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 June 30, 2023
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 July 26, 2023, there were 144,602,208 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 June 30, 2023 (unaudited) and December 31, 2022
Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited)
4
Consolidated Statements of Changes in Net Assets for the three and six months ended June 30, 2023 and 2022 (unaudited)
5
Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)
6
Consolidated Schedule of Investments as of June 30, 2023 (unaudited)
7
Consolidated Schedule of Investments as of December 31, 2022
18
Notes to Consolidated Financial Statements (unaudited)
29
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
62
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, Use of Proceeds and Issuer Purchases of Equity Securities
80
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits and Financial Statement Schedules
81
SIGNATURES
86
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)
June 30, 2023
December 31, 2022
(unaudited)
Assets
Investments, at fair value:
Non-control/Non-affiliate investments (cost of $3,025,780 and $2,918,425, respectively)
$
3,021,866
2,887,497
Control investments (cost of $88,317 and $87,271, respectively)
90,923
76,458
Total investments, at fair value (cost of $3,114,097 and $3,005,696, respectively; fair value amounts related to a VIE $256,076 and $236,585, respectively)
3,112,789
2,963,955
Cash and cash equivalents
61,695
15,797
Restricted cash (amounts related to a VIE $12,339 and $10,079, respectively)
12,339
10,079
Interest receivable
32,086
31,682
Right of use asset
3,783
4,986
Other assets
1,812
2,356
Total assets
3,224,504
3,028,855
Liabilities
Debt (net of debt issuance costs - Note 5; amounts related to a VIE $148,251 and $147,957, respectively)
1,588,608
1,574,351
Accounts payable and accrued liabilities
46,500
47,539
Operating lease liability
3,886
5,506
Total liabilities
1,638,994
1,627,396
Net assets consist of:
Common stock, par value
145
134
Capital in excess of par value
1,468,270
1,341,416
Total distributable earnings
117,095
59,909
Total net assets
1,585,510
1,401,459
Total liabilities and net assets
Shares of common stock outstanding ($0.001 par value and 200,000 authorized)
144,641
133,045
Net asset value per share
10.96
10.53
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
Investment income:
Interest and dividend income:
Non-control/Non-affiliate investments
107,931
67,511
206,712
127,601
Control investments
1,055
1,144
2,171
2,259
Affiliate investments
—
1,123
Total interest and dividend income
108,986
68,731
208,883
130,983
Fee income:
7,226
3,367
12,400
6,256
19
17
38
33
Total fee income
7,245
3,384
12,438
6,289
Total investment income
116,231
72,115
221,321
137,272
Operating expenses:
Interest
17,184
12,698
33,809
24,345
Loan fees
2,464
1,492
4,793
3,334
General and administrative
5,151
4,322
9,277
8,140
Tax expenses
1,980
1,821
2,533
Employee compensation:
Compensation and benefits
12,841
11,060
27,458
19,389
Stock-based compensation
3,325
3,661
6,511
8,085
Total employee compensation
16,166
14,721
33,969
27,474
Total gross operating expenses
42,945
35,054
85,215
65,826
Expenses allocated to the Adviser Subsidiary
(2,414
)
(3,070
(5,093
(4,472
Total net operating expenses
40,531
31,984
80,122
61,354
Net investment income
75,700
40,131
141,199
75,918
Net realized gain (loss) and net change in unrealized appreciation (depreciation):
Net realized gain (loss):
217
(2,133
8,177
(4,600
3,772
Loss on extinguishment of debt
(3,686
Total net realized gain (loss)
(4,514
Net change in unrealized appreciation (depreciation):
14,285
(51,749
26,544
(90,698
4,573
4,728
13,419
6,182
(1,295
(542
Total net change in unrealized appreciation (depreciation)
18,858
(48,316
39,963
(85,058
Total net realized gain (loss) and net change in unrealized appreciation (depreciation)
19,075
(50,449
48,140
(89,572
Net increase (decrease) in net assets resulting from operations
94,775
(10,318
189,339
(13,654
Net investment income before gains and losses per common share:
Basic
0.53
0.32
1.01
0.62
Change in net assets resulting from operations per common share:
0.66
(0.09
1.35
(0.12
Diluted
1.34
Weighted average shares outstanding:
141,390
124,255
138,338
121,292
142,084
139,587
Distributions paid per common share:
0.47
0.48
0.94
0.96
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(amounts in thousands)
Capital in
Distributable
Common Stock
excess
Earnings
Net
For the Three Months Ended June 30, 2023
Shares
Par Value
of par value
(loss)
Balance as of March 31, 2023
138,596
139
1,409,168
89,699
1,499,006
Public offering, net of offering expenses
5,062
65,401
65,406
Issuance of common stock under equity-based award plans
955
1
75
Shares retired on vesting of equity-based awards
(44
(10,311
Distributions reinvested in common stock
72
939
Distributions
(67,379
Stock-based compensation (1)
2,998
Balance as of June 30, 2023
For the Six Months Ended June 30, 2023
Balance as of December 31, 2022
9,721
9
130,739
130,748
1,902
2
213
215
(160
(11,828
133
1,879
(132,153
5,851
For the Three Months Ended June 30, 2022
Balance as of March 31, 2022
123,194
124
1,178,019
155,305
1,333,448
4,061
61,851
61,855
23
(54
(894
61
921
(59,993
2,721
Balance as of June 30, 2022
127,285
128
1,242,618
84,994
1,327,740
For the Six Months Ended June 30, 2022
Balance as of December 31, 2021
116,619
117
1,091,907
216,523
1,308,547
8,921
147,095
147,104
825
453
454
(182
(4,620
121
1,946
Issuance of Convertible Notes
981
(1
(117,875
5,838
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended June 30,
Cash flows provided by (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
(834,759
(790,706
Fundings assigned to Adviser Funds
199,866
189,806
Principal and fee repayments received and proceeds from the sale of debt investments
516,535
237,178
Proceeds from the sale of equity and warrant investments
30,074
7,749
Net change in unrealized (appreciation) depreciation
(39,963
85,058
Net realized (gain) loss
(8,177
828
Accretion of paid-in-kind principal
(11,347
(9,943
Accretion of loan discounts
(3,211
(1,982
Accretion of loan discount on convertible notes
112
Accretion of loan exit fees
(11,956
(12,057
Change in loan income, net of collections
12,421
7,119
Unearned fees related to unfunded commitments
(68
1,819
Realized loss on debt extinguishment
364
Amortization of debt fees and issuance costs
3,474
2,570
Depreciation and amortization
108
110
Stock-based compensation and amortization of restricted stock grants (1)
Change in operating assets and liabilities:
(393
(4,768
7,546
482
Accrued liabilities
(2,574
(12,630
Net cash provided by (used in) operating activities
52,766
(306,707
Cash flows provided by (used in) investing activities:
Purchases of capital equipment
(379
(74
Net cash provided by (used in) investing activities
Cash flows provided by (used in) financing activities:
Issuance of common stock
132,329
148,721
Offering expenses
(1,581
(1,617
Retirement of employee shares, net
(11,613
(4,166
Distributions paid
(130,274
(115,929
Issuance of debt
380,000
1,124,237
Repayment of debt
(368,000
(854,374
Debt issuance costs
(6,076
Fees paid for credit facilities and debentures
(5,090
(1,600
Net cash provided by (used in) financing activities
(4,229
289,196
Net increase (decrease) in cash, cash equivalents, and restricted cash
48,158
(17,585
Cash, cash equivalents, and restricted cash at beginning of period
25,876
136,265
Cash, cash equivalents, and restricted cash at end of period
74,034
118,680
Supplemental disclosures of cash flow information and non-cash investing and financing activities:
Interest paid
33,664
22,642
Income tax, including excise tax, paid
7,281
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:
115,309
Restricted cash
3,371
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 cash, cash equivalents, and restricted cash.
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2023 (unaudited)
(dollars in thousands)
Portfolio Company
Type of Investment
Maturity Date
Interest Rate and Floor (1)
PrincipalAmount
Cost (2)
Value
Footnotes
Debt Investments
Biotechnology Tools
Alamar Biosciences, Inc.
Senior Secured
June 2026
Prime + 3.00%, Floor rate 6.50%, PIK Interest 1.00%, 5.95% Exit Fee
5,023
5,028
5,055
(13)(14)(17)
PathAI, Inc.
January 2027
Prime + 2.15%, Floor rate 9.15%, 11.21% Exit Fee
28,000
27,696
27,969
(17)
Subtotal: Biotechnology Tools (2.08%)*
32,724
33,024
Communications & Networking
Aryaka Networks, Inc.
July 2026
Prime + 3.25%, Floor rate 6.75%, PIK Interest 1.05%, 3.55% Exit Fee
15,073
14,922
15,407
(14)(17)(19)
Cytracom Holdings LLC
February 2025
3-month SOFR + 9.62%, Floor rate 10.62%
3,284
3,245
3,266
(11)(17)(18)
Rocket Lab Global Services, LLC
June 2024
Prime + 4.90%, Floor rate 8.15%, PIK Interest 1.25%, 3.25% Exit Fee
85,103
86,546
(11)(12)(13)(14)(16)
Subtotal: Communications & Networking (6.64%)*
104,713
105,219
Consumer & Business Services
AppDirect, Inc.
April 2026
Prime + 5.50%, Floor rate 8.75%, 7.12% Exit Fee
55,790
57,154
58,178
(12)
Carwow LTD
December 2024
Prime + 4.70%, Floor rate 7.95%, PIK Interest 1.45%, 4.95% Exit Fee
£
19,327
26,412
24,845
(5)(10)(14)(17)
Collective Health, Inc.
September 2023
Prime + 4.75%, Floor rate 12.50%
4,000
3,985
Houzz, Inc.
Convertible Debt
May 2028
PIK Interest 7.00%
22,494
22,407
(9)(14)
Jobandtalent USA, Inc.
1-month SOFR + 8.75%, Floor rate 9.75%, 3.00% Exit Fee
14,000
13,969
14,056
(5)(10)
Provi
December 2026
Prime + 4.40%, Floor rate 10.65%, 2.95% Exit Fee
15,000
14,819
14,745
(15)
Rhino Labs, Inc.
March 2024
Prime + 5.50%, Floor rate 8.75%, PIK Interest 2.25%
12,908
(14)(15)
RVShare, LLC
3-month LIBOR + 5.50%, Floor rate 6.50%, PIK Interest 4.00%
28,296
27,892
28,114
(13)(14)(15)(17)
SeatGeek, Inc.
May 2026
Prime + 7.00%, Floor rate 10.50%, PIK Interest 0.50%, 1.00% Exit Fee
25,135
25,008
25,836
(11)(14)(16)(17)
July 2025
Prime + 2.50%, Floor rate 10.75%, PIK Interest 0.50%
58,125
57,689
(16)(17)
Total SeatGeek, Inc.
83,260
82,697
83,525
Skyword, Inc.
November 2026
Prime + 2.75%, Floor rate 9.25%, PIK Interest 1.75%, 3.00% Exit Fee
9,087
9,051
9,093
(13)(14)
Tectura Corporation
July 2024
PIK Interest 5.00%
23,703
13,263
(7)(8)(14)
FIXED 8.25%
8,250
7,073
(7)
Total Tectura Corporation
31,953
21,513
Thumbtack, Inc.
Prime + 4.95%, Floor rate 8.20%, PIK Interest 1.50%, 3.95% Exit Fee
10,180
10,399
(12)(14)(17)
Udacity, Inc.
September 2024
Prime + 4.50%, Floor rate 7.75%, PIK Interest 2.00%, 3.00% Exit Fee
52,464
53,106
51,752
(12)(14)
Veem, Inc.
March 2025
Prime + 4.00%, Floor rate 7.25%, PIK Interest 1.25%, 4.50% Exit Fee
5,075
5,085
5,124
Prime + 4.70%, Floor rate 7.95%, PIK Interest 1.50%, 4.50% Exit Fee
5,071
5,096
5,194
(14)
Total Veem, Inc.
10,146
10,181
10,318
Worldremit Group Limited
3-month SOFR + 9.25%, Floor rate 10.25%, 3.20% Exit Fee
88,250
88,626
88,741
(5)(10)(11)(12)(16)(19)
1-month SOFR + 9.25%, Floor rate 10.25%, 3.20% Exit Fee
6,250
6,252
6,270
(5)(10)(16)(19)
Total Worldremit Group Limited
94,500
94,878
95,011
Subtotal: Consumer & Business Services (28.15%)*
461,172
446,342
Diversified Financial Services
Gibraltar Acquisition, LLC (p.k.a. Gibraltar Business Capital, LLC)
Unsecured
September 2026
FIXED 11.50%
25,000
24,613
(7)(20)
Hercules Adviser LLC
June 2025
FIXED 5.00%
12,000
Next Insurance, Inc.
February 2028
Prime + -1.50%, Floor rate 4.75%, PIK Interest 5.50%
9,984
Subtotal: Diversified Financial Services (2.94%)*
46,597
Drug Discovery & Development
Akero Therapeutics, Inc.
Prime + 3.65%, Floor rate 7.65%, 5.85% Exit Fee
12,500
12,385
12,794
(10)(13)(17)
Aldeyra Therapeutics, Inc.
October 2024
Prime + 3.10%, Floor rate 8.60%, 8.90% Exit Fee
16,047
16,179
(11)
Alladapt Immunotherapeutics Inc.
Prime + 3.65%, Floor rate 8.40%, Cap rate 10.90%, 5.30% Exit Fee
30,000
29,904
29,747
(13)
AmplifyBio, LLC
Prime + 2.50%, Floor rate 9.50%, Cap rate 10.75%, 5.85% Exit Fee
24,000
23,883
23,728
ATAI Life Sciences N.V.
August 2026
Prime + 4.55%, Floor rate 8.55%, 6.95% Exit Fee
10,500
10,592
10,633
Axsome Therapeutics, Inc.
January 2028
Prime + 2.20%, Floor rate 9.95%, Cap rate 10.70%, 5.78% Exit Fee
143,350
142,818
143,739
(10)(11)(12)(16)(17)
Bicycle Therapeutics PLC
Prime + 4.55%, Floor rate 8.05%, Cap rate 9.05%, 5.00% Exit Fee
11,500
11,818
11,542
(5)(10)(11)(12)
BiomX, INC
September 2025
Prime + 5.70%, Floor rate 8.95%, 6.55% Exit Fee
8,008
8,277
8,246
(5)(10)(11)
BridgeBio Pharma, Inc.
FIXED 9.00%, 2.00% Exit Fee
37,880
37,718
34,033
(12)(13)(14)
Cellarity, Inc.
Prime + 5.70%, Floor rate 8.95%, 3.75% Exit Fee
30,056
30,478
(13)(15)
COMPASS Pathways plc
July 2027
Prime + 1.50%, Floor rate 9.75%, PIK Interest 1.40%, 4.75% Exit Fee
23,443
Corium, Inc.
Prime + 5.70%, Floor rate 8.95%, 7.75% Exit Fee
132,675
134,545
136,450
(13)(16)
Curevo, Inc.
June 2027
Prime + 1.70%, Floor rate 9.70%, 6.95% Exit Fee
10,000
9,674
Eloxx Pharmaceuticals, Inc.
April 2025
Prime + 6.25%, Floor rate 9.50%, 6.55% Exit Fee
5,000
5,642
5,552
enGene, Inc.
Prime + 5.00%, Floor rate 8.25%, 6.35% Exit Fee
11,000
11,230
11,264
(5)(10)(12)(13)
G1 Therapeutics, Inc.
Prime + 5.65%, Floor rate 9.15%, 11.41% Exit Fee
38,750
39,386
39,500
(11)(12)(15)
Geron Corporation
Prime + 5.75%, Floor rate 9.00%, 6.55% Exit Fee
18,500
19,243
19,482
(10)(12)(13)
Gritstone Bio, Inc.
Prime + 3.15%, Floor rate 7.15%, Cap rate 8.65%, PIK Interest 2.00%, 5.75% Exit Fee
22,799
22,874
22,766
Hibercell, Inc.
May 2025
Prime + 5.40%, Floor rate 8.65%, 4.95% Exit Fee
16,386
16,837
16,770
HilleVax, Inc.
May 2027
Prime + 1.05%, Floor rate 4.55%, Cap rate 6.05%, PIK Interest 2.85%, 7.15% Exit Fee
20,238
20,209
19,163
Iveric Bio, Inc.
August 2027
Prime + 4.00%, Floor rate 8.75%, Cap rate 10.25%, 4.25% Exit Fee
49,500
49,336
52,631
(10)(12)(17)
Kura Oncology, Inc.
November 2027
Prime + 2.40%, Floor rate 8.65%, 15.13% Exit Fee
5,500
5,489
5,606
(10)(15)(17)
Locus Biosciences, Inc.
Prime + 6.10%, Floor rate 9.35%, 4.95% Exit Fee
6,854
7,042
7,049
Madrigal Pharmaceutical, Inc.
Prime + 2.45%, Floor rate 8.25%, 5.35% Exit Fee
68,000
67,896
68,481
(10)
Phathom Pharmaceuticals, Inc.
October 2026
Prime + 2.25%, Floor rate 5.50%, PIK Interest 3.35%, 7.50% Exit Fee
96,262
97,177
96,827
(10)(12)(14)(15)(16)(17)(22)
Redshift Bioanalytics, Inc.
January 2026
Prime + 4.25%, Floor rate 7.50%, 3.80% Exit Fee
5,001
5,027
Replimune Group, Inc.
October 2027
Prime + 1.75%, Floor rate 7.25%, Cap rate 9.00%, PIK Interest 1.50%, 4.95% Exit Fee
20,906
20,904
21,240
(10)(14)
Tarsus Pharmaceuticals, Inc.
February 2027
Prime + 4.45%, Floor rate 8.45%, Cap rate 11.45%, 4.75% Exit Fee
10,313
10,372
10,434
TG Therapeutics, Inc.
Prime + 1.20%, Floor rate 8.95%, PIK Interest 2.25%, 5.69% Exit Fee
65,023
65,045
65,130
(10)(11)(12)(14)(17)
uniQure B.V.
Prime + 4.70%, Floor rate 7.95%, 6.10% Exit Fee
70,000
70,682
72,066
8
Unity Biotechnology, Inc.
August 2024
Prime + 6.10%, Floor rate 9.35%, 6.25% Exit Fee
16,766
18,014
17,999
Valo Health, LLC
May 2024
Prime + 6.45%, Floor rate 9.70%, 3.85% Exit Fee
5,271
5,621
(11)(13)
Viridian Therapeutics, Inc.
Prime + 4.20%, Floor rate 7.45%, Cap rate 8.95%, 6.00% Exit Fee
2,000
2,027
1,950
(10)(13)
X4 Pharmaceuticals, Inc.
Prime + 3.15%, Floor rate 10.15%, 6.35% Exit Fee
32,500
32,658
32,747
(11)(12)(13)
Subtotal: Drug Discovery & Development (68.62%)*
1,083,845
1,087,991
Electronics & Computer Hardware
Locus Robotics Corp.
Prime + 4.50%, Floor rate 8.00%, 1.00% Exit Fee
18,281
18,256
18,942
(17)(19)
Subtotal: Electronics & Computer Hardware (1.19%)*
Healthcare Services, Other
Better Therapeutics, Inc.
August 2025
Prime + 5.70%, Floor rate 8.95%, 5.95% Exit Fee
11,314
11,608
Blue Sprig Pediatrics, Inc.
1-month SOFR + 5.00%, Floor rate 6.00%, PIK Interest 4.45%
57,658
56,974
55,819
(11)(13)(14)
Carbon Health Technologies, Inc.
Prime + 5.60%, Floor rate 8.85%, 4.61% Exit Fee
46,125
46,859
47,142
Equality Health, LLC
February 2026
Prime + 6.25%, Floor rate 9.50%, PIK Interest 1.55%
53,999
53,646
54,269
(11)(12)(14)
Main Street Rural, Inc.
Prime + 1.95%, Floor rate 9.95%, 6.85% Exit Fee
17,500
17,331
Modern Life, Inc.
Prime + 2.75%, Floor rate 8.75%, 3.00% Exit Fee
13,000
12,765
(13)(17)
Vida Health, Inc.
March 2026
Prime + 1.00%, Floor rate 9.20%, Cap rate 10.20%, 4.95% Exit Fee
20,000
19,810
19,359
(11)(17)
Subtotal: Healthcare Services, Other (13.76%)*
218,993
218,185
Information Services
Capella Space Corp.
November 2025
Prime + 5.00%, Floor rate 8.25%, PIK Interest 1.10%, 7.00% Exit Fee
20,362
20,826
20,949
Saama Technologies, LLC
Prime + 0.70%, Floor rate 8.95%, PIK Interest 2.00%, 2.95% Exit Fee
11,625
11,480
Signal Media Limited
Prime + 5.50%, Floor rate 9.00%, Cap rate 12.00%, 3.45% Exit Fee
3,000
2,970
2,955
(5)(10)(17)
Yipit, LLC
1-month SOFR + 9.03%, Floor rate 10.03%
31,875
31,423
31,987
(17)(18)
Subtotal: Information Services (4.25%)*
66,699
67,371
Manufacturing Technology
Bright Machines, Inc.
Prime + 4.00%, Floor rate 9.50%, 5.00% Exit Fee
10,231
10,252
10,356
MacroFab, Inc.
Prime + 4.35%, Floor rate 7.60%, PIK Interest 1.25%, 4.50% Exit Fee
20,254
19,995
21,608
Ouster, Inc.
Prime + 6.15%, Floor rate 9.40%, 7.45% Exit Fee
14,110
14,585
Subtotal: Manufacturing Technology (2.94%)*
44,357
46,549
Media/Content/Info
Fever Labs, Inc.
Prime + 3.50%, Floor rate 9.00%, 1.00% Exit Fee
6,667
6,619
6,682
(19)
1,500
1,495
1,503
December 2025
1,667
1,656
1,664
1,648
Total Fever Labs, Inc.
11,501
11,418
11,497
Subtotal: Media/Content/Info (0.73%)*
Software
3GTMS, LLC
6-month SOFR + 9.27%, Floor rate 10.27%
13,174
13,061
13,016
Agilence, Inc.
1-month BSBY + 9.00%, Floor rate 10.00%
9,259
9,063
(12)(17)(18)
Alchemer LLC
1-month SOFR + 8.14%, Floor rate 9.14%
20,908
20,475
21,158
(13)(17)(18)
Annex Cloud
1-month BSBY + 8.99%, Floor rate 9.99%
8,479
8,290
8,319
Automation Anywhere, Inc.
September 2027
Prime + 4.25%, Floor rate 9.00%, 2.50% Exit Fee
19,600
19,197
19,782
(11)(17)(19)
Babel Street
December 2027
3-month SOFR + 7.89%, Floor rate 8.89%
45,000
43,889
44,387
(15)(17)(18)
Brain Corporation
Prime + 3.70%, Floor rate 9.20%, PIK Interest 1.00%, 3.95% Exit Fee
30,268
30,313
30,184
Campaign Monitor Limited
3-month SOFR + 8.90%, Floor rate 9.90%
33,000
32,640
(13)(19)
Catchpoint Systems, Inc.
1-month SOFR + 8.76%, Floor rate 9.76%
10,124
9,952
10,081
(18)
Ceros, Inc.
6-month LIBOR + 8.89%, Floor rate 9.89%
22,973
22,547
23,145
Constructor.io Corporation
1-month SOFR + 8.44%, Floor rate 9.44%
4,688
4,582
4,736
Convoy, Inc.
Prime + 3.20%, Floor rate 6.45%, PIK Interest 1.95%, 4.55% Exit Fee
74,719
74,304
74,805
(14)(19)
Copper CRM, Inc
Prime + 4.50%, Floor rate 8.25%, Cap rate 10.25%, PIK Interest 1.95%, 4.32% Exit Fee
9,848
9,937
9,645
(11)(14)
Cutover, Inc.
October 2025
Prime + 5.20%, Floor rate 9.95%, 4.95% Exit Fee
5,629
(5)(10)(12)(17)
Cybermaxx Intermediate Holdings, Inc.
6-month SOFR + 8.38%, Floor rate 9.38%
7,975
7,830
7,557
6-month SOFR + 12.11%, Floor rate 13.11%
2,553
2,493
2,604
Total Cybermaxx Intermediate Holdings, Inc.
10,528
10,323
10,161
Dashlane, Inc.
Prime + 3.05%, Floor rate 7.55%, PIK Interest 1.10%, 2.39% Exit Fee
42,611
42,648
42,749
(11)(13)(14)(19)
Dispatch Technologies, Inc.
April 2028
3-month SOFR + 8.01%, Floor rate 8.76%
7,500
7,309
7,414
Eigen Technologies Ltd.
Prime + 5.10%, Floor rate 8.35%, 2.95% Exit Fee
3,750
3,746
Elation Health, Inc.
Prime + 4.25%, Floor rate 9.00%, PIK Interest 1.95%, 3.95% Exit Fee
4,935
5,059
Enmark Systems, Inc.
3-month SOFR + 6.75%, Floor rate 7.75%, PIK Interest 2.14%
8,313
8,161
8,263
(11)(14)(17)(18)
Flight Schedule Pro, LLC
1-month SOFR + 7.70%, Floor rate 8.70%
5,948
5,785
5,859
Fortified Health Security
6-month SOFR + 7.54%, Floor rate 8.54%
7,000
6,837
6,796
Ikon Science Limited
3-month Eurodollar + 9.00%, Floor rate 10.00%
6,388
6,284
6,363
(5)(10)(17)(18)
Imperva, Inc.
3-month LIBOR + 7.75%, Floor rate 8.75%
19,887
20,200
Khoros (p.k.a Lithium Technologies)
January 2024
3-month SOFR + 8.00%, Floor rate 9.00%
57,113
57,037
Kore.ai, Inc.
April 2027
Prime + 1.50%, Floor rate 9.25%, PIK Interest 2.20%, 2.25% Exit Fee
30,114
29,707
29,503
Leapwork ApS
Prime + 0.25%, Floor rate 7.25%, PIK Interest 1.95%, 2.70% Exit Fee
3,776
3,751
(5)(10)(12)(14)(17)
Loftware, Inc.
March 2028
3-month SOFR + 7.88%, Floor rate 8.88%
25,900
25,278
LogicSource
3-month SOFR + 8.93%, Floor rate 9.93%
13,300
13,050
13,287
Mobile Solutions Services
3-month LIBOR + 9.06%, Floor rate 10.06%
18,366
18,059
17,821
10
Nuvolo Technologies Corporation
Prime + 5.25%, Floor rate 8.50%, 2.42% Exit Fee
22,500
22,644
22,975
(12)(13)(17)(19)
Omeda Holdings, LLC
3-month SOFR + 8.05%, Floor rate 9.05%
7,519
7,299
7,398
Riviera Partners LLC
6-month SOFR + 7.53%, Floor rate 8.53%
25,988
25,477
24,871
Salary.com, LLC
17,910
17,591
17,577
ShadowDragon, LLC
6-month SOFR + 8.95%, Floor rate 9.95%
6,000
5,868
5,739
Simon Data, Inc.
March 2027
Prime + 1.00%, Floor rate 8.75%, PIK Interest 1.95%, 2.95% Exit Fee
15,058
14,980
14,962
Sisense Ltd.
Prime + 1.50%, Floor rate 9.50%, PIK Interest 1.95%, 2.55% Exit Fee
34,500
33,984
Streamline Healthcare Solutions
1-month SOFR + 7.25%, Floor rate 8.25%
13,200
12,931
12,932
Sumo Logic, Inc.
May 2030
3-month SOFR + 6.50%, Floor rate 7.50%
23,000
22,432
Tact.ai Technologies, Inc.
February 2024
Prime + 4.00%, Floor rate 8.75%, PIK Interest 2.00%, 5.50% Exit Fee
2,672
2,657
ThreatConnect, Inc.
6-month SOFR + 9.00%, Floor rate 10.00%
10,976
10,753
10,823
Tipalti Solutions Ltd.
Prime + 0.45%, Floor rate 7.95%, PIK Interest 2.00%, 3.75% Exit Fee
10,541
10,416
VideoAmp, Inc.
Prime + 3.70%, Floor rate 6.95%, PIK Interest 1.25%, 5.25% Exit Fee
63,585
63,830
68,207
(14)(15)(19)
Zappi, Inc.
3-month SOFR + 8.03%, Floor rate 9.03%
9,000
8,797
8,803
Zimperium, Inc.
3-month SOFR + 8.31%, Floor rate 9.31%
16,313
16,028
16,235
Subtotal: Software (53.63%)*
842,249
850,278
Sustainable and Renewable Technology
Ampion, PBC
Prime + 4.70%, Floor rate 7.95%, PIK Interest 1.45%, 3.95% Exit Fee
4,067
4,053
4,091
Pineapple Energy LLC
FIXED 10.00%
1,876
1,856
Subtotal: Sustainable and Renewable Technology (0.38%)*
5,929
5,947
Total: Debt Investments (185.30%)*
2,936,952
2,937,942
Type ofInvestment
Acquisition Date (6)
Series (3)
Equity Investments
Consumer & Business Products
Grove Collaborative, Inc.
Equity
4/30/2021
12,260
433
22
(4)
Savage X Holding, LLC
4/30/2010
Class A Units
42,137
13
144
TechStyle, Inc.
42,989
87
TFG Holding, Inc.
89
Subtotal: Consumer & Business Products (0.02%)*
663
325
12/15/2021
Preferred Series D-4
199,742
1,151
511
DoorDash, Inc.
12/20/2018
81,996
946
6,267
Lyft, Inc.
12/26/2018
100,738
5,263
966
Nerdy Inc.
9/17/2021
100,000
1,000
417
OfferUp, Inc.
10/25/2016
Preferred Series A
286,080
1,663
450
Preferred Series A-1
108,710
632
171
Total OfferUp, Inc.
394,790
2,295
621
Oportun
6/28/2013
48,365
577
289
Reischling Press, Inc.
7/31/2020
3,095
39
1/24/2022
Preferred Series B-2
7,063
666
5/23/2018
414,994,863
900
6/6/2016
Preferred Series BB
1,000,000
415,994,863
Subtotal: Consumer & Business Services (0.61%)*
13,171
9,737
11
3/1/2018
Member Units
29,006
19,779
3/26/2021
35
27,161
Newfront Insurance Holdings, Inc.
9/30/2021
Preferred Series D-2
210,282
403
373
Subtotal: Diversified Financial Services (2.98%)*
29,444
47,313
Drug Delivery
AcelRx Pharmaceuticals, Inc.
12/10/2018
8,836
1,329
Aytu BioScience, Inc.
3/28/2014
680
BioQ Pharma Incorporated
12/8/2015
Preferred Series D
165,000
500
PDS Biotechnology Corporation
4/6/2015
2,498
309
12
Subtotal: Drug Delivery (0.00%)*
3,638
Applied Molecular Transport
4/6/2021
42
(4)(10)
Avalo Therapeutics, Inc.
8/19/2014
9,923
5/9/2022
127,021
4,165
9,128
(4)(10)(16)
10/5/2020
98,100
1,871
2,503
(4)(5)(10)
6/21/2018
231,329
2,255
3,979
Dare Biosciences, Inc.
1/8/2015
13,550
Dynavax Technologies
7/22/2015
550
258
10/26/2022
442,477
863
5/7/2021
Preferred Series B
3,466,840
4,250
1,131
5/3/2022
235,295
4,044
Humanigen, Inc.
3/31/2021
43,243
800
6/16/2023
47,826
506
NorthSea Therapeutics
Preferred Series C
983
763
Paratek Pharmaceuticals, Inc.
2/26/2007
76,362
2,744
169
6/9/2023
147,233
1,730
2,108
Rocket Pharmaceuticals, Ltd.
8/22/2007
944
Savara, Inc.
8/11/2015
11,119
202
36
Sio Gene Therapies, Inc.
2/2/2017
16,228
1,269
5/5/2022
155,555
2,100
2,811
1/31/2019
17,175
332
197
12/11/2020
510,308
2,280
10/31/2022
170,102
1,070
Total Valo Health, LLC
680,410
3,350
11/26/2019
1,566,064
2,945
3,038
Subtotal: Drug Discovery & Development (2.20%)*
40,305
34,933
11/17/2022
Preferred Series F
15,116
650
512
Skydio, Inc.
3/8/2022
Preferred Series E
248,900
611
Subtotal: Electronics & Computer Hardware (0.07%)*
2,150
23andMe, Inc.
3/11/2019
825,732
5,095
1,446
3/30/2021
217,880
1,687
867
Subtotal: Healthcare Services, Other (0.15%)*
6,782
2,313
Planet Labs, Inc.
6/21/2019
547,880
615
1,764
12/30/2021
41,021
3,825
3,705
Subtotal: Information Services (0.34%)*
4,440
5,469
Medical Devices & Equipment
Coronado Aesthetics, LLC
10/15/2021
Common Units
180,000
Preferred Series A-2
5,000,000
250
292
Total Coronado Aesthetics, LLC
5,180,000
297
Flowonix Medical Incorporated
11/3/2014
Preferred Series AA
221,893
Gelesis, Inc.
11/30/2009
1,490,700
871
59
ViewRay, Inc.
12/16/2013
36,457
Subtotal: Medical Devices & Equipment (0.02%)*
2,953
369
Semiconductors
Achronix Semiconductor Corporation
7/1/2011
277,995
160
368
Subtotal: Semiconductors (0.02%)*
8/9/2021
965
Black Crow AI, Inc. affiliates
3/24/2021
Preferred Note
2,406
(21)
CapLinked, Inc.
10/26/2012
Preferred Series A-3
53,614
51
Contentful Global, Inc.
12/22/2020
41,000
138
263
11/20/2018
108,500
736
Total Contentful Global, Inc.
149,500
638
999
Docker, Inc.
11/29/2018
4,284
565
Druva Holdings, Inc.
10/22/2015
Preferred Series 2
458,841
1,706
8/24/2017
Preferred Series 3
93,620
300
377
Total Druva Holdings, Inc.
552,461
1,300
2,083
HighRoads, Inc.
1/18/2013
190
307
Lightbend, Inc.
12/4/2020
38,461
265
Nextdoor.com, Inc.
8/1/2018
1,019,255
4,854
3,323
Palantir Technologies
9/23/2020
1,018,337
6,225
15,611
SingleStore, Inc.
11/25/2020
580,983
1,922
8/12/2021
52,956
280
211
Total SingleStore, Inc.
633,939
2,133
Verana Health, Inc.
7/8/2021
952,562
548
ZeroFox, Inc.
5/7/2020
289,992
101
290
Subtotal: Software (1.83%)*
25,711
28,941
Fulcrum Bioenergy, Inc.
9/13/2012
Preferred Series C-1
187,265
711
1,024
Impossible Foods, Inc.
5/10/2019
Preferred Series E-1
188,611
Modumetal, Inc.
6/1/2015
1,035
NantEnergy, LLC
8/31/2013
59,665
102
12/10/2020
304,487
3,153
Pivot Bio, Inc.
6/28/2021
593,080
4,500
2,409
Proterra, Inc.
5/28/2015
457,841
542
549
Subtotal: Sustainable and Renewable Technology (0.33%)*
11,508
5,266
Total: Equity Investments (8.59%)*
140,925
136,180
Warrant Investments
Warrant
6/21/2022
15,399
24
12/23/2022
53,418
461
430
Subtotal: Biotechnology Tools (0.03%)*
485
441
6/28/2022
229,611
123
Subtotal: Communications & Networking (0.01%)*
Gadget Guard, LLC
6/3/2014
1,662,441
228
6/27/2014
206,185
60
7/16/2013
1,101
513
The Neat Company
8/13/2014
54,054
365
Whoop, Inc.
6/27/2018
686,270
396
Subtotal: Consumer & Business Products (0.06%)*
1,712
969
12/14/2021
174,163
164
53
10/29/2019
529,661
20
Landing Holdings Inc.
3/12/2021
11,806
116
147
Lendio, Inc.
3/29/2019
127,032
40
12/22/2022
117,042
166
143
13,106
470
RumbleON, Inc.
10/30/2018
1,048
15
6/12/2019
1,379,761
842
2,122
(12)(16)
11/14/2022
1,607,143
57
27
8/23/2019
444,444
83
Total Skyword, Inc.
2,051,587
140
30
Snagajob.com, Inc.
4/20/2020
600,000
16
6/30/2016
1,800,000
782
1,211,537
Total Snagajob.com, Inc.
3,611,537
860
45
5/1/2018
267,225
844
401
9/25/2020
486,359
218
3/31/2022
98,428
126
21
2/11/2021
77,215
129
52
(5)(10)(12)(16)
8/27/2021
1,868
26
(5)(10)(16)
79,083
155
Subtotal: Consumer & Business Services (0.20%)*
4,175
3,197
3/30/2023
37,618
3/28/2022
150,926
120
Subtotal: Healthcare Services, Other (0.01%)*
284
175
2/3/2023
522,930
214
167
Subtotal: Diversified Financial Services (0.01%)*
Aerami Therapeutics Holdings, Inc.
9/30/2015
110,882
74
10/27/2014
459,183
8/28/2014
3,929
390
465
14
ADMA Biologics, Inc.
2/24/2014
58,000
6/15/2022
22,949
702
12/27/2022
69,239
238
222
61,004
1,289
1,707
(4)(10)(12)(16)
12/8/2021
287
226
Century Therapeutics, Inc.
9/14/2020
16,112
37
6/30/2023
Ordinary Shares
75,376
278
95,221
233
219
Dermavant Sciences Ltd.
5/31/2019
223,642
94
133,692
(5)(10)(12)
Evofem Biosciences, Inc.
6/11/2014
266
Fresh Tracks Therapeutics, Inc. (p.k.a. Brickell Biotech, Inc.)
2/18/2016
201
119
Kineta, Inc.
12/20/2019
2,202
11/2/2022
14,342
88
41
(4)(10)(15)
12,514
517
1,806
426,866
520
64,687
848
216
(4)(10)(12)(15)(16)
3/23/2022
475,510
Scynexis, Inc.
5/14/2021
106,035
296
65
(4)(12)
2/28/2019
264,226
1,284
4,046
(4)(10)(12)
6/15/2020
102,216
256
142
12/9/2022
1,392,787
510
931
Subtotal: Drug Discovery & Development (0.68%)*
7,710
10,797
908 Devices, Inc.
3/15/2017
49,078
8,503
34
152
11/8/2021
622,255
557
Subtotal: Electronics & Computer Hardware (0.04%)*
692
662
10/21/2021
176,200
207
90
INMOBI Inc.
11/19/2014
65,587
82
NetBase Solutions, Inc.
8/22/2017
Preferred Series 1
60,000
356
357
6/29/2022
94,857
Subtotal: Information Services (0.03%)*
466
392,308
537
726
1,111,111
528
1,242
Xometry, Inc.
5/9/2018
87,784
47
1,079
Subtotal: Manufacturing Technology (0.19%)*
1,112
3,047
12/30/2022
350,902
56
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
Outset Medical, Inc.
9/27/2013
62,794
683
Tela Bio, Inc.
3/31/2017
15,712
Subtotal: Medical Devices & Equipment (0.04%)*
1,925
6/26/2015
750,000
99
820
Subtotal: Semiconductors (0.05%)*
Aria Systems, Inc.
5/22/2015
Preferred Series G
231,535
9/23/2022
254,778
448
Bitsight Technologies, Inc.
11/18/2020
29,691
514
10/4/2021
194,629
165
CloudBolt Software, Inc.
9/30/2020
211,342
Cloudian, Inc.
11/6/2018
477,454
71
46
Cloudpay, Inc.
4/10/2018
6,763
54
3/30/2022
165,456
974
330
Couchbase, Inc.
4/25/2019
105,350
462
695
9/21/2022
102,898
28
453,641
353
Delphix Corp.
10/8/2019
718,898
1,594
2,485
Demandbase, Inc.
8/2/2021
727,047
545
334
DNAnexus, Inc.
3/21/2014
909,091
97
181
Dragos, Inc.
6/28/2023
49,309
1,453
1,452
DroneDeploy, Inc.
6/30/2022
95,911
374
4/13/2022
522
9/12/2022
362,837
583
Esme Learning Solutions, Inc.
1/27/2022
56,765
198
First Insight, Inc.
5/10/2018
75,917
96
55
Fulfil Solutions, Inc.
7/29/2022
84,995
408
3/31/2023
64,293
208
273
1/23/2023
39,948
2/14/2018
89,685
131
Mixpanel, Inc.
82,362
252
299
172
156
Poplicus, Inc.
5/28/2014
132,168
Reltio, Inc.
6/30/2020
69,120
383
SignPost, Inc.
1/13/2016
Series Junior 1 Preferred
474,019
314
3/22/2023
77,934
73
4/28/2020
312,596
103
6/8/2023
321,956
174
2/13/2020
1,041,667
206
The Faction Group LLC
8,076
234
730
254,877
204
1/21/2022
152,048
1,275
Subtotal: Software (0.75%)*
11,775
11,870
Surgical Devices
TransMedics Group, Inc.
9/11/2015
14,440
731
Subtotal: Surgical Devices (0.05%)*
4/15/2022
18,472
Halio, Inc.
4/22/2014
325,000
4/7/2015
131,883
63
Total Halio, Inc.
456,883
Polyera Corporation
3/24/2015
150,036
269
Subtotal: Sustainable and Renewable Technology (0.01%)*
539
Total: Warrant Investments (2.16%)*
32,085
34,314
Total Investments in Securities (196.05%)*
3,109,962
3,108,436
Investment Funds & Vehicles Investments
Forbion Growth Opportunities Fund I C.V.
Investment Funds & Vehicles
11/16/2020
3,271
3,239
Forbion Growth Opportunities Fund II C.V.
6/23/2022
483
765
Subtotal: Drug Discovery & Development (0.25%)*
3,754
4,004
Liberty Zim Co-Invest L.P.
7/21/2022
381
349
Subtotal: Software (0.02%)*
Total: Investment Funds & Vehicles Investments (0.27%)*
4,135
4,353
Total Investments (196.33%)*
3,114,097
Foreign Currency Forward Contracts
Foreign Currency
Settlement Date
Counterparty
Amount
Transaction
US $ Value at Settlement Date
Great British Pound (GBP)
6/3/2024
Goldman Sachs Bank USA
19,288
Sold
23,810
(554
Total Foreign Currency Forward (-0.03%*)
* 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.
4,951
27,388
Subtotal: Biotechnology Tools (2.31%)*
32,339
4,969
5,053
3-month LIBOR + 9.31%, Floor rate 10.31%
8,910
8,768
8,748
84,581
85,430
87,933
Subtotal: Communications & Networking (7.26%)*
99,167
101,734
Prime + 5.50%, Floor rate 8.75%, 8.29% Exit Fee
40,790
41,856
42,426
(12)(17)
18,890
26,024
22,971
(5)(10)(14)
PIK Interest 5.50%
21,853
20,356
1-month SOFR + 8.86%, Floor rate 9.75%, 3.00% Exit Fee
13,853
13,904
14,739
16,500
16,328
16,496
27,730
27,265
27,256
June 2023
Prime + 5.00%, Floor rate 10.50%, PIK Interest 0.50%
60,915
60,721
(12)(13)(14)(16)
Prime + 7.00%, Floor rate 10.50%, PIK Interest 0.50%
25,071
24,912
25,823
(11)(14)(16)
85,986
85,633
86,544
9,007
8,918
8,870
10,680
240
8,042
13,023
10,103
10,050
10,167
51,937
52,265
52,976
5,043
5,042
5,033
4,988
10,076
9,988
10,166
3-month LIBOR + 9.25%, Floor rate 10.25%, 3.00% Exit Fee
94,418
93,837
Subtotal: Consumer & Business Services (30.59%)*
444,703
428,750
Gibraltar Business Capital, LLC
FIXED 14.50%
14,715
12,802
9,852
8,898
Total Gibraltar Business Capital, LLC
24,567
21,700
Subtotal: Diversified Financial Services (2.40%)*
36,567
33,700
5,039
15,879
15,974
Prime + 3.65%, Floor rate 8.40%, Cap rate 10.90%, 10.60% Exit Fee
14,920
23,663
10,513
Aveo Pharmaceuticals, Inc.
Prime + 6.40%, Floor rate 9.65%, Cap rate 15.00%, 6.95% Exit Fee
40,000
41,644
43,183
(11)(15)
Prime + 5.70%, Floor rate 8.95%, Cap rate 10.70%, 5.31% Exit Fee
81,725
81,631
78,074
11,757
11,435
9,174
9,052
37,312
37,039
33,344
29,841
30,097
April 2024
Prime + 6.30%, Floor rate 9.55%, 3.95% Exit Fee
10,235
10,292
Codiak Biosciences, Inc.
Prime + 5.00%, Floor rate 8.25%, 5.50% Exit Fee
25,759
25,177
133,557
135,619
12,753
12,535
11,072
11,067
Finch Therapeutics Group, Inc.
Prime + 4.05%, Floor rate 7.55%, Cap rate 8.80%, 5.50% Exit Fee
15,012
13,940
Prime + 5.90%, Floor rate 9.15%, 9.86% Exit Fee
58,674
58,407
(11)(12)(15)(17)
19,109
19,174
15,113
15,109
(14)(17)
17,000
17,313
17,265
12,072
12,043
11,333
(14)(15)(17)
49,090
(10)(12)
5,448
8,000
8,120
Prime + 3.95%, Floor rate 7.45%, 5.35% Exit Fee
34,000
33,945
33,987
(10)(17)
Nabriva Therapeutics
Prime + 4.30%, Floor rate 9.80%, 9.95% Exit Fee
2,079
2,734
2,804
(5)(10)(13)
94,737
95,032
93,916
Provention Bio, Inc.
Prime + 2.70%, Floor rate 8.20%, 6.60% Exit Fee
24,670
4,957
4,946
20,754
20,656
(10)(14)(17)
Prime + 5.80%, Floor rate 9.05%, 3.95% Exit Fee
18,667
18,675
18,698
(12)(13)
Seres Therapeutics, Inc.
Prime + 6.40%, Floor rate 9.65%, 4.98% Exit Fee
37,500
38,638
38,816
Prime + 5.20%, Floor rate 8.45%, 4.75% Exit Fee
8,274
8,423
Prime + 2.15%, Floor rate 5.40%, PIK Interest 3.45%, 5.95% Exit Fee
47,983
47,889
48,649
(10)(11)(12)(14)
Prime + 4.70%, Floor rate 7.95%, 7.28% Exit Fee
72,329
73,019
(5)(10)(11)(12)(16)
21,079
20,967
8,146
8,416
8,410
Prime + 4.20%, Floor rate 7.45%, Cap rate 8.95%, 4.76% Exit Fee
2,012
1,934
Prime + 3.75%, Floor rate 8.75%, 8.80% Exit Fee
33,705
Subtotal: Drug Discovery & Development (78.59%)*
1,107,352
1,101,430
18,171
18,723
Subtotal: Electronics & Computer Hardware (1.34%)*
12,162
12,053
1-month LIBOR + 5.00%, Floor rate 6.00%, PIK Interest 4.45%
51,480
50,813
49,732
46,552
46,548
(11)(13)(19)
53,587
53,164
53,871
Oak Street Health, Inc.
Prime + 2.45%, Floor rate 7.95%, Cap rate 9.45%, PIK Interest 1.00%, 4.95% Exit Fee
33,808
33,651
Subtotal: Healthcare Services, Other (13.98%)*
196,342
195,855
20,250
20,506
20,574
750
742
738
1-month SOFR + 9.08%, Floor rate 10.08%
31,371
30,763
Subtotal: Information Services (3.72%)*
52,619
52,075
11,050
10,832
17,137
16,917
13,970
14,204
Subtotal: Manufacturing Technology (2.99%)*
41,568
41,953
Fungible, Inc.
Prime + 5.00%, Floor rate 8.25%, 4.95% Exit Fee
19,639
21,192
(15)(19)
Subtotal: Semiconductors (1.51%)*
3-month LIBOR + 9.28%, Floor rate 10.28%
10,426
10,291
10,317
(11)(18)
3-month LIBOR + 6.57%, Floor rate 7.57%
2,750
2,681
Total 3GTMS, LLC
13,176
13,035
12,998
9,306
9,088
8,977
1-month SOFR + 7.89%, Floor rate 8.89%
20,463
19,999
20,123
1-month BSBY + 8.99%, Floor rate 10.00%
8,500
8,292
8,176
19,059
43,801
Prime + 3.70%, Floor rate 6.95%, PIK Interest 1.00%, 3.95% Exit Fee
20,166
20,242
20,138
6-month SOFR + 8.90%, Floor rate 9.90%
32,578
3-month SOFR + 8.86%, Floor rate 9.76%
10,175
9,980
9,996
6-month LIBOR + 9.67%, Floor rate 10.67%
21,445
21,003
21,050
Prime + 6.70%, Floor rate 9.95%, 3.45% Exit Fee
10,069
10,498
(11)(19)
73,987
73,060
73,498
(14)(16)(19)
Prime + 4.50%, Floor rate 8.25%, Cap rate 10.25%, PIK Interest 1.95%, 4.50% Exit Fee
10,144
10,150
9,820
4,949
6-month SOFR + 9.53%, Floor rate 10.28%
10,298
10,114
Prime + 3.05%, Floor rate 7.55%, PIK Interest 1.10%, 4.95% Exit Fee
31,930
32,346
32,012
(11)(13)(14)(17)(19)
Prime + 2.25%, Floor rate 5.50%, PIK Interest 3.00%, 5.00% Exit Fee
28,503
28,442
28,664
(13)(14)(17)(19)
7,295
7,339
3,744
5,021
4,839
3-month LIBOR + 6.77%, Floor rate 7.77%, PIK Interest 2.16%
8,223
8,054
8,043
Esentire, Inc.
3-month LIBOR + 9.96%, Floor rate 10.96%
8,436
8,361
8,376
(5)(10)(11)(18)
Prime + 5.50%, Floor rate 8.75%, PIK Interest 1.50%, 3.00% Exit Fee
4,892
4,737
1,671
(8)(14)
6-month SOFR + 7.79%, Floor rate 8.54%
6,824
1-month SOFR + 7.79%, Floor rate 8.70%
5,771
6,563
6,422
6,484
19,875
Kazoo, Inc. (p.k.a. YouEarnedIt, Inc.)
July 2023
3-month SOFR + 10.14%, Floor rate 11.14%
10,681
10,593
56,208
56,062
55,520
13,028
Logicworks
Prime + 7.50%, Floor rate 10.75%
14,500
14,398
14,473
17,915
17,556
17,474
Nextroll, Inc.
Prime + 3.75%, Floor rate 7.75%, PIK Interest 2.95%, 1.95% Exit Fee
22,211
22,284
22,508
22,817
7,261
26,184
25,622
25,487
6-month SOFR + 8.00%, Floor rate 9.00%
18,000
17,654
3-month LIBOR + 9.00%, Floor rate 10.00%
5,985
5,841
5,830
4,481
4,446
6-month LIBOR + 9.00%, Floor rate 10.00%
11,032
10,778
10,793
63,187
62,640
63,429
8,779
16,000
16,072
Subtotal: Software (54.28%)*
762,371
760,679
4,037
4,008
PIK Interest 10.00%
3,237
3,006
Subtotal: Sustainable and Renewable Technology (0.50%)*
7,222
7,014
Total: Debt Investments (199.47%)*
2,818,060
2,795,444
Acquisition Date (4)
61,300
132
Subtotal: Consumer & Business Products (0.04%)*
498
257
945
4,003
1,110
225
372
141
805
Uber Technologies, Inc.
12/1/2020
32,991
318
816
Subtotal: Consumer & Business Services (0.57%)*
13,488
7,995
830,000
1,884
1,107
10,602,752
26,122
14,137
11,432,752
28,006
15,244
19,153
472
Subtotal: Diversified Financial Services (2.49%)*
28,444
34,869
13,600
Subtotal: Drug Delivery (0.01%)*
9/19/2022
Albireo Pharma, Inc.
540
9,924
50
7/31/2011
190,179
1,715
2,843
9,797
2,904
1,763
Concert Pharmaceuticals, Inc.
2/13/2019
70,796
1,367
413
1,527
2,233
3,937
1,476
203
Tricida, Inc.
2/28/2018
68,816
389
(4)(5)(10)(16)
2,063
1,012
3,075
1,555
Subtotal: Drug Discovery & Development (2.66%)*
43,971
37,315
606
915
Subtotal: Electronics & Computer Hardware (0.11%)*
1,521
5,094
1,784
Subtotal: Healthcare Services, Other (0.21%)*
6,781
2,894
2,383
3,375
Zeta Global Corp.
11/20/2007
295,861
2,417
Subtotal: Information Services (0.58%)*
8,175
313
319
1,499
333
163
Subtotal: Medical Devices & Equipment (0.07%)*
205
Subtotal: Semiconductors (0.01%)*
793
732
990
503
395
2,159
1,418,337
8,670
9,106
1,940
221
2,161
Sprinklr, Inc.
3/22/2017
700,000
3,748
5,719
1,023
1,382
(4)(20)
Subtotal: Software (2.07%)*
32,498
28,966
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
150
Total Gynesonics, Inc.
9,595,178
1,941
11/7/2012
50,000
538
2,546
Subtotal: Surgical Devices (0.18%)*
2,479
995
2,173
304,486
634
2,456
1,726
Subtotal: Sustainable and Renewable Technology (0.57%)*
7,984
Total: Equity Investments (9.56%)*
153,173
133,972
463
486
Spring Mobile Solutions, Inc.
4/19/2013
2,834,375
418
541
1,103
745
475
Subtotal: Consumer & Business Products (0.17%)*
2,323
127
308
4/30/2018
5,139
1,332
43
25
192
194
Subtotal: Consumer & Business Services (0.19%)*
4,248
2,639
Acacia Pharma Inc.
6/29/2018
201,330
304
18,360
674
6/8/2020
5,311
31
40,396
880
1,590
199
200
10,131
177
1,977
Myovant Sciences, Ltd.
10/16/2017
73,710
460
958
9/15/2022
111,934
281
677
231,613
1,033
1,084
3/27/2019
31,352
Subtotal: Drug Discovery & Development (0.60%)*
7,466
8,444
8,511
212
975
Subtotal: Electronics & Computer Hardware (0.09%)*
1,273
100,618
114
Subtotal: Healthcare Services, Other (0.00%)*
380
Subtotal: Information Services (0.04%)*
509
1,154
1,202
1,800
Subtotal: Manufacturing Technology (0.30%)*
4,156
221,622
351
713
Lucira Health, Inc.
2/4/2022
59,642
864
2,034
919
524
12/16/2021
800,000
751
Subtotal: Semiconductors (0.04%)*
850
398
400
(16)
488
168
180
382
Evernote Corporation
9/30/2016
62,500
107
298
426
69
436
321
Subtotal: Software (0.59%)*
9,761
8,244
1/16/2013
16,835
492
Subtotal: Surgical Devices (0.04%)*
44
4/30/2013
93,632
64
275
IngredientWerks Holdings, Inc. (p.k.a Agrivida, Inc.)
6/20/2013
471,327
Subtotal: Sustainable and Renewable Technology (0.03%)*
723
Total: Warrant Investments (2.19%)*
30,964
30,646
Total Investments in Securities (211.21%)*
3,002,197
2,960,062
2,699
3,080
419
438
3,118
3,518
375
Subtotal: Software (0.03%)*
Total: Investment Funds & Vehicles Investments (0.28%)*
3,499
3,893
Total Investments (211.49%)*
3,005,696
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, Denver, CO, 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 is not registered with the Commodity Futures Trading Commission (“CFTC”). 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”). Certain of the subsidiaries are taxable and not consolidated with Hercules 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.
The Company formed Hercules Adviser LLC (the “Adviser Subsidiary”) in 2020 as a wholly owned Delaware limited liability subsidiary 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, 2022. 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 all Variable Interest Entities (“VIE”) of 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.
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 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 June 30, 2023, approximately 96.5% 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. Fair 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
32
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.
Derivative Instruments
The Company's derivative instruments include foreign currency forward contracts. The Company recognizes all derivative instruments as assets or liabilities at fair value in its consolidated financial statements. Derivative contracts entered into by the Company are not designated as hedging instruments, and as a result, the Company presents changes in fair value through net change in unrealized appreciation (depreciation) on non-control/non-affiliate investments in the Consolidated Statements of Operations. Realized gains and losses of the derivative instruments are included in net realized gains (losses) on non-control/non-affiliate investments in the Consolidated Statements of Operations.
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 June 30, 2023, the Company held $2,258 thousand (Cost basis $2,204 thousand) of foreign cash. As of December 31, 2022, the Company held $1,178 thousand (Cost basis $1,168 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 its 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 and other investment related 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.
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”.
Investment Income Recognition
The Company’s investment portfolio generates interest, fee, and dividend income. The Company records interest income on an accrual basis, recognizing income as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. The Company’s Structured Debt investments may generate OID. The OID received upfront typically represents the value of detachable equity, warrants, or another asset obtained in conjunction with the acquisition of debt securities. The OID is accreted into interest income over the term of the loan as a yield enhancement following the effective interest method. Additionally, certain debt investments in the Company’s portfolio earn PIK interest. The Company records PIK interest in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. Contractual PIK interest represents contractually deferred interest that is added to the loan balance as principal and is generally due at the end of the loan term.
The Company’s loan origination activities generate fee income, which is generally collected in advance and includes loan commitment, 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 capitalized and then amortized into income over the contractual life of the loan using the effective interest method. One-off fees for transaction and management services are generally recognized as income in the period when the services are rendered. The Company may also earn loan exit fees, which are contractual fees that are generally received upon the earlier of maturity or prepayment. The Company accretes loan exit fees into interest income following the effective interest method, recognizing income as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected.
From time to time, additional fees may be earned by the Company relating to specific loan modifications, prepayments, or other one-off events. These non-recurring fees are either amortized into fee income over the remaining term of the loan commencing in the quarter for loan modifications, or recognized currently as one-time fee income for items such as 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.
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 determine to continue to accrue interest on 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.
Realized Gains or Losses
Realized gains or losses are measured by the difference between the net proceeds from the sale or other realization event and the cost basis of the investment using the specific identification method without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries.
Secured Borrowings
The Company follows the guidance in ASC Topic 860, Transfers and Servicing (“ASC Topic 860”), when accounting for participation and other partial loan sales. Certain loan sales do not qualify for sale accounting under ASC Topic 860 because these sales do not meet the definition of a “participating interest”, as defined in the guidance, in order for sale accounting treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest, or which are not eligible for sale accounting treatment remain as an investment on the consolidated balance sheet as required under U.S. GAAP and the proceeds are recorded as a secured borrowing. Secured borrowings are carried at fair value.
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 Statements of Operations within net realized gains (losses) as a “Loss on extinguishment of debt”.
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 accounts 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. 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, it may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax.
The Company has elected to be treated as a RIC under Subchapter M of the Code. As such, the Company generally will not be subject to U.S. 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 securities gains.
Because taxable income as determined in accordance with U.S. federal tax regulations differ from U.S. GAAP, 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. 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, gains or losses are recognized at some time in the future for tax or U.S. GAAP purposes.
As a RIC, the Company will be subject to a 4% non-deductible 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. The Company will not be subject to this excise tax on any amount on which the Company incurred U.S. federal 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 return of capital.
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 six months ended June 30, 2023 or 2022. 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.
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 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.
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 June 30, 2023 and December 31, 2022.
Balance as ofJune 30,
Quoted Prices inActive Markets forIdentical Assets
SignificantOther ObservableInputs
SignificantUnobservableInputs
Description
(Level 1)
(Level 2)
(Level 3)
803
Investments
Senior Secured Debt
2,878,923
Unsecured Debt
59,019
Preferred Stock
41,249
Common Stock (1)
94,931
61,144
33,787
Warrants
13,134
21,180
3,034,158
Investment Funds & Vehicles measured at Net Asset Value (2)
Total Investments, at fair value
Derivative Instruments (3)
Total Investments, at fair value including derivative instruments
3,112,235
Balance as ofDecember 31,
875
2,741,388
54,056
41,488
92,484
66,027
1,398
25,059
11,227
19,419
12,625
2,881,410
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 six months ended June 30, 2023 and 2022.
Balance as ofJanuary 1, 2023
Net RealizedGains (Losses) (1)
Net Change inUnrealizedAppreciation(Depreciation) (2)
Purchases (5)
Sales
Repayments(6)
GrossTransfersintoLevel 3 (3)
GrossTransfersout ofLevel 3 (3)
Balance as ofJune 30, 2023
(5,845
19,330
648,729
(524,679
4,276
687
(1,941
1,702
8,322
(594
(1,763
722
2,809
(7
Escrow Receivable
(152
Total
2,882,285
(9,469
34,352
653,225
(753
3,034,961
Balance as ofJanuary 1, 2022
GrossTransfersintoLevel 3 (4)
GrossTransfersout ofLevel 3 (4)
Balance as ofJune 30, 2022
2,156,709
(1,883
(16,525
599,596
(73,500
(164,254
(3,504
2,496,639
52,890
(2,025
3,362
54,227
69,439
2,867
(14,157
2,903
(4,772
(6,422
49,858
21,968
(93
10,240
(3,942
28,380
27,477
409
(8,120
4,391
(2,167
21,990
561
312
(398
642
2,329,044
1,612
(30,587
610,419
(80,837
(13,868
2,651,736
For the six months ended June 30, 2023, approximately $1.7 million in net unrealized depreciation and $8.3 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 $23.0 million in net unrealized appreciation and $0.8 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 six months ended June 30, 2022, approximately $14.9 million in net unrealized depreciation and $10.2 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 $17.7 million and $8.6 million in net unrealized depreciation 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 June 30, 2023 and December 31, 2022. 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 ofJune 30, 2023(in thousands)
ValuationTechniques/Methodologies
Unobservable Input (1)
Range
WeightedAverage(2)
Pharmaceuticals
1,046,205
Market Comparable Companies
Hypothetical Market Yield
11.72% - 18.25%
14.52%
Premium/(Discount)
(1.00)% - 3.50%
0.10%
Technology
1,047,563
12.87% - 20.20%
15.57%
(0.75)% - 3.00%
0.39%
Convertible Note Analysis
Probability weighting of alternative outcomes
1.00% - 50.00%
35.22%
11.10%
0.75%
Lower Middle Market
252,658
14.07% - 17.36%
13.96%
(0.75)% - 1.75%
0.23%
Liquidation(3)
20.00% - 80.00%
80.00%
Debt Investments for which Cost Approximates Fair Value
255,144
Debt Investments originated within 6 months
142,446
Imminent Payoffs(4)
162,590
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, 2022(in thousands)
Valuation Techniques/Methodologies
903,427
11.74% - 19.04%
15.17%
0.01%
967,108
12.05% - 18.53%
15.21%
(1.00)% - 1.50%
0.20%
35.79%
5.00% - 80.00%
48.29%
14.71% - 14.71%
14.71%
0.75% - 0.75%
328,393
13.68% - 18.49%
14.82%
(2.00)% - 0.75%
(0.43)%
392,168
77,676
93,597
Investment Type - Level 3 Equity and Warrant Investments
Unobservable Input(1)
Weighted Average(5)
35,966
EBITDA Multiple(2)
13.3x - 13.3x
13.3x
Revenue Multiple(2)
0.6x - 18.0x
7.9x
Tangible Book Value Multiple(2)
1.7x - 1.7x
1.7x
Discount for Lack of Marketability(3)
5.47% - 32.11%
23.35%
8,882
Market Adjusted OPM Backsolve
Market Equity Adjustment (4)
(83.47)% - 13.33%
(13.31)%
Discounted Cash Flow
Discount Rate(7)
19.95% - 31.68%
26.14%
Liquidation
83.00% - 83.00%
83.00%
3,027
Other (6)
15,936
0.7x - 9.9x
3.9x
5.47% - 32.50%
22.91%
5,244
Market Equity Adjustment(4)
(63.49)% - 23.93%
6.56%
Total Level 3 Equity and Warrant Investments
96,216
30,086
12.4x - 12.4x
12.4x
0.7x - 16.1x
7.4x
1.6x - 1.6x
1.6x
8.11% - 28.90%
19.79%
13,795
(97.82)% - 16.34%
(16.69)%
17.72% - 30.13%
24.46%
2.1x - 2.1x
2.1x
85.00% - 85.00%
85.00%
3,513
Other(6)
12,479
0.6x - 8.8x
3.4x
8.11% - 32.70%
18.97%
6,934
(97.82)% - 66.43%
(8.86)%
6.2x - 6.2x
6.2x
90.00% - 90.00%
90.00%
85,966
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 June 30, 2023 and December 31, 2022, the 2033 Notes were trading on the New York Stock Exchange (“NYSE”) at $24.70 and $24.59 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 June 30, 2023 and December 31, 2022, the 2031 Asset-Backed Notes were quoted for 0.932 and 0.951. 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 June 30, 2023 and December 31, 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 June 30, 2023 and December 31, 2022:
Carrying
Approximate
Identical Assets
Observable Inputs
Unobservable Inputs
Fair Value
SBA Debentures
170,028
146,395
July 2024 Notes
104,680
103,447
February 2025 Notes
49,809
47,754
June 2025 Notes
69,676
65,121
June 2025 3-Year Notes
49,694
47,831
March 2026 A Notes
49,747
46,038
March 2026 B Notes
49,725
46,105
September 2026 Notes
321,849
274,835
January 2027 Notes
345,269
301,265
2031 Asset-Backed Notes
148,251
139,740
2033 Notes
38,880
39,520
MUFG Bank Facility(1)
61,000
SMBC Facility
130,000
1,449,051
179,260
1,269,791
169,738
155,257
104,533
102,019
49,751
47,044
69,595
64,198
49,616
47,528
49,700
45,512
49,673
45,588
321,358
269,509
344,604
296,826
147,957
142,620
38,826
39,344
107,000
72,000
1,434,445
181,964
1,252,481
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 six months ended June 30, 2023 and 2022.
Three Months Ended June 30, 2023
Six Months Ended June 30, 2023
Portfolio Company(1)
Type
Fair Value as of June 30, 2023
Interest Income
Fee Income
Net Change in Unrealized Appreciation (Depreciation)
Realized Gain (Loss)
Control Investments
Control
(22
Gibraltar Acquisition LLC (3)
44,392
2,667
6,402
39,161
2,566
302
(701
342
(969
Total Control Investments
Three Months Ended June 30, 2022
Six Months Ended June 30, 2022
Fair Value as of June 30, 2022
422
(192
(143
39,064
(3,578
1,678
(4,805
35,181
8,637
239
11,191
8,208
(139
(61
82,875
Affiliate Investments
Black Crow AI, Inc.(2)
Affiliate
(120
Pineapple Energy LLC(2)
3,613
(422
Total Affiliate Investments
Total Control & Affiliate Investments
86,488
1,220
3,433
3,382
5,640
Portfolio Composition
The following table shows the fair value of the Company’s portfolio of investments by asset class as of June 30, 2023 and December 31, 2022:
Investments at Fair Value
Percentage ofTotal Portfolio
Investments atFair Value
92.5
%
1.9
1.8
1.4
3.0
3.1
1.1
0.1
100.0
A summary of the Company’s investment portfolio, at value, by geographic location as of June 30, 2023 and December 31, 2022 is shown as follows:
United States
2,755,178
88.5
2,670,520
90.1
United Kingdom
200,455
6.5
171,629
5.8
Netherlands
87,664
2.8
88,915
Israel
53,019
1.7
0.3
Canada
0.4
19,472
0.7
Denmark
3,767
0.0
Germany
Other
443
573
Ireland
The following table shows the fair value of the Company’s portfolio by industry sector as of June 30, 2023 and December 31, 2022:
1,137,725
36.5
1,150,707
38.8
891,438
28.6
798,264
26.9
459,276
14.8
439,384
220,673
7.1
198,763
6.7
105,343
3.4
101,833
94,077
68,569
2.3
73,306
2.4
60,759
2.0
49,596
1.6
46,109
33,465
32,825
20,727
21,517
15,486
0.5
1,294
2,821
1,188
21,921
1,052
1,834
No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of June 30, 2023 or December 31, 2022.
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”, “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 June 30, 2023 and December 31, 2022, the Company’s ten largest portfolio companies represented approximately 30.3% and 29.0% of the total fair value of the Company’s investments in portfolio companies, respectively. As of June 30, 2023 and December 31, 2022, the Company had six and eight portfolio companies, respectively, that represented 5% or more of the Company’s net assets. As of June 30, 2023, the Company had four equity investments representing approximately 52.6% 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, 2022, the Company had four equity investments which represented approximately 39.8% 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. The Company's investments were collateralized as follows as of June 30, 2023 and December 31, 2022:
Percentage of debt investments (at fair value), as of
Senior Secured First Lien
All assets including intellectual property
50.3
42.0
All assets with negative pledge on intellectual property
21.1
26.1
“Last-out” with security interest in all of the assets
11.7
11.6
Total senior secured first lien position
83.1
79.7
Second lien
14.9
18.4
Total debt investments at fair value
The Company enters into forward currency contracts from time to time to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. The following is a summary of the fair value and location of the Company’s derivative instruments in the Consolidated Statements of Assets and Liabilities held as of June 30, 2023 and December 31, 2022:
Derivative Instrument
Statement Location
Foreign currency forward contract
Net realized and unrealized gains and losses on derivative instruments recorded by the Company during the three and six months ended June 30, 2023 and 2022 are in the following locations in the Consolidated Statements of Operations:
Net realized gain (loss) - Non-control / Non-affiliate investments
Net change in unrealized appreciation (depreciation) - Non-control / Non-affiliate investments
Investment Income
The Company’s investment portfolio generates interest, fee, and dividend income. The composition of the Company’s interest income and fee income is as follows:
Contractual interest income
86,147
56,063
168,938
105,607
Exit fee interest income
14,054
6,655
23,436
13,381
PIK interest income
5,819
4,968
11,347
9,943
Other interest income (1)
2,966
1,045
5,162
2,052
Total interest income
Recurring fee income
2,135
1,907
3,686
Fee income - expired commitments
521
Accelerated fee income - early repayments
5,002
1,044
7,912
2,082
As of June 30, 2023 and December 31, 2022, unamortized capitalized fee income was recorded as follows:
(in millions)
June 30,
December 31,
Offset against debt investment cost
43.9
43.1
Deferred obligation contingent on funding or other milestone
12.2
10.9
Total Unamortized Fee Income
56.1
54.0
As of June 30, 2023 and December 31, 2022, loan exit fees receivable were recorded as follows:
Included within debt investment cost
32.5
Deferred receivable related to expired commitments
3.5
5.0
Total Exit Fees Receivable
36.0
37.5
5. Debt
As of June 30, 2023 and December 31, 2022, the Company had the following available and outstanding debt:
Total Available
Principal
Carrying Value (1)
SBA Debentures (2)
175,000
105,000
350,000
150,000
MUFG Bank Facility (2)(3)
400,000
545,000
SMBC Facility (2)(4)
225,000
2,215,000
1,606,000
2,185,000
1,594,000
Debt issuance costs, net of accumulated amortization, were as follows as of June 30, 2023 and December 31, 2022:
4,972
5,262
320
467
191
249
324
405
306
384
253
327
3,151
3,642
4,731
5,396
1,749
2,043
1,120
1,174
MUFG Bank Facility (1)
4,425
1,292
SMBC Facility (1)
1,701
23,952
For the three and six months ended June 30, 2023, 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
1,137
146
1,283
2,262
2,552
1,252
1,326
2,504
148
2,652
535
563
1,127
755
796
1,509
789
1,578
562
585
1,125
1,172
568
594
1,189
1,138
2,175
2,379
4,349
4,757
4,266
3,078
3,285
6,157
414
6,571
5,906
1,904
100
2,004
1,857
3,807
4,007
3,713
625
652
1,250
1,304
MUFG Bank Facility(2)
1,363
442
691
2,496
1,595
3,076
884
1,308
5,268
2,480
236
2,896
2,738
4,063
439
4,835
3,988
1,537
927
19,648
9,824
3,046
1,747
38,602
For the three and six months ended June 30, 2022, 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)
1,688
286
1,974
749
2022 Notes(2)
1,011
1,061
2,293
67
586
48
1,173
5,473
178
2022 Convertible Notes(2)
923
149
1,072
5,004
MUFG Bank Facility(3)
1,369
1,939
1,215
1,483
412
962
2,857
68
283
587
113
833
519
1,029
14,190
3,632
2,239
1,095
27,679
As of June 30, 2023 and December 31, 2022, 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 held the following SBA debentures outstanding principal balances as of June 30, 2023 and December 31, 2022:
(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
21,000
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 June 30, 2023 and December 31, 2022.
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 June 30, 2023 and December 31, 2022, HC IV has issued a total of $175.0 million in SBA guaranteed debentures.
As of June 30, 2023, the Company held investments in HC IV in 21 companies with a fair value of approximately $312.7 million, accounting for approximately 10.0% of the Company’s total investment portfolio. Further, HC IV held approximately $319.2 million in tangible assets which accounted for approximately 9.9% of the Company’s total assets as of June 30, 2023.
As of December 31, 2022, the Company held investments in HC IV in 21 companies with a fair value of approximately $343.7 million, accounting for approximately 11.6% of the Company’s total investment portfolio. Further, HC IV held approximately $348.6 million in tangible assets which accounted for approximately 11.5% of the Company’s total assets as of December 31, 2022.
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.
49
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 June 30, 2023 and December 31, 2022, there was approximately $12.3 million and $10.1 million, respectively, 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 June 30, 2023 and December 31, 2022, the Company has two available credit facilities, the MUFG Bank Facility and the SMBC Facility (together, the “Credit Facilities”). For the six months ended June 30, 2023 and year ended December 31, 2022, the weighted average interest rate was 7.16% and 4.51%, respectively, and the average debt outstanding under the Credit Facilities was $209.0 million and $127.7 million, respectively.
MUFG Bank Facility
On January 13, 2023, the Company entered into a third amended credit facility agreement, which amends the agreement dated as of June 10, 2022. 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 $400.0 million, which may be further increased via an accordion feature up to an aggregate $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 2.75% for SOFR loans. The MUFG Bank Facility matures on January 13, 2026, plus a 12-month amortization period, 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 and a minimum tangible net worth with respect to Hercules Funding IV. 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 June 30, 2023, 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. The SMBC Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $500.0 million, funded by existing or additional lenders and with the agreement of SMBC Bank and subject to other customary conditions. 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. 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.
Additionally in January 2023, the Company entered into a Letter of Credit Facility Agreement (the “SMBC LC Facility”) with Sumitomo Mitsui Banking Corporation that provides for a letter of credit facility with a final maturity date ending on January 13, 2026 and a commitment amount of $175.0 million as amended. Further, the SMBC LC Facility includes an accordion provision to increase the commitment up to $400 million, subject to certain conditions. The Company’s obligations under the SMBC LC Facility may in the future be guaranteed by certain of the Company’s subsidiaries and is primarily secured by a first priority security interest (subject to certain exceptions) in only certain specified property and assets of the Company and any subsidiary guarantors thereunder.
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 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, the determination of taxable income pursuant to U.S. federal income tax regulations differs from U.S. GAAP. As a result, permanent differences are reclassified among capital accounts in the financial statements to reflect their appropriate tax character. During the year ended December 31, 2022, the Company reclassified $3.0 million from accumulated net realized gains (losses) to additional paid-in capital for book purposes primarily related to net realized gains from portfolio companies which are held in taxable subsidiaries and are not consolidated with the Company for income tax purposes.
Taxable income for the three months ended June 30, 2023, was approximately $60.9 million or $0.43 per share. Taxable net realized gains for the same period were $20.2 million or approximately $0.14 per share. Taxable income for the three months ended June 30, 2022, was approximately $40.0 million or $0.32 per share. Taxable net realized gains for the same period were $(1.7) million or approximately $(0.02) per share.
Taxable income for the six months ended June 30, 2023, was approximately $125.0 million or $0.90 per share. Taxable net realized gains for the same period were $27.4 million or approximately $0.20 per share. Taxable income for the six months ended June 30, 2022, was approximately $73.1 million or $0.60 per share. Taxable net realized gains for the same period were $2.0 million or approximately $0.02 per share.
The aggregate gross unrealized appreciation of the Company’s investments over cost for U.S. federal income tax purposes was $92.5 million and $72.2 million, as of June 30, 2023 and December 31, 2022, respectively. The aggregate gross unrealized depreciation of the Company’s investments under cost for U.S. federal income tax purposes was $92.0 million and $112.0 million, as of June 30, 2023 and December 31, 2022, respectively. The net unrealized appreciation over cost for U.S. federal income tax purposes was $0.5 million as of June 30, 2023 and the net unrealized depreciation over cost for U.S. federal income tax purposes was $39.8 million as of December 31, 2022. The aggregate cost of securities for U.S. federal income tax purposes was $3.1 billion and $3.0 billion as of June 30, 2023 and December 31, 2022, respectively.
As a RIC, the Company is subject to a 4% non-deductible 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 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.
For the three and six months ended June 30, 2023, the Company paid approximately $0.4 million and $5.2 million of income tax, including excise tax, and had $3.4 million of accrued, but unpaid tax expense as of June 30, 2023. For the three and six months ended June 30, 2022, the Company paid approximately $0.2 million and $7.3 million of income tax, including excise tax, and had $2.4 million of accrued, but unpaid tax expense as of June 30, 2022.
Additionally, 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 U.S. federal tax rates based on its taxable income.
In accordance with ASC 740, the Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of provision for income taxes. Based on an analysis of the Company’s tax position, there are no uncertain tax positions that met the recognition or measurement criteria. The Company is currently not undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The 2019 - 2021 federal tax years for the Company remain subject to examination by the Internal Revenue Service. The 2018 – 2021 state tax years for the Company remain subject to examination by the state taxing authorities.
7. Stockholders’ Equity and Distributions
The Company has issued and outstanding 144,641,540 and 133,044,602 shares of common stock as of June 30, 2023 and December 31, 2022, respectively. We currently sell shares through our equity distribution agreement with JMP Securities LLC (“JMP”) and Jefferies LLC (“Jefferies”) (the “2023 Equity Distribution Agreement”) entered into on May 5, 2023. The 2023 Equity Distribution Agreement provides that we may offer and sell up to 25.0 million shares of our common stock from time to time through JMP or Jefferies, as our sales agents. Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. The 2023 Equity Distribution Agreement replaced the ATM equity distribution agreement between us, JMP and Jefferies executed on May 9, 2022.
The Company issued and sold the following shares of common stock during the six months ended June 30, 2023 and 2022:
(in millions, except per share data)
Six Months Ended June 30th,
Number of Shares Issued
Gross Proceeds
Underwriting Fees/Offering Expenses
Net Proceeds
Average Price/Share
8.9
148.7
147.1
16.5
9.7
132.3
130.7
13.5
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 June 30, 2023, approximately 23.8 million shares remain available for issuance and sale under the current equity distribution agreement.
The Company currently pays quarterly distributions to its stockholders. The following table summarizes the Company’s distributions declared during the six months ended June 30, 2023 and year ended December 31, 2022:
Distribution Type
Declared Date
Record Date
Payment Date
Per Share Amount
Total Amount
Base
February 16, 2022
March 9, 2022
March 16, 2022
0.33
39,794
Supplemental
0.15
18,088
April 27, 2022
May 17, 2022
May 24, 2022
41,245
18,748
July 20, 2022
August 9, 2022
August 16, 2022
0.35
44,765
19,185
October 13, 2022
November 10, 2022
November 17, 2022
0.36
47,472
19,780
Total distributions declared during the year ended December 31, 2022
1.97
249,077
February 9, 2023
March 2, 2023
March 9, 2023
0.39
53,749
0.08
11,025
April 27, 2023
May 16, 2023
May 23, 2023
55,910
11,469
Total distributions declared during the six months ended June 30, 2023
132,153
During the six months ended June 30, 2023, for income tax purposes, the distributions paid of $0.94 per share were comprised of ordinary income. As of June 30, 2023, the Company estimates that it has generated undistributed taxable earnings “spillover” of $1.02 per share. The undistributed taxable earnings spillover will be carried forward toward distributions to be paid in accordance with RIC requirements.
The Company has a distribution reinvestment plan, whereby the Company may buy shares of its common stock in the open
market or issue new shares in order to satisfy dividend reinvestment requests. When the Company issues new shares in connection
with the dividend reinvestment plan, the issue price is equal to the closing price of its common stock on the dividend record date.
During the six months ended June 30, 2023 and 2022, the Company issued 133,142 and 121,471 shares, respectively, of common stock to stockholders in connection with the dividend reinvestment plan.
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, unless earlier terminated by the Board, terminate on May 12, 2028. Subject to certain adjustments and permitted reversions of shares, the maximum aggregate number of shares that may be authorized for issuance under awards granted under the 2018 Plan and Director Plan is 9,261,229 shares and 300,000 shares, respectively. In connection with the issuance of shares under the 2018 Plan and Director Plan, the Company has registered, in aggregate, 18.7 million and 300,000 shares of common stock, respectively. 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-awards in the period they are forfeited. For the three months ended June 30, 2023, and 2022, the Company recognized $3.3 million and $3.7 million of stock-based compensation expense in the Consolidated Statements of Operations, respectively. For the six months ended June 30, 2023, and 2022, the Company recognized $6.5 million and $8.1 million of stock-based compensation expense in the Consolidated Statements of Operations, respectively. As of June 30, 2023, and 2022, approximately $24.6 million and $19.1 million of total unrecognized compensation costs expected to be recognized over the next 2.9 and 2.0 years, respectively.
Service-Vesting Awards
The Company grants equity-based awards which have service conditions, which 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. Certain awards have service conditions of longer duration and may begin to vest up to seven years after the date of grant. These equity-based awards which vest upon achievement of service conditions are collectively referred to as the “Service Vesting Awards”. The grant date fair value of Service Vesting Awards granted during the six months ended June 30, 2023, and 2022, were approximately $18.1 million, and $10.7 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 six months ended June 30, 2023, and 2022, are summarized below:
Weighted Average Grant DateFair Value per Share
Unvested Shares Beginning of Period
958,985
16.35
1,037,848
14.51
Granted
1,306,880
13.81
610,541
17.39
Vested (1)
(414,634
16.28
(463,408
14.39
Forfeited
(6,712
16.17
(17,108
15.89
Unvested Shares End of Period
1,844,519
14.57
1,167,873
16.05
(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 six months ended June 30, 2023 and 2022, was approximately $67,000 and 83,000, respectively. During the six months ended June 30, 2023 and 2022, approximately $46,000, and $30,000, 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. For certain Performance Awards, distribution equivalent units (“Performance DEUs”) will accrue in the form of additional shares, but will not be paid unless the Performance Awards to which such Performance DEUs relate actually vest.
During the six months ended June 30, 2023, no Performance Awards were granted or vested. During the six months ended June 30, 2022, a total of 487,409 Performance Award shares vested. During the six months ended June 30, 2023, 54,858 shares Performance DEUs were issued and vested immediately with an aggregate fair value of $0.7 million. During the six months ended June 30, 2022, 241,770 Performance DEUs were issued with a grant date fair value of $4.0 million. As of June 30, 2023 and 2022, there were no 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 $3.1 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 June 30, 2023, 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 June 30, 2023, all Liability Awards are unvested and there was approximately $1.2 million of total unrecognized compensation costs expected to be recognized over a weighted average period of 0.8 years. For the six months ended June 30, 2023, there was approximately $0.7 million of compensation expense related to the Liability Awards recognized in the Consolidated Statement of Operations and $1.9 million accrued within Accounts Payable and Accrued Liabilities in the Consolidated Statements of Assets and Liabilities. During the six months ended June 30, 2023 and 2022, $0 and $6.0 million, respectively of the Liability Awards vested.
As of June 30, 2022, all Liability Awards are unvested and there was approximately $3.2 million of total unrecognized compensation costs expected to be recognized over a weighted average period of 1.8 years. For the six months ended June 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.
9. Earnings Per Share
Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:
Numerator
Less: Total distributions declared
Total Earnings (loss), net of total distributions
27,396
(70,311
57,186
(131,529
Earnings (loss), net of distributions attributable to common shares
27,108
56,552
Add: Distributions declared attributable to common shares
66,672
59,431
130,696
116,693
Numerator for basic and diluted change in net assets per common share
93,780
(10,880
187,248
(14,836
Denominator
Basic weighted average common shares outstanding
Common shares issuable
694
1,249
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. For three and six months ended June 30, 2022, as the Company had a net loss, the effect of unvested stock options, restricted stock units and awards, and Performance Awards were anti-dilutive, and therefore have been excluded from the calculation of diluted loss per share.
The calculation of change in net assets resulting from operations per common share assuming dilution, excludes all anti-dilutive shares. For the three and six months ended June 30, 2023, and 2022, 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:
Anti-dilutive Securities
Unvested common stock options
3,146
2,499
Restricted stock units
9,555
8,714
Unvested restricted stock awards
65,346
59,854
Performance awards*
1,685
1,116
*Included in these amounts are shares related to certain equity-based awards, which fully vested in May 2022 and delivered in May 2023 and thus no longer outstanding for purposes of calculating earnings per share.
As of June 30, 2023 and December 31, 2022, 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 six months ended June 30, 2023 and 2022:
(in thousands, except per share data and ratios)
Per share data (1):
Net asset value at beginning of period
11.22
1.02
Net realized gain (loss)
0.06
(0.04
Net unrealized appreciation (depreciation)
0.29
(0.70
Total from investment operations
1.37
Net increase (decrease) in net assets from capital share transactions (1)
(0.01
0.23
Distributions of net investment income (6)
(0.96
Stock-based compensation expense included in net investment income and other movements(2)
0.03
Net asset value at end of period
10.43
Ratios and supplemental data:
Per share market value at end of period
14.80
13.49
Total return (3)
19.55
(13.72
)%
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)
10.75
9.13
Ratio of net investment income before investment gains and losses to average net assets (4)
18.95
11.30
Portfolio turnover rate (5)
17.20
8.88
Weighted average debt outstanding
1,614,522
1,386,242
Weighted average debt per common share
11.69
11.43
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 June 30, 2023, 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 the financial condition or business outlook for the portfolio company. 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 June 30, 2023, and December 31, 2022, the Company had approximately $381.1 million and $628.9 million, respectively, of available unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by future or unachieved milestones. In order to draw a portion of the Company's available unfunded commitments, a portfolio company must submit to the Company a formal funding request that complies with the applicable advance notice and other operational requirements. The amounts disclosed exclude unfunded commitments (i) for which, with respect to a portfolio company's agreement, a milestone was achieved after the last day on which the portfolio company could have requested a drawdown funding to be completed within the reporting period; and (ii) 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 June 30, 2023, and December 31, 2022, 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:
29,400
25,375
19,375
16,625
66,500
14,365
Dragos
Dronedeploy, Inc.
12,375
10,740
6,500
5,700
5,970
4,150
4,100
3,875
3,500
3,250
5,250
2,571
2,500
20,700
2,250
2,200
1,600
58
1,423
1,222
1,209
1,088
1,050
938
906
840
639
457
445
890
386
33,750
8,333
495
Total Unfunded Debt Commitments:
376,087
623,221
Investment Funds & Vehicles:(2)
2,269
2,842
2,748
Total Unfunded Commitments in Investment Funds & Vehicles:
5,017
5,653
Total Unfunded Commitments
381,104
628,874
The following table provides additional information on the Company’s unencumbered unfunded commitments regarding milestones, expirations and type:
Unfunded Debt Commitments:
Expiring during:
187,230
461,296
2024
156,056
134,856
2025
720
2026
9,037
9,038
2027
15,152
15,171
2028
5,318
2,140
2030
Total Unfunded Debt Commitments
Unfunded Commitments in Investment Funds & Vehicles:
2032
Total Unfunded Commitments in Investment Funds & Vehicles
The following tables provide the Company’s contractual obligations as of June 30, 2023 and December 31, 2022:
As of June 30, 2023:
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)
375,000
866,000
365,000
Lease and License Obligations (4)
27,493
2,922
6,617
6,223
11,731
1,633,493
381,617
872,223
376,731
As of December 31, 2022:
Debt (5)(3)
382,000
847,000
8,641
2,723
2,452
1,207
1,602,641
384,259
849,452
366,207
Certain premises are leased or licensed under agreements which expire at various dates through March 2034. For the three and six months ended June 30, 2023 and 2022, total rent expense, including short-term leases, amounted to approximately $0.8 million and $1.6 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.
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 June 30, 2023, and 2022:
Total operating lease cost
744
1,441
Cash paid for amounts included in the measurement of lease liabilities
1,175
1,736
1,769
As of June 30, 2023
As of December 31, 2022
Weighted-average remaining lease term (in years)
8.62
5.48
Weighted-average discount rate
6.71
5.37
The following table shows future minimum lease payments under the Company’s operating leases and a reconciliation to the operating lease liability as of June 30, 2023:
1,042
3,034
3,288
3,383
Thereafter
16,623
Total lease payments
27,370
Less: imputed interest & other items
(23,484
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. The Company has a shared services agreement (“Sharing Agreement”) with the Adviser Subsidiary, through which the Adviser Subsidiary has access to the Company's human capital resources (including administrative functions) and other resources and infrastructure (including office space and technology). 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 months ended June 30, 2023 and 2022, are net of expenses allocated to the Adviser Subsidiary of $2.4 million and $3.1 million, respectively. The Company’s total expenses for the six months ended June 30, 2023 and 2022, are net of expenses allocated to the Adviser Subsidiary of $5.1 million and $4.5 million, respectively. As of June 30, 2023 and December 31, 2022, there was $0.1 million receivable from the Adviser Subsidiary in each period.
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 six months ended June 30, 2023, $320.4 million of all investment commitments of the Company and the Adviser Subsidiary were assigned to or directly committed by the Adviser Funds. During the six months ended June 30, 2023, fundings of $199.9 million were assigned to, directly originated, or funded by the Adviser Funds. The Company received $9.6 million from the Adviser Funds relating to the assigned investments during the six months ended June 30, 2023.
During the six months ended June 30, 2022, $440.0 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 six months ended June 30, 2022, fundings of $189.8 million were assigned to, directly originated, or funded by the Adviser Funds. The Company received $88.2 million from the Adviser Funds relating to the assigned investments during the six months ended June 30, 2022. Additionally, in May 2022, the Company sold $73.5 million of assets to the Adviser Funds and realized a $0.1 million gain.
13. Subsequent Events
Dividend Distribution Declaration
On July 28, 2023, the Board declared a cash distribution of $0.40 per share to be paid on August 25, 2023 to stockholders of record as of August 18, 2023. In addition to the cash distribution, and as part of the supplemental cash distribution of $0.32 per share to be paid in four quarterly distributions of $0.08 per share, the Board declared a supplemental cash distribution of $0.08 per share to be paid on August 25, 2023 to stockholders of record as of August 18, 2023. Including the $0.08 per share supplemental cash distributions paid to stockholders of record as of March 9, 2023 and May 16, 2023, the Board has declared a total of $0.24 per share of the $0.32 per share supplemental cash distribution declared on February 9, 2023.
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 16, 2023 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. We use the term “Structured Debt” to refer to a debt investment that is structured with an equity, warrant, option, or other right to purchase or convert into common or preferred stock. 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 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, Denver, CO, and London, United Kingdom.
We have elected to be treated for tax purposes as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other requirements, we must maintain certain source-of-income and asset diversification requirements. In addition, we must make timely distributions of at least 90% of annual taxable income to our stockholders. As a RIC, we generally will not be subject to U.S. federal income tax on the income that we distribute (or are deemed to distribute) to our stockholders provided that we maintain our RIC status for a given year.
Our primary business objectives are to increase our net income, net investment income, and NAV by investing in Structured Debt and senior secured debt instruments 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. Our Structured Debt and senior secured debt investments are typically secured by some or all of the assets of the applicable 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 alternative investment structures. Through such alternative structures we may acquire an investment, a portfolio of investments, an entire company, or sell portions of our portfolio on an opportunistic basis. Through our investment strategy, we aim to achieve our business objectives by maximizing our portfolio total return from generation of investment 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, 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.
Hercules Adviser LLC is our wholly owned registered investment adviser subsidiary, which began providing investment advisory and related services to the Adviser Funds in 2021. 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 federal 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.
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 market volatility caused by the
ongoing rise of inflation, rising interest rates, geopolitical events, the continuing impacts of COVID-19 pandemic, supply chain issues, and disruptions in the banking sector. We are continuing to closely monitor the impact of these macroeconomic 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 of 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.
The extent of the impact that macroeconomic developments will have on our own operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame is uncertain. Inflation historically has not 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.
Portfolio and Investment Activity
The total fair value of our investment portfolio as of June 30, 2023 and December 31, 2022 was as follows:
2,937.9
2,795.4
136.2
134.0
34.3
30.6
4.4
3.9
Total Investment Portfolio
3,112.8
2,963.9
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 six months ended June 30, 2023, Hercules and the Adviser Funds directly committed or originated an aggregate total of $1,067.5 million of investment commitments and funded $834.8 million of investment fundings. Of the aggregated total directly committed or originated by Hercules and the Adviser Funds, $320.4 million of investment commitments were directly committed or originated by the Adviser Funds. Of the aggregate total direct fundings or originations, $199.9 million of debt, equity, and warrant fundings during the period, were assigned to, directly funded or originated by the Adviser Funds.
During the six months ended June 30, 2022, Hercules and the Adviser Funds directly committed or originated an aggregate total of $1,659.2 million of investment commitments and funded $790.7 million of investment fundings. Of the aggregated total directly committed or originated by Hercules and the Adviser Funds, $440.0 million of investment commitments were directly committed or originated by the Adviser Funds. Of the aggregate total direct fundings or originations, $189.8 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 six months ended June 30, 2023 and June 30, 2022 was comprised of the following:
June 30, 2022
Gross Debt Commitments Originated by Hercules Capital and the Adviser Funds (1)
New portfolio company
800.4
1,290.5
Existing portfolio company
263.1
349.0
Sub-total
1,063.5
1,639.5
Less: Debt commitments assigned to or directly committed by the Adviser Funds (3)
(319.7
(436.8
Net Total Debt Commitments
743.8
1,202.7
Gross Debt Fundings by Hercules Capital and the Adviser Funds (2)
347.2
508.7
483.0
265.4
830.2
774.1
Less: Debt fundings assigned to or directly funded by the Adviser Funds (3)
(199.2
(186.6
Net Total Debt Fundings
631.0
587.5
Equity Investments and Investment Funds and Vehicles Fundings by Hercules Capital and the Adviser Funds
4.6
16.6
Less: Equity fundings assigned to or directly funded by the Adviser Funds (3)
(0.7
(3.2
Net Total Equity and Investment Funds and Vehicle Fundings
13.4
Total Unfunded Contractual Commitments (4)
381.1
488.9
Non-Binding Term Sheets
155.1
387.5
1.0
155.6
388.5
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 six months ended June 30, 2023, we received approximately $516.6 million in aggregate principal repayments. Approximately $17.2 million of the aggregate principal repayments related to scheduled principal payments and approximately $499.4 million were early principal repayments related to 25 portfolio companies. Additionally, we may hold investments in debt, warrant, or equity positions of portfolio companies that have filed a registration statement 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.
Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable and escrow receivables) as of and for the six months ended June 30, 2023 and June 30, 2022 was as follows:
Beginning portfolio
2,434.5
New fundings and restructures
834.8
790.7
Fundings assigned to or directly funded by the Adviser Funds(1)
(199.9
(189.8
Warrants not related to current period fundings
0.8
Principal repayments received on investments
(17.2
(43.6
Early payoffs
(499.4
(117.9
Proceeds from sale of debt investments
(73.5
Proceeds from sale of equity and warrant investments
(30.1
(9.8
Accretion of loan discounts and paid-in-kind principal
28.4
26.3
Net acceleration of loan discounts and loan fees due to early payoffs or restructures
(8.1
(2.7
New loan fees
(6.9
(6.8
Gain (loss) on investments due to sales or write offs
5.4
(1.3
Net change in unrealized appreciation (depreciation)
40.5
(88.0
Ending portfolio
2,718.9
The following table presents certain selected information regarding our debt investment portfolio as of June 30, 2023 and December 31, 2022:
Number of portfolio companies with debt outstanding
Percentage of debt bearing a floating rate
95.5
95.3
Percentage of debt bearing a fixed rate
4.5
4.7
Weighted average core yield (1)(3)
14.1
13.8
Weighted average effective yield (2)(3)
16.0
14.7
Prime rate at the end of the period
8.25
7.50
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 June 30, 2023, our debt investments generally have a term of between two and five years and typically bear interest at a rate ranging from approximately 8.5% to approximately 17.7%. 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. As of June 30, 2023 and December 31, 2022, unamortized capitalized fee income was recorded as follows:
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 June 30, 2023 and December 31, 2022, loan exit fees receivable were recorded as follows:
Additionally, 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. During the three months ended June 30, 2023 and 2022, we recorded approximately $5.8 million and $5.0 million in PIK income, respectively. During the six months ended June 30, 2023 and 2022, we recorded approximately $11.3 million and $9.9 million in PIK income, respectively.
66
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
15.3
10.8
Effective Yield(1)
11.5
Core Yield (Non-GAAP)(1)
11.3
We believe that these measures are useful for our stockholders as it provides further insight into 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 except income from expired commitments
(13,686
(1,322
Non-GAAP Basis:
Core investment income
102,545
70,793
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, which was approximately 19.6% and (13.7)% during the six months ended June 30, 2023 and 2022, 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 June 30, 2023 and December 31, 2022:
Percentage of Total Portfolio
All other industries (1)
403,677
13.0
376,837
12.8
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 six months ended June 30, 2023 and the year ended December 31, 2022, our ten largest portfolio companies represented approximately 30.3% and 29.0% of the total fair value of our investments in portfolio companies, respectively. As of June 30, 2023 and December 31, 2022, we had six and eight investments that represented 5% or more of our net assets, respectively. As of June 30, 2023 and December 31, 2022, we had four and four equity investments representing approximately 52.6% and 39.8%, respectively, of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. No single portfolio investment represented more than 10% of the fair value of our total investments as of June 30, 2023 and December 31, 2022.
As of June 30, 2023 and December 31, 2022, approximately 95.5% and 95.3% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime, LIBOR, SOFR, Eurodollar, or BSBY-based interest rate floor, respectively. Changes in interest rates, including Prime, LIBOR, SOFR, Eurodollar, or BSBY rates, may affect the interest income and the value of our investment portfolio for portfolio investments with floating rates.
Our investments in Structured Debt generally have detachable equity enhancement features in the form of warrants or other equity securities designed to provide us with an opportunity for capital appreciation. 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 June 30, 2023, we held warrants in 108 portfolio companies, with a fair value of approximately $34.3 million. The fair value of our warrant portfolio increased by approximately $3.7 million, as compared to a fair value of $30.6 million as of December 31, 2022, primarily related to the increase in fair value of the portfolio companies.
Our existing warrant holdings would require us to invest approximately $71.0 million to exercise such warrants as of June 30, 2023. 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 June 30, 2023 and December 31, 2022, respectively:
Investment Grading
Number of Companies
Debt Investmentsat Fair Value
593,599
20.2
549,135
19.6
1,151,667
39.2
1,171,632
41.9
1,125,641
38.3
1,015,199
36.3
67,035
57,807
2.1
0
As of June 30, 2023, our debt investments had a weighted average investment grading of 2.24 on a cost basis, as compared to 2.23 as of December 31, 2022. 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 of current macroeconomic environment.
As macroeconomic events evolve and 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 remaining proactive in our assessments of credit performance to manage potential risks across our investment portfolio.
Non-accrual Investments
The following table shows the amortized cost of our performing and non-accrual investments as of June 30, 2023 and December 31, 2022:
As of June 30,
As of December 31,
Amortized Cost
Percentage of Total Portfolio at Amortized Cost
Performing
3,101
99.6
2,988
99.4
Non-accrual
0.6
Total Investments
3,114
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.
Results of Operations
Our operating results for the three and six months ended June 30, 2023 and 2022, were as follows:
Total expenses
Our operating results can vary substantially from period to period due to various factors, including changes in the level of investments held, changes in our investment yields, recognition of realized gains and losses, and changes in net unrealized appreciation and depreciation, among other factors. As a result, comparison of the net increase (decrease) in net assets resulting from operations may not be meaningful.
Total investment income for the three and six months ended June 30, 2023 was approximately $116.2 million and $221.3 million, respectively as compared to approximately $72.1 million and $137.3 million, respectively for the three and six months ended June 30, 2022. 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 six months ended June 30, 2023 and 2022:
Interest income for the three and six months ended June 30, 2023 totaled approximately $109.0 million and $208.9 million as compared to approximately $68.7 million $131.0 million for the three and six months ended June 30, 2022. The increase in interest income for the three and six months ended June 30, 2023 as compared to the period ended June 30, 2022 is primarily attributable to an increase in the weighted average principal and an increase in core yield due to increases in the benchmark rates of our debt investment portfolio outstanding between the periods.
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 six months ended June 30, 2023 and 2022:
Recurring interest income
100,302
68,453
195,987
129,495
Non-recurring interest income
8,684
12,896
1,488
The following table shows the PIK-related activity for the six months ended June 30, 2023 and 2022, at cost:
Beginning PIK interest receivable balance
25,713
11,801
PIK interest income during the period
PIK accrued (capitalized) to principal but notrecorded as income during the period
(375
Payments received from PIK loans
(2,495
(4,159
Realized gain (loss)
(52
(367
Ending PIK interest receivable balance
34,138
17,218
The increase in PIK interest income during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 is due to an increase in the weighted average principal outstanding for debt investments which earn PIK interest. Payments on PIK loans are normally received only in the event of payoffs. The PIK receivable for June 30, 2023 and June 30, 2022 was approximately 1% and less than 1% of total debt investments, respectively.
Fee income from commitment, facility and loan related fees for the three and six months ended June 30, 2023 totaled approximately $7.3 million and $12.4 million, respectively as compared to approximately $3.4 million and $6.3 million, respectively for the three and six months ended June 30, 2022. The increase in fee income for the three and six months ended June 30, 2023 is primarily due to an increase in the acceleration of unamortized fees, and one-time fees as a result of a higher volume of early repayments on our loan portfolio.
Fee income is comprised or recurring fee income from commitment, facility, and loan related fees, fee income due to expired commitments, and acceleration of fee income due to early loan repayments during the period. The following table summarizes the components of fee income for the three and six months ended June 30, 2023 and 2022:
In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three and six months ended June 30, 2023 or 2022.
70
Operating Expenses
Our operating expenses are comprised of interest and fees on our debt borrowings, general and administrative expenses, taxes, and employee compensation and benefits. During the three and six months ended June 30, 2023 and 2022, our net operating expenses totaled approximately $40.5 million and $32.0 million, respectively for the three-month periods, and approximately $80.1 million and $61.4 million, respectively for the six-month periods.
Interest and Fees on our Debt
Interest and fees on our debt totaled approximately $19.7 million and $14.2 million for the three months ended June 30, 2023 and 2022, respectively. Interest and fee expense during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, increased due to higher weighted average borrowing costs and debt outstanding. Interest and fees on our debt totaled approximately $38.6 million and $27.7 million for the six months ended June 30, 2023 and 2022, respectively. Our higher weighted average borrowing costs during the six months ended June 30, 2023, resulted in an increase of interest and fee expenses as compared to the six months ended June 30, 2022.
We had a weighted average cost of debt of approximately 4.8% and 4.0% for the three months ended June 30, 2023 and 2022, respectively and 4.8% and 4.0%, for the six months ended June 30, 2023 and 2022, 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 increase in the weighted average cost of debt during 2023 as compared to 2022, was attributable to increased usage of our Credit Facilities which are floating rate instruments and thus, have a higher cost of debt.
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 $5.2 million from $4.3 million for the three months ended June 30, 2023 and 2022, respectively and increased to $9.3 million from $8.1 million for the six months ended. The increase in general and administrative expenses for the three and six months ended June 30, 2023 is primarily attributable to an increase in costs of office and travel expenses and certain professional fees. Tax expenses primarily relate to excise tax accruals. Tax expenses were $2.0 million and $1.8 million during the three months ended June 30, 2023 and 2022, respectively and $3.4 million and $2.5 million for the six months ended June 30, 2023 and 2022, respectively.
Employee Compensation
Employee compensation and benefits totaled approximately $12.8 million and $27.5 million, for the three and six months ended June 30, 2023 as compared to approximately $11.1 million and $19.4 million respectively, for the three and six months ended June 30, 2022. The increase between the three and six months ended June 30, 2023 and 2022 was primarily due to an increase in variable compensation.
Employee stock-based compensation totaled approximately $3.3 million and $6.5 million, for the three and six months ended June 30, 2023 as compared to approximately $3.7 million and $8.1 million respectively, for the three and six months ended June 30, 2022. The decrease between comparative periods was primarily attributable to a decrease in compensation expense related to Performance Awards which vested in 2022.
The shared services agreement with the Adviser Subsidiary (the “Sharing Agreement”), provides the Adviser Subsidiary access to 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 June 30, 2023 and 2022, are net of expenses allocated to the Adviser Subsidiary of $2.4 million and $3.1 million, respectively and $5.1 million and $4.5 million for the six months ended June 30, 2023 and 2022, respectively. The decrease in expenses allocated to the Adviser Subsidiary for the three months ended June 30, 2023 compared to 2022 is due to a lower amount of fundings assigned or directly funded by the Adviser Funds. For the six months ended June 30, 2023, the increase over 2022 in expenses allocated to the Adviser Subsidiary is a result of higher average assets under management held by the Adviser Funds. As of June 30, 2023 and December 31, 2022, $0.1 million and $0.1 million, respectively, 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 six months ended June 30, 2023 and 2022 is as follows:
Realized gains
10,226
1,170
19,840
6,213
Realized losses
(10,017
(3,249
(11,676
(6,987
Realized foreign exchange gains (losses)
Net realized gains (losses)
During the three and six months ended June 30, 2023, we recognized net realized gains of $0.2 million and $8.1 million, respectively. The net realized gains were generated from gross realized gains of $10.2 million and $19.8 million, respectively, for the three and six month periods, primarily from the sale of our equity and warrant positions in Palantir Technologies, Provention Bio, Inc., TransMedics Group, Inc., Sprinklr, Inc., and Zeta Global Corp. Our gains were offset by gross realized losses of $10.0 million and $11.7 million, respectively, for the three and six month periods, from the write-off of equity and warrant investments in Concert Pharmaceuticals, Inc. and Fungible, Inc. which had no value after the respective portfolio companies were acquired, the write-off of our equity investment in Gynesonics, Inc. as a result of a capital markets transaction, and including a net $5.8 million from write-off of our debt investments in Codiak Biosciences, Inc. and Esme Learning Solutions, Inc, net of recovered collections of $17.1 million.
During the three and six months ended June 30, 2022, we recognized net realized losses of $2.1 million and $4.5 million, respectively. During the three and six months ended June 30, 2022, we recorded gross realized gains of $1.2 million and $6.2 million, respectively, primarily from the sale of our equity position in Black Crow AI, Inc. Our gains were offset by gross realized losses of $3.2 million and $7.0 million primarily from the write-off of our investments in Regent Education, Medrobotics Corporation, and Genocea Biosciences, Inc. during the period. 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 extinguishment of debt” on the Consolidated Statements of Operations for the three and six months ended June 30, 2022.
The net change in unrealized appreciation and depreciation of our investments is derived from the changes in fair value of each investment determined in good faith by our Valuation Committee and approved by the Board. The following table summarizes the change in net unrealized appreciation or depreciation of investments for the three and six months ended June 30, 2023 and 2022:
For the three months ended June 30
Gross unrealized appreciation on portfolio investments
43,542
19,274
96,119
38,814
Gross unrealized depreciation on portfolio investments
(16,524
(70,283
(40,549
(127,456
Reversal of prior period net changes in unrealized appreciation (depreciation) upon a realization event
(8,357
(16,508
3,894
Net change in unrealized appreciation (depreciation) on portfolio investments
18,661
(48,142
39,062
(84,748
Other net changes in unrealized appreciation (depreciation) (1)
(174
901
(310
During the three months ended June 30, 2023 and 2022, we recorded approximately $18.9 million of net unrealized appreciation and $48.3 million of net unrealized depreciation on our debt, equity, warrant, and investment funds, respectively. During the six months ended June 30, 2023 and 2022, we recorded approximately $40.0 million of net unrealized appreciation and $85.0 million of net unrealized depreciation 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 June 30, 2023 and 2022:
For the three months ended June 30,
Equity, Warrants and Investment Funds(1)
Equity, Warrants and Investment Funds
Investment valuation appreciation (depreciation)
18,239
27,018
(7,544
(43,465
(51,009
30,792
24,778
55,570
(15,507
(73,135
(88,642
(5,592
(2,765
(14
2,881
(8,425
(8,083
(164
4,058
Other net changes in unrealized appreciation (depreciation)
700
(503
(187
1,320
(419
(345
3,887
14,971
(7,545
(40,771
23,687
16,276
(15,636
(69,422
Income and Excise Taxes
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 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.
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 six months ended June 30, 2023 and 2022, 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, Capital Resources and Obligations” section should be read in conjunction with the “Macroeconomic Market Developments” section above.
During the six months ended June 30, 2023, we principally funded our operations from (i) cash receipts from interest, dividend, and fee income from our investment portfolio, (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments, (iii) debt offerings along with borrowings on our credit facilities, and (iv) equity offerings.
During the six months ended June 30, 2023, our operating activities provided $52.8 million of cash and cash equivalents, compared to $306.7 million used during the six months ended June 30, 2022. The $359.5 million decrease in cash used in operating activities was primarily due to a $279.4 million increase in principal, fee repayments, and proceeds received from debt investments, and $22.3 million increase in proceeds received from the sale of equity and warrant investments.
During the six months ended June 30, 2023, our investing activities used approximately $379 thousand of cash, compared to $74 thousand used during the six months ended June 30, 2022. The $305 thousand increase in cash used in investing activities was due to an increase in purchases of capital equipment.
During the six months ended June 30, 2023, our financing activities used $4.2 million of cash, compared to $289.2 million provided by financing activities during the six months ended June 30, 2022. The $293.4 million decrease in cash flows from financing activities was primarily due to decreased net borrowing activity of $255.3 million, and a decrease in equity issued through our ATM program of $16.4 million. During the six months ended June 30, 2023 and 2022, equity issued (net of offering costs) through our ATM program approximated $130.7 million and $147.1 million, respectively. Additionally, dividend distributions increased $14.3 million for a total $130.3 million during the six months ended June 30, 2023, compared to $115.9 million during the six months ended June 30, 2022.
As of June 30, 2023, our net assets totaled $1.6 billion, with a NAV per share of $10.96. 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 June 30, 2023
As of June 30, 2023, we had $670.7 million in available liquidity, including $61.7 million in cash and cash equivalents, and approximately $175.0 million available under our SMBC letter of credit facility. Additional liquidity is available through accordion provisions within the terms of our Credit Facilities, through which the available borrowing capacity can be increased by an aggregate $475.0 million, subject to certain conditions. Further, the SMBC letter of credit facility may also be increased by an additional $225.0 million (up to $400 million), subject to certain conditions. As of June 30, 2023, we had available borrowing capacity of $95.0 million under the SMBC Facility and $339.0 million under the MUFG Bank Facility. Total amounts outstanding as of June 30, 2023, were $191.0 million outstanding under our Credit Facilities, which are floating interest rate obligations, and the remaining $1,415.0 million of term debt outstanding, which are all fixed interest rate debt obligations.
Not considered above, as of June 30, 2023, we held $12.3 million of cash classified as restricted cash. Our restricted cash relates to amounts that are held as collateral securing certain of our financing transactions, including collections of interest and principal payments on assets that are securitized related to the 2031 Asset-Backed Notes. 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.
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 June 30, 2023, our asset coverage ratio under our regulatory requirements as a BDC was 210.6% 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 198.5% as of June 30, 2023.
The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain exceptions. One such exception is prior stockholder approval of issuances below NAV provided that our Board makes certain determinations. On July 20, 2023, we obtained authorization from our stockholders to issue common stock at a price below our then-current NAV per share for a twelve-month period expiring on July 20, 2024, subject to certain conditions. For a further discussion, refer to Part II, Item 1A “Risk Factors - Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then-current NAV per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock.” appearing elsewhere in this report.
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 macro-economic events, including rising interest rates, inflation, the continued impact of the COVID-19 pandemic, geopolitical events, supply chain issues, disruptions in the banking sector, 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
We may from time-to-time issue and sell shares of our common stock through public or ATM offerings. We currently sell shares through our equity distribution agreement with JMP Securities LLC (“JMP”) and Jefferies LLC (“Jefferies”) (the “2023 Equity Distribution Agreement”) entered into on May 5, 2023. The 2023 Equity Distribution Agreement provides that we may offer and sell up to 25.0 million shares of our common stock from time to time through JMP or Jefferies, as our sales agents. Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. The 2023 Equity Distribution Agreement replaced the ATM equity distribution agreement between us, JMP and Jefferies executed on May 9, 2022.
During the three and six months ended June 30, 2023, we issued and sold 5.1 million and 9.7 million shares of our common stock receiving total accumulated net proceeds of approximately $65.4 million and $130.7 million, respectively. This is a decrease from the three and six months ended June 30, 2022, where we issued and sold 4.1 million and 8.9 million shares of our common stock receiving total accumulated net proceeds of approximately $61.9 million and $147.1 million, respectively.
We generally use net proceeds from these offerings to make investments, to repurchase or pay down liabilities and for general corporate purposes. As of June 30, 2023, approximately 23.8 million shares remain available for issuance and sale under the current equity distribution agreement.
Commitments and Obligations
Our significant cash requirements generally relate to our debt obligations. As of June 30, 2023, we had $1,606.0 million of debt outstanding, none of which was due within the next year, $375.0 million within 1 to 3 years, and $1,231.0 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 June 30, 2023, we had approximately $381.1 million of available unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by future or unachieved milestones, as well as uncalled capital commitments to make investments in private equity funds. In order to draw a portion of the Company's available unfunded commitments, a portfolio company must submit to the Company a formal funding request that complies with the applicable advance notice and other operational requirements. The available unfunded commitments excludes unfunded commitments (i) for which, with respect to a portfolio company's agreement, a milestone was achieved after the last day on which the portfolio company could have requested a drawdown funding to be completed within the reporting period; and (ii) $127.9 million of unfunded commitments which represent the portion of portfolio company commitments assigned to or directly committed by the Adviser Funds.
Additionally, we had approximately $155.6 million of non-binding term sheets outstanding to three new companies and one existing company, 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.
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)
42,881
(50)
21,510
(22,018
(43,968
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.
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 June 30, 2023, approximately 95.5% of the loans in our portfolio had variable rates based on floating Prime, LIBOR, SOFR, Eurodollar, or BSBY rates with a floor. As of June 30, 2023, approximately 3.0% of our debt investments have variable rates based on LIBOR and 21.1% of our debt investments have variable rates based on SOFR, BSBY or Eurodollar rates. Additionally, all of our LIBOR rate based debt securities have interest rate floors. We continue to transition LIBOR linked instruments to alternative benchmarks in accordance with the LIBOR fallback language of each instrument and discussions with our portfolio companies. We generally expect SOFR to replace the remaining LIBOR linked positions. 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 Statement of Assets and Liabilities as of June 30, 2023, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investments and debt:
Income
Expense
EPS
(200)
(46,437
(4,268
(42,169
(0.30
(23,850
(2,134
(21,716
(0.15
(75)
(18,265
(1,601
(16,664
(12,653
(1,067
(11,586
(0.08
(25)
(6,404
(534
(5,870
6,578
534
6,044
0.04
12,799
1,067
11,732
19,019
1,601
17,418
0.12
We generally do not engage in hedging activities. From time-to-time, we may hedge against interest rate fluctuations and foreign currency by using standard hedging instruments such as futures, options, and forward contracts. 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 six months ended June 30, 2023, we have entered into a foreign currency forward to limit our foreign currency exposure with respect to the British Pound. For additional information refer to “Note 4 – Investments”, included in the notes to our consolidated financial statements appearing elsewhere in this report.
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 would 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, 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
The Company’s chief executive and chief financial officers, under the supervision and with the participation of the Company’s management, conducted an evaluation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d- 15(e) under the Exchange Act. As of the end of the period covered by this quarterly report on Form 10-Q, the Company’s chief executive and chief financial officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits 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 the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s 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, 2022 filed with the SEC on February 16, 2023 (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, 2023 filed with the SEC on May 4, 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 as of June 30, 2023 that represent greater than 5% of our net assets:
Percentage of Net Assets
154,574
8.6
99,152
6.3
95,063
6.0
5.5
85,647
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.
Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then-current NAV per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock.
The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain exceptions. One such exception is prior stockholder approval of issuances below NAV provided that our Board makes certain determinations. On July 20, 2023, we obtained authorization from our stockholders to issue common stock at a price below our then-current NAV per share for a twelve-month period expiring on July 20, 2024. We may seek to obtain this authorization again in the future. Our stockholders have previously approved a proposal to authorize us to issue securities to subscribe to, convert to, or purchase shares of our common stock in one or more offerings. Even though we have obtained authorization from our stockholders to issue common stock at a price below our then-current NAV, we cannot predict whether we will make any Below-NAV Sales under the prospectus supplement, as supplemented by the amendment. Any decision to sell shares of our common stock below the then-current NAV per share of our common stock or securities to subscribe to, convert to, or purchase shares of our common stock would be subject to the determination by our Board that such issuance is in our and our stockholders’ best interests.
If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This dilution would occur as a result of the sale of shares at a price below the then-current NAV per share of our
common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. In addition, if we issue securities to subscribe to, convert to or purchase shares of common stock, the exercise or conversion of such securities would increase the number of outstanding shares of our common stock. Any such exercise would be dilutive on the voting power of existing stockholders and could be dilutive with regard to dividends and our NAV, and other economic aspects of the common stock.
Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted; however, the example below illustrates the effect of dilution to existing stockholders resulting from the sale of common stock at prices below the NAV of such shares.
Illustration: Example of Dilutive Effect of the Issuance of Shares Below NAV. Assume that Company XYZ has 1,000,000 total shares outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The NAV per share of the common stock of Company XYZ is $10.00. The following table illustrates the reduction to NAV and the dilution experienced by Stockholder A following the sale of 40,000 shares of the common stock of Company XYZ at $9.50 per share, a price below its NAV per share.
Prior to Sale
Following Sale
Percentage
Below NAV
Change
Reduction to NAV
Total Shares Outstanding
1,040,000
NAV per share
10.00
9.98
(0.2
Dilution to Existing Stockholder
Shares Held by Stockholder A
10,000(1)
0.00
Percentage Held by Stockholder A
1.00
(4.0
Total Interest of Stockholder A in NAV
99,808
(1) Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV.
In addition, all distributions in cash payable to stockholders who participate in our dividend reinvestment plan are automatically reinvested in shares of our common stock. As a result, stockholders who opt out of our dividend reinvestment plan will experience dilution of their ownership percentage of our common stock over time.
79
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Dividend Reinvestment Plan
During the six months ended June 30, 2023, we issued 133,142 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 $1.9 million.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5.OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended June 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
ITEM 6.EXHIBITS
ExhibitNumber
3(a)
Articles of Amendment and Restatement.(1)
3(b)
Articles of Amendment, dated March 6, 2007.(2)
3(c)
Articles of Amendment, dated April 5, 2011.(3)
3(d)
Articles of Amendment, dated April 3, 2015.(4)
3(e)
Articles of Amendment, dated February 23, 2016.(5)
3(f)
Amended and Restated Bylaws of Hercules Capital, Inc.(5)
10(a)
Form of Equity Distribution Agreement.(6)
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.
104
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, has been formatted in Inline XBRL
* Filed herewith.
(1) Previously filed as part of Pre-Effective Amendment No. 1, as filed on May 17, 2005 (File No. 333-122950) to the Registration Statement on Form N-2 of the Company.
(2) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 9, 2007.
(3) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 11, 2011.
(4) Previously filed as part of the Registration Statement on Form N-2 of the Company, as filed on April 20, 2015 (File No. 333-203511).
(5) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 25, 2016.
(6) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on May 5, 2023.
Schedule 12 – 14
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
For the Six Months Ended June 30, 2023 (unaudited)
Investment(1)
Amount of Interest and Fees Credited to Income(2)
Fair Value as ofDecember 31, 2022
Gross Additions(3)
Gross Reductions(4)
Net Change in Unrealized Appreciation/ (Depreciation)
Majority Owned Control Investments
Coronado Aesthetics, LLC(8)
(21
Gibraltar Acquisition LLC (p.k.a. Gibraltar Business Capital, LLC)(5)
1,565
3,535
Hercules Adviser LLC(6)
Total Majority Owned Control Investments
1,867
68,416
1,046
14,388
83,850
Other Control Investments
Tectura Corporation(7)
Senior Debt
Total Other Control Investments
2,209
For the Six Months Ended June 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)
Coronado Aesthetics, LLC (10)
(88
(55
Gibraltar Business Capital, LLC (5)
1,711
23,212
(576
22,675
19,393
(3,978
15,415
1,225
(251
Hercules Adviser LLC (6)
8,850
3,150
11,990
23,181
65,235
3,189
6,243
74,667
8,269
2,292
73,504
Black Crow AI, Inc. (8)
(1,000
Pineapple Energy LLC (9)
7,747
(4,781
(104
2,940
591
(318
673
9,458
478
(5,781
Total Control and Affiliate Investments
3,415
82,962
3,667
As of June 30, 2023 (unaudited)
Industry
Type of Investment (1)
Interest Rate and Floor
Principal or Shares
Cost
Value (2)
Preferred Series A Equity
Gibraltar Acquisition LLC (p.k.a. Gibraltar Business Capital, LLC)(3)
Interest rate FIXED 11.50%
Total Gibraltar Acquisition, LLC
53,619
Interest rate FIXED 5.00%
Total Hercules Adviser LLC
12,035
Total Majority Owned Control Investments (5.29%)*
65,904
Interest rate FIXED 8.25%
Preferred Series BB Equity
22,413
Total Other Control Investments (0.44%)*
Total Control Investments (5.73%)*
88,317
* Value as a percent of net assets
84
As of and for the year ended December 31, 2022
Interest rate FIXED 14.50%
52,573
36,944
31,153
Total Majority Owned Control Investments (4.88%)*
64,858
Total Other Control Investments (0.58%)*
Total Control Investments (5.46%)*
87,271
85
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: August 3, 2023
/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