UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 814-00702
HERCULES CAPITAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
74-3113410
(State or Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification Number)
400 Hamilton Ave., Suite 310
Palo Alto, California
(Address of Principal Executive Offices)
94301
(Zip Code)
(650) 289-3060
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, par value $0.001 per share
HTGC
New York Stock Exchange
6.25% Notes due 2033
HCXY
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On October 27, 2022, there were 130,149,104 shares outstanding of the Registrant’s common stock, $0.001 par value.
FORM 10-Q TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
3
Item 1.
Consolidated Financial Statements
Consolidated Statements of Assets and Liabilities as of September 30, 2022 (unaudited) and December 31, 2021
Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (unaudited)
4
Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2022 and 2021 (unaudited)
5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)
6
Consolidated Schedule of Investments as of September 30, 2022 (unaudited)
7
Consolidated Schedule of Investments as of December 31, 2021
18
Notes to Consolidated Financial Statements (unaudited)
29
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
60
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
76
Item 4.
Controls and Procedures
77
PART II. OTHER INFORMATION
78
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
79
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits and Financial Statement Schedules
80
SIGNATURES
85
PART I: FINANCIAL INFORMATION
In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Capital, Inc., its wholly owned subsidiaries, and its affiliated securitization trust unless the context otherwise requires.
ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except per share data)
September 30, 2022
December 31, 2021
(unaudited)
Assets
Investments, at fair value:
Non-control/Non-affiliate investments (cost of $2,782,220 and $2,293,398, respectively)
$
2,745,413
2,351,560
Control investments (cost of $87,249 and $84,039, respectively)
80,325
73,504
Affiliate investments (cost of $0 and $13,547, respectively)
—
9,458
Total investments, at fair value (cost of $2,869,469 and $2,390,984, respectively; fair value amounts related to a VIE $236,826 and $0, respectively)
2,825,738
2,434,522
Cash and cash equivalents
57,065
133,115
Restricted cash (amounts related to a VIE $8,346 and $0, respectively)
8,346
3,150
Interest receivable
25,494
17,365
Right of use asset
5,672
6,761
Other assets
2,207
5,100
Total assets
2,924,522
2,600,013
Liabilities
Debt (net of debt issuance costs - Note 5; amounts related to a VIE $147,810 and $0, respectively)
1,521,220
1,236,303
Accounts payable and accrued liabilities
34,492
47,781
Operating lease liability
6,092
7,382
Total liabilities
1,561,804
1,291,466
Net assets consist of:
Common stock, par value
131
117
Capital in excess of par value
1,288,341
1,091,907
Total distributable earnings
74,246
216,523
Total net assets
1,362,718
1,308,547
Total liabilities and net assets
Shares of common stock outstanding ($0.001 par value and 200,000 authorized)
130,191
116,619
Net asset value per share
10.47
11.22
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
Investment income:
Interest income:
Non-control/Non-affiliate investments
80,146
62,239
207,747
185,497
Control investments
1,181
1,072
3,440
2,900
Affiliate investments
81
1
1,204
Total interest income
81,408
63,312
212,391
188,400
Fee income:
2,803
6,861
9,059
20,068
20
51
43
Total fee income
2,821
6,881
9,110
20,111
Total investment income
84,229
70,193
221,501
208,511
Operating expenses:
Interest
14,499
13,069
38,844
42,309
Loan fees
2,183
1,674
5,517
6,694
General and administrative
4,364
4,085
12,504
11,749
Tax expenses
1,602
2,395
4,135
5,579
Employee compensation:
Compensation and benefits
10,968
8,898
30,357
27,051
Stock-based compensation
2,474
3,320
10,559
8,990
Total employee compensation
13,442
12,218
40,916
36,041
Total gross operating expenses
36,090
33,441
101,916
102,372
Expenses allocated to the Adviser Subsidiary
(1,863
)
(1,337
(6,335
(3,474
Total net operating expenses
34,227
32,104
95,581
98,898
Net investment income
50,002
38,089
125,920
109,613
Net realized gain (loss) and net change in unrealized appreciation (depreciation):
Net realized gain (loss):
7,303
22,813
2,703
78,444
(2,014
1,758
(62,143
Loss on debt extinguishment
(1,702
(3,686
Total net realized gain (loss)
5,289
21,111
775
14,599
Net change in unrealized appreciation (depreciation):
(4,149
(31,759
(94,847
(10,662
(2,571
(3,774
3,611
(7,327
4,631
(118
4,089
64,220
Total net change in unrealized appreciation (depreciation)
(2,089
(35,651
(87,147
46,231
Total net realized gain (loss) and net change in unrealized appreciation (depreciation)
3,200
(14,540
(86,372
60,830
Net increase (decrease) in net assets resulting from operations
53,202
23,549
39,548
170,443
Net investment income before investment gains and losses per common share:
Basic
0.39
0.33
1.01
0.95
Change in net assets resulting from operations per common share:
0.41
0.20
0.31
1.47
Diluted
0.30
1.46
Weighted average shares outstanding
127,484
114,805
123,379
114,590
129,334
116,239
124,767
115,550
Distributions paid per common share:
0.50
1.15
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(amounts in thousands)
Capital in
Distributable
Common Stock
excess
Earnings
Net
For the Three Months Ended September 30, 2022
Shares
Par Value
of par value
(loss)
Balance as of June 30, 2022
127,285
128
1,242,618
84,994
1,327,740
Public offering, net of offering expenses
2,866
42,851
42,854
Issuance of common stock due to stock option exercises
22
266
Retired shares from net issuance
(12
(176
Issuance of common stock under restricted stock plan
23
Retired shares for restricted stock vesting
(56
(662
Distributions reinvested in common stock
63
949
Distributions
(63,950
Stock-based compensation (1)
2,495
Balance as of September 30, 2022
For the Nine Months Ended September 30, 2022
Balance as of December 31, 2021
11,787
12
189,946
189,958
59
720
(14
(208
811
(1
(236
(5,250
184
2,895
Issuance of common stock from conversion of 2022 Convertible Notes
981
(181,825
8,333
For the Three Months Ended September 30, 2021
Balance as of June 30, 2021
115,867
116
1,163,910
192,332
1,356,358
(10
14
180
(3
(52
38
(46
(872
55
947
(45,190
2,622
Balance as of September 30, 2021
115,925
1,166,725
170,691
1,337,532
For the Nine Months Ended September 30, 2021
Balance as of December 31, 2020
114,726
115
1,158,198
133,391
1,291,704
277
3,813
(65
(1,141
998
(200
(4,778
189
3,057
(133,143
7,785
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
Cash flows used in operating activities:
Adjustments to reconcile net increase in net assets resulting fromoperations to net cash provided by (used in) operating activities:
Purchases of investments
(1,097,812
(1,033,189
Fundings assigned to Adviser Funds
247,848
107,793
Principal and fee repayments received and proceeds from the sale of debt investments
378,109
738,321
Proceeds from the sale of equity investments
14,303
98,567
Net unrealized (appreciation) depreciation
87,147
(46,231
Net realized (gain) loss on investments
(4,461
(16,301
Accretion of paid-in-kind principal
(14,888
(8,105
Accretion of loan discounts
(2,996
(2,737
Accretion of loan discount on convertible notes
112
504
Accretion of loan exit fees
364
(17,364
Change in loan income, net of collections
(18,398
21,730
Unearned fees related to unfunded commitments
19,412
(2,367
Realized loss on debt extinguishment
3,378
1,702
Amortization of debt issuance costs
4,051
4,957
Depreciation and amortization
160
255
Stock-based compensation and amortization of restricted stock grants (1)
Change in operating assets and liabilities:
(8,039
1,218
(1,196
2,380
Accrued liabilities
(14,856
(680
Net cash provided by (used in) operating activities
(359,881
28,681
Cash flows used in investing activities:
Purchases of capital equipment
(86
Net cash used in investing activities
Cash flows provided by (used in) financing activities:
Issuance of common stock
192,011
Offering expenses
(2,053
Retirement of employee shares, net
(4,738
(2,106
Distributions paid
(178,930
(130,086
Issuance of debt
1,169,237
1,396,406
Repayment of debt
(878,198
(1,272,712
Debt issuance costs
(6,581
(4,830
Fees paid for credit facilities and debentures
(1,635
(3,395
Net cash provided by (used in) financing activities
289,113
(16,931
Net increase (decrease) in cash, cash equivalents, and restricted cash
(70,854
11,738
Cash, cash equivalents, and restricted cash at beginning of period
136,265
237,622
Cash, cash equivalents, and restricted cash at end of period
65,411
249,360
Supplemental disclosures of cash flow information and non-cash investing and financing activities:
Interest paid
44,382
44,985
Income tax, including excise tax, paid
7,341
3,731
Distributions reinvested
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Statements of Assets and Liabilities that sum to the total of the same such amounts in the Consolidated Statements of Cash Flows:
(Dollars in thousands)
235,851
Restricted cash
13,509
Total cash, cash equivalents, and restricted cash presented in the Consolidated Statements of Cash Flows
See “Note 2 – Summary of Significant Accounting Policies” for a description of restricted cash and cash equivalents.
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2022 (unaudited)
(dollars in thousands)
Portfolio Company
Type of Investment
Maturity Date
Interest Rate and Floor (1)
PrincipalAmount
Cost (2)
Value
Footnotes
Debt Investments
Communications & Networking
1-5 Years Maturity
Aryaka Networks, Inc.
Senior Secured
July 2026
PRIME + 3.25%, Floor rate 6.75%, PIK Interest 1.05%, 3.55% Exit Fee
5,009
4,943
(14)(17)(19)
Cytracom Holdings LLC
February 2025
3-Month LIBOR + 9.31%, Floor rate 10.31%
8,933
8,776
8,728
(11)(17)(18)
Rocket Lab Global Services, LLC
June 2024
PRIME + 4.90%, Floor rate 8.15%, PIK Interest 1.25%, 3.20% Exit Fee
84,314
84,877
87,283
(11)(12)(13)(14)(16)
Subtotal: 1-5 Years Maturity
98,596
100,954
Subtotal: Communications & Networking (7.41%)*
Consumer & Business Products
Grove Collaborative, Inc.
April 2025
PRIME + 5.50%, Floor rate 8.75%, 8.75% Exit Fee
23,520
23,774
24,190
(19)
Subtotal: Consumer & Business Products (1.78%)*
Diversified Financial Services
Gibraltar Business Capital, LLC
Unsecured
September 2026
FIXED 14.50%
15,000
14,701
13,033
(7)
FIXED 11.50%
10,000
9,844
9,006
Total Gibraltar Business Capital, LLC
25,000
24,545
22,039
Hercules Adviser LLC
June 2025
FIXED 5.00%
12,000
36,545
34,039
Subtotal: Diversified Financial Services (2.50%)*
Drug Discovery & Development
Under 1 Year Maturity
Chemocentryx, Inc.
December 2022
PRIME + 3.30%, Floor rate 8.05%, 6.25% Exit Fee
11,451
12,677
12,780
(10)(13)
Nabriva Therapeutics
June 2023
PRIME + 4.30%, Floor rate 9.80%, 9.95% Exit Fee
3,077
3,701
3,313
(5)(10)(13)
Subtotal: Under 1 Year Maturity
16,378
16,093
Akero Therapeutics, Inc.
January 2027
PRIME + 3.65%, Floor rate 7.65%, 5.85% Exit Fee
5,000
4,966
4,983
(10)(17)
Aldeyra Therapeutics, Inc.
October 2023
PRIME + 3.10%, Floor rate 8.60%, 6.95% Exit Fee
15,817
15,608
(11)
Alladapt Immunotherapeutics Inc.
PRIME + 3.65%, Floor rate 8.40%, Cap rate 10.90%, 5.30% Exit Fee
14,858
(17)
Applied Genetic Technologies Corporation
April 2024
PRIME + 6.50%, Floor rate 9.75%, 6.95% Exit Fee
15,609
16,450
16,308
(13)
ATAI Life Sciences N.V.
August 2026
PRIME + 4.55%, Floor rate 8.55%, 6.95% Exit Fee
10,500
10,467
(5)(10)(17)
Aveo Pharmaceuticals, Inc.
September 2024
PRIME + 6.40%, Floor rate 9.65%, Cap rate 15.00%, 6.95% Exit Fee
40,000
41,439
41,374
(11)(15)
Axsome Therapeutics, Inc.
October 2026
PRIME + 5.70%, Floor rate 8.95%, Cap rate 10.70%, 5.31% Exit Fee
81,725
81,388
79,295
(10)(11)(12)(16)(17)
Bicycle Therapeutics PLC
July 2025
PRIME + 4.55%, Floor rate 8.05%, Cap rate 9.05%, 5.00% Exit Fee
11,500
11,724
11,619
(5)(10)(11)(12)
BiomX, INC
September 2025
PRIME + 5.70%, Floor rate 8.95%, 6.55% Exit Fee
9,000
9,125
9,004
(5)(10)(11)
BridgeBio Pharma, Inc.
November 2026
FIXED 9.00%, 2.00% Exit Fee
37,022
36,694
33,561
(12)(13)(14)
Cellarity, Inc.
June 2026
PRIME + 5.70%, Floor rate 8.95%, 3.75% Exit Fee
30,000
29,734
29,943
(13)(15)
Century Therapeutics, Inc.
PRIME + 6.30%, Floor rate 9.55%, 3.95% Exit Fee
10,197
10,261
PRIME + 3.25%, Floor rate 8.50%, 7.15% Exit Fee
5,214
5,408
Codiak Biosciences, Inc.
October 2025
PRIME + 5.00%, Floor rate 8.25%, 5.50% Exit Fee
25,681
25,076
Corium, Inc.
PRIME + 5.70%, Floor rate 8.95%, 7.75% Exit Fee
132,675
133,069
135,828
(13)(16)
Eloxx Pharmaceuticals, Inc.
PRIME + 6.25%, Floor rate 9.50%, 6.55% Exit Fee
12,500
12,673
12,408
(15)
enGene, Inc.
PRIME + 5.00%, Floor rate 8.25%, 6.35% Exit Fee
11,000
10,994
10,918
Finch Therapeutics Group, Inc.
PRIME + 4.05%, Floor rate 7.55%, Cap rate 8.80%, 5.50% Exit Fee
14,958
14,241
G1 Therapeutics, Inc.
PRIME + 5.90%, Floor rate 9.15%, 9.86% Exit Fee
58,125
58,472
58,006
(11)(12)(15)(17)
Geron Corporation
October 2024
PRIME + 5.75%, Floor rate 9.00%, 6.55% Exit Fee
18,500
19,003
19,059
(10)(12)(13)
Gritstone Bio, Inc.
July 2027
PRIME + 3.15%, Floor rate 7.15%, Cap rate 8.65%, PIK Interest 2.00%, 5.75% Exit Fee
15,037
14,989
(14)(17)
Hibercell, Inc.
May 2025
PRIME + 5.40%, Floor rate 8.65%, 4.95% Exit Fee
17,000
17,244
17,225
HilleVax, Inc.
May 2027
PRIME + 1.05%, Floor rate 4.55%, Cap rate 6.05%, PIK Interest 2.85%, 7.15% Exit Fee
4,043
4,044
(14)(15)(17)
Iveric Bio Gene Therapy LLC
August 2027
PRIME + 4.00%, Floor rate 8.75%, Cap rate 10.25%, 4.25% Exit Fee
24,750
24,530
24,531
Locus Biosciences, Inc.
PRIME + 6.10%, Floor rate 9.35%, 4.95% Exit Fee
8,000
8,084
8,062
Madrigal Pharmaceutical, Inc.
May 2026
PRIME + 3.95%, Floor rate 7.45%, 5.35% Exit Fee
34,000
33,807
(10)
Phathom Pharmaceuticals, Inc.
PRIME + 2.25%, Floor rate 5.50%, PIK Interest 3.35%, 7.50% Exit Fee
93,978
93,948
94,006
(10)(12)(14)(15)(16)(17)(22)
Provention Bio, Inc.
PRIME + 2.70%, Floor rate 8.20%, 6.60% Exit Fee
24,552
Redshift Bioanalytics, Inc.
January 2026
PRIME + 4.25%, Floor rate 7.50%, 3.80% Exit Fee
4,936
4,935
Scynexis, Inc.
March 2025
PRIME + 5.80%, Floor rate 9.05%, 3.95% Exit Fee
18,667
18,592
18,524
(12)(13)
Seres Therapeutics, Inc.
PRIME + 6.40%, Floor rate 9.65%, 4.98% Exit Fee
37,500
38,509
38,657
Tarsus Pharmaceuticals, Inc.
February 2027
PRIME + 5.20%, Floor rate 8.45%, 4.75% Exit Fee
8,250
8,255
8,388
(10)(13)(17)
TG Therapeutics, Inc.
PRIME + 2.15%, Floor rate 5.40%, PIK Interest 3.45%, 5.95% Exit Fee
47,567
47,267
47,137
(10)(11)(12)(14)
uniQure B.V.
December 2025
PRIME + 4.70%, Floor rate 7.95%, 7.28% Exit Fee
70,000
72,015
73,205
(5)(10)(11)(12)(16)
Unity Biotechnology, Inc.
August 2024
PRIME + 6.10%, Floor rate 9.35%, 6.25% Exit Fee
20,000
20,990
20,844
Valo Health, LLC
May 2024
PRIME + 6.45%, Floor rate 9.70%, 3.85% Exit Fee
9,583
9,805
9,760
(11)(13)
Viridian Therapeutics, Inc.
PRIME + 4.20%, Floor rate 7.45%, Cap rate 8.95%, 4.76% Exit Fee
2,000
2,004
1,969
X4 Pharmaceuticals, Inc.
July 2024
PRIME + 3.75%, Floor rate 8.75%, 8.80% Exit Fee
32,500
33,464
33,291
(11)(12)(13)
1,039,957
1,036,151
Subtotal: Drug Discovery & Development (77.22%)*
1,056,335
1,052,244
Healthcare Services, Other
Better Therapeutics, Inc.
August 2025
PRIME + 5.70%, Floor rate 8.95%, 5.95% Exit Fee
12,093
11,996
Blue Sprig Pediatrics, Inc.
1-Month LIBOR + 5.00%, Floor rate 6.00%, PIK Interest 4.45%
40,949
40,403
39,332
(11)(13)(14)(17)
Carbon Health Technologies, Inc.
PRIME + 5.60%, Floor rate 8.85%, 4.61% Exit Fee
46,125
46,399
46,158
(11)(12)(13)(17)(19)
Elation Health, Inc.
March 2026
PRIME + 4.25%, Floor rate 9.00%, PIK Interest 1.95%, 3.95% Exit Fee
4,796
4,795
(17)(19)
Equality Health, LLC
February 2026
PRIME + 6.25%, Floor rate 9.50%, PIK Interest 1.55%
53,388
52,928
53,644
(12)(14)
156,619
155,925
Greater than 5 Years Maturity
Oak Street Health, Inc.
October 2027
PRIME + 2.45%, Floor rate 7.95%, Cap rate 9.45%, PIK Interest 1.00%
44,250
43,955
Subtotal: Greater than 5 Years Maturity
Subtotal: Healthcare Services, Other (14.67%)*
200,574
199,880
8
Information Services
Capella Space Corp.
November 2024
PRIME + 5.00%, Floor rate 8.25%, PIK Interest 1.10%, 7.00% Exit Fee
20,193
20,302
20,219
(14)(15)(19)
Signal Media Limited
PRIME + 5.50%, Floor rate 9.00%, Cap rate 12.00%, 3.45% Exit Fee
750
739
Yipit, LLC
1-Month LIBOR + 9.08%, Floor rate 10.08%
31,875
31,345
30,782
(17)(18)
52,386
51,740
Subtotal: Information Services (3.80%)*
Internet Consumer & Business Services
Nextroll, Inc.
July 2023
PRIME + 3.75%, Floor rate 7.75%, PIK Interest 2.95%, 1.95% Exit Fee
22,046
21,952
SeatGeek, Inc.
PRIME + 5.00%, Floor rate 10.50%, PIK Interest 0.50%
60,838
60,529
82,481
AppDirect, Inc.
April 2026
PRIME + 5.50%, Floor rate 8.75%, 9.70% Exit Fee
30,790
31,733
31,991
(12)(17)
Carwow LTD
December 2024
PRIME + 4.70%, Floor rate 7.95%, PIK Interest 1.45%, 4.95% Exit Fee
£
18,798
25,845
21,021
(5)(10)(14)
Convoy, Inc.
PRIME + 3.20%, Floor rate 6.45%, PIK Interest 1.95%, 4.55% Exit Fee
73,623
72,447
73,092
(14)(16)(19)
LogicSource
3-Month SOFR + 8.93%, Floor rate 9.93%
13,300
13,017
Jobandtalent USA, Inc.
1-Month SOFR + 8.86%, Floor rate 9.75%, 3.00% Exit Fee
14,000
13,802
13,865
(5)(10)
Rhino Labs, Inc.
March 2024
PRIME + 5.50%, Floor rate 8.75%, PIK Interest 2.25%
16,407
16,180
16,331
(14)(15)
RVShare, LLC
December 2026
3-Month LIBOR + 5.50%, Floor rate 6.50%, PIK Interest 4.00%
20,489
20,138
20,130
(13)(14)(15)(17)
Salary.com, LLC
September 2027
6-Month SOFR + 8.00%, Floor rate 9.00%
18,000
17,640
(18)
PRIME + 7.00%, Floor rate 10.50%, PIK Interest 0.50%
25,040
24,869
25,591
Skyword, Inc.
PRIME + 3.88%, Floor rate 9.38%, PIK Interest 1.90%, 4.00% Exit Fee
12,607
12,922
12,708
(13)(14)
Tectura Corporation
PIK Interest 5.00%
10,680
240
(7)(8)(14)
FIXED 8.25%
13,023
68
Total Tectura Corporation
31,953
21,513
8,318
Thumbtack, Inc.
PRIME + 4.95%, Floor rate 8.95%, PIK Interest 1.50%, 3.95% Exit Fee
10,065
9,985
9,938
(12)(14)(17)
Veem, Inc.
PRIME + 4.00%, Floor rate 7.25%, PIK Interest 1.25%, 4.50% Exit Fee
5,027
4,959
4,967
PRIME + 4.70%, Floor rate 7.95%, PIK Interest 1.50%, 4.50% Exit Fee
5,014
4,932
5,055
Total Veem, Inc.
10,041
9,891
10,022
Worldremit Group Limited
3-Month LIBOR + 9.25%, Floor rate 10.25%, 3.00% Exit Fee
94,500
94,115
92,293
(5)(10)(11)(12)(16)(19)
384,097
365,957
Houzz, Inc.
Convertible Debt
May 2028
PIK Interest 5.50%
21,252
20,354
(9)(14)
Subtotal: Internet Consumer & Business Services (34.40%)*
487,830
468,792
Manufacturing Technology
Bright Machines, Inc.
November 2022
PRIME + 5.70%, Floor rate 8.95%, 6.95% Exit Fee
15,902
16,045
(11)(19)
MacroFab, Inc.
PRIME + 4.35%, Floor rate 7.60%, PIK Interest 1.25%, 4.50% Exit Fee
17,083
16,616
16,469
Ouster, Inc.
PRIME + 6.15%, Floor rate 9.40%, 7.45% Exit Fee
7,000
6,981
7,040
23,597
23,509
Subtotal: Manufacturing Technology (2.90%)*
39,499
39,554
9
Medical Devices & Equipment
Lucira Health, Inc.
PRIME + 5.50%, Floor rate 8.75%, 5.25% Exit Fee
14,927
14,835
Subtotal: Medical Devices & Equipment (1.09%)*
Semiconductors
Fungible, Inc.
PRIME + 5.00%, Floor rate 8.25%, 4.95% Exit Fee
19,492
19,647
(15)(19)
Subtotal: Semiconductors (1.44%)*
Software
Kazoo, Inc. (p.k.a. YouEarnedIt, Inc.)
3-Month SOFR + 10.15%, Floor rate 11.15%
10,819
10,691
3GTMS, LLC
3-Month LIBOR + 9.28%, Floor rate 10.28%
10,808
10,660
10,496
Agilence, Inc.
1-Month BSBY + 9.00%, Floor rate 10.00%
9,330
9,100
8,880
(12)(17)(18)
Annex Cloud
8,500
8,282
8,148
(13)(17)
Automation Anywhere, Inc.
PRIME + 4.25%, Floor rate 9.00%, 2.50% Exit Fee
19,600
19,008
Brain Corporation
PRIME + 3.70%, Floor rate 6.95%, PIK Interest 1.00%, 3.95% Exit Fee
20,116
20,101
20,196
Campaign Monitor Limited
November 2025
3-Month SOFR + 8.90%, Floor rate 9.90%
33,000
32,546
32,944
(13)(19)
Catchpoint Systems, Inc.
3-Month SOFR + 8.76%, Floor rate 9.76%
10,200
10,034
10,043
Ceros, Inc.
6-month LIBOR + 8.89%, Floor rate 9.89%
19,855
19,420
19,482
CloudBolt Software, Inc.
PRIME + 6.70%, Floor rate 9.95%, 3.45% Exit Fee
10,021
10,014
(11)(12)(19)
Constructor.io Corporation
1-Month SOFR + 8.44%, Floor rate 9.44%
4,688
4,569
Copper CRM, Inc
PRIME + 4.50%, Floor rate 8.25%, Cap rate 10.25%, PIK Interest 1.95%, 4.50% Exit Fee
10,095
10,058
9,882
(11)(14)
Cutover, Inc.
PRIME + 5.20%, Floor rate 9.95%, 4.95% Exit Fee
4,927
Cybermaxx Intermediate Holdings, Inc.
6-month LIBOR + 9.28%, Floor rate 10.28%
7,980
7,808
7,732
Dashlane, Inc.
PRIME + 3.05%, Floor rate 7.55%, PIK Interest 1.10%, 4.95% Exit Fee
31,841
32,186
31,580
(11)(13)(14)(17)(19)
Demandbase, Inc.
PRIME + 2.25%, Floor rate 5.50%, PIK Interest 3.00%, 5.00% Exit Fee
28,288
28,010
28,187
(13)(14)(17)(19)
Eigen Technologies Ltd.
PRIME + 5.10%, Floor rate 8.35%, 2.95% Exit Fee
3,750
3,730
3,726
Enmark Systems, Inc.
3-Month LIBOR + 6.83%, Floor rate 7.83%, PIK Interest 2.19%
8,178
8,001
7,948
(11)(14)(17)(18)
Esentire, Inc.
3-Month LIBOR + 9.96%, Floor rate 10.96%
8,468
8,380
8,425
(5)(10)(11)(18)
Esme Learning Solutions, Inc.
PRIME + 5.50%, Floor rate 8.75%, PIK Interest 1.50%, 3.00% Exit Fee
5,045
4,890
4,270
(14)
Gryphon Networks Corp.
1-Month LIBOR + 9.69%, Floor rate 10.69%
5,232
5,125
5,258
(11)(17)
Ikon Science Limited
3-Month Eurodollar + 9.00%, Floor rate 10.00%
6,650
6,510
6,572
(5)(10)(17)(18)
10
Imperva, Inc.
3-Month LIBOR + 7.75%, Floor rate 8.75%
19,869
Khoros (p.k.a Lithium Technologies)
January 2024
3-Month SOFR + 8.00%, Floor rate 9.00%
56,208
56,028
55,958
Logicworks
PRIME + 7.50%, Floor rate 10.75%
14,500
14,373
14,356
(12)
Mixpanel, Inc.
PRIME + 4.70%, Floor rate 7.95%, PIK Interest 1.80%, 3.00% Exit Fee
20,713
20,755
21,554
(14)(19)
Mobile Solutions Services
3-Month LIBOR + 9.06%, Floor rate 10.06%
17,668
17,283
16,984
Nuvolo Technologies Corporation
PRIME + 5.25%, Floor rate 8.50%, 2.04% Exit Fee
17,500
17,525
17,586
(12)(13)(17)(19)
Omeda Holdings, LLC
3-Month SOFR + 8.05%, Floor rate 9.05%
7,500
7,251
Pollen, Inc.
November 2023
PRIME + 4.75%, Floor rate 8.00%, PIK Interest 0.50%, 4.50% Exit Fee
7,486
7,657
7,975
PRIME + 5.25%, Floor rate 8.50%, PIK Interest 1.35%, 4.50% Exit Fee
13,176
13,373
14,039
Total Pollen, Inc.
20,662
21,030
22,014
Riviera Partners LLC
April 2027
6 Month SOFR + 7.53%, Floor rate 8.53%
26,184
25,595
ShadowDragon, LLC
3-Month LIBOR + 9.00%, Floor rate 10.00%
6,000
5,849
5,780
Tact.ai Technologies, Inc.
February 2024
PRIME + 4.00%, Floor rate 8.75%, PIK Interest 2.00%, 5.50% Exit Fee
5,213
4,885
ThreatConnect, Inc.
11,060
10,791
10,832
Udacity, Inc.
PRIME + 4.50%, Floor rate 7.75%, PIK Interest 2.00%, 3.00% Exit Fee
51,675
51,851
52,330
VideoAmp, Inc.
PRIME + 3.70%, Floor rate 6.95%, PIK Interest 1.25%, 5.25% Exit Fee
62,987
62,056
62,467
Zimperium, Inc.
3-Month SOFR + 8.31%, Floor rate 9.31%
16,313
15,984
614,819
615,863
Alchemer LLC
1-Month SOFR + 7.89%, Floor rate 8.89%
15,125
14,778
Dispatch Technologies, Inc.
April 2028
1-Month SOFR + 8.01%, Floor rate 8.76%
7,288
22,066
Subtotal: Software (47.60%)*
647,576
648,620
Sustainable and Renewable Technology
Ampion, PBC
PRIME + 4.70%, Floor rate 7.95%, PIK Interest 1.45%, 3.95% Exit Fee
4,022
3,953
3,943
Pineapple Energy LLC
PIK Interest 10.00%
3,156
2,961
7,109
6,904
Subtotal: Sustainable and Renewable Technology (0.51%)*
Total: Debt Investments (195.30%)*
2,684,643
2,661,399
11
Type ofInvestment
Acquisition Date (4)
Series (3)
Equity Investments
Equity
4/30/2021
61,300
433
127
(4)(20)
TechStyle, Inc.
4/30/2010
42,989
58
Subtotal: Consumer & Business Products (0.01%)*
561
185
3/1/2018
830,000
1,884
1,134
Preferred Series A
10,602,752
26,122
14,489
11,432,752
28,006
15,623
3/26/2021
Member Units
35
21,945
Newfront Insurance Holdings, Inc.
9/30/2021
Preferred Series D-2
210,282
403
454
Subtotal: Diversified Financial Services (2.79%)*
28,444
38,022
Drug Delivery
AcelRx Pharmaceuticals, Inc.
12/10/2018
176,730
1,329
37
(4)
Aytu BioScience, Inc.
3/28/2014
13,600
1,500
BioQ Pharma Incorporated
12/8/2015
Preferred Series D
165,000
500
PDS Biotechnology Corporation
4/6/2015
2,498
309
Subtotal: Drug Delivery (0.01%)*
3,638
90
9/19/2022
38,461
1,000
1,310
(4)(10)
Albireo Pharma, Inc.
9/14/2020
484
Applied Molecular Transport
4/6/2021
42
Avalo Therapeutics, Inc.
8/19/2014
9,924
33
7/31/2011
190,179
1,715
1,565
5/9/2022
127,021
4,165
5,360
(4)(10)(16)(20)
10/5/2020
98,100
1,871
2,282
(4)(5)(10)
6/21/2018
231,329
2,255
2,299
6/15/2020
17,241
891
Concert Pharmaceuticals, Inc.
2/13/2019
70,796
1,367
474
Dare Biosciences, Inc.
1/8/2015
13,550
Dynavax Technologies
7/22/2015
550
209
5/7/2021
Preferred Series B
3,466,840
4,250
2,917
5/3/2022
235,295
4,000
4,021
Humanigen, Inc.
3/31/2021
43,243
800
NorthSea Therapeutics
12/15/2021
Preferred Series C
983
1,515
Paratek Pharmaceuticals, Inc.
2/26/2007
76,362
2,744
196
Rocket Pharmaceuticals, Ltd.
8/22/2007
944
15
Savara, Inc.
8/11/2015
11,119
203
17
Sio Gene Therapies, Inc.
2/2/2017
16,228
1,269
5/5/2022
155,555
2,100
2,663
Tricida, Inc.
2/28/2018
68,816
863
721
1/31/2019
17,175
332
322
(4)(5)(10)(16)
12/11/2020
510,308
3,000
3,622
11/26/2019
1,111,519
2,522
1,901
Subtotal: Drug Discovery & Development (2.41%)*
42,548
32,844
Electronics & Computer Hardware
Skydio, Inc.
3/8/2022
Preferred Series E
248,900
1,034
Subtotal: Electronics & Computer Hardware (0.08%)*
23andMe, Inc.
3/11/2019
825,732
5,094
2,362
3/30/2021
217,880
1,688
836
Subtotal: Healthcare Services, Other (0.23%)*
6,782
3,198
Planet Labs, Inc.
6/21/2019
547,880
615
2,975
12/30/2021
41,021
3,825
2,648
Zeta Global Corp.
11/20/2007
295,861
-
1,956
Subtotal: Information Services (0.56%)*
4,440
7,579
Black Crow AI, Inc. affiliates
3/24/2021
Preferred Note
(21)
Preferred Series D-4
199,742
1,151
216
Contentful Global, Inc.
12/22/2020
41,000
138
239
11/20/2018
108,500
685
Total Contentful Global, Inc.
149,500
638
924
DoorDash, Inc.
12/20/2018
81,996
945
4,055
Lyft, Inc.
12/26/2018
100,738
5,263
1,327
Nerdy Inc.
9/17/2021
100,000
Nextdoor.com, Inc.
8/1/2018
1,019,255
4,854
2,844
OfferUp, Inc.
10/25/2016
286,080
1,663
418
Preferred Series A-1
108,710
632
159
Total OfferUp, Inc.
394,790
2,295
577
Oportun
6/28/2013
48,365
211
Reischling Press, Inc.
7/31/2020
1,163
1/24/2022
Preferred Series B-2
7,063
866
Savage X Holding, LLC
Class A Units
42,137
13
179
5/23/2018
414,994,863
900
6/6/2016
Preferred Series BB
1,000,000
415,994,863
TFG Holding, Inc.
89
95
Uber Technologies, Inc.
12/1/2020
32,991
318
874
Subtotal: Internet Consumer & Business Services (1.13%)*
22,058
15,377
Coronado Aesthetics, LLC
10/15/2021
Common Units
180,000
Preferred Series A-2
5,000,000
250
391
Total Coronado Aesthetics, LLC
5,180,000
400
Flowonix Medical Incorporated
11/3/2014
Preferred Series AA
221,893
Gelesis, Inc.
11/30/2009
1,490,700
871
1,611
ViewRay, Inc.
12/16/2013
36,457
132
Subtotal: Medical Devices & Equipment (0.16%)*
2,953
2,143
Achronix Semiconductor Corporation
7/1/2011
277,995
259
Subtotal: Semiconductors (0.02%)*
8/9/2021
675
CapLinked, Inc.
10/26/2012
Preferred Series A-3
53,614
Docker, Inc.
11/29/2018
4,284
494
Druva Holdings, Inc.
10/22/2015
Preferred Series 2
458,841
1,428
8/24/2017
Preferred Series 3
93,620
300
330
Total Druva Holdings, Inc.
552,461
1,300
HighRoads, Inc.
1/18/2013
190
307
Lightbend, Inc.
12/4/2020
265
Palantir Technologies
9/23/2020
1,418,337
8,670
11,531
SingleStore, Inc.
11/25/2020
580,983
1,278
8/12/2021
Preferred Series F
52,956
280
150
Total SingleStore, Inc.
633,939
2,280
Sprinklr, Inc.
3/22/2017
700,000
3,748
6,454
Verana Health, Inc.
7/8/2021
952,562
1,171
ZeroFox, Inc.
5/7/2020
289,992
101
1,467
Subtotal: Software (1.83%)*
24,006
24,997
Surgical Devices
Gynesonics, Inc.
1/18/2007
219,298
6/16/2010
656,538
282
2/8/2013
1,991,157
712
7/14/2015
2,786,367
429
12/18/2018
1,523,693
118
Preferred Series F-1
2,418,125
Total Gynesonics, Inc.
9,595,178
1,941
Subtotal: Surgical Devices (0.00%)*
Fulcrum Bioenergy, Inc.
9/13/2012
Preferred Series C-1
187,265
711
Impossible Foods, Inc.
5/10/2019
Preferred Series E-1
188,611
2,438
Modumetal, Inc.
6/1/2015
1,035
NantEnergy, LLC
8/31/2013
59,665
102
12/10/2020
304,486
3,153
243
Pivot Bio, Inc.
6/28/2021
593,080
4,500
2,571
Proterra, Inc.
5/28/2015
457,841
542
Subtotal: Sustainable and Renewable Technology (0.62%)*
11,508
8,406
Total: Equity Investments (9.84%)*
150,539
134,134
Warrant Investments
Warrant
6/28/2022
229,611
123
140
Spring Mobile Solutions, Inc.
4/19/2013
2,834,375
Subtotal: Communications & Networking (0.01%)*
541
Gadget Guard, LLC
6/3/2014
1,662,441
228
7/16/2013
206,185
1,101
365
The Neat Company
8/13/2014
54,054
Whoop, Inc.
6/27/2018
686,270
757
Subtotal: Consumer & Business Products (0.08%)*
1,712
1,122
Aerami Therapeutics Holdings, Inc.
9/30/2015
110,882
74
10/27/2014
459,183
8/28/2014
3,929
390
Subtotal: Drug Delivery (0.00%)*
465
Acacia Pharma Inc.
6/29/2018
201,330
304
ADMA Biologics, Inc.
12/21/2012
89,750
295
2
6/15/2022
18,360
56
398
6/8/2020
5,311
61
26
9/25/2020
40,396
880
783
(4)(10)(16)
Fresh Tracks Therapeutics, Inc. (p.k.a. Brickell Biotech, Inc.)
2/18/2016
200
119
12/8/2021
287
370
16,112
16
Dermavant Sciences Ltd.
5/31/2019
223,642
104
(5)(10)(12)
133,692
72
31
Evofem Biosciences, Inc.
6/11/2014
520
10,131
177
214
Myovant Sciences, Ltd.
10/16/2017
73,710
460
426,866
64,687
848
113
(4)(10)(15)(16)
9/15/2022
111,934
281
224
3/23/2022
475,510
5/14/2021
106,035
296
47
Stealth Bio Therapeutics Corp.
6/30/2017
500,000
158
2/28/2019
231,613
1,033
335
(4)(10)(12)
3/27/2019
31,352
102,216
256
242
3/18/2019
1,021,576
792
628
Yumanity Therapeutics, Inc.
12/20/2019
15,414
110
Subtotal: Drug Discovery & Development (0.30%)*
7,709
4,074
908 Devices, Inc.
3/15/2017
49,078
284
Locus Robotics Corp.
6/21/2022
8,511
34
27
11/8/2021
622,255
557
1,153
Subtotal: Electronics & Computer Hardware (0.11%)*
692
1,464
9/12/2022
362,837
583
501
Vida Health, Inc.
3/28/2022
100,618
114
Subtotal: Healthcare Services, Other (0.04%)*
697
521
10/21/2021
176,200
207
50
INMOBI Inc.
11/19/2014
65,587
82
NetBase Solutions, Inc.
8/22/2017
Preferred Series 1
60,000
356
345
6/29/2022
94,857
21
Subtotal: Information Services (0.03%)*
680
416
Aria Systems, Inc.
5/22/2015
Preferred Series G
231,535
12/14/2021
174,163
164
Cloudpay, Inc.
4/10/2018
6,763
54
310
3/30/2022
165,456
974
582
(16)
First Insight, Inc.
5/10/2018
75,917
Fulfil Solutions, Inc.
7/29/2022
84,995
325
199
10/29/2019
529,661
Landing Holdings Inc.
3/12/2021
11,806
Lendio, Inc.
3/29/2019
127,032
39
13,106
470
344
RumbleON, Inc.
4/30/2018
5,139
88
6/27/2014
875
6/12/2019
1,379,761
842
1,692
ShareThis, Inc.
12/14/2012
493,502
547
8/23/2019
444,444
83
Snagajob.com, Inc.
4/20/2020
600,000
69
6/30/2016
1,800,000
782
120
1,211,537
62
Total Snagajob.com, Inc.
3,611,537
860
258
The Faction Group LLC
8,076
234
387
5/1/2018
267,225
844
459
3/31/2022
98,428
126
48
2/11/2021
77,215
129
399
(5)(10)(16)
8/27/2021
1,868
Total Worldremit Group Limited
79,083
155
405
Subtotal: Internet Consumer & Business Services (0.43%)*
6,110
5,800
196,335
151
320
1,111,111
528
603
Xometry, Inc.
5/9/2018
87,784
3,415
Subtotal: Manufacturing Technology (0.32%)*
726
4,338
Media/Content/Info
Zoom Media Group, Inc.
348
Subtotal: Media/Content/Info (0.00%)*
Aspire Bariatrics, Inc.
1/28/2015
22,572
455
110,946
362
9/21/2018
725,806
352
Total Flowonix Medical Incorporated
836,752
714
Intuity Medical, Inc.
12/29/2017
Preferred Series B-1
3,076,323
294
30
2/4/2022
59,642
Outset Medical, Inc.
9/27/2013
62,794
401
413
Tela Bio, Inc.
3/31/2017
15,712
Subtotal: Medical Devices & Equipment (0.03%)*
2,035
443
6/26/2015
750,000
99
12/16/2021
800,000
751
Subtotal: Semiconductors (0.05%)*
850
715
9/23/2022
254,778
448
437
Bitsight Technologies, Inc.
11/18/2020
29,691
597
10/4/2021
194,629
165
9/30/2020
211,342
Cloudian, Inc.
11/6/2018
477,454
71
Couchbase, Inc.
4/25/2019
105,350
462
563
9/21/2022
102,898
25
453,641
353
Delphix Corp.
10/8/2019
718,898
1,594
2,306
8/2/2021
727,047
545
DNAnexus, Inc.
3/21/2014
909,091
97
DroneDeploy, Inc.
6/30/2022
95,911
278
4/13/2022
522
1/27/2022
56,765
198
Evernote Corporation
9/30/2016
62,500
107
2/14/2018
89,685
82,362
252
233
172
Poplicus, Inc.
5/28/2014
132,168
Reltio, Inc.
6/30/2020
69,120
215
SignPost, Inc.
1/13/2016
Series Junior 1 Preferred
474,019
314
4/28/2020
312,596
103
2/13/2020
1,041,667
206
486,359
218
1/21/2022
152,048
1,275
Subtotal: Software (0.46%)*
7,639
6,217
12/5/2012
33,670
TransMedics Group, Inc.
11/7/2012
64,440
139
1,536
Subtotal: Surgical Devices (0.11%)*
152
Agrivida, Inc.
6/20/2013
471,327
4/15/2022
18,472
53
4/30/2013
93,632
64
220
Halio, Inc.
4/22/2014
325,000
4/7/2015
131,883
28
Total Halio, Inc.
456,883
111
Polyera Corporation
12/11/2012
311,612
337
Subtotal: Sustainable and Renewable Technology (0.03%)*
373
Total: Warrant Investments (1.99%)*
31,148
27,159
Total Investments in Securities (207.14%)*
2,866,330
2,822,692
Investment Funds & Vehicles Investments
Forbion Growth Opportunities Fund I C.V.
Investment Funds & Vehicles
11/16/2020
2,353
2,291
Forbion Growth Opportunities Fund II C.V.
6/23/2022
374
Subtotal: Drug Discovery & Development (0.20%)*
2,758
2,665
Liberty Zim Co-Invest L.P.
7/21/2022
381
Subtotal: Software (0.03%)*
Total: Investment Funds & Vehicles Investments (0.22%)*
3,139
3,046
Total Investments before Cash and Cash Equivalents (207.36%)*
2,869,469
Cash & Cash Equivalents
GS Financial Square Government Fund
FGTXX/38141W273
Total: Investments in Cash & Cash Equivalents (1.83%)*
Total: Investments after Cash and Cash Equivalents (209.19%)*
2,894,469
2,850,738
* Value as a percent of net assets. All amounts are stated in U.S. Dollars unless otherwise noted. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
3-month LIBOR + 9.31% or Floor rate of 10.31%
8,802
8,725
(11)(16)(17)
PRIME + 4.90% or Floor rate of 8.15%, PIK Interest 1.25%, 3.25% Exit Fee
88,542
88,286
90,505
97,088
99,230
Subtotal: Communications & Networking (7.58%)*
PRIME + 5.50% or Floor rate of 8.75%, 6.75% Exit Fee
23,162
23,298
Convertible Note
August 2022
PIK Interest 0.19% or Floor rate of 0.19%
(9)
14,662
13,818
9,823
9,394
24,485
23,212
May 2023
8,850
33,335
32,062
Subtotal: Diversified Financial Services (2.48%)*
33,738
32,465
PRIME + 3.30% or Floor rate of 8.05%, 6.25% Exit Fee
18,951
20,036
PRIME + 5.90% or Floor rate of 9.15%, 6.95% Exit Fee
10,229
10,268
(10)(11)
PRIME + 3.10% or Floor rate of 8.60%, 6.95% Exit Fee
15,639
15,653
PRIME + 6.50% or Floor rate of 9.75%, 6.95% Exit Fee
20,416
20,339
PRIME + 6.40% or Floor rate of 9.65%, 6.95% Exit Fee
40,842
40,776
PRIME + 5.70% or Floor rate of 8.95%, 5.82% Exit Fee
50,000
49,542
48,859
(10)(12)
PRIME + 5.60% or Floor rate of 8.85%, 5.00% Exit Fee
24,000
24,271
24,454
PRIME + 5.70% or Floor rate of 8.95%, 6.55% Exit Fee
8,980
38,000
37,462
PRIME + 5.70% or Floor rate of 8.95%, 3.75% Exit Fee
29,422
Center for Breakthrough Medicines Holdings, LLC
PRIME + 5.50% or Floor rate of 8.75%, 7.50% Exit Fee
5,005
Century Therapeutics
PRIME + 6.30% or Floor rate of 9.55%, 3.95% Exit Fee
10,075
10,361
PRIME + 3.25% or Floor rate of 8.50%, 7.15% Exit Fee
5,161
5,070
PRIME + 5.00% or Floor rate of 8.25%, 5.50% Exit Fee
25,459
25,316
PRIME + 5.70% or Floor rate of 8.95%, 7.75% Exit Fee
91,500
90,997
PRIME + 6.25% or Floor rate of 9.50%, 6.55% Exit Fee
12,443
PRIME + 5.00% or Floor rate of 8.25%, 6.35% Exit Fee
6,858
PRIME + 5.90% or Floor rate of 9.15%, 9.86% Exit Fee
57,873
57,874
(10)(11)(12)(14)(16)
PRIME + 5.75% or Floor rate of 9.00%, 6.55% Exit Fee
32,704
32,744
PRIME + 5.40% or Floor rate of 8.65%, 4.95% Exit Fee
17,041
17,014
20,235
19,985
(9)(10)
Kaleido Biosciences, Inc.
PRIME + 6.10% or Floor rate of 9.35%, 7.55% Exit Fee
22,500
23,505
23,384
Locus Biosciences
PRIME + 6.10% or Floor rate of 9.35%, 4.95% Exit Fee
7,977
7,900
PRIME + 4.30% or Floor rate of 9.80%, 6.95% Exit Fee
5,500
5,459
PRIME + 2.25% or Floor rate of 5.50%, PIK Interest 3.35%, 7.50% Exit Fee
87,116
86,075
(10)(12)(13)(14)(15)(16)
PRIME + 5.80% or Floor rate of 9.05%, 3.95% Exit Fee
16,000
15,826
15,778
PRIME + 4.40% or Floor rate of 9.65%, 4.85% Exit Fee
24,051
24,777
25,183
Syndax Pharmaceutics Inc.
PRIME + 6.00% or Floor rate of 9.25%, 4.99% Exit Fee
20,646
20,653
(12)(16)
PRIME + 2.15% or Floor rate of 5.40%, PIK Interest 3.45%, 5.95% Exit Fee
51,450
50,470
PRIME + 4.70% or Floor rate of 7.95%, 7.28% Exit Fee
77,500
78,755
(5)(10)(11)(12)(15)
PRIME + 6.10% or Floor rate of 9.35%, 6.25% Exit Fee
22,701
23,293
23,627
Valo Health, LLC (p.k.a. Integral Health Holdings, LLC)
PRIME + 6.45% or Floor rate of 9.70%, 3.85% Exit Fee
11,547
11,492
PRIME + 3.75% or Floor rate of 8.75%, 8.80% Exit Fee
34,140
34,085
(11)(12)
PRIME + 4.00% or Floor rate of 8.75%, 5.92% Exit Fee
12,732
13,256
13,187
916,421
915,928
Subtotal: Drug Discovery & Development (71.53%)*
936,457
935,964
PRIME + 5.70% or Floor rate of 8.95%, 5.95% Exit Fee
7,966
(14)(16)
3-month LIBOR + 5.00% or Floor rate of 6.00%, PIK Interest 4.45%
25,022
24,653
PRIME + 5.60% or Floor rate of 8.85%, 4.61% Exit Fee
45,964
(16)(18)
PRIME + 6.25% or Floor rate of 9.50%, PIK Interest 1.55%
35,444
35,141
35,056
(12)(13)(16)
113,724
113,639
Subtotal: Healthcare Services, Other (8.68%)*
Capella Space
PRIME + 5.00% or Floor rate of 8.25%, PIK Interest 1.10%, 4.00% Exit Fee
20,025
19,751
19,424
(13)(14)(18)
1-month LIBOR + 9.08% or Floor rate of 10.08%
45,900
45,022
(16)(17)
64,773
64,446
Subtotal: Information Services (4.93%)*
19
June 2022
PRIME + 3.75% or Floor rate of 7.00%, PIK Interest 2.95%, 3.50% Exit Fee
21,555
22,164
(12)(13)(18)
PRIME + 5.90% or Floor rate of 9.15%, 7.95% Exit Fee
31,416
32,248
PRIME + 4.70% or Floor rate of 7.95%, PIK Interest 1.45%, 4.95% Exit Fee
21,250
28,632
ePayPolicy Holdings, LLC
3-month LIBOR + 8.50% or Floor rate of 9.50%
8,169
8,011
7,967
(11)(16)
20,676
20,425
(9)(13)
PRIME + 5.50% or Floor rate of 8.75%, PIK Interest 2.25%
16,136
15,765
15,876
1-month LIBOR + 5.50% or Floor rate of 6.50%, PIK Interest 4.00%
PRIME + 5.00% or Floor rate of 10.50%, PIK Interest 0.50%
60,607
59,983
60,316
PRIME + 3.88% or Floor rate of 9.38%, PIK Interest 1.90%, 4.00% Exit Fee
12,426
12,665
12,521
(7)(8)(13)
(7)(8)
8,269
September 2023
PRIME + 3.45% or Floor rate of 8.95%, PIK Interest 1.50%, 3.95% Exit Fee
25,618
25,965
26,372
Zepz (p.k.a. Worldremit Group Limited)
3-month LIBOR + 9.25% or Floor rate of 10.25%, 3.00% Exit Fee
103,000
101,674
100,472
(5)(10)(12)(15)(18)
341,001
327,799
Subtotal: Internet Consumer & Business Services (26.74%)*
363,165
349,963
PRIME + 5.70% or Floor rate of 8.95%, 6.95% Exit Fee
14,995
Subtotal: Manufacturing Technology (1.15%)*
Fungible Inc.
PRIME + 5.00% or Floor rate of 8.25%, 4.95% Exit Fee
19,072
(14)(18)
Subtotal: Semiconductors (1.46%)*
October 2022
6-month LIBOR + 8.00% or Floor rate of 9.00%
55,834
Pymetrics, Inc.
PRIME + 5.50% or Floor rate of 8.75%, PIK Interest 1.75%, 4.00% Exit Fee
9,667
9,845
Regent Education
January 2022
FIXED 10.00%, PIK Interest 2.00%, 7.94% Exit Fee
2,951
3,064
2,608
(8)(13)
68,743
68,287
3GTMS, LLC.
6-Month LIBOR + 9.28% or Floor rate of 10.28%
9,812
9,656
1-month LIBOR + 9.00% or Floor rate of 10.00%
9,400
9,138
PRIME + 3.70% or Floor rate of 6.95%, PIK Interest 1.00%, 3.95% Exit Fee
10,016
9,943
(13)(14)(16)
6-month LIBOR + 7.90% or Floor rate of 11.15%
32,459
Ceros, LLC
3-month LIBOR + 8.89% or Floor rate of 9.89%
17,978
17,474
Cloud 9 Software
3-month LIBOR + 8.20% or Floor rate of 9.20%
9,953
9,856
PRIME + 6.70% or Floor rate of 9.95%, 2.95% Exit Fee
9,923
10,035
(11)(12)(18)
6-month LIBOR + 9.28% or Floor rate of 10.28%
7,801
PRIME + 3.05% or Floor rate of 7.55%, PIK Interest 1.10%, 7.10% Exit Fee
20,719
21,807
21,734
(11)(13)(16)(18)
February 2023
PRIME + 5.50% or Floor rate of 10.25%, 5.00% Exit Fee
61,736
62,345
(12)(15)(18)
PRIME + 5.25% or Floor rate of 8.50%, 2.00% Exit Fee
16,875
16,463
Enmark Systems
6-Month LIBOR + 6.83% or Floor rate of 7.83%, PIK Interest 2.19%
7,798
3-month LIBOR + 9.96% or Floor rate of 10.96%
21,000
20,699
20,750
(5)(10)(11)(17)
3-month LIBOR + 9.69% or Floor rate of 10.69%
5,106
5,088
3-month LIBOR + 9.00% or Floor rate of 10.00%
6,913
6,719
6,767
(5)(10)(16)(17)
3-month LIBOR + 10.14% or Floor rate of 11.14%
8,571
8,403
8,375
PRIME + 7.50% or Floor rate of 10.75%
9,862
9,965
PRIME + 4.70% or Floor rate of 7.95%, PIK Interest 1.80%, 3.00% Exit Fee
20,431
20,292
6-month LIBOR + 9.87% or Floor rate of 10.87%
19,074
18,575
18,834
PRIME + 7.70% or Floor rate of 10.95%, 1.75% Exit Fee
14,967
15,017
(12)(18)
PRIME + 4.75% or Floor rate of 8.00%, PIK Interest 0.50%, 4.50% Exit Fee
7,457
7,528
7,314
PRIME + 5.25% or Floor rate of 8.50%, PIK Interest 1.35%, 4.50% Exit Fee
13,041
13,005
13,092
20,498
20,533
20,406
PRIME + 5.70% or Floor rate of 8.95%, PIK Interest 1.70%, 4.95% Exit Fee
10,248
10,336
10,542
(13)(18)
5,828
PRIME + 4.00% or Floor rate of 8.75%, PIK Interest 2.00%, 5.50% Exit Fee
5,185
5,305
5,245
11,144
10,831
10,859
(12)(16)(17)
PRIME + 4.50% or Floor rate of 7.75%, PIK Interest 2.00%, 3.00% Exit Fee
50,895
50,646
51,722
1-month LIBOR + 8.95% or Floor rate of 9.95%
15,633
15,347
437,659
441,115
3-month LIBOR + 7.75% or Floor rate of 8.75%
19,851
Subtotal: Software (40.46%)*
526,253
529,402
July 2022
PRIME + 3.95% or Floor rate of 8.95%, 9.00% Exit Fee
15,022
19,379
19,378
FIXED 10.00%
247
(6)(9)(16)
19,659
19,625
December 2023
(6)(8)(13)(16)
Subtotal: Sustainable and Renewable Technology (2.07%)*
27,125
Total: Debt Investments (168.86%)*
2,219,586
2,209,599
Peerless Network Holdings, Inc.
10/21/2020
3,328
4/11/2008
1,135,000
1,230
6,242
Total Peerless Network Holdings, Inc.
1,138,328
6,260
Subtotal: Communications & Networking (0.48%)*
TechStyle, Inc. (p.k.a. Just Fabulous, Inc.)
447
Subtotal: Consumer & Business Products (0.03%)*
1,225
19,393
20,618
11,990
Subtotal: Diversified Financial Services (2.49%)*
28,041
32,608
Aytu BioScience, Inc. (p.k.a. Neos Therapeutics, Inc.)
168
PDS Biotechnology Corporation (p.k.a. Edge Therapeutics, Inc.)
Subtotal: Drug Delivery (0.02%)*
305
Avalo Therapeutics, Inc. (p.k.a. Cerecor, Inc.)
119,087
202
892
5,971
3,859
223
Genocea Biosciences, Inc.
11/20/2014
27,933
32
3,264
161
2/10/2021
86,585
343
Sio Gene Therapies, Inc. (p.k.a. Axovant Gene Therapies Ltd.)
658
(4)(5)(10)(15)
4,650
198,277
1,641
Subtotal: Drug Discovery & Development (1.90%)*
33,401
24,860
1,687
1,864
Subtotal: Healthcare Services, Other (0.56%)*
6,781
7,364
3,369
2,220
(4)(19)
Subtotal: Information Services (0.72%)*
9,414
Black Crow AI, Inc.
Preferred Series Seed
872,797
1,120
(6)
(20)
Brigade Group, Inc.
3/1/2013
9,023
93
608
Contentful Global, Inc. (p.k.a. Contentful, Inc.)
506
1,388
Total Contentful Global, Inc. (p.k.a. Contentful, Inc.)
1,894
12,209
4,305
450
6,624
1,791
2,471
980
Reischling Press, Inc. (p.k.a. Blurb, Inc.)
Uber Technologies, Inc. (p.k.a. Postmates, Inc.)
1,383
Subtotal: Internet Consumer & Business Services (2.70%)*
22,151
35,331
65
565
227,013
3,351
12/30/2011
243,432
503
3,593
12/31/2011
191,626
2,828
Total Gelesis, Inc.
662,071
1,003
9,772
Medrobotics Corporation
9/12/2013
136,798
10/22/2014
73,971
10/16/2015
163,934
Total Medrobotics Corporation
374,703
905
333
201
Subtotal: Medical Devices & Equipment (0.81%)*
3,991
10,538
725
Subtotal: Semiconductors (0.06%)*
985
Druva Holdings, Inc. (p.k.a. Druva, Inc.)
2,387
529
Total Druva Holdings, Inc. (p.k.a. Druva, Inc.)
2,916
25,828
SingleStore, Inc. (p.k.a. memsql, Inc.)
2,239
279
Total SingleStore, Inc. (p.k.a. memsql, Inc.)
2,279
2,479
3,749
11,109
1,697
Subtotal: Software (3.45%)*
23,905
45,087
173
543
Subtotal: Surgical Devices (0.04%)*
3,430
NantEnergy, LLC (p.k.a. Fluidic, Inc.)
3,000,000
4,767
591
3,164
Subtotal: Sustainable and Renewable Technology (0.86%)*
12,412
11,228
Total: Equity Investments (14.12%)*
142,219
184,710
Subtotal: Communications & Networking (0.00%)*
83,625
326
Penumbra Brands, LLC (p.k.a. Gadget Guard)
2,181
1,847
Subtotal: Consumer & Business Products (0.33%)*
2,145
4,354
24
Aerami Therapeutics (p.k.a. Dance Biopharm, Inc.)
15,541
681
142
Brickell Biotech, Inc.
9,005
6/8/2017
61,273
178
354
Preferred Series 3 Class C
84,714
7,806
4/24/2018
41,176
Motif Bio PLC
1/27/2020
121,337,041
267
6/27/2017
432,240
546
427
(4)(10)(14)(15)
90,887
188
2,172
441
108,334
673
Subtotal: Drug Discovery & Development (0.36%)*
7,393
4,745
618
124,451
422
1,040
InMobi Inc.
Netbase Solutions, Inc.
Subtotal: Information Services (0.04%)*
645
96
105
Interactions Corporation
6/16/2015
Preferred Series G-3
68,187
204
505
141
84
3/21/2016
79,625
210
1,140
121
171
382
Tapjoy, Inc.
7/1/2014
748,670
317
650
190,953
552
786
3,038
1,962
(5)(10)(15)
Total Zepz (p.k.a. Worldremit Group Limited)
1,987
Subtotal: Internet Consumer & Business Services (0.78%)*
4,992
10,212
155,325
363
351
881,131
264
3/13/2013
455,539
1,797
SonaCare Medical, LLC
9/28/2012
6,464
2,483
2,074
1,950
Subtotal: Semiconductors (0.21%)*
2,701
1,272
1,343
560,536
404
415
3,275
483,248
106
Fuze, Inc.
256,158
906
283
9/15/2020
150,943
RapidMiner, Inc.
11/28/2017
4,982
637
Signpost, Inc.
704
162
648,350
7/2/2021
20,563
Subtotal: Software (0.85%)*
5,594
11,133
2/8/2012
151,123
67
TransMedics Group, Inc. (p.k.a Transmedics, Inc.)
480
486
280,897
274
699
Halio, Inc. (p.k.a. Kinestral Technologies, Inc.)
249
86
Total Halio, Inc. (p.k.a. Kinestral Technologies, Inc.)
311,609
338
Subtotal: Sustainable and Renewable Technology (0.08%)*
950
Total: Warrant Investments (2.93%)*
27,147
38,399
Total: Investments in Securities (185.91%)*
2,388,952
2,432,708
2,032
1,814
Total: Investments in Investment Funds & Vehicles (0.14%)*
Total: Investments (186.05%)*
2,390,984
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Hercules Capital, Inc. (the “Company”) is 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 Company sources its investments through its principal office located in Palo Alto, CA, as well as through its additional offices in Boston, MA, New York, NY, Bethesda, MD, San Diego, CA, and London, United Kingdom. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003.
The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a Business Development Company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was subject to tax as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). Effective January 1, 2006, the Company elected to be treated for tax purposes as a Regulated Investment Company (“RIC”) under Subchapter M of the Code (see “Note 6 - Income Taxes”).
The Company does not currently use Commodity Futures Trading Commission (“CFTC”) derivatives. However, to the extent that it uses CFTC derivatives in the future, it intends to do so below prescribed levels and will not market itself as a “commodity pool” or a vehicle for trading such instruments. The Company has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act (“CEA”), pursuant to Rule 4.5 under the CEA. The Company is not, therefore, subject to registration or regulation as a "commodity pool operator" under the CEA.
Hercules Capital IV, L.P. (“HC IV”) is our wholly owned Delaware limited partnership that was formed in December 2010. HC IV received a license to operate as a Small Business Investment Company (“SBIC”) under the authority of the Small Business Administration (“SBA”) on October 27, 2020. SBICs are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments. Hercules Technology SBIC Management, LLC (“HTM”), is a wholly owned limited liability company subsidiary of the Company, which was formed in November 2003 and serves as the general partner of HC IV.
The Company has also established certain wholly owned subsidiaries, all of which are structured as Delaware corporations or Limited Liability Companies (“LLCs”), to hold portfolio companies organized as LLCs (or other forms of pass-through entities). These subsidiaries are consolidated for financial reporting purposes and in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). These subsidiaries are taxable entities and are not consolidated with Hercules for income tax purposes. The Company's taxable subsidiaries may generate income tax expense, or benefit, and tax assets and liabilities as a result of their ownership of certain portfolio investments.
In May 2020, Hercules Adviser LLC (the “Adviser Subsidiary”) was formed as a wholly owned Delaware limited liability subsidiary of the Company to provide investment advisory and related services to investment vehicles (“Adviser Funds”) owned by one or more unrelated third-party investors (“External Parties”). The Adviser Subsidiary receives fee income for the services provided to the Adviser Funds. 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”).
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated interim financial statements have been prepared in conformity with U.S. GAAP for interim financial information, and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments consisting solely of normal recurring accruals considered necessary for the fair statement of consolidated financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the full fiscal year. Therefore, the interim unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021. The year-end Consolidated Statements of Assets and Liabilities data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The Company’s functional currency is U.S. dollars (“USD”) and these consolidated financial statements have been prepared in that currency.
As an investment company, the Company follows accounting and reporting guidance as set forth in Topic 946 Financial Services – Investment Companies (“ASC Topic 946”) of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”). As provided under Regulation S-X and ASC Topic 946, the Company will not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company
whose business consists of providing services to the Company. Rather, an investment company’s interest in portfolio companies that are not investment companies should be measured at fair value in accordance with ASC Topic 946. The Adviser Subsidiary is not an investment company as defined in ASC Topic 946 and further, the Adviser Subsidiary provides investment advisory services exclusively to the Adviser Funds which are owned by External Parties. As such pursuant to ASC Topic 946, the Adviser Subsidiary is accounted for as a portfolio investment of the Company held at fair value and is not consolidated.
Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income, expenses, gains and losses during the reported periods. Changes in the economic and regulatory environment, financial markets, the credit worthiness of our portfolio companies, other macro-economic developments (for example, global pandemics, natural disasters, terrorism, international conflicts and war), and any other parameters used in determining these estimates and assumptions could cause actual results to differ from these estimates and assumptions.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company, its consolidated subsidiaries, and Variable Interest Entities (“VIE”) for which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could be significant to the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the Company has a potentially significant interest in the VIE, then it consolidates the VIE.
The Company performs periodic reassessments, usually quarterly, of whether it is the primary beneficiary of a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The Company also reconsiders whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework.
As of September 30, 2022, the Company's Consolidated Financial Statements included the accounts of the securitization trust, a VIE, formed in conjunction with the issuance of the 2031 Asset-Backed Notes (as defined in “Note 5 – Debt”). The Company held no interests in a VIE as of December 31, 2021. The assets of the Company's securitization VIE are restricted to be used to settle obligations of its consolidated securitization VIE, which are disclosed parenthetically on the Consolidated Statements of Assets and Liabilities. The liabilities are the only obligations of its consolidated securitization VIE, and the creditors (or beneficial interest holders) do not have recourse to the Company's general credit.
Fair Value Measurements
The Company follows guidance in ASC Topic 820, Fair Value Measurement (“ASC Topic 820”), where fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a three-tier hierarchy which maximizes the use of observable market data input and minimizes the use of unobservable inputs to establish a classification of fair value measurements. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the information available. The inputs or methodology used for valuing assets or liabilities may not be an indication of the risks associated with investing in those assets or liabilities. ASC Topic 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC Topic 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.
The Company categorizes all investments recorded at fair value in accordance with ASC Topic 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC Topic 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are publicly held debt investments and warrants held in a public company.
Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company.
Valuation of Investments
The most significant estimate inherent in the preparation of the Company’s consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.
As of September 30, 2022, approximately 96.6% of the Company’s total assets represented investments in portfolio companies whose fair value is determined in good faith by the Company's Valuation Committee and approved by the Board. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the valuation designee of the Board. The Company’s investments are carried at fair value in accordance with the 1940 Act and ASC Topic 946 and measured in accordance with ASC Topic 820. The Company’s debt securities are primarily invested in venture capital-backed and institutional-backed companies in technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology at all stages of development. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC Topic 820 because there generally is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy established by the Board in accordance with the provisions of ASC Topic 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by the Company's Valuation Committee and approved by the Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material.
In accordance with procedures established by its Board, the Company values investments on a quarterly basis following a multistep valuation process. Pursuant to the amended SEC Rule 2a-5 of the 1940 Act, the Board has designated the Company’s Valuation Committee as the “valuation designee”. The quarterly Board approved multi-step valuation process is described below:
Investments purchased within the preceding two calendar quarters before the valuation date and debt investments with remaining maturities within 12 months or less may each be valued at cost with interest accrued or discount accreted/premium amortized to the date of maturity, unless such valuation, in the judgment of the Company, does not represent fair value. In this case such investments shall be valued at fair value as determined in good faith by the Valuation Committee and approved by the Board. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by the Valuation Committee and approved by the Board.
As part of the overall process noted above, the Company engages one or more independent valuation firm(s) to provide management with assistance in determining the fair value of selected portfolio investments each quarter. In selecting which portfolio investments to engage an independent valuation firm, the Company considers a number of factors, including, but not limited to, the potential for material fluctuations in valuation results, size, credit quality, and the time lapse since the last valuation of the portfolio investment by an independent valuation firm. The scope of services rendered by the independent valuation firm is at the discretion of the Valuation Committee and subject to approval of the Board, and the Company may engage an independent valuation firm to value all or some of our portfolio investments. In determining the fair value of a portfolio investment in good faith, the Company recognizes these determinations are made using the best available information that is knowable or reasonably knowable. In addition, changes in the market environment, portfolio company performance and other events that may occur over the duration of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. The change in fair value of each individual investment is recorded as an adjustment to the investment's fair value and the change is reflected in unrealized appreciation or depreciation.
The Company’s debt securities are primarily invested in venture capital-backed and institutional-backed companies in technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology at all stages of development. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC Topic 820 because there generally is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. The Company may, from time to time, invest in public debt of companies that meet the Company’s investment objectives, and to the extent market quotations or other pricing indicators (i.e. broker quotes) are available, these investments are considered Level 1 or 2 assets in line with ASC Topic 820.
In making a good faith determination of the value of the Company’s investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the original issue discount (“OID”), if any, and payment-in-kind (“PIK”) interest or other receivables which have been accrued as earned. The Company then applies the valuation methods as set forth below.
The Company assumes the sale of each debt security in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. The Company determines the yield at inception for each debt investment. The Company then uses senior secured, leveraged loan yields provided by third party providers to calibrate the change in market yields between inception of the debt investment and the measurement date. Industry specific indices and other relevant market data are used to benchmark and assess market-based movements for reasonableness. As part of determining the fair value, the Company also evaluates the collateral for recoverability of the debt investments. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a credit adjusted hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes an analysis of, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
The Company values debt securities that are traded on a public exchange at the prevailing market price as of the valuation date. For syndicated debt investments, for which sufficient market data is available and liquidity, the Company values debt securities using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis.
The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a debt investment is doubtful or, if under the in-exchange premise, when the value of a debt investment is less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt investment is greater than amortized cost.
When originating a debt instrument, the Company generally receives warrants or other equity securities from the borrower. The Company determines the cost basis of the warrants or other equity securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity securities received. Any resulting discount on the debt investments from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investment.
Equity Securities and Warrants
Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Company has a limited amount of equity securities in public companies. In accordance with the 1940 Act, unrestricted
publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date.
At each reporting date, privately held warrant and equity securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition, general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. Absent a qualifying external event, the Company estimates the fair value of warrants using a Black Scholes OPM. For certain privately held equity securities, the income approach is used, in which the Company converts future amounts (for example, cash flows or earnings) to a net present value. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account include, as relevant: applicable market yields and multiples, the portfolio company’s capital structure, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, and enterprise value among other factors.
The Company applies the practical expedient provided by the ASC Topic 820 relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). ASC Topic 820 permits an entity holding investments in certain entities that either are investment companies, or have attributes similar to an investment company, and calculate NAV per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy as per ASC Topic 820.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents consist solely of funds deposited with financial institutions and short-term liquid investments in money market deposit accounts. Cash and cash equivalents are carried at cost, which approximates fair value. As of September 30, 2022, the Company held $679 thousand (Cost basis $726 thousand) of foreign cash. As of December 31, 2021, the Company held $95 thousand (Cost basis $93 thousand) of foreign cash. Restricted cash includes amounts that are held as collateral securing certain of the Company’s financing transactions, including amounts held in a securitization trust by trustees related to our 2031 Asset-Backed Notes (refer to “Note 5 – Debt”).
Other Assets
Other assets generally consist of prepaid expenses, debt issuance costs on our Credit Facilities net of accumulated amortization, fixed assets net of accumulated depreciation, deferred revenues and deposits and other assets, including escrow receivables.
Escrow Receivables
Escrow receivables are collected in accordance with the terms and conditions of the escrow agreement. Escrow balances are typically distributed over a period greater than one year and may accrue interest during the escrow period. Escrow balances are measured for collectability on at least a quarterly basis and fair value is determined based on the amount of the estimated recoverable balances and the contractual maturity date. As of both September 30, 2022 and December 31, 2021, there were no material past due escrow receivables. The approximate fair value in accordance with ASC Topic 820 of the escrow receivable balance as of September 30, 2022 and December 31, 2021 was $1.3 million and $0.6 million, respectively.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in right of use (“ROU”) assets, and operating lease liability obligations in our Consolidated Statements of Assets and Liabilities. The Company recognizes a ROU asset and an operating lease liability for all leases, with the exception of short-term leases which have a term of 12 months or less. ROU assets represent the right to use an underlying asset for the lease term and operating lease liability obligations represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The Company has lease agreements with lease and non-lease components and has separated these components when determining the ROU assets and the related lease liabilities. As most of the Company’s leases do not provide an implicit rate, the Company estimated its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. See “Note 11 – Commitments and Contingencies”.
Income Recognition
The Company records interest income on an accrual basis and recognizes it as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. OID initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. 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. When a debt investment is placed on non-accrual status, the Company ceases to recognize interest and fee income until the portfolio company has paid all principal and interest due or demonstrated the ability to repay its current and future contractual obligations to the Company. The Company 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.
Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by the Company to portfolio companies and other third parties. Loan commitment and facility fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The Company had approximately $53.6 million of unamortized fees as of September 30, 2022, of which approximately $42.1 million was included as an offset to the cost basis of its current debt investments and approximately $11.5 million was deferred contingent upon the occurrence of a funding or milestone. As of December 31, 2021, the Company had approximately $42.9 million of unamortized fees, of which approximately $36.5 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $6.4 million was deferred contingent upon the occurrence of a funding or milestone.
The Company recognizes nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fee income, including prepayment penalties, fees related to select covenant default, waiver fees and acceleration of previously deferred loan fees and OID related to early loan pay-off or material modification of the specific debt outstanding. The Company recorded approximately $0.5 million and $1.7 million in one-time fee income during the three months ended September 30, 2022 and 2021, respectively. The Company recorded approximately $1.3 million and $6.2 million in one-time fee income during the nine months ended September 30, 2022 and 2021, respectively.
In addition, the Company may also be entitled to an exit fee that is amortized into income over the life of the loan. 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 September 30, 2022, the Company had approximately $36.5 million in exit fees receivable, of which approximately $32.0 million was included as a component of the cost basis of its current debt investments and approximately $4.5 million was a deferred receivable related to expired commitments. As of December 31, 2021, the Company had approximately $35.0 million in exit fees receivable, of which approximately $29.6 million was included as a component of the cost basis of its current debt investments and approximately $5.4 million was a deferred receivable related to expired commitments.
The Company has debt investments in its portfolio that contain a PIK provision. Contractual PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on an accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and interest due. The Company recorded approximately $4.9 million and $2.9 million in PIK income during the three months ended September 30, 2022 and 2021, respectively. The Company recorded approximately $14.9 million and $8.1 million in PIK income during the nine months ended September 30, 2022 and 2021, respectively.
To maintain the Company’s RIC status for taxation purposes, PIK and exit fee income generally must be accrued and distributed to stockholders in the form of dividends for U.S. federal income tax purposes even though the cash has not yet been collected. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments.
In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment transaction closes. The Company had no income from advisory services in the three and nine months ended September 30, 2022 and 2021.
Equity Offering Expenses
The Company’s offering expenses are charged against the proceeds from equity offerings when received as a reduction of capital upon completion of an offering of registered securities.
Debt
The debt of the Company is carried at amortized cost which is comprised of the principal amount borrowed net of any unamortized discount and debt issuance costs. Discounts and issuance costs are accreted to interest expense and loan fees, respectively, using the straight-line method, which closely approximates the effective yield method, over the remaining life of the underlying debt obligations (see “Note 5 – Debt”). Accrued but unpaid interest is included within Accounts payable and accrued liabilities on the Consolidated Statements of Assets and Liabilities. In the event that the debt is extinguished, either partially or in full, before maturity, the Company recognizes the gain or loss in the Consolidated Statement of Operations within net realized gains (losses) as a “Loss on debt extinguishment”.
Debt Issuance Costs
Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing and are recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective yield method or the straight-line method, which closely approximates the effective yield method. In accordance with ASC Subtopic 835-30, Interest – Imputation of Interest, debt issuance costs are presented as a reduction to the associated liability balance on the Consolidated Statements of Assets and Liabilities, except for debt issuance costs associated with line-of-credit arrangements.
Stock Based Compensation
The Company has issued and may, from time to time, issue stock options, restricted stock, and other stock based compensation awards to employees and directors. Management follows the guidance set forth under ASC Topic 718, to account for stock-based compensation awards granted. Under ASC Topic 718, compensation expense associated with stock-based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment. This includes certain assumptions such as stock price volatility, forfeiture rate, expected outcome probability, and expected option life, as applicable to each award. In accordance with ASC Topic 480, certain stock awards are classified as a liability. The compensation expense associated with these awards is recognized in the same manner as all other stock-based compensation. The award liability is recorded as deferred compensation and included in Accounts payable and accrued liabilities.
Income Taxes
The Company intends to operate so as to qualify to be subject to tax as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income (including gains) distributed as dividends for U.S. federal income tax purposes to stockholders. Taxable income includes the Company’s taxable interest, dividend and fee income, reduced by certain deductions, as well as taxable net realized gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as such gains or losses are not included in taxable income until they are realized.
As a RIC, the Company will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless the Company makes distributions treated as dividends for U.S. federal income tax purposes in a timely manner to its stockholders in respect of each calendar year of an amount at least equal to the Excise Tax Avoidance Requirement, as defined below. The Company will not be subject to this excise tax on any amount on which the Company incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, the Company may choose to carry over taxable income in excess of current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S. federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent the Company chooses to carry over taxable income into the next taxable year, distributions declared and paid by the Company in a taxable year may differ from the Company’s taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
We account for income taxes in accordance with the provisions of ASC Topic 740 Income Taxes, under which income taxes are provided for amounts currently payable and for amounts deferred based upon the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances may be used to reduce deferred tax assets to the amount likely to be realized. We intend to timely distribute to our stockholders substantially all of our annual taxable income for each year, except that we may retain certain net capital gains for reinvestment and, depending upon the level of taxable income earned in a year, we may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax.
Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gains recognized for financial reporting purposes. Differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their appropriate tax character. Permanent differences may also result from the change in the classification of certain items, such as the treatment of short-term gains as ordinary income for tax purposes. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Also, tax legislation requires that income be recognized for tax purposes no later than when recognized for financial reporting purposes, with certain exceptions.
Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing net earnings applicable to common stockholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and restricted stock for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock for which future service is required as a condition to the delivery of the underlying common stock. In accordance with ASC 260-10-45-60A, the Company uses the two-class method in the computation of basic EPS and diluted EPS, if applicable.
Comprehensive Income
The Company reports all changes in comprehensive income in the Consolidated Statements of Operations. The Company did not have other comprehensive income for the three and nine months ended September 30, 2022 or 2021. The Company’s comprehensive income is equal to its net increase in net assets resulting from operations.
Distributions to common stockholders are approved by the Board on a quarterly basis and the distribution payable is recorded on the ex-dividend date. The Company maintains an “opt out” dividend reinvestment plan that provides for reinvestment of the Company’s distribution on behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company declares a distribution, cash distributions will be automatically reinvested in additional shares of its common stock unless the stockholder specifically “opts out” of the dividend reinvestment plan and chooses to receive cash distributions. During the three and nine months ended September 30, 2022, the Company issued 62,726 shares and 184,197 shares, respectively, of common stock to stockholders in connection with the dividend reinvestment plan. During the three and nine months ended September 30, 2021, the Company issued 55,413 shares and 189,356 shares, of common stock to stockholders in connection with the dividend reinvestment plan.
Segments
The Company lends to and invests in portfolio companies in various technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single reportable segment.
Recent Accounting Pronouncements
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments Credit Losses (Topic 326)”, which is intended to address issues identified during the post-implementation review of ASU 2016-13, “Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendment, among other things, eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, “Receivables Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The new guidance is effective for interim and annual periods beginning after December 15, 2022. The Company does not anticipate the new standard will have a material impact to the consolidated financial statements and related disclosures.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”, which was issued to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim and annual periods beginning after December 15, 2023. The Company does not anticipate the new standard will have a material impact to the consolidated financial statements and related disclosures.
36
3. Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of September 30, 2022 and December 31, 2021.
(in thousands)
Balance as ofSeptember 30,
Quoted Prices inActive Markets forIdentical Assets
SignificantOther ObservableInputs
SignificantUnobservableInputs
Description
(Level 1)
(Level 2)
(Level 3)
Cash equivalents
Money Market Fund
1,282
Investments
Senior Secured Debt
2,607,006
Unsecured Debt
54,393
Preferred Stock
41,038
93,096
58,319
7,175
27,602
Warrants
9,520
17,639
16,695
2,747,678
Investment Funds & Vehicles measured at Net Asset Value (1)
Total Investments excluding cash equivalents
Total Investments including cash equivalents
Balance as ofDecember 31,
2,156,709
52,890
69,439
115,271
84,460
8,843
21,968
10,922
27,477
19,765
2,328,483
The table below presents a reconciliation of changes for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and 2021.
Balance as ofJanuary 1, 2022
Net RealizedGains (Losses) (1)
Net Change inUnrealizedAppreciation(Depreciation) (2)
Purchases (5)
Sales
Repayments (6)
GrossTransfersintoLevel 3 (3)
GrossTransfersout ofLevel 3 (3)
Balance as ofSeptember 30, 2022
(1,883
(11,377
854,978
(73,500
(314,417
(3,504
(1,880
3,383
(22,458
3,614
(11,101
(6,422
(74
9,462
(19
(3,942
992
(13,795
6,127
(3,162
Escrow Receivable
(328
1,148
(500
Total
2,329,044
7,402
(40,376
869,250
(88,282
(13,868
2,748,960
Balance as ofJanuary 1, 2021
GrossTransfersintoLevel 3 (4)
GrossTransfersout ofLevel 3 (4)
Balance as ofSeptember 30, 2021
2,079,465
(3,744
7,066
884,833
(754,373
2,213,247
14,970
(1,194
36,519
50,295
58,981
54,508
13,954
(61,732
(1,267
64,444
27,398
(60,904
15,592
4,371
60,900
(16,025
31,332
21,483
2,584
9,043
1,854
(4,630
(1,769
28,565
584
(1,515
2,473
(1,036
571
2,202,362
(61,480
83,500
944,004
(6,498
(19,061
2,388,454
For the nine months ended September 30, 2022, approximately $23.2 million in net unrealized depreciation and $9.5 million in net unrealized appreciation relating to assets still held at the reporting date were recorded for preferred stock and common stock Level 3 investments, respectively. For the same period, approximately $12.2 million and $13.4 million in net unrealized depreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date.
For the nine months ended September 30, 2021, approximately $6.5 million in net unrealized depreciation and $15.6 million in net unrealized appreciation were recorded for preferred stock and common stock Level 3 investments, respectively, relating to assetsstill held at the reporting date. For the nine months ended September 30, 2021, approximately $0.4 million and $8.0 million in net unrealized appreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date.
The following tables provide quantitative information about the Company’s Level 3 fair value measurements as of September 30, 2022 and December 31, 2021. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology for the determination of the fair value of the Company’s investments is discussed in “Note 2 – Summary of Significant Accounting Policies”. The significant unobservable input used in the fair value measurement of the Company’s escrow receivables is the amount recoverable at the contractual maturity date of the escrow receivable.
Investment Type - Level 3Debt Investments
Fair Value as ofSeptember 30, 2022(in thousands)
ValuationTechniques/Methodologies
Unobservable Input (1)
Range
WeightedAverage (2)
Pharmaceuticals
37,851
Originated Within 4-6 Months
Origination Yield
9.28% - 10.26%
10.16%
982,922
Market Comparable Companies
Hypothetical Market Yield
10.48% - 18.10%
13.17%
Premium/(Discount)
(0.75)% - 1.50%
0.02%
Technology
43,732
9.90% - 12.53%
10.41%
910,488
11.72% - 17.52%
14.22%
0.16%
Convertible Note Analysis
Probability weighting of alternative outcomes
1.00% - 50.00%
35.83%
Liquidation (3)
15.00% - 55.00%
46.57%
13.67%-13.67%
13.67%
0.75%-0.75%
0.75%
Medical Devices
14.84% - 14.84%
14.84%
0.50% - 0.50%
0.50%
Lower Middle Market
9.67% - 9.67%
9.67%
308,155
12.71% - 17.82%
13.94%
(2.00)% - 1.50%
(0.38)%
20.00% - 80.00%
80.00%
Debt Investments for which Cost Approximates Fair Value
130,945
Debt Investments originated within 3 months
77,801
Imminent Payoffs (4)
93,172
Debt Investments Maturing in Less than One Year
Total Level 3 Debt Investments
Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries noted above as follows:
Fair Value as ofDecember 31, 2021(in thousands)
Valuation Techniques/Methodologies
206,461
11.23% - 12.84%
11.40%
451,587
9.69% - 13.89%
11.34%
(0.50)% - 0.75%
0.06%
109,904
11.12% - 11.68%
11.39%
654,320
8.98% - 14.54%
11.64%
0.12%
20.00% - 50.00%
40.48%
1.00% - 35.00%
32.95%
40.00% - 60.00%
51.84%
Expected Realizable Value (4)
100% - 100%
100.00%
3,100
5.17% - 5.17%
5.17%
81,566
12.23% - 16.01%
13.22%
0.00% - 1.50%
0.43%
90,504
30.00% - 70.00%
57.74%
10.64% - 10.64%
10.64%
(1.00)% - (1.00)%
(1.00)%
441,524
131,584
40
Investment Type - Level 3 Equity and Warrant Investments
Weighted Average (5)
29,721
EBITDA Multiple (2)
11.5x - 11.5x
11.5x
Revenue Multiple (2)
0.6x - 15.4x
6.6x
Tangible Book Value Multiple (2)
1.7x - 1.7x
1.7x
Discount for Lack of Marketability (3)
7.19% - 32.68%
20.53%
13,397
Market Adjusted OPM Backsolve
Market Equity Adjustment (4)
(97.29)% - 7.80%
(16.68)%
Discounted Cash Flow
Discount Rate (7)
17.08% - 28.80%
23.32%
Liquidation
2.1x - 2.1x
2.1x
84.00% - 84.00%
84.00%
3,577
Other (6)
0.6x - 9.3x
3.6x
0.00% - 32.7%
21.35%
6,671
(97.29)% - 10.57%
(18.68)%
7.1x - 7.1x
7.1x
90.00% - 90.00%
90.00%
Total Level 3Warrant and Equity Investments
86,279
41
26,587
20.6x - 20.6x
20.6x
1.0x - 18.4x
11.8x
2.5x - 2.5x
2.5x
18.81% - 34.69%
25.53%
24,910
(88.67)% - 47.22%
0.81%
15.93% - 25.30%
20.46%
27,920
14,517
20.6x - 26.0x
20.7x
0.6x - 9.5x
4.5x
18.81% - 37.35%
26.93%
11,914
(7.76)%
1,046
Total Level 3 Warrant and Equity Investments
118,884
The Company believes that the carrying amounts of its financial instruments, other than investments and debt, which consist of cash and cash equivalents, receivables including escrow receivables, accounts payable and accrued liabilities, approximate the fair values of such items due to the short maturity of such instruments. The debt obligations of the Company are recorded at amortized cost and not at fair value on the Consolidated Statements of Assets and Liabilities. The fair value of the Company’s outstanding debt obligations are based on observable market trading prices or quotations and unobservable market rates as applicable for each instrument.
As of September 30, 2022, the 2033 Notes were trading on the New York Stock Exchange (“NYSE”) at $23.48 per unit at par value. The par value at underwriting for the 2033 Notes was $25.00 per unit. Based on market quotations on or around September 30, 2022, the 2031 Asset-Backed Notes were quoted for 0.970. The fair values of the SBA debentures, July 2024 Notes, February 2025 Notes, June 2025 Notes, June 2025 3-Year Notes, March 2026 A Notes, March 2026 B Notes, September 2026, and January 2027 Notes are calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms. The fair values of the outstanding debt under the MUFG Bank Facility and the SMBC Facility are equal to their outstanding principal balances as of September 30, 2022.
The following tables provide additional information about the approximate fair value and level in the fair value hierarchy of the Company’s outstanding borrowings as of September 30, 2022 and December 31, 2021:
Carrying
Approximate
Identical Assets
Observable Inputs
Unobservable Inputs
Fair Value
SBA Debentures
169,591
153,614
July 2024 Notes
104,459
99,364
February 2025 Notes
49,723
45,739
June 2025 Notes
69,555
63,834
June 2025 3-Year Notes
49,577
47,626
March 2026 A Notes
49,676
44,107
March 2026 B Notes
49,647
44,181
September 2026 Notes
321,112
261,406
January 2027 Notes
344,271
286,885
2031 Asset-Backed Notes
147,810
145,500
2033 Notes
38,799
37,568
MUFG Bank Facility(1)
102,000
SMBC Facility
1,356,824
183,068
1,173,756
145,498
151,471
2022 Notes
149,563
152,906
104,238
110,496
49,637
51,983
69,433
72,031
49,605
52,646
49,570
52,751
320,376
315,495
38,718
42,672
2022 Convertible Notes
229,740
236,049
Union Bank Facility(1)
29,925
1,268,425
431,627
836,798
4. Investments
Control and Affiliate Investments
As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “control”. Under the 1940 Act, the Company is generally deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an “affiliate” of a company in which it has invested if it owns 5% or more, but generally less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. For purposes of determining the classification of its investments, the Company has included consideration of any voting securities or board appointment rights held by the Adviser Funds.
The following table summarizes the Company’s realized gains and losses and changes in unrealized appreciation and depreciation on control and affiliate investments for the three and nine months ended September 30, 2022 and 2021.
Three Months Ended September 30, 2022
Nine Months Ended September 30, 2022
Portfolio Company(1)
Type
Fair Value as of September 30, 2022
Interest Income
Fee Income
Net Change in Unrealized Appreciation (Depreciation)
Realized Gain (Loss)
Control Investments
Control
(22
(165
37,662
853
(1,423
2,531
(6,228
33,945
154
(1,236
393
9,955
174
516
49
Total Control Investments
Affiliate Investments
Black Crow AI, Inc.(2)
Affiliate
(120
3,772
Pineapple Energy LLC(2)
4,209
Total Affiliate Investments
Total Control & Affiliate Investments
1,262
2,060
4,644
7,700
Three Months Ended September 30, 2021
Nine Months Ended September 30, 2021
Fair Value as of September 30, 2021
40,737
(3,475
2,325
(17,690
16,804
45
(219
10,669
8,294
(80
(306
65,835
1,243
(66
2,028
8,469
Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)
62,183
9,712
75,547
1,073
(3,892
2,903
56,893
Portfolio Composition
The following table shows the fair value of the Company’s portfolio of investments by asset class as of September 30, 2022 and December 31, 2021:
Investments at Fair Value
Percentage ofTotal Portfolio
Investments atFair Value
92.3
%
88.6
1.9
2.2
1.4
2.8
3.3
4.7
1.0
1.6
0.1
100.0
A summary of the Company’s investment portfolio, at value, by geographic location as of September 30, 2022 and December 31, 2021 is shown as follows:
United States
2,545,973
90.1
2,138,184
87.8
United Kingdom
158,491
5.6
169,407
7.0
Netherlands
88,174
3.1
82,925
3.4
Canada
19,373
0.7
27,673
1.1
Israel
0.3
0.4
Ireland
0.2
Germany
Other
485
0.0
The following table shows the fair value of the Company’s portfolio by industry sector as of September 30, 2022 and December 31, 2021:
1,091,827
38.6
967,383
39.7
680,216
24.1
585,622
489,968
17.3
395,506
16.3
203,599
7.2
121,003
5.0
101,094
3.6
105,490
4.3
72,061
2.5
65,073
2.7
59,735
2.1
74,417
43,892
0.6
25,497
0.9
28,099
1.2
20,621
22,498
17,421
12,612
0.5
15,683
39,387
1,029
368
44
No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of September 30, 2022 or December 31, 2021.
Concentrations of Credit Risk
The Company’s customers are primarily privately held companies and public companies which are active in the “Drug Discovery & Development", "Software”, “Internet Consumer & Business Services”, “Healthcare Services, Other”, and “Communications & Networking" sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property.
Industry and sector concentrations vary as new loans are recorded and loans are paid off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and warrant or other equity interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies.
As of September 30, 2022 and December 31, 2021, the Company’s ten largest portfolio companies represented approximately 30.1% and 30.5% of the total fair value of the Company’s investments in portfolio companies, respectively. As of September 30, 2022 and December 31, 2021, the Company had eight and six portfolio companies, respectively, that represented 5% or more of the Company’s net assets. As of September 30, 2022, the Company had three equity investments representing approximately 36.6% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of the Company’s equity investments. As of December 31, 2021, the Company had six equity investments which represented approximately 49.6% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of such investments.
Investment Collateral
In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. As of September 30, 2022, approximately 77.4% of the Company’s debt investments at fair value were in a senior secured first lien position, with 40.2% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 27.9% secured by a first priority security in all of the assets of the portfolio company and the portfolio company was prohibited from pledging or encumbering its intellectual property, and 9.3% of the Company’s debt investments at fair value were in a first lien “last-out” senior secured position with a security interest in all of the assets of the portfolio company, whereby the “last-out” loans will be subordinated to the “first-out” portion of the unitranche loan in a liquidation, sale or other disposition. Another 20.6% of the Company’s debt investments at fair value were secured by a second priority security interest in the portfolio company’s assets, and 2.0% were unsecured.
As of December 31, 2021, approximately 77.0% of the Company’s debt investments at fair value were in a senior secured first lien position, with 37.5% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 31.6% secured by a first priority security in all of the assets of the portfolio company and the portfolio company was prohibited from pledging or encumbering its intellectual property and 7.9% of the Company’s debt investments at fair value were in a first lien “last-out” senior secured position with security interest in all of the assets of the portfolio company, whereby the “last-out” loans will be subordinated to the “first-out” portion of the unitranche loan in a liquidation, sale or other disposition. Another 20.6% of the Company’s debt investments at fair value were secured by a second priority security interest in the portfolio company’s assets, and 2.4% were unsecured.
5. Debt
As of September 30, 2022 and December 31, 2021, the Company had the following available and outstanding debt:
Total Available
Principal
Carrying Value (1)
175,000
150,500
150,000
105,000
350,000
230,000
MUFG Bank Facility (2)(3)
545,000
400,000
SMBC Facility (2)
225,000
2,185,000
1,542,000
1,745,000
1,250,425
Debt issuance costs, net of accumulated amortization, were as follows as of September 30, 2022 and December 31, 2021:
5,409
5,002
762
445
567
423
324
395
430
3,888
4,624
5,729
2,190
1,201
149
MUFG Bank Facility (1)
1,346
1,239
SMBC Facility (1)
1,574
922
23,700
16,035
For the three and nine months ended September 30, 2022, the components of interest expense, related fees, losses on debt extinguishment and cash paid for interest expense for debt were as follows:
Interest expense(1)
Amortization of debt issuance cost (loan fees)
Unused facility and other fees (loan fees)
Total interest expense and fees
Cash paid for interest expense
1,160
148
1,308
2,086
2,848
434
3,282
2,835
1,011
1,061
2,293
1,252
1,326
2,504
3,756
222
3,978
5,008
535
564
1,070
1,605
1,691
2,140
754
794
2,263
2,384
1,509
788
817
859
587
1,125
1,760
2,250
569
595
1,137
1,706
1,784
2,275
2,174
2,378
4,266
6,523
612
7,135
8,532
3,079
3,286
5,906
8,552
575
9,127
1,903
100
2,003
1,815
2,072
109
625
652
1,875
923
5,004
MUFG Bank Facility(2)
253
1,973
1,025
665
1,682
4,830
2,240
135
98
195
428
181
722
328
1,261
700
1,268
915
16,682
21,740
3,507
2,010
44,361
46
For the three and nine months ended September 30, 2021, the components of interest expense and related fees and cash paid for interest expense for debt were as follows:
Amortization of debt issuance cost (loan fees)(2)
183
1,228
367
1,595
2,272
1,776
1,866
5,327
270
5,597
3,469
221
3,977
April 2025 Notes(3)
1,477
667
1,667
3,636
2,635
70
1,138
2027 Asset-Backed Notes(3)
1,344
1,416
1,348
4,593
5,515
4,677
2028 Asset-Backed Notes(3)
2,226
251
2,477
2,256
7,684
867
8,551
2,683
2,906
5,031
8,050
669
8,719
10,062
Wells Facility(3)
146
592
MUFG Bank Facility(4)
290
458
1,062
327
968
1,404
2,997
540
2,772
604
16,445
16,274
6,532
50,705
As of September 30, 2022 and December 31, 2021, the Company was in compliance with the terms of all borrowing arrangements. There are no sinking fund requirements for any of the Company’s debt.
The Company reported the following SBA debentures outstanding principal balances as of September 30, 2022 and December 31, 2021:
(in thousands) Issuance/Pooling Date
Interest Rate (1)
March 26, 2021
September 1, 2031
1.58%
June 25, 2021
16,200
July 28, 2021
5,400
August 20, 2021
October 21, 2021
March 1, 2032
3.21%
November 1, 2021
November 15, 2021
5,200
November 30, 2021
20,800
December 20, 2021
December 23, 2021
December 28, 2021
January 14, 2022
January 21, 2022
Total SBA Debentures
SBICs are subject to a variety of regulations and oversight by the SBA concerning the size and nature of the companies in which they may invest as well as the structures of those investments. The SBA as part of its oversight periodically examines and audits to determine SBICs compliance with SBA regulations. Our SBIC was in compliance with all SBIC terms, including those pertaining to the SBA Debentures as of September 30, 2022 and December 31, 2021.
HC IV received its license to operate as a SBIC on October 27, 2020. The license has a 10-year term. Through the license, HC IV has access to $175.0 million of capital through the SBA debenture program, that is in addition to the Company’s regulatory capital commitment of $87.5 million to HC IV. As of September 30, 2022, HC IV has issued a total of $175.0 million in SBA guaranteed debentures and has paid the SBA commitment fees and facility fees of approximately $1.75 million and $4.2 million, respectively.
As of September 30, 2022, the Company held investments in HC IV in 18 companies with a fair value of approximately $277.1 million, accounting for approximately 9.8% of the Company’s total investment portfolio. Further, HC IV held approximately $287.6 million in tangible assets which accounted for approximately 9.8% of the Company’s total assets as of September 30, 2022.
On October 23, 2017, the Company issued $150.0 million in aggregate principal amount of 4.625% interest-bearing unsecured notes that mature on October 23, 2022 (the “2022 Notes”), unless repurchased in accordance with their terms. Interest on the 2022 Notes is due semiannually in arrears on April 23 and October 23 of each year, commencing on April 23, 2018. On February 22, 2022, pursuant to the redemption terms of the 2025 Notes indenture, the Company fully repaid the aggregate outstanding $150.0 million of principal and $2.3 million of accrued interest. In addition, the Company paid $3.3 million of prepayment premium fees, which together with the accelerated recognition of $0.3 million of debt issuance costs was recognized as a realized loss on extinguishment of the debt.
On January 25, 2017, the Company issued $230.0 million in aggregate principal amount of 4.375% interest-bearing unsecured notes due on February 1, 2022 (the “2022 Convertible Notes”), unless previously converted or caused to repurchase the notes in accordance with their terms by the holders of the 2022 Convertible Notes. The $230.0 million issued aggregate principal of the 2022 Convertible Notes includes an additional $30.0 million aggregate principal amount issued pursuant to the initial purchaser’s exercise in full of its overallotment option. Interest on the 2022 Convertible Notes is due semiannually in arrears on February 1 and August 1 of each year. On February 1, 2022, the Company fully repaid the aggregate outstanding $230.0 million principal, $5.0 million of accrued interest and fees, and issued 981,169 shares related to noteholders who elected to convert pursuant to the redemption terms of the 2022 Convertible Notes indenture.
On July 16, 2019, the Company issued $105.0 million in aggregate principal amount of 4.77% interest-bearing unsecured notes due on July 16, 2024 (the “July 2024 Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the July 2024 Notes is due semiannually. The July 2024 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On February 5, 2020, the Company issued $50.0 million in aggregate principal amount of 4.28% interest-bearing unsecured notes due February 5, 2025 (the “February 2025 Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the February 2025 Notes is due semiannually. The February 2025 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On June 3, 2020, the Company issued $70.0 million in aggregate principal amount of 4.31% interest-bearing unsecured notes due June 3, 2025 (the “June 2025 Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the June 2025 Notes is due semiannually. The June 2025 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On June 23, 2022, the Company issued $50.0 million in aggregate principal amount of 6.00% interest-bearing unsecured notes due June 23, 2025 (the “June 2025 3-Year Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the June 2025 3-Year Notes is due semiannually. The June 2025 3-Year Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On November 4, 2020, the Company issued $50.0 million in aggregate principal amount of 4.5% interest-bearing unsecured notes due March 4, 2026 (the “March 2026 A Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the March 2026 A Notes is due semiannually. The March 2026 A Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On March 4, 2021, the Company issued $50.0 million in aggregate principal amount of 4.55% interest-bearing unsecured notes due March 4, 2026 (the “March 2026 B Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement pursuant note offering. The sale of the March 2026 B Notes generated net proceeds of approximately $49.5 million. Aggregate offering expenses in connection with the transaction, including fees and commissions, were approximately $0.5 million. Interest on the March 2026 B Notes is due semiannually. The March 2026 B Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On September 16, 2021, the Company issued $325.0 million in aggregate principal amount of 2.625% interest-bearing unsecured notes due September 16, 2026 (the “September 2026 Notes”), unless repurchased in accordance with the terms of the Seventh Supplemental Indenture, dated September 16, 2021. The issuance of the September 2026 Notes generated net proceeds of approximately $320.1 million. The aggregate offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $4.1 million of costs and $0.8 million related to the discount. Interest on the September 2026 Notes is payable semi-annually in arrears on March 16 and September 16 of each year, commencing on March 16, 2022. The September 2026 Notes are general unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The Company may redeem some or all of the September 2026 Notes at any time, or from time to time, at the redemption price set forth under the terms of the September 2026 Notes Indenture.
On January 20, 2022, the Company issued $350.0 million in aggregate principal amount of 3.375% interest-bearing unsecured notes due January 20, 2027 (the “January 2027 Notes”), unless repurchased in accordance with the terms of the Eight Supplemental Indenture, dated January 20, 2022. The issuance of the January 2027 Notes generated net proceeds of approximately $343.4 million. The aggregate offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $4.1 million of costs and $2.5 million related to the discount. Interest on the January 2027 Notes is payable semi-annually in arrears on January 20 and July 20 of each year, commencing on July 20, 2022. The January 2027 Notes are general unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The Company may redeem some or all of the January 2027 Notes at any time, or from time to time, at the redemption price set forth under the terms of the January 2027 Notes Indenture.
On June 22, 2022, the Company completed a term debt securitization in connection with which an affiliate of the Company issued $150.0 million in aggregate principal amount of 4.95% interest-bearing asset-backed notes due on July 20, 2031 (the “2031 Asset-Backed Notes”). The 2031 Asset-Backed Notes were issued by Hercules Capital Funding Trust 2022-1 LLC (the “2022 Securitization Issuer”) pursuant to a note purchase agreement, dated as of June 22, 2022, by and among the Company, Hercules Capital Funding 2022-1 LLC, as trust depositor, the 2022 Securitization Issuer, and U.S. Bank Trust Company, N. A., as trustee, and are backed by a pool of senior loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2031 Asset-Backed Notes will be paid, to the extent of funds available.
Under the terms of the 2031 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the 2031 Asset-Backed Notes and through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2031 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. As of September 30, 2022, there was approximately $8.3 million and none as of December 31, 2021 of funds segregated as restricted cash related to the 2031 Asset-Backed Notes.
On September 24, 2018, the Company issued $40.0 million in aggregate principal amount of 6.25% interest-bearing unsecured notes due October 30, 2033 (the “2033 Notes”), unless repurchased in accordance with the terms of the Sixth Supplemental Indenture to the Base Indenture, dated September 24, 2018. Interest on the 2033 Notes is payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year. The 2033 Notes trade on the NYSE under the symbol “HCXY.” The 2033 Notes are general unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated
indebtedness issued by the Company. The Company may redeem some or all of the 2033 Notes at any time, or from time to time, at the redemption price set forth under the terms of the 2033 Notes Indenture after October 30, 2023.
Credit Facilities
As of September 30, 2022 and December 31, 2021, the Company has two available credit facilities, the MUFG Bank Facility and the SMBC Facility (together, the “Credit Facilities”). For the nine months ended September 30, 2022 and year ended December 31, 2021, the weighted average interest rate was 3.70% and 2.54%, respectively, and the average debt outstanding under the Credit Facilities was $115.6 million and $28.8 million, respectively.
MUFG Bank Facility
On June 10, 2022, the Company entered into a second amended credit facility agreement, which amends the agreement dated as of February 20, 2020. The Company, through a special purpose wholly owned subsidiary, Hercules Funding IV LLC (“Hercules Funding IV”), as borrower, entered into the credit facility (the “MUFG Bank Facility”) with MUFG Bank Ltd. (formerly MUFG Union Bank and known as the “Union Bank Facility”) as the arranger and administrative agent, and the lenders party to the MUFG Bank Facility from time to time.
Under the MUFG Bank Facility, the lenders have made commitments of $545.0 million, which is an increase from $400.0 million as of December 31, 2021. The MUFG Bank Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $600.0 million, funded by existing or additional lenders and with the agreement of MUFG Bank and subject to other customary conditions. There can be no assurances that additional lenders will join the MUFG Bank Facility to increase available borrowings. Debt under the MUFG Bank Facility generally bears interest at a rate per annum equal to SOFR plus 2.60% for SOFR loans with a one-month interest period and 2.65% for SOFR loans with a three-month interest period. The MUFG Bank Facility matures on February 22, 2024, unless sooner terminated in accordance with its terms. The MUFG Bank Facility is secured by all of the assets of Hercules Funding IV. The MUFG Bank Facility requires payment of a non-use fee during the revolving credit availability period.
The MUFG Bank Facility also includes financial and other covenants applicable to the Company and the Company’s subsidiaries, in addition to those applicable to Hercules Funding IV, including covenants relating to certain changes of control of Hercules Funding IV. Among other things, these covenants require the Company to maintain certain financial ratios, including a minimum interest coverage ratio with respect to Hercules Funding IV and a minimum tangible net worth in an amount that is in excess of $723.0 million.
The MUFG Bank Facility provides for customary events of default, including with respect to payment defaults, breach of representations and covenants, servicer defaults, certain key person provisions, cross default provisions to certain other debt, lien and judgment limitations, and bankruptcy.
On June 14, 2022, the Company entered into a second amendment to a revolving credit agreement, which amends the revolving credit agreement, dated as of November 9, 2021, with Sumitomo Mitsui Banking Corporation (the “SMBC Facility”), as administrative agent, and the lenders and issuing banks to the SMBC Facility. As of September 30, 2022, the SMBC Facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies of up to $225.0 million, from which the Company may access subject to certain conditions. As of December 31, 2021, the Company had access to $100.0 million, subject to certain conditions. Additionally, the SMBC Facility provides for the issuance of letters of credit on the account of the Company or its designee in U.S. dollars and certain agreed upon foreign currencies in an aggregate face amount not to exceed $15.0 million. The Company’s obligations under the SMBC Facility may in the future be guaranteed by certain of the Company’s subsidiaries and primarily secured by a first priority security interest (subject to certain exceptions) in only certain specified property and assets of the Company and the subsidiary guarantors thereunder. Availability under the SMBC Facility will terminate on November 7, 2025, and the outstanding loans under the SMBC Facility will mature on November 9, 2026. Borrowings under the SMBC Facility are subject to compliance with a borrowing base and an aggregate portfolio balance.
Interest under the SMBC Facility is determined by the nature and denomination of the borrowing. Interest rates are determined by the appropriate benchmark rate (SOFR, EURIBOR, Prime, CDOR, or TIBOR) as applicable for the type of borrowing plus an applicable margin adjustment which can range from 0.875% to 2.0% per annum subject to certain conditions. In addition to interest, the SMBC Facility is subject to a non-usage fee of 0.375% per annum (based on the immediately preceding period’s average usage) on the unused portion of the commitment under the SMBC Facility during the revolving period. The Company is required to pay letter of credit participation fees and a fronting fee on the average daily amount of any lender’s exposure with respect to any letters of credit issued under the SMBC Facility.
The SMBC Facility contains customary events of default with customary cure and notice provisions, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default and cross-acceleration to other indebtedness and bankruptcy. The SMBC Facility also includes financial and other covenants
applicable to the Company and the Company’s subsidiaries, including covenants relating to minimum stockholders' equity, asset coverage ratios, and our status as a RIC.
6. Income Taxes
To qualify and be subject to tax as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing dividends of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without regard to any deduction for distributions paid, to its stockholders. The amount to be paid out as a distribution is determined by the Board each quarter and is based upon the annual earnings estimated by the management of the Company. To the extent that the Company’s earnings fall below the amount of dividend distributions declared, however, a portion of the total amount of the Company’s distributions for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.
As previously noted, federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Permanent differences are reclassified among capital accounts in the financial statements to reflect their appropriate tax character. Permanent differences may also result from the change in the classification of short-term gains as ordinary income for tax purposes. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Also, income is required to be recognized for tax purposes no later than when recognized for financial reporting purposes, with certain exceptions.
As a RIC, the Company will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless the Company makes distributions treated as dividends for U.S. federal income tax purposes in a timely manner to its stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of its ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of its 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 (the “Excise Tax Avoidance Requirement”). The Company will not be subject to this excise tax on any amount on which the Company incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, the Company may choose to carry over taxable income in excess of current taxable year distributions from such taxable income into the next taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next taxable year under the Code is the total amount of distributions paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent the Company chooses to carry over taxable income into the next taxable year, distributions declared and paid by the Company in a taxable year may differ from the Company’s taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
The Company has taxable subsidiaries which hold certain portfolio investments in an effort to limit potential legal liability and/or comply with source-income type requirements contained in the RIC tax provisions of the Code. These taxable subsidiaries are consolidated for U.S. GAAP and the portfolio investments held by the taxable subsidiaries are included in the Company’s consolidated financial statements and are recorded at fair value. These taxable subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities as a result of their ownership of certain portfolio investments. Any income generated by these taxable subsidiaries generally would be subject to tax at normal corporate tax rates based on its taxable income.
Taxable income for the three months ended September 30, 2022, was approximately $49.1 million or $0.39 per share. Taxable net realized losses for the same period were $(2.0) million or approximately $(0.02) per share. Taxable income for the three months ended September 30, 2021, was approximately $43.3 million or $0.38 per share. Taxable net realized gains for the same period were $23.0 million or approximately $0.20 per share.
Taxable income for the nine months ended September 30, 2022, was approximately $122.2 million or $0.99 per share. Taxable net realized losses for the same period were $(0.1) million or approximately $(0.00) per share. Taxable income for the nine months ended September 30, 2021, was approximately $125.3 million or $1.09 per share. Taxable net realized gains for the same period were $80.5 million or approximately $0.70 per share.
For the three and nine months ended September 30, 2022, the Company paid approximately $0.1 million and $7.3 million of income tax, respectively, including excise tax, and had $4.0 million of accrued but unpaid tax expense as of September 30, 2022. For the three and nine months ended September 30, 2021, the Company paid approximately $0.1 million and $3.7 million of income tax, including excise tax, and had $4.9 million of accrued but unpaid tax expense as of September 30, 2021.
The Company intends to timely distribute to its stockholders substantially all of its annual taxable income for each year, except that it may retain certain net capital gains for reinvestment and, depending upon the level of taxable income earned in a year, may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax.
During the three and nine months ended September 30, 2022, the Company declared and paid distributions of $0.50 and $1.46 per share, respectively. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s taxable year generally based upon its taxable income for the full taxable year and distributions paid for the full taxable year. As a result, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. If the Company had determined the tax attributes of its distributions taxable year-to-date as of September 30, 2022, 100% would be from its current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the actual tax attributes of the Company’s fiscal year of 2022 distributions to stockholders will be.
7. Stockholders’ Equity
On May 9, 2022, the Company entered into an At-The-Market (“ATM”) equity distribution agreement with JMP Securities LLC (“JMP”) and Jefferies LLC (“Jeffries”) (the “2022 Equity Distribution Agreement”). The 2022 Equity Distribution Agreement provides that the Company may offer and sell up to 17.5 million shares of its common stock from time to time through JMP or Jeffries, as its sales agents. Sales of the Company’s 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. The 2022 Equity Distribution Agreement replaces the ATM equity distribution agreement between the Company and JMP executed on July 2, 2020 (the “2020 Equity Distribution Agreement”).
Under the 2020 Equity Distribution Agreement, the Company sold no shares and approximately 5.6 million shares, respectively, of common stock during the three and nine months ended September 30, 2022. From the sale of shares under the 2020 Equity Distribution Agreement during the nine months ended September 30, 2022, the Company received total accumulated net proceeds of approximately $98.5 million, including $1.1 million of offering expenses. Under the 2022 Equity Distribution agreement, the Company sold common stock shares of approximately 2.9 million and 6.2 million for the three and nine months ended September 30, 2022. From the sale of shares, the Company received total accumulated net proceeds of approximately $42.9 million and $91.5 million including $0.4 million and $1.0 million of offering expenses for the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, there were no shares sold under the existing equity distribution agreement.
The Company generally uses net proceeds from these offerings to make investments, to repurchase or pay down liabilities and for general corporate purposes. As of September 30, 2022, approximately 11.3 million shares remain available for issuance and sale under the 2022 Equity Distribution Agreement. The 2020 Equity Distribution Agreement is no longer effective. The Company has issued stock options for common stock subject to future issuance, of which 207,794 and 210,569 were outstanding as of September 30, 2022 and December 31, 2021, respectively.
8. Equity Incentive Plans
The Company grants equity-based awards to employees and non-employee directors for the purpose of attracting and retaining the services of its executive officers, key employees, and members of the Board. The Company’s equity-based awards are granted under the 2018 Equity Incentive Plan (the “2018 Plan”) for employees and 2018 Non-Employee Director Plan (the “Director Plan”) for non-employee directors. The 2018 Plan and the Director Plan were approved by stockholders on June 28, 2018, and authorize us to issue up to 18.7 million shares of common stock and 300,000 shares of restricted stock under the 2018 Plan and Director Plan, respectively. Unless earlier terminated by the Board, the 2018 Plan and Director Plan will terminate on May 12, 2028. Outstanding awards issued under plans that precede the 2018 Plan and Director Plan remain outstanding, unchanged and subject to the terms of such plans and their respective award agreements, until the vesting, expiration or lapse of such awards in accordance with their terms.
The Company has received exemptive relief from the SEC that permits it to issue restricted stock to non-employee directors under the Director Plan and restricted stock and restricted stock units to certain of its employees, officers, and directors (excluding non-employee directors) under the 2018 Plan. The exemptive order also allows participants in the Director Plan and the 2018 Plan to (i) elect to have the Company withhold shares of its common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”) and/or (ii) permit the holders of restricted stock to elect to have the Company withhold shares of its stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual employee would be able to make a cash payment to satisfy applicable tax withholding at the time of option exercise or vesting on restricted stock.
The Company has granted equity-based awards that have service and performance conditions. Certain of the Company’s equity-based awards are classified as liability awards in accordance with ASC Topic 718, Compensation – Stock Compensation. All of the Company’s equity-based awards require future service, and are expensed over the relevant service period. The Company does not estimate forfeitures, and reverses all unvested costs associated with equity-based awards in the period they are forfeited. For the three months ended September 30, 2022, and 2021, the Company recognized $2.5 million and $3.3 million of stock based compensation expense in the Consolidated Statement of Operations, respectively. For the nine months ended September 30, 2022, and 2021, the Company recognized $10.6 million and $9.0 million of stock based compensation expense in the Consolidated Statement of
52
Operations, respectively. As of September 30, 2022, and 2021, approximately $16.0 million and $18.3 million of total unrecognized compensation costs expected to be recognized over the next 1.8 and 1.9 years, respectively.
Service-Vesting Awards
The Company grants equity-based awards which have service conditions, and generally begin to vest one-third after one year after the date of grant and ratably over the succeeding 2 years in accordance with the individual award terms (the “Service Vesting Awards”). The grant date fair value of Service Vesting Awards granted during the nine months ended September 30, 2022, and 2021, were approximately $11.1 million, and $11.2 million, respectively.
The Company has granted restricted stock equity awards in the form of restricted stock awards and restricted stock units. The Company determines the grant date fair values of restricted stock equity awards using the grant date stock close price. The activities for the Company's unvested restricted stock equity awards for each of the nine months ended September 30, 2022, and 2021, are summarized below:
Weighted Average Grant DateFair Value per Share
Unvested Shares Beginning of Period
1,037,848
14.51
989,100
13.69
Granted
632,831
17.24
748,519
14.80
Vested (1)
(578,579
14.39
(517,076
13.71
Forfeited
(25,407
15.99
(71,020
14.16
Unvested Shares End of Period
1,066,693
16.16
1,149,523
14.42
(1) With respect to certain restricted stock equity awards granted prior to January 1, 2019, receipt of the shares of the Company’s common stock underlying vested restricted stock equity awards will be deferred for four years from grant date unless certain conditions are met. Accordingly, such vested restricted stock equity awards will not be issued as common stock upon vesting until the completion of the deferral period.
In addition to the restricted stock equity based awards, the Company has also issued stock options to certain employees. The fair value of options granted during the nine months ended September 30, 2022 and 2021, was approximately $143,000 and $123,000, respectively. During the nine months ended September 30, 2022 and 2021, approximately $52,000, and $23,000, of share-based cost due to stock option grants was expensed, respectively.
Performance-Vesting Awards
The Company has granted equity-based awards, which have market and performance conditions in addition to a service condition (“Performance Awards”). The value of these awards may increase dependent on increases to the Company’s total stockholder return (“TSR”). The total compensation will be determined by the Company’s TSR relative to specified BDCs during a specified performance period. Depending on the results achieved during the specified performance period, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the target shares granted. The Performance Awards typically vest after four years, and generally may not be disposed until one year post vesting. The Company determines the fair values of the Performance Awards at the grant date using a Monte-Carlo simulation multiplied by the target payout level and is recognized over the service period. During the nine months ended September 30, 2022, all 487,409 Performance Award shares vested. Additionally, 241,770 distribution equivalent units (“DEUs”) were issued with a grant date fair value of $4.0 million. During the nine months ended September 30, 2021, there were no Performance Awards or DEUs granted or vested. As of September 30, 2022 and 2021, there were no shares and 487,409 shares of unvested Performance Awards.
Liability Classified Awards
The Company has granted equity-based awards which are subject to both service and performance conditions. These awards are settled either in cash or a fixed dollar value of shares, subject to the terms of each individual award, and therefore classified as liability awards (the “Liability Awards”). The remaining maximum total potential value of the Liability Awards granted is $4.3 million, which assumes all performance conditions are met for each Liability award. If the performance conditions are not met, the total compensation expense related to the Liability Awards may be less than the maximum granted value of the awards. The awards are recorded as deferred compensation within Accounts Payable and Accrued Liabilities included on the Consolidated Statement of Assets and Liabilities.
Certain Liability Awards are structured similar to the Performance Awards, and increase in value with corresponding increases to the Company’s TSR and vest after four years. The Company remeasures the value of these awards each period based on the Company’s TSR achieved to date. Certain other Liability Awards are linked to attainment of investment funding goals. The Company determines the fair value of these Liability Awards based on the expected probability of the performance conditions being met and recognized over the service period. As of September 30, 2022, the Company determined that the weighted average expected probability of the performance conditions being met within each Liability Award was 100%. The expected probability is re-evaluated each period, and may be adjusted to reflect changes in this assumption. These other Liability Awards vest over a three year service term.
As of September 30, 2022, all Liability Awards are unvested and there was approximately $2.3 million of total unrecognized compensation costs expected to be recognized over a weighted average period of 1.6 years. For the nine months ended September 30, 2022, there was approximately $2.3 million of compensation expense related to the Liability Awards recognized in the Consolidated Statement of Operations and $2.0 million accrued within Accounts Payable and Accrued Liabilities in the Consolidated Statements of Assets and Liabilities. During the nine months ended September 30, 2022 and 2021, $6.0 million and $0 of the Liability Awards vested.
As of September 30, 2021, all Liability Awards are unvested and there was approximately $4.2 million of total unrecognized compensation costs expected to be recognized over a weighted average period of 2.2 years. For the nine months ended September 30, 2021, there was approximately $1.3 million of compensation expense related to the Liability Awards recognized in the Consolidated Statement of Operations and $5.3 million accrued within Accounts Payable and Accrued Liabilities in the Consolidated Statements of Assets and Liabilities. No Liability Awards vested during the periods presented.
9. Earnings Per Share
Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:
Numerator
Net increase in net assets resulting from operations
Less: Distributions declared-common and restricted shares
(Over-)Undistributed earnings (loss)
(10,748
(21,641
(142,277
37,300
Undistributed earnings-common shares
36,931
Add: Distributions declared-common shares
63,421
44,770
180,114
131,829
Numerator for basic and diluted change in net assets per common share
52,673
23,129
37,837
168,760
Denominator
Basic weighted average common shares outstanding
Incremental shares from assumed conversion of 2022 Convertible Notes
661
293
Common shares issuable
1,850
773
Weighted average common shares outstanding assuming dilution
Change in net assets per common share
In the table above, unvested share-based payment awards that have non-forfeitable rights to distributions or distribution equivalents are treated as participating securities for calculating earnings per share. Unvested common stock options and restricted stock units are also considered for the purpose of calculating diluted earnings per share.
As disclosed in “Note 5 – Debt”, on February 1, 2022, the Company fully repaid the 2022 Convertible Notes. As these notes were fully repaid, there is no dilutive impact for the current period ended September 30, 2022. In July 2021, the Company irrevocably elected combination settlement for the 2022 Convertible Notes. Therefore the dilutive impact of the 2022 Convertible Notes, was calculated for only the portion expected to be settled in stock as it relates to the diluted shares outstanding for the three and nine months ended September 30, 2021.
The calculation of change in net assets resulting from operations per common share assuming dilution, excludes all anti-dilutive shares. For the three and nine months ended September 30, 2022, and 2021, the number of anti-dilutive shares, as calculated based on the weighted average closing price of the Company’s common stock for the periods, are as follows:
Three months ended September 30,
Anti-dilutive Securities
Unvested common stock options
865
1,725
Restricted stock units*
Unvested restricted stock awards
3,982
710
Performance awards*
*Included in these amounts are shares related to certain equity-based awards, which are fully-vested but have not been delivered and thus not outstanding for purposes of calculating earnings per share.
As of both September 30, 2022 and December 31, 2021, the Company was authorized to issue 200.0 million shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote.
10. Financial Highlights
Following is a schedule of financial highlights for the nine months ended September 30, 2022 and 2021:
(in thousands, except per share data and ratios)
Per share data (1):
Net asset value at beginning of period
11.26
Net realized gain (loss)
0.01
0.12
Net unrealized appreciation (depreciation)
(0.71
0.40
Total from investment operations
Net increase (decrease) in net assets from capital share transactions (1)
(0.11
Distributions of net investment income (6)
(1.11
(1.06
Distributions of capital gains (6)
(0.35
(0.09
Stock-based compensation expense included in investment income (2)
0.09
0.07
Net asset value at end of period
11.54
Ratios and supplemental data:
Per share market value at end of period
11.58
16.61
Total return (3)
(24.34
)%
23.05
Shares outstanding at end of period
Weighted average number of common shares outstanding
Net assets at end of period
Ratio of total expense to average net assets (4)
9.51
9.93
Ratio of net investment income before investment gains and losses to average net assets (4)
12.53
11.01
Portfolio turnover rate (5)
14.12
33.14
Weighted average debt outstanding
1,430,814
1,246,769
Weighted average debt per common share
11.60
10.88
11. Commitments and Contingencies
The Company’s commitments and contingencies consist primarily of unfunded commitments to extend credit in the form of loans to the Company’s portfolio companies. As of September 30, 2022, a portion of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Furthermore, the Company’s credit agreements with its portfolio companies generally contain customary lending provisions which allow the Company relief from funding obligations for previously made unfunded commitments in instances where the underlying portfolio company experiences materially adverse events that affect its financial condition or business outlook. Since a portion of these commitments may expire without being drawn, unfunded contractual commitments do not necessarily represent future cash requirements. As such, the Company’s disclosure of unfunded contractual commitments includes only those which are available at the request of the portfolio company and unencumbered by future or unachieved milestones.
As of September 30, 2022, and December 31, 2021, the Company had approximately $659.0 million and $286.8 million, respectively, of unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by future or unachieved milestones. These amounts also exclude unfunded commitments related to the portion of portfolio company investments assigned to or directly committed by the Adviser Funds as described in "Note -12 Related Party Transactions". The fair value of the Company’s 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.
As of September 30, 2022, and December 31, 2021, the Company’s unfunded contractual commitments available at the request of the portfolio company, including undrawn revolving facilities, and unencumbered by milestones were as follows:
Unfunded Commitments (1) as of
Debt Investments:
66,500
43,250
42,000
Vida Health
36,000
29,400
20,020
19,375
18,563
Locus Robotics Corporation
18,281
Dronedeploy, Inc.
11,625
19,300
13,500
Alamar Biosciences, Inc.
9,375
3,500
1,812
1,707
3,845
1,600
1,250
1,209
1,088
1,050
938
890
742
424
1,583
471
457
386
268
225
Total Unfunded Debt Commitments:
652,957
282,913
Investment Funds & Vehicles:(2)
3,187
3,839
2,826
Total Unfunded Commitments in Investment Funds & Vehicles:
6,013
Total Unfunded Commitments
658,970
286,752
The following table provides additional information on the Company’s unencumbered unfunded commitments regarding milestones, expirations and type:
Unfunded Debt Commitments:
Expiring during:
198,281
199,681
2023
312,457
43,675
2024
121,586
25,800
2025
1,694
2,232
2026
9,053
11,525
2027
7,745
2028
2,141
Total Unfunded Debt Commitments
Unfunded Commitments in Investment Funds & Vehicles:
2030
2032
Total Unfunded Commitments in Investment Funds & Vehicles
The following tables provide the Company’s contractual obligations as of September 30, 2022 and December 31, 2021:
As of September 30, 2022:
Payments due by period (in thousands)
Contractual Obligations (1)
Less than 1 year
1 - 3 years
3 - 5 years
After 5 years
Debt (2)(3)
377,000
365,000
Lease and License Obligations (4)
6,821
3,060
1,908
1,853
1,548,821
378,908
801,853
As of December 31, 2021:
Debt (5)(3)
380,000
574,925
190,500
8,283
3,120
2,958
1,427
778
1,258,708
383,120
107,958
576,352
191,278
Certain premises are leased or licensed under agreements which expire at various dates through December 2028. For the three and nine months ended September 30, 2022, total rent expense, including short-term leases, amounted to approximately $0.8 million and $2.4 million, respectively. For the three and nine months ended September 30, 2021, total rent expense, including short-term leases, amounted to approximately $0.8 million and $2.4 million, respectively. The Company recognizes an operating lease liability and a ROU asset for all leases, with the exception of short-term leases. The lease payments on short-term leases are recognized as rent expense on a straight-line basis. The discount rate applied to measure each ROU asset and lease liability is based on the Company’s incremental weighted average cost of debt. The Company considers the general economic environment and its credit rating and factors in various financing and asset specific adjustments to ensure the discount rate applied is appropriate to the intended use of the underlying lease. While some of the leases contained options to extend and terminate, it is not reasonably certain that either option will be utilized and therefore, only the payments in the initial term of the leases were included in the lease liability and ROU asset.
57
The following table sets forth information related to the measurement of the Company’s operating lease liabilities and supplemental cash flow information related to operating leases as of September 30, 2022, and 2021:
Total operating lease cost
744
724
2,185
2,196
Cash paid for amounts included in the measurement of lease liabilities
642
578
2,411
1,733
As of September 30, 2022
As of September 30, 2021
Weighted-average remaining lease term (in years)
4.17
4.37
Weighted-average discount rate
4.53
4.87
The following table shows future minimum lease payments under the Company’s operating leases and a reconciliation to the operating lease liability as of September 30, 2022:
2,500
887
Thereafter
1,804
Total lease payments
6,691
Less: imputed interest
(599
Total operating lease liability
The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, the Company does not expect any current matters will materially affect the Company’s financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on the Company’s financial condition or results of operations in any future reporting period.
12. Related Party Transactions
As disclosed in “Note 2 – Summary of Significant Accounting Policies”, the Adviser Subsidiary is accounted for as a portfolio investment of the Company held at fair value. Refer to “Note 4 – Investments” for information related to income, gains and losses recognized related to the Company’s investment.
In 2021, the Adviser Subsidiary entered into investment management agreements with its privately-offered Adviser Funds, and it receives management fees based on the assets under management of the Adviser Funds and may receive incentive fees based on the performance of the Adviser Funds. Additionally, the Company entered into a shared services agreement (“Sharing Agreement”) with the Adviser Subsidiary, through which the Adviser Subsidiary will utilize human capital resources (including administrative functions) and other resources and infrastructure (including office space and technology) of the Company. Under the terms of the Sharing Agreement, the Company allocates the related expenses of shared services to the Adviser Subsidiary based on direct time spent, investment activity, and proportion of assets under management depending on the nature of the expense. The Company’s total expenses for the three and nine months ended September 30, 2022, are net of expenses allocated to the Adviser Subsidiary of $1.9 million and $6.3 million, respectively. As of September 30, 2022, the Adviser Subsidiary owed $0.5 million to the Company. The Company’s total expenses for the three and nine months ended September 30, 2021, are net of expenses allocated to the Adviser Subsidiary of $1.3 million and $3.5 million, respectively. As of December 31, 2021, there was $0.1 million receivable from the Adviser Subsidiary.
In addition, the Company may from time-to-time make investments alongside the Adviser Funds or assign a portion of investments to the Adviser Funds in accordance with the Company’s allocation policy. During the nine months ended September 30, 2022, $610.9 million of all investment commitments of the Company and the Adviser Subsidiary were assigned to or directly committed by the Adviser Funds. During the nine months ended September 30, 2022, fundings of $247.8 million were assigned to, directly originated, or funded by the Adviser Funds. The Company received $114.9 million from the Adviser Funds relating to the assigned investments during the nine months ended September 30, 2022. Additionally, on May 31, 2022, the Company sold $73.5 million of assets to the Adviser Funds and realized a $0.1 million gain.
During the nine months ended September 30, 2021, $204.5 million of all investment commitments of the Company and the Adviser Subsidiary were assigned to or directly committed by the Adviser Funds, respectively. During the nine months ended September 30, 2021, fundings of $139.6 million were assigned to, directly originated, or funded by the Adviser Funds. The Company received $107.6 million from the Adviser Funds relating to the assigned investments during the nine months ended September 30, 2021.
13. Subsequent Events
Dividend Distribution Declaration
On October 13, 2022, the Board declared a cash distribution of $0.36 per share to be paid on November 17, 2022 to stockholders of record as of November 10, 2022. In addition to the cash distribution, and as part of the declared supplemental cash distribution of $0.60 per share to be paid in four quarterly distributions of $0.15, the Board declared a supplemental cash distribution of $0.15 per share to be paid on November 17, 2022 to stockholders of record as of November 10, 2022. Including the $0.15 per share supplemental cash distributions paid to stockholders of record as of March 9, 2022, May 17, 2022, and August 9, 2022, the Board has declared the full $0.60 per share supplemental cash distribution declared on February 16, 2022.
ITEM 2.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. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to:
You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this report.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. 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” of Part II of this quarterly report on Form 10-Q, Item 1A— “Risk Factors” of our annual report on Form 10-K filed with the SEC on February 22, 2022 and under “Forward-Looking Statements” of this Item 2.
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. The non-GAAP financial measures we present may not be comparable to similarly-named measures reported by other companies.
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. Our goal is to be the leading structured debt financing provider for venture capital-backed and institutional-backed companies in a variety of technology-related industries requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology and to offer a full suite of growth capital products. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in technology related companies at various stages of their development.
We are structured as an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. 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. Consistent with requirements under the 1940 Act, we invest primarily in United-States based companies and to a lesser extent in foreign companies. We source our investments through our principal office located in Palo Alto, CA, as well as through our additional offices in Boston, MA, New York, NY, Bethesda, MD, San Diego, CA, and London, United Kingdom.
We have elected to be treated for tax purposes as RIC under Subchapter M of the Code. As a RIC, we generally will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain (i.e., net realized long-term capital gains in excess of net realized short-term capital losses) that 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 will be subject to a 4% non-deductible U.S. federal excise tax on certain undistributed taxable income and capital 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 subject to certain requirements as defined for RICs. In order to qualify as a RIC requires that we must comply with provisions contained in Subchapter M of the Code. For example, as a RIC we must earn 90% or more of our gross income during each taxable year from qualified sources, typically referred to as “good income,” as well as satisfy certain quarterly asset diversification and annual income distribution requirements.
We have established Hercules Adviser LLC, a wholly owned registered investment adviser subsidiary. The Adviser Subsidiary provides investment advisory and related services to the Adviser Funds and External Parties. The Adviser Subsidiary is not consolidated for reporting purposes as noted in “Note 1 Description of Business”. In addition to the Adviser Subsidiary, we have established other wholly owned subsidiaries which are consolidated for reporting. However, certain of these subsidiaries are not consolidated for income tax purposes and may generate income tax expense or benefit, as well as tax assets and liabilities as a result of their ownership of certain portfolio investments.
Our primary business objectives are to increase our net income, net investment income, and NAV by investing in debt, typically with warrants or equity, of venture capital-backed and institutional-backed companies in a variety of technology-related industries at attractive current yields and the potential for equity appreciation and realized gains. We aim to achieve our business objectives by maximizing our portfolio total return through generation of current income from our debt investments and capital appreciation from our warrant and equity investments. Our equity ownership in our portfolio companies may exceed 25% of the voting securities of such companies, which represents a controlling interest under the 1940 Act. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we provide is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We invest primarily in private companies but also have investments in public companies.
We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or other rights to purchase or convert into common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. We also invest in “unitranche” loans, which are loans that combine both senior and mezzanine debt, generally in a first lien position. In addition to our debt investments, we regularly engage in discussions with third parties with respect to various potential transactions to explore all alternatives. Through such alternatives we may acquire an investment, a portfolio of investments, an entire company, or sell portions of our portfolio on an opportunistic basis.
We, our subsidiaries or our affiliates, may also agree to manage certain other funds that invest in debt, equity or provide other financing or services to companies in a variety of industries for which we may earn management or other fees for our services. We may also invest in the equity of these funds, along with other third parties, from which we would seek to earn a return and/or future incentive allocations. Some of these transactions could be material to our business. Consummation of any such transaction will be subject to completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final definitive documentation as well as a number of other factors and conditions which may include, depending on the transaction and without limitation, the approval of our Board, required regulatory or third-party consents, and/or the approval of our stockholders.
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.
Portfolio and Investment Activity
The total fair value of our investment portfolio was approximately $2.8 billion and $2.4 billion as of September 30, 2022 and December 31, 2021, respectively. The fair value of our debt investment portfolio as of September 30, 2022 was approximately $2.7 billion, compared to a fair value of approximately $2.2 billion at December 31, 2021. The fair value of the equity portfolio as of September 30, 2022 was approximately $134.1 million, compared to a fair value of approximately $184.7 million as of December 31, 2021. The fair value of the warrant portfolio as of September 30, 2022 was approximately $27.2 million, compared to a fair value of approximately $38.4 million as of December 31, 2021.
Portfolio Activity
Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. Not all debt commitments represent future cash requirements. Unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments are subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally fund over the two succeeding quarters from close. From time to time, unfunded contractual commitments may expire without being drawn and thus do not represent future cash requirements.
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. 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.
During the nine months ended September 30, 2022, Hercules and the Adviser Funds directly committed or originated an aggregate total of $2,476.4 million of investment commitments. Of the aggregated total directly committed or originated by Hercules and the Adviser Funds, $610.9 million of investment commitments were directly committed or originated by the Adviser Funds. Of the aggregate total direct fundings or originations, $247.8 million of debt, equity, and warrant fundings during the period, were assigned to, directly funded or originated by the Adviser Funds.
During the nine months ended September 30, 2021, Hercules and the Adviser Funds directly committed or originated an aggregate total of $1,691.4 million of investment commitments. Of the aggregated total directly committed or originated by Hercules and the Adviser Funds, $204.5 million of investment commitments were directly committed or originated by the Adviser Funds. Of the aggregate total direct fundings or originations, $139.6 million of debt, equity, and warrant fundings during the period, were assigned to, directly funded or originated by the Adviser Funds.
Our portfolio activity for the nine months ended September 30, 2022 and September 30, 2021 was comprised of the following:
(in millions)
September 30, 2021
Gross Debt Commitments Originated by Hercules Capital and the Adviser Funds (1)
New portfolio company
2,083.5
1,258.1
Existing portfolio company
369.7
413.6
Sub-total
2,453.2
1,671.7
Less: Debt commitments assigned to or directly committed by the Adviser Funds (3)
(606.5
(202.5
Net Total Debt Commitments
1,846.7
1,469.2
Gross Debt Fundings by Hercules Capital and the Adviser Funds (2)
758.4
786.2
318.3
258.4
1,076.7
1,044.6
Less: Debt fundings assigned to or directly funded by the Adviser Funds (3)
(243.4
(137.6
Net Total Debt Fundings
833.3
907.0
Equity Investments and Investment Funds and Vehicles Fundings by Hercules Capital and the Adviser Funds
15.3
16.1
5.2
21.1
20.5
Less: Equity fundings assigned to or directly funded by the Adviser Funds (3)
(4.4
(2.0
Net Total Equity and Investments Funds and Vehicle Fundings
16.7
18.5
Unfunded Contractual Commitments (4)
659.0
309.9
Non-Binding Term Sheets
208.0
185.2
63.0
210.1
248.2
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. During the nine months ended September 30, 2022, we received approximately $301.1 million in aggregate principal repayments. Approximately $58.7 million of the aggregate principal repayments related to scheduled principal payments and approximately $242.4 million represented early principal repayments from 18 portfolio companies. Further, $26.7 million of the early principal repayments was an early repayment due to merger and acquisition transaction of two portfolio companies. Additionally, we sold $73.5 million of assets and realized a $0.1 million gain on May 31, 2022.
Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable and escrow receivables) as of and for the nine months ended September 30, 2022 and September 30, 2021 was as follows:
Beginning portfolio
2,434.5
2,354.1
New fundings and restructures
1,097.8
1,065.1
Fundings assigned to or directly funded by the Adviser Funds(1)
(247.8
(139.6
Warrants not related to current period fundings
1.5
Principal repayments received on investments
(58.7
(62.0
Early payoffs
(242.4
(678.3
Proceeds from sale of debt investments
(73.5
Proceeds from sale of equity investments
(16.7
(97.9
Accretion of loan discounts and paid-in-kind principal
40.2
32.7
Net acceleration of loan discounts and loan fees due to early payoff or restructure
(13.3
(14.0
New loan fees
(10.0
(12.2
Gain (loss) on investments due to sales or write offs
15.5
Net change in unrealized appreciation (depreciation)
(87.4
47.8
Ending portfolio
2,825.7
2,511.9
Periodically, we may hold investments held in debt, warrant, or equity positions of portfolio companies that have filed a registration statement on Form S-1 with the SEC in contemplation of a potential initial public offering. There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all.
The following table presents certain selected information regarding our debt investment portfolio as of September 30, 2022 and December 31, 2021:
Number of portfolio companies with debt outstanding
92
Percentage of debt bearing a floating rate
95.1
94.0
Percentage of debt bearing a fixed rate
4.9
6.0
Weighted average core yield (1)
12.4
11.4
Weighted average effective yield (2)
12.9
Prime rate at the end of the period
6.25
3.25
Income from Portfolio
We generate revenue in the form of interest income, primarily from our investments in debt securities, and fee income, which is primarily comprised of commitment and facility fees. Interest income is recognized in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. Fees generated in connection with our debt investments are recognized over the life of the loan or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other equity securities that we acquire from our portfolio companies. Our investments generally range from $15.0 million to $40.0 million, although we may make investments in amounts above or below that range. As of September 30, 2022, our debt investments generally have a term of between two and five years and typically bear interest at a rate ranging from approximately 6.0% to approximately 13.8%. 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.
Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the investment. In addition, our loans may include an interest-only period ranging from three to eighteen months or longer. In limited instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities and any accrued but unpaid interest become due at the maturity date.
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. We had approximately $53.6 million of unamortized fees as of September 30, 2022, of which approximately $42.1 million was included as an offset to the cost basis of our current debt investments and approximately $11.5 million was deferred contingent upon the occurrence of a funding or milestone. As of December 31, 2021, we had approximately $42.9 million of unamortized fees, of which approximately $36.5 million was included as an offset to the cost basis of our current debt investments and approximately $6.4 million was deferred contingent upon the occurrence of a funding or milestone.
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 September 30, 2022, we had approximately $36.5 million in exit fees receivable, of which approximately $32.0 million was included as a component of the cost basis of our current debt investments and approximately $4.5 million was a deferred receivable related to expired commitments. As of December 31, 2021, we had approximately $35.0 million in exit fees receivable, of which approximately $29.6 million was included as a component of the cost basis of our current debt investments and approximately $5.4 million was a deferred receivable related to expired commitments.
We have debt investments in our portfolio that earn PIK interest. The PIK interest, computed at the contractual rate specified in each loan agreement, is recorded as interest income and added to the principal balance of the loan on specified capitalization dates. 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. We recorded approximately $4.9 million and $2.9 million in PIK income during the three months ended September 30, 2022 and 2021, respectively. We recorded approximately $14.9 million and $8.1 million in PIK income during the nine months ended September 30, 2022 and 2021, 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. 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. The key metrics that we monitor with respect to yields are as described below:
Three months ended
Total Yield
12.0
11.8
Effective Yield
12.7
Core Yield (Non-GAAP)
We believe that these measures are useful for our stockholders as it provides the yield of our portfolio to allow a more meaningful comparison with our competitors. As noted above, Core Yield, a Non-GAAP financial measure, is derived by dividing Core investment income, as defined above, by the weighted average GAAP basis value of debt investment portfolio assets at amortized cost outstanding. The reconciliation to calculate “Core investment income” from GAAP basis 'Total investment income' are as follows:
GAAP Basis:
Less: fee and income accelerations attributed to early payoffs, restructuring, loan modifications, and other one-time events, but including income from expired commitments
(3,140
(7,212
Non-GAAP Basis:
Core investment income
81,089
62,981
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. Although the Core Yield, a Non-GAAP financial measure, is intended to enhance our stockholders’ understanding of our performance, the Core Yield should not be considered in isolation from or as an alternative to the GAAP financial metrics presented. The aforementioned Non-GAAP financial measure may not be comparable to similar Non-GAAP financial measures used by other companies.
Another financial measure that we monitor is the total return for our investors, was approximately (24.3)% and 23.1% during the nine months ended September 30, 2022 and 2021, respectively. The total return equals the change in the ending market value over the beginning of the period price per share plus distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the distribution. The total return does not reflect any sales load that may be paid by investors. See “Note 10 – Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this report.
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.
The following table presents the fair value of the Company’s portfolio by industry sector as of September 30, 2022 and December 31, 2021:
Percentage of Total Portfolio
All other industries (1)
563,727
20.0
486,011
19.9
Industry and sector concentrations vary as new loans are recorded and loans are paid off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and warrants or other equity interests, can fluctuate materially when a loan is paid off or a warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated in several portfolio companies.
For the nine months ended September 30, 2022 and the year ended December 31, 2021, our ten largest portfolio companies represented approximately 30.1% and 30.5% of the total fair value of our investments in portfolio companies, respectively. As of September 30, 2022 and December 31, 2021, we had eight and six investments that represented 5% or more of our net assets, respectively. As of September 30, 2022, we had three equity investments representing approximately 36.6% 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, 2021, we had six equity investments which represented approximately 49.6% of the total fair value of our equity investment portfolio, and each represented 5% or more of the total fair value of our equity investments. No single portfolio investment represented more than 10% of the fair value of our total investments as of September 30, 2022 and December 31, 2021.
As of September 30, 2022 and December 31, 2021, approximately 95.1% and 94.0% 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. Changes in interest rates, including Prime, LIBOR, SOFR, 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 have detachable equity enhancement features, typically 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. As of September 30, 2022, we held warrants in 107 portfolio companies, with a fair value of approximately $27.2 million. The fair value of our warrant portfolio decreased by approximately $11.2 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.
Our existing warrant holdings would require us to invest approximately $71.5 million to exercise such warrants as of September 30, 2022. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. 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. We may also experience losses from our warrant portfolio in the event that warrants are terminated or expire unexercised.
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. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of September 30, 2022 and December 31, 2021, respectively:
Investment Grading
Number of Companies
Debt Investmentsat Fair Value
412,141
408,975
1,380,414
51.9
1,208,323
54.7
827,379
31.1
581,424
26.3
41,465
0
66
As of September 30, 2022, our debt investments had a weighted average investment grading of 2.20 on a cost basis, as compared to 2.10 as of December 31, 2021. Changes in a portfolio company's investment grading may be a result of changes in portfolio company's performance and/or timing of expected liquidity events. For instance, we may downgrade a portfolio company if it is not meeting our financing criteria or are underperforming relative to their respective business plans. We may also downgrade a portfolio company as it approaches a point in time when it will require additional equity capital to continue operations. Conversely, we may upgrade a portfolio company's investment grading when it is exceeding our financial performance expectations and/or is expected to mature/repay in full due to a liquidity event. The overall downgrade of the portfolio's weighted average investment grading is reflective of the impact the current macroeconomic environment.
As the recent macro-economic events continue to cause disruption in the capital markets and to businesses, we are continuing to monitor and work with the management teams and stakeholders of our portfolio companies to navigate the significant market, operational, and economic challenges created by these events. This includes increasing our proactive assessments of credit performance, in an effort to manage potential risks across our debt investment portfolio.
Non-accrual Investments
The following table shows the amortized cost of our performing and non-accrual investments as of September 30, 2022 and December 31, 2021:
As of September 30,
As of December 31,
Amortized Cost
Percentage of Total Portfolio at Amortized Cost
Performing
2,856
99.5
2,367
99.0
Non-accrual
Total Investments
2,869
2,391
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. When a debt investment is placed on non-accrual status, we cease to recognize interest and fee income until the portfolio company has paid all principal and interest due or demonstrated the ability to repay our current and future contractual obligations. 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.
Macroeconomic Market Developments
Our investment portfolio continues to be focused on industries and sectors that are generally expected to be more resilient to economic cycles. However, the U.S and global capital markets continue to evolve as a result of the increasing market volatility caused by the ongoing COVID-19 pandemic, recent geopolitical events, and the related supply chain and inflation issues. We are continuing to closely monitor the impact of these macro market developments on all aspects of our business, including impacts to our portfolio companies, employees, due diligence and underwriting processes, and financial markets. As a result, pressure on liquidity and financial results to certain of our portfolio companies have persisted, and our portfolio companies may draw on most, if not all, of the unfunded portion of any revolving or delayed draw term loans made by us, subject to availability under the terms of such loans. The extent to which the ongoing macroeconomic market events will continue to affect the financial condition and liquidity of our portfolio companies’ results of operations are highly uncertain and cannot be predicted.
Equally the extent of the impact of the COVID-19 pandemic, geopolitical events, and related supply chain and inflation issues have on our own operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend to a large extent on future developments regarding the duration and severity of these matters. Inflation has not historically had a significant effect on our results of operations in any of the reporting periods presented herein. However, the impact that these macroeconomic events have on our portfolio companies could have a negative impact on the fair value of our investments in these portfolio companies. Further, an extended period of global supply chain and economic disruption, including inflation, could materially affect our business, results of operations, access to sources of liquidity and financial condition. Given the fluidity of these market events, neither our management nor our Board is able to predict the full impact of the current macroeconomic events on our business, future results of operations, financial position, or cash flows at this time.
Results of Operations
Refer below for a discussion of our operating results for three and nine months ended September 30, 2022 as compared to the same periods for 2021.
Investment Income
Total investment income for the three and nine months ended September 30, 2022 was approximately $84.2 million and $221.5 million, respectively as compared to approximately $70.2 million and $208.5 million, respectively for the three and nine months ended
September 30, 2021. Investment income is primarily composed of interest income earned on our debt investments and fee income from commitments, facilities, and other loan related fees.
The following table summarizes the components of interest income for the three and nine months ended September 30, 2022 and 2021:
Contractual interest income
66,451
50,597
172,057
150,901
Exit fee interest income
8,696
9,029
22,077
26,599
PIK interest income
4,944
2,893
14,888
8,105
Other interest income (1)
1,317
793
2,795
Interest income for the three months ended September 30, 2022 totaled approximately $81.4 million as compared to approximately $63.3 million for the three months ended September 30, 2021. Interest income for the nine months ended September 30, 2022 totaled approximately $212.4 million as compared to approximately $188.4 million for the nine months ended September 30, 2021. The increase in interest income for the three and nine months ended September 30, 2022 as compared to the same periods ended September 30, 2021, was attributable to a higher weighted average principal outstanding and increase in core yield due to the increase in benchmark rates during the three and nine months ended September 30, 2022.
Interest income is comprised of recurring interest income from the contractual servicing of loans and non-recurring interest income that is related to the acceleration of income due to early loan repayments and other one-time events during the period. The following table summarizes recurring and non-recurring interest income for the three and nine months ended September 30, 2022 and 2021:
Recurring interest income
78,984
60,116
208,479
178,283
Non-recurring interest income
2,424
3,196
3,912
10,117
The following table shows the PIK-related activity for the nine months ended September 30, 2022 and 2021, at cost:
Beginning PIK interest receivable balance
11,801
14,817
PIK interest income during the period
Payments received from PIK loans
(4,482
(5,692
Realized gain (loss)
(367
(180
Ending PIK interest receivable balance
21,840
17,050
The increase in PIK interest income during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 is primarily due to an increase in the weighted average principal outstanding of loans which earn PIK interest. Payments on PIK loans are normally received only in the event of payoffs. As of both September 30, 2022 and December 31, 2021 PIK receivable represented less than 1% of total debt investments.
Fee income from commitment, facility and loan related fees for the three and nine months ended September 30, 2022 totaled approximately $2.8 million and $9.1 million, respectively, as compared to approximately $6.9 million and $20.1 million, for the three and nine months ended September 30, 2021, respectively. The decrease in fee income for the three and nine months ended September 30, 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.
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. The following table summarizes the components of fee income for the three and nine months ended September 30, 2022 and 2021:
Recurring fee income
2,076
5,762
5,625
Accelerated fee income - expired commitments
960
2,372
Accelerated fee income - early repayments
716
4,018
2,798
12,114
In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three and nine months ended September 30, 2022 or 2021.
Operating Expenses
Our operating expenses are comprised of interest and fees on our debt borrowings, general and administrative expenses, and employee compensation and benefits. During the three and nine months ended September 30, 2022 and 2021, our net operating expenses totaled approximately $34.2 million and $32.1 million, respectively for the three month periods, and approximately $95.6 million and $98.9 million, respectively for the nine month periods.
Interest and Fees on our Debt
Interest and fees on our debt totaled approximately $16.7 million and $14.7 million for the three months ended September 30, 2022 and 2021, respectively. Our higher weighted average borrowings offset the lower weighted average borrowing costs during the three months ended September 30, 2022, resulting in higher interest and fee expenses as compared to the three months ended September 30, 2021. Interest and fees on our debt totaled approximately $44.4 million and $49.0 million for the nine months ended September 30, 2022 and 2021, respectively. The decline of interest and fee expenses during the nine months ended September 30, 2022, was a result of our lower weighted average borrowing costs as compared to the nine months ended September 30, 2021.
We had a weighted average cost of debt of approximately 4.4% and 4.9% for the three months ended September 30, 2022 and 2021, respectively and 4.1% and 5.1%, for the nine months ended September 30, 2022, and 2021, respectively. The weighted average cost of debt includes interest and fees on our debt, but excludes the impact of fee accelerations due to the extinguishment of debt. The decrease in the weighted average cost of debt during 2022 as compared to 2021, was attributable to our debt refinancing activities completed over the past two years.
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 $4.4 million from $4.1 million for the three months ended September 30, 2022 and 2021, respectively and increased to $12.5 million from $11.7 million for the nine months ended September 30, 2022. The increase in general and administrative expenses for the three and nine months ended September 30, 2022 is primarily attributable to an increase in information technology related expenses. Tax expenses primarily relate to excise tax accruals. Tax expenses were $1.6 million and $2.4 million during the three months ended September 30, 2022 and 2021, respectively and $4.1 million and $5.6 million for nine months ended September 30, 2022 and 2021, respectively.
Employee Compensation
Employee compensation and benefits totaled approximately $11.0 million and $30.4 million, for the three and nine months ended September 30, 2022 as compared to approximately $8.9 million and $27.1 million respectively, for the three and nine months ended September 30, 2021. The increase between the three and nine months ended September 30, 2022 and 2021 was primarily due to an increase in variable compensation.
Employee stock-based compensation totaled approximately $2.5 million and $10.6 million, for the three and nine months ended September 30, 2022 as compared to approximately $3.3 million and $9.0 million, respectively for the three and nine months ended September 30, 2021. The decrease between the three month comparative periods was primarily attributable to the Performance Awards, which fully vested as of the quarter ended June 30, 2022. The increase between the nine month comparative periods was primarily attributable to the issuance of additional stock-based compensation awards and higher weighted average grant date fair value.
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. 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 three months ended September 30, 2022 and 2021, are net of expenses allocated to the Adviser Subsidiary of $1.9 million and $1.3 million, respectively and $6.3 million and $3.5 million for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022, $0.5 million was receivable from the Adviser Subsidiary related to investment allocation transactions during the period. As of December 31, 2021, $0.1 million was due from the Adviser Subsidiary.
Net Realized Gains and Losses and Net Change in Unrealized Appreciation and Depreciation
Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the period, net of recoveries. Realized loss on debt extinguishment relates to additional fees, costs, and
accelerated recognition of remaining debt issuance costs, which are recognized in the event debt is extinguished before its stated maturity. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
A summary of net realized gains and losses for the three and nine months ended September 30, 2022 and 2021 is as follows:
Realized gains
6,050
24,999
12,264
82,364
Realized losses
(3,091
(2,186
(10,079
(66,063
Realized foreign exchange gains (losses)
2,330
2,276
Net realized gains (losses)
During the three and nine months ended September 30, 2022, we recognized net realized gains of $5.3 million and $0.8 million. The net realized gain was comprised of gross realized gains of $6.1 million and $12.3 million primarily from the sale of our equity position in Black Crow AI, Inc and Peerless Network Holdings, Inc. Our gains were offset by gross realized losses of $3.1 million and $10.1 million primarily from the write-off of our investments in Regent Education, Medrobotics Corporation, Genocea Biosciences, Inc, Kaleido Biosciences, Inc., and Pineapple Energy LLC during the period. During the three months ended September 30, 2022, we repaid £19.4 million of principal borrowings under our SMBC Facility and realized a $2.3 million foreign exchange gain. In addition, as part of the retirement of the 2022 Notes in Q1 2022, we incurred a $3.7 million loss on debt extinguishment. The realized loss on debt extinguishment was related to fees, accrued interest, and the acceleration of debt issuance costs amortization, and is included as a realized loss within the “Loss on debt extinguishment” on the Consolidated Statement of Operations.
During the three and nine months ended September 30, 2021, we recognized net realized gains of $21.1 million and $14.6 million, respectively. During the three and nine months ended September 30, 2021, we recorded gross realized gains of $25.0 million and $82.4 million, respectively, primarily from the sale of DoorDash, Inc., Palantir Technologies, Ology Bioservices, and TransMedics Group, Inc. Our gains were offset by gross realized losses of $2.2 million and $66.1 million, respectively, primarily from the write-off of our investments in Intent (p.k.a. Intent Media, Inc.) and Solar Spectrum Holdings, LLC. Additionally, on July 1, 2021, we fully redeemed the aggregate outstanding $75.0 million of principal and $0.6 million of accrued interest pursuant to the redemption terms of the April 2025 Notes Indenture. Combined with other debt redemptions, we accelerated recognition of $1.7 million of debt issuance costs associated with the extinguishment of the debt, which is included as a realized loss within the “Loss on debt extinguishment” on the Consolidated Statement of Operations for the three and nine months ended September 30, 2021.
The net change in unrealized appreciation and depreciation on investments is based on the fair value of each investment determined in good faith by our Valuation Committee and approved by the Board. The following table summarizes the movements in net change in unrealized appreciation or depreciation for the three and nine months ended September 30, 2022 and 2021:
For the three months ended September 30
Gross unrealized appreciation
30,010
27,946
68,824
142,016
Gross unrealized depreciation
(27,483
(35,827
(154,939
(88,866
Reversal of prior period net unrealized appreciation (depreciation) upon a realization event
(27,770
4,267
(5,404
Net unrealized appreciation (depreciation) on debt, equity, warrant and fund investments
(81,848
47,746
Other net unrealized appreciation (depreciation)
(4,989
(5,299
Total net unrealized appreciation (depreciation)
During the three months ended September 30, 2022 and 2021, we recorded approximately $2.1 million and $35.6 million of net unrealized depreciation on our investments, respectively. During the nine months ended September 30, 2022, and 2021, we recorded approximately $87.1 million of net unrealized depreciation and $46.2 million of net unrealized appreciation on our investments, respectively. The following table summarizes the key drivers of change in net unrealized appreciation (depreciation) of investments for the three months ended September 30, 2022 and 2021:
Equity, Warrants and Investment Funds
Valuation appreciation (depreciation)
3,690
(1,163
2,527
(8,331
(7,881
(11,817
(74,298
(86,115
2,864
50,286
53,150
3,558
(3,185
(4,109
(23,661
3,394
873
3,007
(8,411
(4,418
(571
(4,383
(916
Net realized appreciation (depreciation)
2,830
(4,919
(3,659
(31,992
(12,806
(74,341
5,871
40,360
Income and Excise Taxes
Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their appropriate tax character. Permanent differences may also result from the classification of certain items, such as the treatment of short-term gains as ordinary income for tax purposes. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
Net Change in Net Assets Resulting from Operations and Earnings Per Share
For the three months ended September 30, 2022 and 2021, we had net increases in net assets of approximately $53.2 million and $23.5 million resulting from operations, respectively. For the nine months ended September 30, 2022 and 2021, our net increase in net assets were approximately $39.6 million and $170.4 million resulting from operations, respectively. For the three and nine months ended September 30, 2022, the basic net increase in net assets per common share was $0.41 and $0.31 per share, and for the three and nine months ended September 30, 2021 was $0.20 and $1.47 per share. On a fully diluted basis, the net increase in net assets per common share was $0.41 and $0.30 per share and $0.20 and $1.46 per share, for the same periods each respectively.
The Adviser Subsidiary has entered into investment management agreements (the “IMAs”) with the Adviser Funds. Pursuant to the IMAs, the Adviser Subsidiary provides investment advisory and management services to the Adviser Funds in exchange for an asset-based fee and certain incentive fees. The Adviser Funds are privately offered investment funds exempt from registration under the 1940 Act that invest in debt and equity investments in venture or institutionally backed technology related and life sciences companies.
Hercules Adviser LLC, the Adviser Subsidiary, receives fee income for the services provided to the Adviser Funds. The Adviser Subsidiary’s contribution to our net investment income is derived from dividend income declared by the Adviser Subsidiary and interest income earned on loans to the Adviser Subsidiary. For the three and nine months ended September 30, 2022 and 2021, no dividends were declared by the Adviser Subsidiary.
Financial Condition, Liquidity, Capital Resources and Obligations
Our liquidity and capital resources are derived from our debt borrowings and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our debt and the proceeds from the turnover of our portfolio and from public and private offerings of securities to finance our investment objectives. 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 “COVID-19 Developments” section above.
During the nine months ended September 30, 2022, we principally funded our operations from (i) cash receipts from interest, dividend, and fee income from our investment portfolio and (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 nine months ended September 30, 2022, our operating activities used $359.9 million of cash and cash equivalents, compared to $28.7 million provided during the nine months ended September 30, 2021. The $388.6 million increase in cash used in operating activities was primarily due to a $360.2 million decrease in principal, fee repayments, and proceeds received from the sale of debt investments, $84.3 million fewer proceeds received from the sale of equity investments, which was offset by a decrease of $75.4 million in net purchases of investments due to increased assignments to the Adviser Funds.
During the nine months ended September 30, 2022, our investing activities used approximately $86 thousand of cash, compared to $12 thousand used during the nine months ended September 30, 2021. The $74 thousand increase in cash used in investing activities was due to an increase in purchases of capital equipment.
During the nine months ended September 30, 2022, our financing activities provided $289.1 million of cash, compared to $16.9 million used in financing activities during the nine months ended September 30, 2021. The $306.0 million increase of cash flows from financing activities was primarily due to $1,169.2 million of new debt issuances related to the issuance of our January 2027 Notes, June 2025 3-Year Notes, 2031 Asset-Backed Notes, SBA Debenture borrowings, and increased utilization of our Credit Facilities during the nine months ended September 30, 2022. The debt issuances were used in our operating activities and to repay the $230.0 million of 2022 Convertible Notes and $150.0 million to retire the 2022 Notes. Additionally, we issued $190.0 million of ATM equity (net of offering costs) during the nine months ended September 30, 2022. We did not issue any common stock issued during the nine months ended September 30, 2021. These amounts offset the $48.8 million increase in dividend distributions, which totaled $178.9 million during the nine months ended September 30, 2022, compared to $130.1 million during the nine months ended September 30, 2021.
As of September 30, 2022, our net assets totaled $1.4 billion, with a NAV per share of $10.47. We intend to continue to operate in order to generate cash flows from operations, including income earned from investments in our portfolio companies. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock.
Available liquidity and capital resources as of September 30, 2022
As of September 30, 2022, we had $700.1 million in available liquidity, including $57.1 million in cash and cash equivalents. We had available borrowing capacity of $200.0 million under the SMBC Facility and $443.0 million under the MUFG Bank Facility. In addition, the MUFG Bank Facility has accordion provision through which the available borrowing capacity can be increased by $55.0 million, subject to certain conditions.
The 1940 Act permits BDCs to incur borrowings, issue debt securities, or issue preferred stock unless immediately after the borrowings or issuance the ratio of total assets (less total liabilities other than indebtedness) to total indebtedness plus preferred stock is less than 200% (or 150% if certain requirements are met). On September 4, 2018 and December 6, 2018, our Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As of September 30, 2022, our asset coverage ratio under our regulatory requirements as a BDC was 199.4% excluding our SBA debentures. Our exemptive order from the SEC allows us to exclude all SBA leverage from our asset coverage ratio. 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 188.1% as of September 30, 2022.
As of September 30, 2022, we had $127.0 million outstanding under our Credit Facilities, which are floating interest rate obligations. As of September 30, 2022, the remaining $1,415.0 million of debt outstanding are all fixed interest rate debt obligations.
During the nine months ended September 30, 2022, we issued $350 million in aggregate principal amount of January 2027 Notes, which generated net proceeds of approximately $343.4 million. The net proceeds from the January 2027 Notes generated was primarily used to repay the 2022 Convertible Notes and to retire the 2022 Notes. In addition, we issued $150 million and $50 million in aggregate principal which generated net proceeds of approximately $147.7 million and $49.5 million related to the 2031 Asset-Backed Notes and June 2025 3-Year Notes, respectively. We also borrowed the remaining $24.5 million of capital available through our SBIC, and raised $190.0 million through ATM equity offerings of common shares.
Lastly, as of September 30, 2022, $8.3 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. Based on current characteristics of the securitized debt investment portfolios, the restricted funds may be used to pay monthly interest and principal on the securitized debt with any excess distributed to us or available for our general operations. 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 detailed above, our diverse and well-structured balance sheet is designed to provide a long-term focused and sustainable investment platform. Currently, we believe we have ample liquidity to support our near-term capital requirements. As the impact of
current macro-economic events, including the COVID-19 pandemic, 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.
Equity Offerings
On May 9, 2022, we entered into an ATM equity distribution agreement (the “2022 Equity Distribution Agreement”) with JMP and Jeffries (the “Sales Agents”). 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 the Sales Agents. 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. The 2022 Equity Distribution Agreement replaces the ATM equity distribution agreement between the Company and JMP executed on July 2, 2020 (the “2020 Equity Distribution Agreement”).
Commitments and Obligations
Our significant cash requirements generally relate to our debt obligations. As of September 30, 2022, we had $1,542.0 million of debt outstanding, which includes $377.0 million within 1 to 3 years, and $1,165.0 million 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. These consist primarily of unfunded contractual commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded contractual commitments to provide funds to portfolio companies are not reflected on our balance sheet.
Our unfunded contractual commitments may be significant from time to time. A portion of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Furthermore, our credit agreements contain customary lending provisions which allow us relief from funding obligations for previously made unfunded commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. 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. As such, our disclosure of unfunded contractual commitments includes only those which are available at the request of the portfolio company and unencumbered by milestones. Refer to “Note 11 – Commitments and Contingencies” included in the notes to our consolidated financial statements appearing elsewhere in this report for additional discussion of our unfunded commitments.
As of September 30, 2022, we had approximately $659.0 million of 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. This excludes $203.2 million of unfunded commitments which represent the portion of portfolio company commitments assigned to or directly committed by the Adviser Funds. We intend to use cash flow from normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments.
As of September 30, 2022, we also had approximately $210.1 million of non-binding term sheets outstanding to three new companies and two existing companies, which generally convert to contractual commitments within approximately 90 days of signing. 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.
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.
Indemnification Agreements
We have entered into indemnification agreements with our directors and executive officers. The indemnification agreements are intended to provide our directors and executive officers the maximum indemnification permitted under Maryland law and the 1940 Act. 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
73
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. We and our executives and directors are covered by Directors and Officers Insurance, with the directors and officers being indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.
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 taxable year. In addition, at the end of our taxable year, our Board may choose to pay additional special distributions, so that we may distribute approximately all of our annual taxable income in the taxable year in which it was earned, or may elect to maintain the option to spill over our excess taxable income into the following taxable year as part of any future distribution payments.
Distributions from our taxable income (including gains) to a stockholder generally will be treated as a dividend for U.S. federal income tax purposes to the extent of such stockholder’s allocable share of our current or accumulated earnings and profits. Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital to the extent of a stockholder’s tax basis in our shares, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our taxable year based upon our taxable income for the full taxable year and distributions paid for the full taxable year. As a result, any determination of the tax attributes of our distributions made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full taxable year.
Of the distributions declared during the year ended December 31, 2021, 100% were distributions derived from our current and accumulated earnings and profits. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2022 distributions to stockholders will actually be.
We maintain an “opt out” dividend reinvestment plan that provides for reinvestment of our distribution on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board authorizes, and we declare, a cash distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.
Shortly after the close of each calendar year information identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution, if any) will be provided to our stockholders subject to information reporting. To the extent our taxable earnings fall below the total amount of our distributions for any taxable year, a portion of those distributions may be deemed a tax return of capital to our stockholders.
We expect to qualify to be subject to tax as a RIC under Subchapter M of the Code. In order to be subject to tax as a RIC, we are required to satisfy certain annual gross income and quarterly asset composition tests, as well as make distributions to our stockholders each taxable year treated as dividends for federal income tax purposes of an amount at least equal to 90% of the sum of our investment company taxable income, determined without regard to any deduction for dividends paid, plus our net tax-exempt income, if any. Upon being eligible to be subject to tax as a RIC, we would be entitled to deduct such distributions we pay to our stockholders in determining the overall components of our “taxable income.” Components of our taxable income include our taxable interest, dividend and fee income, reduced by certain deductions, as well as taxable net realized securities gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses and generally excludes net unrealized appreciation or depreciation as such gains or losses are not included in taxable income until they are realized. In connection with maintaining our ability to be subject to tax as a RIC, among other things, we have made and intend to continue to make the requisite distributions to our stockholders each taxable year, which generally should relieve us from corporate-level U.S. federal income taxes.
As a RIC, we will be subject to a 4% nondeductible 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 Excise Tax Avoidance Requirement. We will not be subject to this excise tax on any amount on which we incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S. federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from our taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our debt. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act.
We intend to timely distribute to our stockholders substantially all of our annual taxable income for each year, except that we may retain certain net capital gains for reinvestment and, depending upon the level of taxable income earned in a year, we may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax.
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. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition.
For a description of our critical accounting policies, refer to “Note 2 – Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements appearing elsewhere in this report. We consider the most significant accounting policies to be those related to our Valuation of Investments, Fair Valuation Measurements, Income Recognition, and Income Taxes. The valuation of investments is our most significant critical estimate. The most significant input to this estimate is the yield interest rate, which includes the hypothetical market yield plus premium or discount adjustment, used in determining the fair value of our debt investments. 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:
Change in unrealized
Basis Point Change
appreciation (depreciation)
(100)
37,153
(50)
19,429
(19,631
(39,185
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.
75
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. 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. As of September 30, 2022, approximately 95.1% of the loans in our portfolio had variable rates based on floating Prime, LIBOR, SOFR, Eurodollar, or BSBY rates with a floor. As of September 30, 2022, approximately 11.6% of our debt investments have variable rates based on LIBOR and 9.6% of our debt investments have variable rates based on SOFR, BSBY or Euordollar rates. Additionally, all of our LIBOR rate based debt securities have interest rate floors. 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. 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.
Based on our Consolidated Statements of Assets and Liabilities as of September 30, 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:
Income
Expense
EPS
(75)
(18,645
(711
(17,934
(0.14
(12,413
(504
(11,909
(25)
(6,207
(262
(5,945
(0.05
6,145
262
5,883
0.05
12,288
525
11,763
18,431
787
17,644
0.14
24,463
23,413
0.18
48,442
2,099
46,343
0.36
We do not currently engage in any hedging activities. 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. While hedging activities may insulate us against changes in interest rates and foreign currency, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. During the nine months ended September 30, 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. It also does not adjust for other business developments, including our debt borrowings and use of our Credit Facilities that could affect the net increase in net assets resulting from operations, or net income. It also does not assume any repayments from our portfolio companies. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.
Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds may increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio. For additional information regarding the interest rate associated with each of our debt borrowings and Credit Facilities, refer to Item 2 “Financial Condition, Liquidity and Capital Resources” in this quarterly report on Form 10-Q and “Note 5 – Debt” included in the notes to our consolidated financial statements appearing elsewhere in this report.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our chief executive and chief financial officers, under the supervision and with the participation of our management, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. As of the end of the period covered by this quarterly report on Form 10-Q, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financing reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1.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. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.
ITEM 1A.RISK FACTORS
In addition to the risks discussed below, important risk factors that could cause results or events to differ from current expectations are described in Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 22, 2022 (the “Annual Report”) and Part II, Item 1A “Risk Factors” of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 filed with the SEC on May 5, 2022.
Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.
Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at September 30, 2022 that represent greater than 5% of our net assets:
Percentage of Net Assets
10.0
94,119
6.9
92,698
6.8
87,812
6.4
85,438
6.3
73,674
5.4
73,527
Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Dividend Reinvestment Plan
During the nine months ended September 30, 2022, we issued 184,197 shares of common stock to stockholders in connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act. The aggregate value of the shares of our common stock issued under our dividend reinvestment plan was approximately $2.9 million.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
ExhibitNumber
10.1*
Form of Dividend Reinvestment Plan, dated September 22, 2022
10.2*
Transfer Agency and Service Agreement, dated October 3, 2022, between Hercules Capital, Inc. and Computershare Trust Company, N.A. and Computershare Inc.
31.1*
Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, has been formatted in Inline XBRL
* Filed herewith.
Schedule 12 – 14
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
For the Nine Months Ended September 30, 2022 (unaudited)
Investment (1)
Amount of Interest and Fees Credited to Income (2)
Fair Value as ofDecember 31, 2021
Gross Additions(3)
Gross Reductions (4)
Net Change in Unrealized Appreciation/ (Depreciation)
Majority Owned Control Investments
Coronado Aesthetics, LLC (10)
(109
Gibraltar Business Capital, LLC (5)
2,581
(1,233
(4,904
(91
Hercules Adviser LLC (6)
Total Majority Owned Control Investments
2,974
65,235
3,210
3,562
72,007
Other Control Investments
Tectura Corporation(7)
Senior Debt
Total Other Control Investments
3,490
Black Crow AI, Inc. (8)
(1,000
Pineapple Energy LLC (9)
7,747
(7,780
(4,767
4,176
(13,547
Total Control and Affiliate Investments
4,694
82,962
For the Nine Months Ended September 30, 2021 (unaudited)
Fair Value as ofDecember 31, 2020
Fair Value as ofSeptember 30, 2021
2,363
9,627
23,403
31,554
(15,386
16,168
(1,110
1,166
6,100
10,704
2,422
48,800
15,762
(7,021
57,541
Tectura Corporation (7)
8,600
2,943
57,400
2,208
(3,993
1,785
7,620
840
849
Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (10)
(641
(681
(61,502
61,502
8,340
(66,176
2,946
65,740
19,090
As of September 30, 2022 (unaudited)
Industry
Type of Investment (1)
Interest Rate and Floor
Principal or Shares
Cost
Value (2)
Preferred Series A Equity
Interest rate FIXED 14.50%
Interest rate FIXED 11.50%
52,551
Interest rate FIXED 5.00%
Total Hercules Adviser LLC
12,035
Total Majority Owned Control Investments (5.28%)*
64,836
Interest rate FIXED 8.25%
Preferred Series BB Equity
22,413
Total Other Control Investments (0.61%)*
Total Control Investments (5.89%)*
87,249
Total Control and Affiliate Investments (5.89%)*
* Value as a percent of net assets
As of and for the year ended December 31, 2021
52,491
43,830
8,885
20,840
Total Majority Owned Control Investments (4.99%)*
61,626
Total Other Control Investments (0.63%)*
Total Control Investments (5.62%)*
84,039
Interest rate FIXED 10.00%
Total Pineapple Energy LLC
12,547
8,338
Total Affiliate Investments (0.72%)*
13,547
Total Control and Affiliate Investments (6.34%)*
97,586
Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HERCULES CAPITAL, INC. (Registrant)
Dated: November 2, 2022
/S/ SCOTT BLUESTEIN
Scott Bluestein
President, Chief Executive Officer, and
Chief Investment Officer
/S/ SETH H. MEYER
Seth H. Meyer
Chief Financial Officer, and
Chief Accounting Officer