repayments and proceeds from borrowings and notes to fund these commitments.
In the event that we are not able to renew, extend or replace our Credit Facilities at the time of their respective maturities, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC. 42 Risks Related To Our SBIC Subsidiaries We, through our wholly owned subsidiary, issue debt securities guaranteed by the SBA and sold in the capital markets.
In the event that we are not able to renew, extend or replace our Credit Facilities at the time of their respective maturities, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC.
The likelihood of any new legislation being enacted is uncertain. Any of those new laws, regulations or interpretations may take effect retroactively and could adversely affect the taxation of us or our stockholders.
At any time, the U.S. federal income tax laws governing RICs or the administrative interpretations of those laws or regulations may be amended. The likelihood of any new legislation being enacted is uncertain. Any of those new laws, regulations or interpretations may take effect retroactively and could adversely affect the taxation of us or our stockholders.
Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and there can be no assurance that any such hedging arrangements will achieve the desired effect. During the year ended December 31, 2022, we did not engage in any hedging activities.
Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and there can be no assurance that any such hedging arrangements will achieve the desired effect. During the year ended and as of December 31, 2023, we had entered into and held one outstanding foreign currency forward contract.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 4. M ine Safety Disclosures Not applicable. 47 PART II
Biggest changeItem 4. Mine Safety Disclosures Not applicable. 52 Table of Contents PART II
Item 3. L egal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies.
Item 3. Legal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePremium/ Premium/ Discount of Discount of Cash Price Range High Sales Low Sales Distribution NAV (1) High Low Price to NAV Price to NAV per Share (2) 2020 First quarter $ 9.92 $ 15.99 $ 6.81 61.2 % ( 31.40 )% $ 0.40 Second quarter $ 10.19 $ 11.83 $ 6.64 16.1 % ( 34.80 )% $ 0.32 Third quarter $ 10.26 $ 11.97 $ 10.02 16.7 % ( 2.30 )% $ 0.32 Fourth quarter $ 11.26 $ 14.42 $ 11.13 28.1 % ( 1.20 )% $ 0.34 2021 First quarter $ 11.36 $ 16.60 $ 14.21 46.1 % 25.1 % $ 0.37 Second quarter $ 11.71 $ 17.66 $ 15.98 50.8 % 36.5 % $ 0.39 Third quarter $ 11.54 $ 17.56 $ 16.50 52.2 % 43.0 % $ 0.39 Fourth quarter $ 11.22 $ 18.07 $ 16.14 61.1 % 43.9 % $ 0.40 2022 First quarter $ 10.82 $ 18.23 $ 16.56 68.5 % 53.0 % $ 0.48 Second quarter $ 10.43 $ 18.91 $ 12.82 81.3 % 22.9 % $ 0.48 Third quarter $ 10.47 $ 16.13 $ 11.45 54.1 % 9.4 % $ 0.50 Fourth quarter $ 10.53 $ 14.92 $ 11.59 41.7 % 10.1 % $ 0.51 (1) NAV per share is generally determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices.
Biggest changePrice Range Premium/ Discount of High Sales Price to NAV Premium/ Discount of Low Sales Price to NAV Cash Distribution per Share (2) NAV (1) High Low 2021 First quarter $ 11.36 $ 16.60 $ 14.21 46.1 % 25.1 % $ 0.37 Second quarter $ 11.71 $ 17.66 $ 15.98 50.8 % 36.5 % $ 0.39 Third quarter $ 11.54 $ 17.56 $ 16.50 52.2 % 43.0 % $ 0.39 Fourth quarter $ 11.22 $ 18.07 $ 16.14 61.1 % 43.9 % $ 0.40 2022 First quarter $ 10.82 $ 18.23 $ 16.56 68.5 % 53.0 % $ 0.48 Second quarter $ 10.43 $ 18.91 $ 12.82 81.3 % 22.9 % $ 0.48 Third quarter $ 10.47 $ 16.13 $ 11.45 54.1 % 9.4 % $ 0.50 Fourth quarter $ 10.53 $ 14.92 $ 11.59 41.7 % 10.1 % $ 0.51 2023 First quarter $ 10.82 $ 16.24 $ 11.56 50.1 % 6.8 % $ 0.47 Second quarter $ 10.96 $ 15.08 $ 12.38 37.6 % 13.0 % $ 0.47 Third quarter $ 10.93 $ 18.02 $ 14.86 64.9 % 36.0 % $ 0.48 Fourth quarter $ 11.43 $ 16.93 $ 15.09 48.2 % 32.1 % $ 0.48 (1) NAV per share is generally determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices.
Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders. There are currently approximately 154 additional beneficial holders of our common stock. Shares of BDCs may trade at a market price that is less than the NAV per share.
Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders. There are currently approximately 190 additional beneficial holders of our common stock. Shares of BDCs may trade at a market price that is less than the NAV per share.
There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2023 distributions to stockholders will actually be and we cannot assure you that we will achieve results that will permit the payment of any cash distributions.
There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2024 distributions to stockholders will actually be and we cannot assure you that we will achieve results that will permit the payment of any cash distributions.
Of the distributions declared during the years ended December 31, 2022, 2021, and 2020, 100% were distributions derived from our current and accumulated earnings and profits.
Of the distributions declared during the years ended December 31, 2023, 2022, and 2021, 100% were distributions derived from our current and accumulated earnings and profits.
These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended ("the Securities Act"). The aggregate value of the shares of our common stock issued under our dividend reinvestment plan during the years ended December 31, 2022, 2021, and 2020 were approximately $4.0 million, $4.1 million, and $3.3 million, respectively.
These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended ("the Securities Act"). The aggregate value of the shares of our common stock issued under our dividend reinvestment plan during the years ended December 31, 2023, 2022, and 2021 were approximately $4.6 million, $4.0 million, and $4.1 million, respectively.
EQUITY COMPENSATION PLAN INFORMATION See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” ISSUER PURCHASES OF EQUITY SECURITIES The Company did not repurchase common stock on the open market during the years ended 2022, 2021, and 2020.
EQUITY COMPENSATION PLAN INFORMATION See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” 53 Table of Contents ISSUER PURCHASES OF EQUITY SECURITIES The Company did not repurchase common stock on the open market during the years ended 2023, 2022, and 2021.
The NAVs shown are based on outstanding shares at the end of each period. (2) Represents the dividend or distribution declared in the relevant quarter. SALES OF UNREGISTERED SECURITIES During 2022, 2021, and 2020, we issued 259,466, 248,041, and 280,690 shares, respectively, of common stock to stockholders in connection with the dividend reinvestment plan.
The NAVs shown are based on outstanding shares at the end of each period. (2) Represents the dividend or distribution declared in the relevant quarter. SALES OF UNREGISTERED SECURITIES During 2023, 2022, and 2021, we issued 303,960, 259,466, and 248,041 shares, respectively, of common stock to stockholders in connection with the dividend reinvestment plan.
Item 5. M arket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PRICE RANGE OF COMMON STOCK Our common stock is traded on the NYSE under the symbol “HTGC.” As of February 3, 2023, we had approximately 117,950 stockholders of record.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PRICE RANGE OF COMMON STOCK Our common stock is traded on the NYSE under the symbol “HTGC.” As of February 2, 2024, we had approximately 134,176 stockholders of record.
Item 5 of the Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
This graph and other information furnished under Part II. Item 5 of the Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
The stock price performance included in the above graph is not necessarily indicative of, or intended to forecast, future stock price performance. Item 6. [Res erved] 50
The stock price performance included in the above graph is not necessarily indicative of, or intended to forecast, future stock price performance. Item 6. [Reserved] 55 Table of Contents
The graph measures total stockholder return, which takes into account both changes in stock price and distributions, prior to any tax effect. It assumes that distributions paid are reinvested in like securities. Copyright© 2023 Standard & Poor's, a division of S&P Global.
The graph measures total stockholder return, which takes into account both changes in stock price and distributions, prior to any tax effect. It assumes that distributions paid are reinvested in like securities. * Assumes $100 invested on December 31, 2018 in Hercules Capital, Inc. or the applicable index, and that all dividends are reinvested.
Please refer to "Retired shares for restricted stock vesting" and "Retired shares from net issuance" in the consolidated statements of changes in net assets for share amounts withheld. 48 DISTRIBUTION POLICY Our Board maintains a variable distribution policy with the objective of distributing four quarterly distributions in an amount that approximates 90-100% of our taxable quarterly income or potential annual income for a particular tax year.
Business - Certain United States Income Tax Considerations.” Our Board maintains a variable distribution policy with the objective of distributing four quarterly distributions in an amount that approximates 90-100% of our taxable quarterly income or potential annual income for a particular tax year.
Business— Certain United States Income Tax Considerations.” 49 PERFORMANCE GRAPH The following stock performance graph compares the cumulative stockholder return assuming that, on December 31, 2017, a person invested $100 in each of our common stock, the S&P 500 Index, the NASDAQ Financial 100 Index, the S&P BDC Index, and the KBW Regional Bank Index.
During 2023, 2022, and 2021, we issued 303,960, 259,466 and 248,041 shares, respectively, of common stock to stockholders in connection with the distribution reinvestment plan. 54 Table of Contents PERFORMANCE GRAPH The following stock performance graph compares the cumulative stockholder return assuming that, on December 31, 2018, a person invested $100 in each of our common stock, the S&P 500 Index, the NASDAQ Financial 100 Index, the S&P BDC Index, and the KBW Regional Bank Index.
During 2022, 2021, and 2020, we issued 259,466, 248,041 and 280,690 shares, respectively, of common stock to stockholders in connection with the distribution reinvestment plan. To maintain our RIC status under the Code, we must distribute to our stockholders dividend distributions of an amount generally at least equal to the Annual Distribution Requirement, in order to maintain our RIC status.
DISTRIBUTION POLICY To maintain our RIC status under the Code, we must distribute to our stockholders dividend distributions of an amount generally at least equal to the Distribution Requirements. See “Item 1.
Removed
In addition, we generally will be required to pay an U.S. federal excise tax equal to 4% on certain undistributed U.S. federal taxable income unless we distribute in a timely manner as defined under the Code.
Added
These shares are netted within the amounts “Issuance of common stock under equity-based award plans” and “Shares retired on vesting of equity-based awards” disclosed in the Consolidated Statements of Changes in Net Assets.
Removed
Depending on the level of taxable income earned in a tax year, we may choose to carry forward such taxable income for distribution in the following year, and pay any applicable excise tax. See “Item 1.
Removed
All rights reserved. * Assumes $100 invested on December 31, 2017 in Hercules Capital, Inc. or the applicable index, and that all dividends are reinvested. ^ The NYSE Composite Index, which was included in our Form 10-K for the year ended December 31, 2021, has been replaced with the S&P BDC Index, which we believe is more directly comparable to Hercules' performance.
Removed
The S&P BDC Index measures the performance of business development companies that trade on major U.S. exchanges, whereas the NYSE Composite Index measures performance of any company listed on the New York Stock Exchange irrespective of whether the company is a business development company or not. This graph and other information furnished under Part II.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeOf the aggregate total direct fundings or originations, $226.4 million of debt, equity, and warrant fundings during the period, were assigned to, directly funded or originated by the Adviser Funds. 53 Our portfolio activity for the years ended December 31, 2022, and 2021 was comprised of the following: (in millions) December 31, 2022 December 31, 2021 Gross Debt Commitments Originated by Hercules Capital and the Adviser Funds (1) New portfolio company $ 2,612.0 $ 1,810.4 Existing portfolio company 482.3 801.3 Sub-total 3,094.3 2,611.7 Less: Debt commitments assigned to or directly committed by the Adviser Funds (3) (742.4 ) $ (371.7 ) Net Total Debt Commitments $ 2,351.9 $ 2,240.0 Gross Debt Fundings by Hercules Capital and the Adviser Funds (2) New portfolio company $ 1,068.1 $ 1,056.7 Existing portfolio company 371.5 482.6 Sub-total 1,439.6 1,539.3 Less: Debt fundings assigned to or directly funded by the Adviser Funds (3) (325.5 ) (223.6 ) Net Total Debt Fundings $ 1,114.1 $ 1,315.7 Equity Investments and Investment Funds and Vehicles Fundings by Hercules Capital and the Adviser Funds New portfolio company $ 5.0 $ 18.6 Existing portfolio company 20.4 10.5 Sub-total $ 25.4 $ 29.1 Less: Equity fundings assigned to or directly funded by the Adviser Funds (3) (4.7 ) (2.8 ) Net Total Equity and Investment Funds and Vehicle Fundings $ 20.7 $ 26.3 Total Unfunded Contractual Commitments (4) $ 628.9 $ 286.8 Non-Binding Term Sheets New portfolio company $ 96.7 $ 275.0 Existing portfolio company 39.4 — Total $ 136.1 $ 275.0 (1) Includes restructured loans and renewals in addition to new commitments.
Biggest changeNot all non-binding term sheets are expected to close and do not necessarily represent future cash requirements. 57 Table of Contents Our portfolio activity for the years ended December 31, 2023, and 2022 was comprised of the following: (in millions) December 31, 2023 December 31, 2022 Investment Commitments (1) Investment Commitments Originated by Hercules Capital and the Adviser Funds $ 2,174.1 $ 3,121.4 Less: Commitments assigned to or directly committed by the Adviser Funds (3) (595.6) (747.1) Net Total Investment Commitments $ 1,578.5 $ 2,374.3 Gross Debt Commitments Originated by Hercules Capital and the Adviser Funds New portfolio company $ 1,571.0 $ 2,612.0 Existing portfolio company 589.5 482.3 Sub-total 2,160.5 3,094.3 Less: Debt commitments assigned to or directly committed by the Adviser Funds (3) (593.7) (742.4) Net Total Debt Commitments $ 1,566.8 $ 2,351.9 Investment Fundings (2) Gross Debt Fundings by Hercules Capital and the Adviser Funds New portfolio company $ 747.3 $ 1,068.1 Existing portfolio company 836.5 371.5 Sub-total 1,583.8 1,439.6 Less: Debt fundings assigned to or directly funded by the Adviser Funds (3) (348.8) (325.5) Net Total Debt Fundings $ 1,235.0 $ 1,114.1 Equity Investments and Investment Funds and Vehicles Fundings by Hercules Capital and the Adviser Funds New portfolio company $ 2.0 $ 5.0 Existing portfolio company 12.8 20.4 Sub-total $ 14.8 $ 25.4 Less: Equity fundings assigned to or directly funded by the Adviser Funds (3) (1.9) (4.7) Net Total Equity and Investment Funds and Vehicle Fundings $ 12.9 $ 20.7 Total Unfunded Contractual Commitments (4) $ 335.3 $ 628.9 Non-Binding Term Sheets New portfolio company $ 645.0 $ 96.7 Existing portfolio company 31.8 39.4 Total $ 676.8 $ 136.1 (1) Includes restructured loans and renewals in addition to new commitments.
(2) Funded amounts include borrowings on revolving facilities. (3) Commitments and fundings include amounts assigned to, directly committed or originated, or funded by the Adviser Funds, as applicable. (4) Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company.
(2) Funded amounts include borrowings on revolving facilities. (3) Commitments and fundings include amounts assigned to, directly committed or originated, funded by the Adviser Funds, as applicable. (4) Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company.
Changes in interest rates, including Prime, LIBOR, SOFR, Eurodollar, or BSBY rates, may affect the interest income and the value of our investment portfolio for portfolio investments with floating rates. Our investments in Structured Debt generally have detachable equity enhancement features in the form of warrants or other equity securities designed to provide us with an opportunity for capital appreciation.
Changes in interest rates, including Prime, SOFR, Eurodollar, or BSBY rates, may affect the interest income and the value of our investment portfolio for portfolio investments with floating rates. Our investments in Structured Debt generally have detachable equity enhancement features in the form of warrants or other equity securities designed to provide us with an opportunity for capital appreciation.
These features are treated as OID and are accreted into interest income over the term of the loan as a yield enhancement. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent equity financing round.
These features are treated as OID and are accreted in to interest income over the term of the loan as a yield enhancement. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent equity financing round.
Loan origination and commitment fees, which are generally received in full at the inception of a loan, are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications.
Loan origination and commitment fees are generally received in full at the inception of a loan, are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications.
The key metrics that we monitor with respect to yields are as described below: • “Total Yield” - The total yield is derived by dividing GAAP basis 'Total investment income' by the weighted average GAAP basis value of investment portfolio assets outstanding during the year, including non-interest earning assets such as warrants and equity investments at amortized cost. • “Effective Yield” on total debt investments - The effective yield is derived by dividing GAAP basis 'Total investment income' by the weighted average GAAP basis value of debt investment portfolio assets at amortized cost outstanding during the year. • “Core Yield” on total debt investments – The core yield is a Non-GAAP financial measure.
The key metrics that we monitor with respect to yields are as described below: • “Total Yield” - The total yield is derived by dividing GAAP basis “Total investment income” by the weighted average GAAP basis value of investment portfolio assets outstanding during the year, including non-interest earning assets such as warrants and equity investments at amortized cost. • “Effective Yield” on total debt investments - The effective yield is derived by dividing GAAP basis “Total investment income” from debt investments (1) by the weighted average GAAP basis value of debt investment portfolio assets at amortized cost outstanding during the year. • “Core Yield” on total debt investments – The core yield is a Non-GAAP financial measure.
The net change in unrealized appreciation and depreciation of our investments is derived from the changes in fair value of each investment as determined in good faith by our Valuation Committee and approved by the Board.
The net change in unrealized appreciation and depreciation of our investments is derived from the changes in fair value of each investment determined in good faith by our Valuation Committee and approved by the Board.
Fee income is comprised or recurring fee income from commitment, facility, and loan related fees, acceleration of fee income due to expired commitments, and acceleration of fee income due to early loan repayments during the period.
Fee income is comprised of recurring fee income from commitment, facility, and loan related fees, fee income due to expired commitments, and acceleration of fee income due to early loan repayments during the period.
Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. The amounts involved may be material. We had no common stock repurchases during the years ended 2020, 2021, or 2022. Commitments and Obligations Our significant cash requirements generally relate to our debt obligations.
Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. The amounts involved may be material. We had no common stock repurchases during the years ended 2021, 2022, or 2023. Commitments and Obligations Our significant cash requirements generally relate to our debt obligations.
Business and throughout this MD&A, we present our financial condition and results of operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we use are “Non-GAAP financial measures” under SEC rules and regulations. GAAP is the acronym for “generally accepted accounting principles” in the United States.
Use of Non-GAAP Measures Throughout this MD&A, we present our financial condition and results of operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we use are “Non-GAAP financial measures” under SEC rules and regulations. GAAP is the acronym for “generally accepted accounting principles” in the United States.
As of December 31, 2022 the fair value as a percentage of total portfolio does not exceed 5.0% for any individual industry sector other than “Drug Discovery & Development”, “Software”, “Consumer & Business Services”, or "Healthcare Services, Other". Industry and sector concentrations vary as new loans are recorded and loans are paid off.
As of December 31, 2023 the fair value as a percentage of total portfolio does not exceed 5.0% for any individual industry sector other than “Drug Discovery & Development”, “Software”, “Consumer & Business Services”, or "Healthcare Services, Other". Industry and sector concentrations vary as new loans are recorded and loans are paid off.
We receive principal payments on our debt investment portfolio based on scheduled amortization of the outstanding balances. In addition, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of these early principal repayments may fluctuate significantly from period to period.
We receive principal payments on our debt investment portfolio based on scheduled amortization of the outstanding balances. In additi on, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of these early principal repayments may fluctuate significantly from period to period.
In addition to the cash yields received on our debt investments, in some instances our debt investments may also include any of the following: exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt.
In addition to the cash yields received on our debt investments, in some instances our d ebt investments may also include any of the following: exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt.
M anagement’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The matters discussed in this report, as well as in future oral and written statements by management of Hercules Capital, Inc. that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The matters discussed in this report, as well as in future oral and written statements by management of Hercules Capital, Inc. that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements.
Portfolio Grading We use an investment grading system, which grades each debt investment on a scale of 1 to 5 to characterize and monitor our expected level of risk on the debt investments in our portfolio with 1 being the highest quality. See “Item 1.
Portfolio Grading We use an investment grading system, which grades each debt investment on a scale of 1 to 5 to characterize and monitor our expected level of risk on the debt investments in our portfolio with 1 being the highest quality.
To maintain our status as a RIC, the non-cash PIK income must be distributed to stockholders with other sources of income in the form of dividend distributions even though we have not yet collected any cash from the borrower. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments.
To maintain our status as a RIC, the non-cash PIK income must be distributed to stockholders with other sources of income in the form of dividend distributions even though we have not yet collected any cash from the borrower. Amounts necessary to pay these distributions may come from available cash or the l iquidation of certain investments.
As attractive investment opportunities arise, we may exercise certain of our warrants to purchase stock, and could ultimately monetize our investments. Of the warrants that we have monetized since inception, we have realized multiples in the range of approximately 1.02x to 42.71x based on the historical rate of return on our investments.
As attractive investment opportunities arise, we may exercise certain of our warrants to purchase stock, and could ultimately monetize our investments. Of the warrants that we have monetized since inception, we have realized multiples in the range of approximately 1.02x to 42.71x b ased on the historical rate of return on our investments.
For the years ended December 31, 2021 and December 31, 2020 A comparison of the fiscal years ended December 31, 2021 and December 31, 2020 can be found in our Form 10-K for the fiscal year ended December 31, 2021 within “Part II, Item 7.
For the years ended December 31, 2022 and December 31, 2021 A comparison of the fiscal years ended December 31, 2022 and December 31, 2021 can be found in our Form 10-K for the fiscal year ended December 31, 2022 within “Part II, Item 7.
Non-binding outstanding term sheets are subject to completion of our due diligence and final investment committee approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.
Non-binding outstanding term sheets are subject to completion of our due diligence and final investment 70 Table of Contents committee approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.
As a result of the SEC exemptive order, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 150%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage when including our SBA debentures was 187.7% as of December 31, 2022.
As a result of the SEC exemptive order, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 150%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage when including our SBA debentures was 214.7% as of December 31, 2023.
The available unfunded commitments excludes unfunded commitments (i) for which, with respect to a portfolio company's agreement, a milestone was achieved after the last day on which the portfolio company could have requested a drawdown funding to be completed within the reporting period; and (ii) $173.5 million of unfunded commitments which represent the portion of portfolio company commitments assigned to or directly committed by the Adviser Funds.
The available unfunded commitments excludes unfunded commitments (i) for which, with respect to a portfolio company's agreement, a milestone was achieved after the last day on which the portfolio company could have requested a drawdown funding to be completed within the reporting period; and (ii) $127.7 million of unfunded commitments which represent the portion of portfolio company commitments assigned to or directly committed by the Adviser Funds.
Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.
Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.
During the year ended December 31, 2022, we principally funded our operations from (i) cash receipts from interest, dividend, and fee income from our investment portfolio, (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments, (iii) debt offerings along with borrowings on our credit facilities, and (iv) equity offerings.
During the year ended December 31, 2023, we principally funded our operations from (i) cash receipts from interest, dividend, and fee income from our investment portfolio, (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments, (iii) debt borrowings on our credit facilities, and (iv) equity offerings.
“Core investment income” adjusts GAAP basis 'Total investment income' to exclude fee and other income accelerations attributed to early payoffs, deal restructuring, loan modifications, and other one-time income events, but includes income from expired commitments.
“Core investment income” adjusts GAAP basis 'Total investment income' from debt investments (1) to exclude fee and other income accelerations attributed to early payoffs, deal restructuring, loan modifications, and other one-time income events, but includes income from expired commitments.
In particular, we evaluate performance through monitoring the portfolio yields as we consider them to be effective indicators, for both management and stockholders, of the financial performance of our total investment portfolio and total debt portfolio.
In particular, we evaluate performance through monitoring the portfolio yields as we consider them to be effective indicators, for both management and 60 Table of Contents stockholders, of the financial performance of our total investment portfolio and total debt portfolio.
We have elected to be treated for tax purposes as a RIC under Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other requirements, we must maintain certain source-of-income and asset diversification requirements.
We have elected to be treated for tax purposes as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other requirements, we must maintain certain income, asset, and distribution requirements.
See “Note 10 – Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this report. 56 Portfolio Composition Our portfolio companies are primarily privately held companies and public companies which are active in sectors characterized by high margins, high growth rates, consolidation, and product and market extension opportunities.
See “Note 10 – Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this report. 61 Table of Contents Portfolio Composition Our portfolio companies are primarily privately held companies and public companies which are active in sectors characterized by high margins, high growth rates, consolidation, and product and market extension opportunities.
Non-accrual Investments The following table shows the amortized cost of our performing and non-accrual investments as of December 31, 2022 and December 31, 2021: (in millions) As of December 31, 2022 2021 Amortized Cost Percentage of Total Portfolio at Amortized Cost Amortized Cost Percentage of Total Portfolio at Amortized Cost Performing $ 2,988 99.4 % $ 2,367 99.0 % Non-accrual 18 0.6 % 24 1.0 % Total Investments $ 3,006 100.0 % $ 2,391 100.0 % Debt investments are placed on non-accrual status when it is probable that principal, interest or fees will not be collected according to contractual terms.
Non-accrual Investments The following table shows the amortized cost of our performing and non-accrual investments as of December 31, 2023 and December 31, 2022: (in millions) As of December 31, 2023 2022 Amortized Cost Percentage of Total Portfolio at Amortized Cost Amortized Cost Percentage of Total Portfolio at Amortized Cost Performing $ 3,216 99.0 % $ 2,988 99.4 % Non-accrual 31 1.0 % 18 0.6 % Total Investments $ 3,247 100.0 % $ 3,006 100.0 % Debt investments are placed on non-accrual status when it is probable that principal, interest or fees will not be collected according to contractual terms.
During the year ended December 31, 2022, we issued and sold 14.6 million shares of our common stock receiving total accumulated net proceeds of approximately $229.7 million. This is an increase from the year ended December 31, 2021, where we issued and sold 0.6 million shares of our common stock receiving total accumulated net proceeds of approximately $10.6 million.
This is an increase from the year ended December 31, 2022, where we issued and sold 14.6 million shares of our common stock receiving total accumulated net proceeds of approximately $229.7 million.
As of December 31, 2022 and 2021, unamortized capitalized fee income was recorded as follows: (in millions) As of December 31, 2022 2021 Offset against debt investment cost $ 43.1 $ 36.5 Deferred obligation contingent on funding or other milestone 10.9 6.4 Total Unamortized Fee Income $ 54.0 $ 42.9 Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan.
As of December 31, 2023 and 2022, unamortized capitalized fee income was recorded as follows: (in millions) As of December 31, 2023 2022 Offset against debt investment cost $ 32.9 $ 43.1 Deferred obligation contingent on funding or other milestone 9.4 10.9 Total Unamortized Fee Income $ 42.3 $ 54.0 Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan.
As of December 31, 2022, we had approximately $628.9 million of available unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by future or unachieved milestones, as well as uncalled capital commitments to make investments in private equity funds.
As of December 31, 2023, we had approximately $335.3 million of available unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by future or unachieved milestones, as well as uncalled capital commitments to make investments in private equity funds.
General and Administrative Expenses and Tax Expenses General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, taxes, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $16.9 million from $16.1 million for the years ended December 31, 2022 and 2021, respectively.
General and Administrative Expenses and Tax Expenses General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $18.7 million from $16.9 million for the years ended December 31, 2023 and 2022, respectively.
The core yield is derived by dividing “Core investment income” by the weighted average GAAP basis value of debt investment portfolio assets at amortized cost outstanding during the year.
The core yield is derived by dividing “Core investment income from debt investments” by the weighted average GAAP basis value of debt investment portfolio assets at amortized cost outstanding during the year.
Our existing warrant holdings would require us to invest approximately $71.9 million to exercise such warrants as of December 31, 2022. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions.
Our existing warrant holdings would require us to invest approximately $61.7 million to exercise such warrants as of December 31, 2023. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions.
For the years ended December 31, 2022 and 2021, our ten largest portfolio companies represented approximately 29.0% and 30.5% of the total fair value of our investments in portfolio companies, respectively. As of December 31, 2022 and December 31, 2021, we had eight and six investments that represented 5% or more of our net assets, respectively.
For the years ended December 31, 2023 and 2022, our ten largest portfolio companies represented approximately 29.7% and 29.0% of the total fair value of our investments in portfolio companies, respectively. As of December 31, 2023 and December 31, 2022, we had five and eight investments that represented 5% or more of our net assets, respectively.
As a result, comparison of the net increase (decrease) in net assets resulting from operations may not be meaningful. Investment Income Total investment income for the year ended December 31, 2022 was approximately $321.7 million as compared to approximately $281.0 million for the year ended December 31, 2021.
As a result, comparison of the net increase (decrease) in net assets resulting from operations may not be meaningful. Investment Income Total investment income for the year ended December 31, 2023 was a pproximately $460.7 million as compared to approximately $321.7 million for the year ended December 31, 2022.
As of December 31, 2022 and 2021, loan exit fees receivable were recorded as follows: (in millions) As of December 31, 2022 2021 Included within debt investment cost $ 32.5 $ 29.6 Deferred receivable related to expired commitments 5.0 5.4 Total Exit Fees Receivable $ 37.5 $ 35.0 Additionally, we have debt investments in our portfolio that earn PIK interest.
As of December 31, 2023 and 2022, loan exit fees receivable were recorded as follows: (in millions) As of December 31, 2023 2022 Included within debt investment cost $ 35.9 $ 32.5 Deferred receivable related to expired commitments 4.3 5.0 Total Exit Fees Receivable $ 40.2 $ 37.5 Additionally, we have debt investments in our portfolio that earn PIK interest.
Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones. This excludes $173.5 million and $34.9 million of unfunded commitments as of December 31, 2022 and December 31, 2021, respectively, to portfolio companies related to loans assigned to or directly committed by the Adviser Funds.
Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones. This ex cludes $127.7 million and $173.5 million of unfunded commitments as of December 31, 2023 and December 31, 2022, respectively, to portfolio companies related to loans assigned to or directly committed by the Adviser Funds.
No single portfolio investment represents more than 10% of the fair value of our total investments as of December 31, 2022 and 2021.
No single portfolio investment represented more than 10% of the fair value of our total investments as of December 31, 2023 and 2022.
As of December 31, 2022, our asset coverage ratio under our regulatory requirements as a BDC was 198.5% excluding our SBA debentures. Our exemptive order from the SEC allows us to exclude all SBA leverage from our asset coverage ratio.
As of December 31, 2023, our asset coverage ratio under our regulatory requirements as a BDC was 228.7% excluding our SBA debentures. Our exemptive order from the SEC allows us to exclude all SBA leverage from our asset coverage ratio.
Another financial measure that we monitor is the total return for our investors, which was approximately (10.1)% and 25.6% during the years ended December 31, 2022 and 2021, respectively.
Another financial measure that we monitor is the total return for our investors, which was approximately 42.0% and (10.1%) during the years ended December 31, 2023 and 2022, respectively.
Additionally, we had approximately $136.1 million of non-binding term sheets outstanding to four new companies and two existing companies, which generally convert to contractual commitments within approximately 90 days of signing.
Additionally, we had approximately $676.8 million of non-binding term sheets outstanding to seven new companies and two existing companies, which generally convert to contractual commitments within approximately 90 days of signing.
The decrease in fee income for year ended December 31, 2022 is primarily due to a decrease in the acceleration of unamortized fees, and one-time fees as a result of a lower volume of early repayments on our loan portfolio.
The increase in fee income for the year ended December 31, 2023 is primarily due to an increase in the acceleration of unamortized fees, and one-time fees as a result of a higher volume of early repayments on our loan portfolio.
In the years ended December 31, 2022 and December 31, 2021, we recorded approximately $20.5 million and $11.2 million of PIK income, respectively. 55 Portfolio Yield We report our financial results on a GAAP basis. We monitor the performance of our total investment portfolio and total debt portfolio using both GAAP and Non-GAAP financial measures.
During the years ended December 31, 2023 and December 31, 2022, we recorded approximately $24.7 million and $20.5 million of PIK income, respectively. Portfolio Yield We report our financial results on a GAAP basis. We monitor the performance of our total investment portfolio and total debt portfolio using both GAAP and Non-GAAP financial measures.
Fee Income Fee income from commitment, facility, and loan related fees for the year ended December 31, 2022 totaled approximately $14.4 million as compared to approximately $27.6 million for the year ended December 31, 2021.
Fee Income Fee income from commitment, facility and loan related fees for the year ended December 31, 2023 totaled approximately $26.3 million as compared to approximately $14.4 million for the year ended December 31, 2022.
As of December 31, 2022 and December 31, 2021, we had four and six equity investments representing approximately 39.8% and 49.6%, respectively, of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments.
As of December 31, 2023 and December 31, 2022, we had five and four equity investments representing approximately 56.5% and 39.8%, respectively, of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which includes securities of private U.S. companies, cash, cash equivalents, and high-quality debt investments that mature in one year or less.
For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which includes securities of private U.S. companies, cash, cash equivalents, and high-quality debt investments that mature in one year or less.
During the year ended December 31, 2022, our operating activities used $424.8 million of cash and cash equivalents, compared to $128.6 million provided during the year ended December 31, 2021.
During the year ended December 31, 2023, our operating activities provided $68.3 million of cash and cash equivalents, compared to $424.8 million used during the year ended December 31, 2022.
Under the terms of the Sharing Agreement, we allocate the related expenses of shared services to the Adviser Subsidiary. Our total net operating expenses for the years ended December 31, 2022 and 2021, are net of expenses allocated to the Adviser Subsidiary of $8.3 million and $5.0 million, respectively.
Under the terms of the Sharing Agreement, we allocate the related expenses of shared services to the Adviser Subsidiary. Our total net operating expenses for the years ended December 31, 2023 and 2022, are net of expenses alloc ated to the Adviser Subsidiary of $9.1 million and $8.3 million, respectively.
The 2022 Equity Distribution Agreement provides that we may offer and sell up to 17.5 million shares of our common stock from time to time through JMP or Jeffries, as our sales agents.
The 2023 Equity Distribution Agreement provides that we may offer and sell up to 25.0 million shares of our common stock from time to time through JMP or Jefferies, as our sales agents.
The Non-GAAP financial measures we present may not be comparable to similarly-named measures reported by other companies. 51 Overview We are a specialty finance company focused on providing senior secured loans to high-growth, innovative venture capital-backed and institutional-backed companies in a variety of technology, life sciences, and sustainable and renewable technology industries.
The Non-GAAP financial measures we present may not be comparable to similarly-named measures reported by other companies. 56 Table of Contents Overview We are a leading specialty finance company with a focus on providing financing solutions to high-growth and innovative venture capital-backed and institutional-backed companies in a variety of technology, life sciences, and sustainable and renewable technology industries.
As of December 31, 2022, we had $1,594.0 million of debt outstanding, none of which was due within the next year, $382.0 million being due within 1 to 3 years, and $1,212.0 million being due beyond 3 years. In addition to our debt obligations, in the normal course of business, we are party to financial instruments with off-balance sheet risk.
As of December 31, 2023, we had $1,570.0 million of debt outstanding, $105.0 million due within the next year, $689.0 million being due within 1 to 3 years, and $776.0 million being due beyond 3 years. In addition to our debt obligations, in the normal course of business, we are party to financial instruments with off-balance sheet risk.
Lastly, as of December 31, 2022, $10.1 million of cash was classified as restricted cash. Our restricted cash relates to amounts that are held as collateral securing certain of the Company’s financing transactions, including collections of interest and principal payments on assets that are securitized related to the 2031 Asset-Backed Notes.
Our restricted cash relates to amounts that are held as collateral securing certain of our financing transactions, including collections of interest and principal payments on assets that are securitized related to the 2031 Asset-Backed Notes.
These non-binding term sheets generally convert to contractual commitments in approximately 90 days from signing and some portion may be assigned or allocated to or directly originated by the Adviser Funds prior to or after closing. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.
These non-binding term sheets generally convert to contractual commitments in approximately 90 days from signing and some portion may be assigned or allocated to or directly originated by the Adviser Funds prior to or after closing.
Payments on PIK loans are normally received only in the event of payoffs. The PIK receivable for both December 31, 2022 and December 31, 2021, represented approximately 1% of total debt investments.
Payments on PIK loans are normally received only in the event of payoffs. The PIK receivable for December 31, 2023 and December 31, 2022 was approximately 1% and less than 1% of total debt investments, respectively.
The fair value of our unfunded commitments is considered to be immaterial as the yield determined at the time of underwriting is expected to be materially consistent with the yield upon funding, given that interest rates are generally pegged to market indices and given the existence of milestones, conditions and/or obligations imbedded in the borrowing agreements. 64 Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with U.S.
The fair value of our unfunded commitments is considered to be immaterial as the yield determined at the time of underwriting is expected to be materially consistent with the yield upon funding, given that interest rates are generally pegged to market indices and given the existence of milestones, conditions and/or obligations embedded in the borrowing agreements.
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 consolidated financial statements, and revenues and expenses during the period reported.
Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with U.S. 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 consolidated financial statements, and revenues and expenses during the period reported.
Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable, and escrow receivables) as of and for each of the years ended December 31, 2022, and 2021 was as follows: (in millions) December 31, 2022 December 31, 2021 Beginning portfolio $ 2,434.5 $ 2,354.1 New fundings and restructures 1,465.0 1,568.4 Fundings assigned to or directly funded by the Adviser Funds (1) (330.2 ) (226.4 ) Warrants not related to current period fundings 2.0 1.1 Principal payments received on investments (70.1 ) (80.9 ) Early payoffs (373.3 ) (1,104.1 ) Proceeds from sale of debt investments (84.0 ) — Proceeds from sale of equity investments (17.6 ) (111.2 ) Accretion of loan discounts and paid-in-kind principal 54.8 44.5 Net acceleration of loan discounts and loan fees due to early payoffs or restructures (17.7 ) (23.4 ) New loan fees (13.8 ) (17.2 ) Gain (loss) on investments due to sales or write offs (0.3 ) 24.7 Net change in unrealized appreciation (depreciation) (85.4 ) 4.9 Ending portfolio $ 2,963.9 $ 2,434.5 (1) Funded amounts include $193.2 million and $101.2 million of direct fundings of investments made by the Adviser Funds for the years ended December 31, 2022 and 2021, respectively.
Approximately $50.8 million of the aggregate principal repayments related to scheduled principal payments and approximately $925.1 million were early principal repayments related to 45 portfolio co mpanies. 58 Table of Contents Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable and escrow receivables) as of and for the years ended December 31, 2023 and December 31, 2022 was as follows: (in millions) December 31, 2023 December 31, 2022 Beginning Portfolio $ 2,963.9 $ 2,434.5 New fundings and restructures 1,598.6 1,465.0 Fundings assigned to or directly funded by the Adviser Funds (1) (350.7) (330.2) Warrants not related to current period fundings 1.3 2.0 Principal payments received on investments (50.8) (70.1) Early payoffs (925.1) (373.3) Proceeds from sale of debt investments (26.7) (84.0) Proceeds from sale of equity investments (43.2) (17.6) Accretion of loan discounts and paid-in-kind principal 59.5 54.8 Net acceleration of loan discounts and loan fees due to early payoffs or restructures (14.1) (17.7) New loan fees (13.5) (13.8) Gain (loss) on investments due to sales or write offs 6.0 (0.3) Net change in unrealized appreciation (depreciation) 42.8 (85.4) Ending Portfolio $ 3,248.0 $ 2,963.9 (1) Funded amounts include $338.6 million and $193.2 million of direct fundings of investments made by the Adviser Funds for the years ended December 31, 2023 and 2022, respectively.
The increase in expenses allocated to the Adviser Subsidiary is a result of higher average assets under management and higher allocations to the Adviser Funds. As of December 31, 2022 and 2021, $0.1 million and $0.1 million, respectively, was due from the Adviser Subsidiary.
The increase in expenses allocated to the Advise r Subsidiary for the year ended December 31, 2023 compared to 2022 is due to higher average assets under management and higher allocations to the Adviser Funds. As of December 31, 2023 and 2022, $0.1 million and $0.1 million, respectively, was due from the Adviser Subsidiary.
The following table summarizes the components of fee income for the years ended December 31, 2022 and December 31, 2021: (in thousands) Year Ended December 31, 2022 2021 Recurring fee income $ 7,834 $ 7,458 Accelerated fee income - expired commitments 1,502 3,031 Accelerated fee income - early repayments 5,094 17,127 Total fee income $ 14,430 $ 27,616 In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the years ended December 31, 2022 and 2021, respectively.
The following table summarizes the components of fee income for the years ended December 31, 2023 and December 31, 2022: (in thousands) Year Ended December 31, 2023 2022 Recurring fee income $ 8,835 $ 7,834 Fee income - expired commitments 1,695 1,502 Accelerated fee income - early repayments 15,713 5,094 Total fee income $ 26,243 $ 14,430 In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the years ended December 31, 2023 and 2022, respectively.
Refer to “Note 5 – Debt” and “Note 14 – Subsequent Events” included in the notes to our consolidated financial statements appearing elsewhere in this report for additional discussion.
Refer to “Note 5 – Debt” included in the notes to our consolidated financial statements appearing elsewhere in this report for additional discussion of our debt obligations.
As of December 31, 2022 and 2021, approximately 95.3% and 94.0%, respectively, of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime, LIBOR, SOFR, Eurodollar, or BSBY-based interest rate floor.
As of December 31, 2023 and 2022, approximately 95.9% and 95.3%, of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime, LIBOR, SOFR, Eurodollar, or BSBY-based interest rate floor, respectively. Note that as of December 31, 2023, no investments were priced using LIBOR based interest rates.
We may not apply the non-accrual status to a loan where the investment has sufficient collateral value to collect all of the contractual amount due and is in the process of collection. Interest collected on non-accrual investments are generally applied to principal.
We may not apply the non-accrual status to a loan where the investment has sufficient collateral value t o collect all of the contractual amount due and is in the process of collection.
As the impact of the macro-economic events, including the COVID-19 pandemic, the war in Ukraine, and the related disruption to markets and business continues to impact the economy, we will continue to evaluate our overall liquidity position and take proactive steps to maintain the appropriate liquidity position based upon the current circumstances.
As the impact of the macro-economic events, potential global recession, acts of terrorism, war, geopolitical events, and the related disruption to markets and business continues to impact the economy, we will continue to evaluate our overall liquidity position and take proactive steps to maintain the appropriate liquidity position based upon the current circumstances.
The following table shows the approximate increase (decrease) to the fair value of our debt investments from hypothetical change to the yield interest rates used for each valuation, assuming no other changes: (in thousands) Change in unrealized Basis Point Change appreciation (depreciation) (100) $ 38,253 (50) $ 19,378 50 $ (19,776 ) 100 $ (39,630 ) For a further discussion and disclosure of key inputs and considerations related to this estimate, refer to "Note 3 - Fair Value of Financial Instruments" included in the notes to our consolidated financial statements appearing elsewhere in this report. 65
The following table shows the approximate increase (decrease) to the fair value of our debt investments from hypothetical change to the yield interest rates used for each valuation, assuming no other changes: (in thousands) Change in unrealized appreciation (depreciation) Basis Point Change (100) $ 37,485 (50) $ 20,761 50 $ (20,945) 100 $ (42,223) For a further discussion and disclosure of key inputs and considerations related to this estimate, refer to "Note 3 -Fair Value of Financial Instruments" included in the notes.
During the year ended December 31, 2022, our financing activities provided $314.5 million of cash, compared to $229.9 million used during the year ended December 31, 2021.
During the year ended December 31, 2023, our financing activities provided $22.7 million of cash, compared to $314.5 million provided during the year ended December 31, 2022.
Prior to entering into a contractual commitment, we generally issue a non-binding term sheet to a prospective portfolio company. Non-binding term sheets are subject to completion of our due diligence and final investment committee approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies.
Non-binding term sheets are subject to completion of our due diligence and final investment committee approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies.
For the years ended December 31, 2022 and 2021, no dividends were declared by the Adviser Subsidiary.
For the years ended December 31, 2023 and 2022, $1.4 million and no dividends were declared by the Adviser Subsidiary, respectively.
The following table presents the fair value of the Company’s portfolio by industry sector as of December 31, 2022 and December 31, 2021: (in thousands) December 31, 2022 December 31, 2021 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio Drug Discovery & Development $ 1,150,707 38.8 % $ 967,383 39.7 % Software 798,264 26.9 % 585,622 24.1 % Consumer & Business Services 439,384 14.8 % 395,506 16.3 % Healthcare Services, Other 198,763 6.7 % 121,003 5.0 % All other industries (1) 376,837 12.8 % 365,008 14.9 % Total $ 2,963,955 100.0 % $ 2,434,522 100.0 % (1) See “Note 4 – Investments” for complete list of industry sectors and corresponding amounts of investments at fair value as a percentage of the total portfolio.
The following table presents the fair value of the Company’s portfolio by industry sector as of December 31, 2023 and December 31, 2022: (in thousands) December 31, 2023 December 31, 2022 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio Drug Discovery & Development $ 1,257,699 38.7 % $ 1,150,707 38.8 % Software 764,985 23.6 % 798,264 26.9 % Consumer & Business Services 525,973 16.2 % 439,384 14.8 % Healthcare Services, Other 300,079 9.3 % 198,763 6.7 % All other industries (1) 399,310 12.2 % 376,837 12.8 % Total $ 3,248,046 100.0 % $ 2,963,955 100.0 % (1) See “Note 4 – Investments” for complete list of industry sectors and corresponding amounts of investments at fair value as a percentage of the total portfolio.
During the year ended December 31, 2022, our investing activities used approximately $114 thousand of cash, compared to $106 thousand used during the year ended December 31, 2021. The $8 thousand increase in cash used by investing activities was due to an increase in purchases of capital equipment.
During the year ended December 31, 2023, our investing activities used approximately $887 thousand of cash, compared to $114 thousand used during the year ended December 31, 2022. The $773 thousand increase in cash used in investing activities was due to an increase in purchases of furniture, fixtures, and other capital equipment.
We may also raise additional equity or debt capital through registered offerings off a shelf registration, At-the-Market (“ATM”), and private offerings of securities, by securitizing a portion of our investments, or by borrowing from the SBA through our SBIC subsidiary. This “Financial Condition, Liquidity and Capital Resources” section should be read in conjunction with the “Macroeconomic Market Developments” section above.
We may also raise additional equity or debt capital through registered offerings off a shelf registration, At-the-Market (“ATM”), and private offerings of securities, by securitizing a portion of our investments, or by borrowing from the SBA through our SBIC subsidiary.
Interest income for the year ended December 31, 2022 totaled approximately $307.3 million as compared to approximately $253.4 million for the year ended December 31, 2021.
Interest and dividend income for the year ended December 31, 2023 totaled appro ximately $434.4 million as compared to approximately $307.3 million for the year ended December 31, 2022.
Expenses allocated to the Adviser Subsidiary In March 2021, we entered into a shared services agreement with the Adviser Subsidiary (the “Sharing Agreement”), pursuant to which the Adviser Subsidiary utilizes our human capital resources, including deal professional, finance, and administrative functions, as well as other resources including infrastructure assets such as office space and technology.
Expenses allocated to the Adviser Subsidiary The shared services agreement with the Adviser Subsidiary (the “Sharing Agreement”), provides the Adviser Subsidiary access to our human capital resources, including deal professionals, finance, and administrative functions, as well as other resources including infrastructure assets such as office space and technology.
As of December 31, 2022, we held warrants in 110 portfolio companies, with a fair value of approximately $30.6 million. The fair value of our warrant portfolio decreased by approximately $7.8 million, as compared to a fair value of $38.4 million as of December 31, 2021, primarily related to the decrease in fair value of the portfolio companies.
As of December 31, 2023, we held warrants in 103 portfolio companies, with a fair value of approximately $33.9 million. The fair value of our warrant portfolio increased by approximately $3.3 million, as compared to a fair value of $30.6 million as of December 31, 2022, primarily related to the decrease in fair value of the portfolio companies.
Employee Compensation Employee compensation and benefits totaled approximately $43.9 million for the year ended December 31, 2022, as compared to approximately $37.0 million for the year ended December 31, 2021. The increase between comparative periods was primarily due to increased variable compensation.
Employee Compensation Employee compensation and benefi ts totaled approximately $50.2 million for the year ended December 31, 2023, as compared to approximately $43.9 million fo r the year ended December 31, 2022. The increase between comparative periods was primarily due to increased headcount and variable compensation during the year ended December 31, 2023 .
A summary of net realized gains and losses for the years ended December 31, 2022 and 2021 is as follows: (in thousands) Year Ended December 31, 2022 2021 Realized gains $ 12,264 $ 91,617 Realized losses (11,798 ) (66,322 ) Realized foreign exchange gains (losses) 2,296 — Realized loss on debt extinguishment (3,686 ) (4,419 ) Net realized gains (losses) $ (924 ) $ 20,876 60 During the year ended December 31, 2022, we recognized net realized losses of $0.9 million.
A summary of net realized gains and losses for the years ended December 31, 2023 and 2022 is as follows: (in thousands) Year Ended December 31, 2023 2022 Realized gains $ 29,920 $ 12,264 Realized losses (21,493) (11,798) Realized foreign exchange gains (losses) 10 2,296 Realized loss on extinguishment of debt — (3,686) Net realized gains (losses) $ 8,437 $ (924) During the year ended December 31, 2023, we recognized a net realized gain of $8.4 million.
Equity Offerings We may from time-to-time issue and sell shares of our common stock through public or ATM offerings. We currently sell shares through our equity distribution agreement with JMP Securities LLC (“JMP”) and Jefferies LLC (“Jeffries”) (the “2022 Equity Distribution Agreement”).
Equity Offerings We may from time-to-time issue and sell shares of our common stock through public or ATM offerings. We currently sell shares through our equity distribution agreement with JMP Securities LLC (“JMP”) and Jefferies LLC 69 Table of Contents (“Jefferies”) (the “2023 Equity Distribution A greement”) entered into on May 5, 2023.
The reconciliation to calculate “Core investment income” from GAAP basis 'Total investment income' are as follows: (in thousands) For the year ended December 31, 2022 December 31, 2021 GAAP Basis: Total investment income $ 321,688 $ 280,976 Less: fee and income accelerations attributed to early payoffs, restructuring, loan modifications, and other one-time events except income from expired commitments (12,340 ) (32,420 ) Non-GAAP Basis: Core investment income $ 309,348 $ 248,556 We believe the Core Yield is useful for our investors as it provides the yield at which our debt investments are originated and eliminates one-off items that can fluctuate significantly from period to period, thereby allowing for a more meaningful comparison over time.
The reconciliation to calculate “Core investment income” from GAAP basis 'Total investment income' are as follows: (in thousands) Three Months Ended December 31, Year ended December 31, 2023 2022 2023 2022 GAAP Basis: Total investment income $ 122,603 $ 100,187 $ 460,668 $ 321,688 Less: fee and income accelerations attributed to early payoffs, restructuring, loan modifications, and other one-time events except income from expired commitments (8,138) (5,630) (38,324) (12,340) Non-GAAP Basis: Core investment income $ 114,465 $ 94,557 $ 422,344 $ 309,348 Less: bank interest income, dividend income, and other investment income from other assets (2,269) (296) (5,123) (667) Core investment income from debt portfolio $ 112,196 $ 94,261 $ 417,221 $ 308,681 We believe the Core Yield is useful for our investors as it provides the yield at which our debt investments are originated and eliminates one-off items that can fluctuate significantly from period to period, thereby allowing for a more meaningful comparison over time.
In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Item 1A—Risk Factors” and “Forward-Looking Statements” of this Item 7. Use of Non-GAAP Measures In Item 1.
Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Item 1A—Risk Factors” and under “Forward-Looking Statements” of this Item 7.
Results of Operations Our operating results for the years ended December 31, 2022 and 2021, were as follows: (in thousands, except per share data) Year Ended December 31, 2022 2021 Total investment income $ 321,688 $ 280,976 Total expenses 133,620 131,008 Net investment income 188,068 149,968 Net realized gain (loss): (924 ) 20,876 Net change in unrealized appreciation (depreciation): (85,063 ) 3,311 Net increase (decrease) in net assets resulting from operations $ 102,081 $ 174,155 Net investment income before gains and losses per common share: Basic $ 1.48 $ 1.29 Change in net assets resulting from operations per common share: Basic $ 0.80 $ 1.50 Diluted $ 0.79 $ 1.49 Our operating results can vary substantially from period to period due to various factors, including changes in the level of investments held, changes in our investment yields, recognition of realized gains and losses, and changes in net unrealized appreciation and depreciation, among other factors.
Interest collected on non-accrual investments are generally applied to principal. 63 Table of Contents Results of Operations Our condensed consolidated operating results for the years ended December 31, 2023 and 2022, were as follows: (in thousands, except per share data) Year Ended December 31, 2023 2022 Total investment income $ 460,668 $ 321,688 Total expenses 156,631 133,620 Net investment income 304,037 188,068 Net realized gain (loss): 8,437 (924) Net change in unrealized appreciation (depreciation): 25,010 (85,063) Net increase (decrease) in net assets resulting from operations $ 337,484 $ 102,081 Net investment income before gains and losses per common share: Basic $ 2.09 $ 1.48 Change in net assets resulting from operations per common share: Basic $ 2.32 $ 0.80 Diluted $ 2.31 $ 0.79 Our operating results can vary substantially from period to period due to various factors, including changes in the level of investments held, changes in our investment yields, recognition of realized gains and losses, and changes in net unrealized appreciation and depreciation, among other factors.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

8 edited+2 added−3 removed6 unchanged
Biggest changeBased on our Consolidated Statement of Assets and Liabilities as of December 31, 2022, 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 our investments and debt.
Biggest changeChanges in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. 71 Table of Contents Based on our Consolidated Statements of Assets and Liabilities as of December 31, 2023, 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 our investments and debt.
Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle fund investments. Our investment income will be affected by changes in various interest rates, including Prime, LIBOR, SOFR, Eurodollar, and BSBY rates, to the extent our debt investments include variable interest rates.
Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle fund investments. Our investment income will be affected by changes in various interest rates, including Prime, SOFR, and BSBY rates, to the extent our debt investments include variable interest rates.
For additional information regarding the interest rate associated with each of our debt borrowings, refer to “Note 5 – Debt” included in the notes to our consolidated financial statements in this report on Form 10-K. 66
For additional information regarding the interest rate associated with each of our debt borrowings, refer to “Note 5 – Debt” included in the notes to our consolidated financial statements in this report on Form 10-K. 72 Table of Contents
Item 7A. Q uantitative and Qualitative Disclosure About Market Risk We are subject to financial market risks, including changes in interest rates.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk We are subject to financial market risks, including changes in interest rates.
However, we may, in the future, hedge against interest rate fluctuations and foreign currency by using standard hedging instruments such as futures, options, and forward contracts.
From time-to-time, we may hedge against interest rate fluctuations and foreign currency by using standard hedging instruments such as futures, options, and forward contracts.
During the year ended December 31, 2022, we did not engage in interest rate or foreign currency hedging activities. Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio.
Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio.
As of December 31, 2022, approximately 95.3% of the loans in our portfolio had variable rates based on floating Prime, LIBOR, SOFR, Eurodollar, or BSBY rates with a floor.
As of December 31, 2023, approximately 95.9% of the loans in our portfolio had variable rates based on floating Prime, SOFR, or BSBY rates with a floor. The majority of our loans are linked to the Prime rate and comprise 69.2% of the loan portfolio as of December 31, 2023.
Our debt borrowings under the Credit Facilities bear interest at a floating rate, all other outstanding debt borrowings bear interest at a fixed rate. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio.
Our debt borrowings under the Credit Facilities bear interest at a floating rate, all other outstanding debt borrowings bear interest at a fixed rate.
Removed
As of December 31, 2022, approximately 10.2% of our debt investments have variable rates based on LIBOR and 13.3% of our debt investments have variable rates based on SOFR, BSBY, or Eurodollar rates. Additionally, all of our LIBOR rate based debt securities have interest rate floors.
Added
(in thousands) Basis Point Change Interest Income Interest Expense Net Income EPS (200) $(41,785) $(4,207) $(37,578) $(0.25) (100) $(22,230) $(2,103) $(20,127) $(0.13) (75) $(17,271) $(1,578) $(15,693) $(0.10) (50) $(11,759) $(1,052) $(10,707) $(0.07) (25) $(6,075) $(526) $(5,549) $(0.04) 25 $6,408 $526 $5,882 $0.04 50 $12,815 $1,052 $11,763 $0.08 75 $19,183 $1,578 $17,605 $0.12 We generally do not engage in hedging activities.
Removed
We are actively considering and discussing the preferred alternative benchmark with our portfolio companies and prioritize the inclusion of LIBOR fallback language in our documentation. The Alternative Reference Rates Committee ("ARRC") has recommended for US based debt securities to use the SOFR rate as the alternative benchmark.
Added
During the year ended December 31, 2023, we have entered into a foreign currency forward to limit our foreign currency exposure with respect to the British Pound. For additional information refer to “Note 4 – Investments”, included in the notes to our consolidated financial statements appearing elsewhere in this report.
Removed
(in thousands) Basis Point Change Interest Income Interest Expense Net Income EPS (75) (18,661 ) (1,215 ) (17,446 ) (0.13 ) (50) (12,441 ) (810 ) (11,631 ) (0.09 ) (25) (6,176 ) (405 ) (5,771 ) (0.04 ) 25 6,176 405 5,771 0.04 50 12,352 810 11,542 0.09 75 18,528 1,215 17,313 0.13 100 24,644 1,619 23,025 0.18 200 48,748 3,239 45,509 0.35 We do not currently engage in any hedging activities.

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