HERCULES CAPITAL, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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:

our current and future management structure;

our future operating results;

our business prospects and the prospects of our potential portfolio companies;

the impact of the investments we plan to make;

our informal relationships with third parties, including in the venture capital industry;

the intended market for venture capital investments and our potential market;

the dependence of our future success on the general economy and its impact on the industries in which we invest;

our ability to access debt and equity markets;

the current and future effects of the COVID-19 pandemic on us and our portfolio companies;

the ability of our portfolio companies to achieve their objectives;

our planned financing and investments;

our regulatory structure and tax status;

our ability to operate as BDCs, SBICs and RICs;

the adequacy of our liquidity and working capital;

the cash flow timing, if any, of our portfolio companies’ operations;

the timing, form and amount of any distribution;

the impact of interest rate fluctuations on our business;

the valuation of potential holdings in portfolio companies, particularly those that do not have a liquid stock exchange; and

our ability to recover unrealized capital losses on investments.

For a discussion of factors that could cause our actual results to differ from
forward-looking statements contained in this report, please see the discussion
under "Item 1A. Risk Factors." 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" and "Forward-Looking Statements"
of this Item 7.

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Use of Non-GAAP Measures

In Item 1. Business and throughout this MD&A, we present our financial condition
and results of operations in the way we believe will be most meaningful and
representative of our business results. Some of the measurements we use are
"non-GAAP financial measures" under SEC rules and regulations. GAAP is the
acronym for "generally accepted accounting principles" in the United States. The
non-GAAP financial measures we present may not be comparable to similarly-named
measures reported by other companies.

COVID-19 developments

The COVID-19 pandemic, which began in late 2019, has and threatens to continue
to create market volatility and disruption in the U.S. and across the global
capital markets. We are continuing to closely monitor the impact of COVID-19 on
all aspects of our business, including impacts to our portfolio companies,
employees, due diligence and underwriting processes, and financial markets. With
the rollout of vaccination programs in the U.S. and globally, several countries,
as well as certain states in the U.S., have lifted or reduced certain travel
restrictions, business restrictions, and other quarantine measures. This has
contributed to a positive economic recovery since 2020, especially in the U.S.
Although the economic recovery and rollout of vaccination programs are
promising, the potential exists for new COVID-19 variants to impede the global
economic recovery. For example, the Delta and Omicron variants have caused a
surge in the reported number of cases, hospitalizations and deaths related to
the COVID-19 pandemic. These surges have led to the re-introduction of such
restrictions and business shutdowns in certain states within the United States
and globally. Although some states and municipalities have begun to eliminate
restrictions related to COVID-19, there remains the potential for new COVID-19
variants to cause the reintroduction of such restrictions in the future.

As a result of the pressures on liquidity and financial results to certain of
our portfolio companies caused by the COVID-19 pandemic, 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 COVID-19 pandemic will continue to affect the
financial condition and liquidity of our portfolio companies' results of
operations will depend on future developments, such as the speed and extent of
further vaccine distribution and the impact of the COVID-19 variants that might
arise, which are highly uncertain and cannot be predicted.

Equally the extent of the impact of the COVID-19 pandemic on our own operational
and financial performance, including our ability to execute our business
strategies and initiatives in the expected time frame, will depend to a large
extent on future developments regarding the duration and severity of the
COVID-19, effectiveness of vaccination deployment and the actions taken by
governments (including stimulus measures or the lack thereof) and their citizens
to contain the COVID-19 or treat its impact, all of which are beyond our
control. An extended period of global supply chain and economic disruption,
including any resulting inflation, could materially affect our business, results
of operations, access to sources of liquidity and financial condition. Given the
fluidity of the situation, neither our management nor our Board is able to
predict the full impact of COVID-19 on our business, future results of
operations, financial position, or cash flows at this time.

Overview

We are a specialty finance company focused on providing senior secured loans to
high-growth, innovative venture capital-backed and institutional-backed
companies in a variety of technology, life sciences, and sustainable and
renewable technology industries. Our goal is to be the leading structured debt
financing provider for venture capital-backed and institutional-backed companies
in a variety of technology-related industries requiring sophisticated and
customized financing solutions. Our strategy is to evaluate and invest in a
broad range of technology-related industries including technology, drug
discovery and development, biotechnology, life sciences, healthcare, and
sustainable and renewable technology and to offer a full suite of growth capital
products. We invest primarily in structured debt with warrants and, to a lesser
extent, in senior debt and equity investments. Our portfolio is comprised of,
and we anticipate that our portfolio will continue to be comprised of,
investments primarily in technology related companies at various stages of their
development.

We are structured as an internally managed, non-diversified, closed-end
investment company that has elected to be regulated as a BDC under the 1940 Act.
As a BDC, we are required to comply with certain regulatory requirements. For
instance, we generally have to invest at least 70% of our total assets in
"qualifying assets," which includes securities of private U.S. companies, cash,
cash equivalents, and high-quality debt investments that mature in one year or
less. Consistent with requirements under the 1940 Act, we invest primarily in
United-States based companies and to a lesser extent in foreign companies. We
source our investments through our principal office located in Palo Alto, CA, as
well as through our additional offices in Boston, MA, New York, NY, Bethesda,
MD, San Diego, CA, and London, United Kingdom.

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We have elected to be treated for tax purposes as RIC under Subchapter M of the
Code. As a RIC, we generally will not be subject to U.S. federal income tax on
the portion of our investment company taxable income and net capital gain (i.e.,
net realized long-term capital gains in excess of net realized short-term
capital losses) that we distribute (or are deemed to distribute) as dividends
for U.S. federal income tax purposes to stockholders with respect to that
taxable year. We will be subject to a 4% non-deductible U.S. federal excise tax
on certain undistributed taxable income and capital gains unless we make
distributions treated as dividends for U.S. federal income tax purposes in a
timely manner to our stockholders in respect of each calendar year subject to
certain requirements as defined for RICs. In order to qualify as a RIC requires
that we must comply with provisions contained in Subchapter M of the Code. For
example, as a RIC we must earn 90% or more of our gross income during each
taxable year from qualified sources, typically referred to as "good income," as
well as satisfy certain quarterly asset diversification and annual income
distribution requirements.

We have established Hercules Adviser LLC, a wholly owned registered investment
adviser subsidiary. The Adviser Subsidiary provides investment advisory and
related services to the Advisor Funds and External Parties. The Adviser
Subsidiary is not consolidated for reporting purposes as noted in "Note 1-
Description of Business". In addition to the Adviser Subsidiary, we have
established other wholly owned subsidiaries which are consolidated for
reporting. However, certain of these subsidiaries are not consolidated for
income tax purposes and may generate income tax expense or benefit, as well as
tax assets and liabilities as a result of their ownership of certain portfolio
investments.

Our primary business objectives are to increase our net income, net investment
income, and NAV by investing in debt, typically with warrants or equity, of
venture capital-backed and institutional-backed companies in a variety of
technology-related industries at attractive current yields and the potential for
equity appreciation and realized gains. We aim to achieve our business
objectives by maximizing our portfolio total return through generation of
current income from our debt investments and capital appreciation from our
warrant and equity investments. Our equity ownership in our portfolio companies
may exceed 25% of the voting securities of such companies, which represents a
controlling interest under the 1940 Act. In some cases, we receive the right to
make additional equity investments in our portfolio companies in connection with
future equity financing rounds. Capital that we provide is generally used for
growth and general working capital purposes as well as in select cases for
acquisitions or recapitalizations. We invest primarily in private companies but
also have investments in public companies.

We invest primarily in structured debt with warrants and, to a lesser extent, in
senior debt and equity investments. We use the term "structured debt with
warrants" to refer to any debt investment, such as a senior or subordinated
secured loan, that is coupled with an equity component, including warrants,
options or other rights to purchase or convert into common or preferred stock.
Our structured debt with warrants investments typically are secured by some or
all of the assets of the portfolio company. We also invest in "unitranche"
loans, which are loans that combine both senior and mezzanine debt, generally in
a first lien position. In addition to our debt investments, we regularly engage
in discussions with third parties with respect to various potential transactions
to explore all alternatives. Through such alternatives we may acquire an
investment, a portfolio of investments, an entire company, or sell portions of
our portfolio on an opportunistic basis.

We, our subsidiaries or our affiliates, may also agree to manage certain other
funds that invest in debt, equity or provide other financing or services to
companies in a variety of industries for which we may earn management or other
fees for our services. We may also invest in the equity of these funds, along
with other third parties, from which we would seek to earn a return and/or
future incentive allocations. Some of these transactions could be material to
our business. Consummation of any such transaction will be subject to completion
of due diligence, finalization of key business and financial terms (including
price) and negotiation of final definitive documentation as well as a number of
other factors and conditions which may include, depending on the transaction and
without limitation, the approval of our Board of Directors (the "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.

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Portfolio and investment activity

The total fair value of our investment portfolio was approximately $2.4 billion
as of December 31, 2021, as compared to approximately $2.4 billion as of
December 31, 2020. The fair value of our debt investment portfolio as of
December 31, 2021 was approximately $2.2 billion, compared to a fair value of
approximately $2.1 billion as of December 31, 2020. The fair value of the equity
portfolio as of December 31, 2021, was approximately $184.7 million, compared to
a fair value of approximately $224.7 million as of December 31, 2020. The fair
value of the warrant portfolio as of December 31, 2021, was approximately $38.4
million, compared to a fair value of approximately $34.6 million as of December
31, 2020.

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 year ended December 31, 2021, Hercules and the Adviser Funds directly
committed or originated an aggregate total $2,639.2 million of investment
commitments. Of the aggregated total directly committed or originated by
Hercules and the Adviser Funds, $374.5 million of investment commitments were
directly committed or originated by the Adviser Funds. Of the aggregate total
direct fundings or originations, $226.4 million of debt, equity, and warrant
fundings during the period, were assigned to, directly funded or originated by
the Adviser Funds. There was no Adviser Funds activity during the year ended
December 31, 2020. Our portfolio activity for the years ended December 31, 2021,
and 2020 was comprised of the following:

(in millions)                                       December 31, 2021       December 31, 2020
Gross Debt Commitments Originated by Hercules
Capital and the Adviser Funds (1)
New portfolio company                              $           1,810.4     $             834.0
Existing portfolio company                                       801.3                   339.1
Sub-total                                                      2,611.7                 1,173.1
Less: Debt commitments assigned to or directly
committed by the Adviser Funds (3)                              (371.7 )                     -
Net Total Debt Commitments                         $           2,240.0     $           1,173.1
Gross Debt Fundings by Hercules Capital and the
Adviser Funds (2)
New portfolio company                              $           1,056.7     $             420.5
Existing portfolio company                                       482.6                   331.3
Sub-total                                                      1,539.3                   751.8
Less: Debt fundings assigned to or directly
funded by the Adviser Funds (3)                                 (223.6 )                     -
Net Total Debt Fundings                            $           1,315.7     $             751.8
Equity Investments and Investment Funds and
Vehicles Fundings by Hercules Capital and the
Adviser Funds
New portfolio company                              $              18.6     $               8.2
Existing portfolio company                                        10.5                     1.3
Sub-total                                          $              29.1     $               9.5
Less: Equity fundings assigned to or directly
funded by the Adviser Funds (3)                                   (2.8 )                     -
Net Total Equity and Investment Funds and
Vehicle Fundings                                   $              26.3     $               9.5
Unfunded Contractual Commitments (4)
Total                                              $             286.8     $             179.8
Non-Binding Term Sheets
New portfolio company                              $             275.0     $             247.5
Existing portfolio company                                           -                       -
Total                                              $             275.0     $             247.5



(1)
Includes restructured loans and renewals in addition to new commitments.
(2)
Funded amounts include borrowings on revolving facilities.
(3)
Commitments and fundings include amounts assigned to, directly committed or
originated, or funded by the Adviser Funds, as applicable.
(4)
Amount represents unfunded commitments, including undrawn revolving facilities,
which are available at the request of the portfolio company. Amount excludes
unfunded commitments which are unavailable due to the borrower having not met
certain milestones. This excludes $34.9 million of unfunded commitments as of
December 31, 2021 to portfolio companies related to loans assigned to or
directly committed by the Adviser Funds.

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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 year ended December 31, 2021, we
received approximately $1,185.0 million in aggregate principal repayments. Of
the aggregate principal repayments, approximately $80.9 million were scheduled
principal payments, and approximately $1,104.1 million were early principal
repayments related to 49 portfolio companies. Of the approximately $1,104.1
million early principal repayments, approximately $247.9 million were early
repayments due to merger and acquisition transactions related to eight portfolio
companies.

Total portfolio investment activity (inclusive of unearned income and excluding
activity related to taxes payable, and escrow receivables) as of and for each of
the years ended December 31, 2021, and 2020 was as follows:

(in millions)                                     December 31, 2021       December 31, 2020
Beginning portfolio                              $           2,354.1     $           2,314.5
New fundings and restructures                                1,568.4                   761.3
Fundings assigned to or directly funded by the
Adviser Funds(1)                                              (226.4 )                     -
Warrants not related to current period
fundings                                                         1.1                    (0.1 )
Principal payments received on investments                     (80.9 )                 (72.2 )
Early payoffs                                               (1,104.1 )                (709.0 )
Accretion of loan discounts and paid-in-kind
principal                                                       44.5                    44.7
Net acceleration of loan discounts and loan
fees due to early payoff or restructure                        (23.4 )                 (12.5 )
New loan fees                                                  (17.2 )                  (9.9 )
Sale of investments                                           (111.2 )                 (32.5 )
Gain (loss) on investments due to sales or
write offs                                                      24.7                   (56.4 )
Net change in unrealized appreciation
(depreciation)                                                   4.9                   126.2
Ending portfolio                                 $           2,434.5     $           2,354.1



(1)

Funded amounts include $101.2 million direct financing of debt investments made by the adviser’s funds.

As of December 31, 2021, we held debt, warrants, or equity positions in seven
companies that have filed definitive agreements for reverse merger initial
public offerings with special purpose acquisition companies. There can be no
assurance that companies that have yet to complete their initial public
offerings will do so in a timely manner or at all.

The following table presents certain selected information regarding our debt
investment portfolio:

                                                         December 31,
                                                             2021           December 31, 2020
Number of portfolio companies with debt outstanding                 92                      97
Percentage of debt bearing a floating rate                        94.0 %                  96.9 %
Percentage of debt bearing a fixed rate                            6.0 %                   3.1 %
Weighted average core yield (1)                                   11.4 %                  11.6 %
Weighted average effective yield (2)                              12.9 %                  12.9 %
Prime rate at the end of the period                                3.3 %                   3.3 %



(1)
The core yield is a Non-GAAP financial measure. The core yield on our debt
investments excludes the effects of fee and income accelerations attributed to
early payoffs, restructuring, loan modifications, other one-time events, and
includes income from expired commitments. Please refer to the "Portfolio Yield"
section below for further discussion of this measure.
(2)
The effective yield on our debt investments includes the effects of fee and
income accelerations attributed to early payoffs, restructuring, loan
modifications, and other one-time events. The effective yield is derived by
dividing total investment income by the weighted average earning investment
portfolio assets outstanding during the year, excluding non-interest earning
assets such as warrants and equity investments.

Portfolio income

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
December 31, 2021, our debt investments generally have a term of between two and
five years and typically bear interest at a rate ranging from approximately 7.0%
to approximately 14.5%. 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.

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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 received in full at the inception of a loan
are deferred and amortized into fee income as an enhancement to the related
loan's yield over the contractual life of the loan. We recognize nonrecurring
fees amortized over the remaining term of the loan commencing in the quarter
relating to specific loan modifications. We had approximately $42.9 million of
unamortized fees as of December 31, 2021, of which approximately $36.5 million
was included as an offset to the cost basis of our current debt investments and
approximately $6.4 million was deferred contingent upon the occurrence of a
funding or milestone. As of December 31, 2020, we had approximately $39.2
million of unamortized fees, of which approximately $32.2 million was included
as an offset to the cost basis of our current debt investments and approximately
$7.0 million was deferred contingent upon the occurrence of a funding or
milestone.

Loan exit fees to be paid at the termination of the loan are accreted into
interest income over the contractual life of the loan. As of December 31, 2021,
we had approximately $35.0 million in exit fees receivable, of which
approximately $29.6 million was included as a component of the cost basis of our
current debt investments and approximately $5.4 million was a deferred
receivable related to expired commitments. As of December 31, 2020, we had
approximately $40.9 million in exit fees receivable, of which approximately
$37.6 million was included as a component of the cost basis of our current debt
investments and approximately $3.3 million was a deferred receivable related to
expired commitments.

We have debt investments in our portfolio that earn PIK interest. The PIK
interest, computed at the contractual rate specified in each loan agreement, is
recorded as interest income and added to the principal balance of the loan on
specified capitalization dates. To maintain our status as a RIC, the non-cash
PIK income must be distributed to stockholders with other sources of income in
the form of dividend distributions even though we have not yet collected any
cash from the borrower. Amounts necessary to pay these distributions may come
from available cash or the liquidation of certain investments. We recorded
approximately $11.2 million and $9.0 million in PIK income in the years ended
December 31, 2021 and December 31, 2020, respectively.

Portfolio return

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:

“Total return” – Total return is obtained by dividing “total investment income” on a GAAP basis by the weighted average GAAP base value of the assets of the investment portfolio outstanding during the year, including assets non-interest bearing such as warrants and equity investments at amortized cost. .

"Effective Yield" on total debt investments - The effective yield is derived by
dividing GAAP basis 'Total investment income' by the weighted average GAAP basis
value of debt investment portfolio assets at amortized cost outstanding during
the year.

"Core Yield" on total debt investments - The core yield is a Non-GAAP financial
measure. The core yield is derived by dividing "Core investment income" by the
weighted average GAAP basis value of debt investment portfolio assets at
amortized cost outstanding during the year. "Core investment income" adjusts
GAAP basis 'Total investment income' to exclude fee and other income
accelerations attributed to early payoffs, deal restructuring, loan
modifications, and other one-time income events, but includes income from
expired commitments.

                         December 31, 2021       December 31, 2020
Total Yield                            11.9 %                  11.7 %
Effective Yield                        12.9 %                  12.9 %
Core Yield (Non-GAAP)                  11.4 %                  11.6 %


We believe that these measures are useful for our stockholders as it provides
the yield of our portfolio to allow a more meaningful comparison with our
competitors. As noted above, Core Yield, a Non-GAAP financial measure, is
derived by dividing Core investment income, as defined above, by the weighted
average GAAP basis value of debt investment portfolio assets at amortized cost
outstanding. The reconciliation to calculate "Core investment income" from GAAP
basis 'Total investment income' are as follows:

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                                                           2021              2020
GAAP Basis:
Total investment income                                      280,976           287,258
Less: fee and income accelerations attributed to
early payoffs, restructuring, loan modifications,
and other one-time events, but including income from
expired commitments                                          (32,420 )         (29,934 )
Non-GAAP Basis:
Core investment income                                       248,556           257,324


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 25.6% and 14.3% during the years ended December 31, 2021
and 2020, 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.

Composition of the portfolio

Our portfolio companies are primarily private and public companies operating in industries characterized by high margins, high growth rates, consolidations and opportunities for product and market expansion.

The following table shows the fair value of the Company’s portfolio by business segment as at December 31, 2021 and December 31, 2020:

                                         December 31, 2021                  

December 31, 2020

                               Investments at        Percentage of         Investments at        Percentage of
(in thousands)                   Fair Value          Total Portfolio         Fair Value          Total Portfolio
Drug Discovery & Development  $        967,383                   39.7 %   $        757,163                   32.2 %
Software                               585,622                   24.1 %            780,045                   33.1 %
Internet Consumer & Business           395,506                   16.3 %            514,538
Services                                                                                                     21.9 %
All other industries (1)               486,011                   19.9 %            302,332                   12.8 %
Total                         $      2,434,522                  100.0 %   $      2,354,078                  100.0 %




(1) See "Note 4 - Investments" for complete list of industry sectors and
corresponding amounts of investments at fair value as a percentage of the total
portfolio. As of December 31, 2021 the fair value as a percentage of total
portfolio does not exceed 5% for any individual industry sector other than "Drug
Discovery & Development", "Software", or "Internet Consumer & Business
Services".

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 years ended December 31, 2021 and 2020, our ten largest portfolio
companies represented approximately 30.5% and 27.9% of the total fair value of
our investments in portfolio companies, respectively. As of December 31, 2021
and December 31, 2020, we had six and three investments that represented 5% or
more of our net assets, respectively. As of December 31, 2021 and December 31,
2020, we had six and four equity investments representing approximately 49.6%
and 63.7%, 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 represents more than 10% of the fair value of our
total investments as of December 31, 2021 and 2020.

As of December 31, 2021 and 2020, approximately 94.0% and 96.9% of the debt
investment portfolio was priced at floating interest rates or floating interest
rates with a Prime or LIBOR-based interest rate floor, respectively. Changes in
interest rates, including Prime and LIBOR rates, may affect the interest income
and the value of our investment portfolio for portfolio investments with
floating rates.

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Our investments in structured debt have detachable equity enhancement features,
typically in the form of warrants or other equity securities designed to provide
us with an opportunity for capital appreciation. These features are treated as
OID and are accreted into interest income over the term of the loan as a yield
enhancement. Our warrant coverage generally ranges from 3% to 20% of the
principal amount invested in a portfolio company, with a strike price generally
equal to the most recent equity financing round. As of December 31, 2021, we
held warrants in 97 portfolio companies, with a fair value of approximately
$38.4 million. The fair value of our warrant portfolio increased by
approximately $3.8 million, as compared to a fair value of $34.6 million as of
December 31, 2020, primarily related to the increase in fair value of the
portfolio companies.

Our existing warrant holdings would require us to invest approximately $67.4
million to exercise such warrants as of December 31, 2021. 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 ranking

We use an investment grading system, which grades each debt investment on a
scale of 1 to 5 to characterize and monitor our expected level of risk on the
debt investments in our portfolio with 1 being the highest quality. See "Item 1.
Business-Investment Process-Loan and Compliance Administration." The following
table shows the distribution of our outstanding debt investments on the 1 to 5
investment grading scale at fair value as of December 31, 2021 and 2020,
respectively:

(in
thousands)                        December 31, 2021                                        December 31, 2020
Investment       Number of    Debt Investments        Percentage of       Number of    Debt Investments        Percentage of
Grading          Companies     at Fair Value         Total Portfolio      Companies     at Fair Value         Total Portfolio
     1              15       $          408,975                  18.5 %      16       $          410,955                  19.6 %
     2              47                1,208,323                  54.7 %      46                1,027,931                  49.1 %
     3              28                  581,424                  26.3 %      28                  621,323                  29.7 %
     4               1                    8,269                   0.4 %       3                   25,313                   1.2 %
     5               1                    2,608                   0.1 %       4                    8,913                   0.4 %
                    92       $        2,209,599                 100.0 %      97       $        2,094,435                 100.0 %


As of December 31, 2021, our debt investments had a weighted average investment
grading of 2.10 on a cost basis, as compared to 2.16 as of December 31, 2020.
Our policy is to lower the grading on our portfolio companies as they approach
the point in time when they will require additional equity capital.
Additionally, we may downgrade our portfolio companies if they are not meeting
our financing criteria or are underperforming relative to their respective
business plans. Various companies in our portfolio will require additional
funding in the near term or have not met their business plans and therefore have
been downgraded until their funding is complete or their operations improve.

As the COVID-19 pandemic and related disruption to markets and businesses
continues to evolve, 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 the continuing COVID-19
pandemic. This includes continuing to proactively assess and manage potential
risks across our debt investment portfolio.

Unearned investments

The following table shows the amortized cost of our performing and non-accrued investments as of December 31, 2021 and December 31, 2020:

                                 As of December 31,                       As of December 31,
                                        2021                                     2020
                                              Percentage of                            Percentage of
                                                  Total                                    Total
                                               Portfolio at                             Portfolio at
(in millions)            Amortized Cost       Amortized Cost      Amortized Cost       Amortized Cost
Performing              $          2,367                99.0 %   $          2,284                98.7 %
Non-accrual                           24                 1.0 %                 31                 1.3 %
Total Investments       $          2,391               100.0 %   $          2,315               100.0 %

Debt investments are placed in a non-recognized position when it is probable that principal, interest or fees will not be collected in accordance with contractual terms. When a debt investment is placed in non-recognition status, we cease to recognize interest and fee income until the holding company has paid all principal and interest due or has demonstrated its ability to repay our current and future interest.

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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.

Operating results

Comparison of closed periods December 31, 2021 and 2020. A comparison of the years ended December 31, 2020 and December 31, 2019 can be found in our Form 10-K for the fiscal year ended December 31, 2020 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

investment income

Total investment income for the year ended December 31, 2021 was approximately
$281.0 million as compared to approximately $287.3 million for the year ended
December 31, 2020. Investment income is primarily composed of interest income
earned on our debt investments and fee income from commitments, facilities, and
other loan related fees.

Interest Income

The following table summarizes the components of interest income for the years ended December 31, 2021 and 2020:

                              Year Ended December 31,
(in thousands)                  2021             2020

Contractual interest income $200,682 $208,017
Interest income on exit commission 37,494 41,191 PIK interest income

               11,210           9,009
Other interest income (1)          3,974           5,162
Total interest income       $    253,360       $ 263,379



(1) Other interest income includes interest income from DIOs and interest recognized on other assets.



Interest income for the year ended December 31, 2021 totaled approximately
$253.4 million as compared to approximately $263.4 million for the year ended
December 31, 2020. The decrease in interest income for the year ended December
31, 2021 as compared to the year ended December 31, 2020 is primarily
attributable to a decrease in the weighted average principal of our debt
investment portfolio outstanding between the periods.

Of the $253.4 million in interest income for the year ended December 31, 2021,
approximately $238.1 million represents recurring income from the contractual
servicing of our debt investment portfolio and approximately $15.3 million
represents income related to the acceleration of income due to early loan
repayments, and other one-time events during the period. Income from the
contractual servicing of our debt investment portfolio and the acceleration of
interest income due to early loan repayments, dividends received, and other
one-time events represented $245.9 million and $17.5 million, respectively, of
the $263.4 million interest income for the year ended December 31, 2020.

The following table shows PIK activity for the years ended December 31, 2021 and 2020, at cost:

                                                   Year Ended December 31,
(in thousands)                                       2021              2020

Initial balance of interest receivable on the PIK $14,817 $14,498
PIK interest income during the period

                   11,210          

9,009

PIK accrued (capitalized) to principal but not
recorded as income during the period                         -         (5,704 )
Payments received from PIK loans                       (14,047 )       (2,973 )
Realized gain (loss)                                      (179 )          (13 )
Ending PIK interest receivable balance           $      11,801       $ 

14,817


The increase in PIK interest income during the year ended December 31, 2021 as
compared to the year ended December 31, 2020 is due to an increase in the
weighted average principal outstanding for debt investments on accrual which
bear PIK interest. PIK accrued (capitalized) to principal but not recorded as
income during the year ended December 31, 2021 and 2020 includes the portion of
PIK receivable that is capitalized as principal on the restructuring of loans,
as applicable. Payments on PIK loans are normally received only in the event of
payoffs. The PIK receivable for both December 31, 2021 and December 31, 2020
represented approximately 1% of total debt investments.

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fee income

Fee income from commitment, facility, and loan related fees for the year ended
December 31, 2021 totaled approximately $27.6 million as compared to
approximately $23.9 million for the year ended December 31, 2020. The increase
in fee income is primarily due to an increase in the acceleration of unamortized
fees, one-time fees due to early repayments.

Of the $27.6 million in fee income from commitment, facility, and loan related
fees for the year ended December 31, 2021, approximately $7.5 million
represented income from recurring fee amortization, approximately $3.0 million
represented the acceleration of unamortized fees from expired commitments, and
approximately $17.1 million represented income related to the acceleration of
unamortized fees during the period.

Of the $23.9 million in fee income from commitment, facility, and loan related
fees for the year ended December 31, 2020, approximately $7.8 million
represented income from recurring fee amortization, approximately $3.1 million
represented the acceleration of unamortized fees from expired commitments, and
approximately $13.0 million represented income related to the acceleration of
unamortized fees during the period.

In certain investment transactions, we may earn income from advisory services;
however, we had no income from advisory services in the years ended December 31,
2021 and 2020, respectively.

Operating Expenses

Our operating expenses are comprised of interest and fees on our debt
borrowings, general and administrative expenses, and employee compensation and
benefits. Our operating expenses totaled approximately $131.0 million and $130.1
million during the years ended December 31, 2021 and 2020, respectively.

Interest and charges on our debt

Interest and fees on our debt totaled approximately $63.1 million and $66.9
million for the years ended December 31, 2021 and 2020, respectively. A lower
weighted average debt outstanding and lower weighted average borrowing cost
during the year ended December 31, 2021, resulted in a decline of interest and
fee expenses as compared to the year ended December 31, 2020.

We had a weighted average cost of debt of approximately 4.9% and 5.1% for the
years ended December 31, 2021 and 2020, respectively. The weighted average cost
of debt includes interest and fees on our debt, but excludes the impact of fee
acceleration due to extinguishment of debt. The decrease in the weighted average
cost of debt was primarily driven by a lower average amount outstanding of
higher cost debt, which is attributable to our refinancing activities during the
year.

General and administrative expenses

General and administrative expenses include legal fees, consulting fees,
accounting fees, printer fees, insurance premiums, taxes, rent, expenses
associated with the workout of underperforming investments and various other
expenses. Our general and administrative expenses increased to $24.0 million
from $23.2 million for the years ended December 31, 2021 and 2020, respectively.
The increase in general and administrative expenses for the year ended December
31, 2021 is primarily attributable to an increase in excise taxes.

Employee compensation

Employee compensation and benefits totaled approximately $37.0 million for the
year ended December 31, 2021 as compared to approximately $29.0 million for the
year ended December 31, 2020. The increase between comparative periods was
primarily due to increased variable compensation and payroll related expenses,
and a higher headcount.

Employee stock-based compensation totaled approximately $11.9 million for the
year ended December 31, 2021 as compared to approximately $11.1 million for the
year ended December 31, 2020. The increase between comparative periods was
primarily attributable to the issuance of additional stock-based compensation
awards and higher weighted average grant date fair value.

Expenses allocated to the Advisor Subsidiary

In March 2021, we entered into a shared services agreement with the Adviser
Subsidiary (the "Sharing Agreement"), pursuant to which the Adviser Subsidiary
utilizes our human capital resources, including deal professional, finance, and
administrative functions,

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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 year ended December 31, 2021 are net of expenses
allocated to the Adviser Subsidiary of $5.0 million. As of December 31, 2021,
$0.1 million remained receivable from the Adviser Subsidiary related to the
expenses allocated during the period. No amounts were allocated or receivable
for the year ended December 31, 2020.

Net realized gains and losses and net change in unrealized appreciation and amortization

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 years ended December 31, 2021
and 2020 is as follows:

                                       Year Ended December 31,
(in thousands)                           2021             2020
Realized gains                       $     91,617       $  23,856
Realized losses                           (66,322 )       (79,961 )
Realized loss on debt extinguishment       (4,419 )             -

Net realized gains (losses) $20,876 ($56,105)


During the year ended December 31, 2021, we recognized net realized gains of
approximately $20.9 million. Net realized gains included gross realized gains of
approximately $91.6 million, primarily from the sale of DoorDash, Inc. Palantir
Technologies, Ology Bioservices, and TransMedics Group, Inc. Our gains were
offset by gross realized losses of $66.3 million, primarily from the write-off
of our investments in Intent (p.k.a. Intent Media, Inc.) and Solar Spectrum
Holdings, LLC.

During the year ended December 31, 2020, we recognized net realized losses of
approximately $56.1 million on the portfolio. Net realized losses included gross
realized losses of approximately $80.0 million, primarily from the full or
partial write-off of our debt investments in Patron Technology, Motif
BioSciences, Inc., and Sebacia, Inc., as well as the write-off of our debt,
equity, and warrant investments in Optiscan Biomedical, Inc. during the period.
These losses were partially offset by gross realized gains of approximately
$23.9 million, primarily from the sale of public equity positions and the sale
of our holdings due to merger and acquisition transactions.

On July 1, 2021 and October 20, 2021, we fully redeemed and repaid the aggregate
outstanding $364.2 million of principal and $1.7 million of accrued interest and
fees pursuant to the redemption terms of the April 2025 Notes, 2027 Asset-Backed
Notes, and 2028 Asset-Backed Notes agreements. Combined with other debt
redemptions, we accelerated recognition of $4.4 million of debt issuance costs
associated with the extinguishment of the debt, which is included as a realized
loss within the "Loss on debt extinguishment" on the Consolidated Statement of
Operations for the year ended December 31, 2021. There were no debt
extinguishment losses recognized during the year ended December 31, 2020.

The net change in unrealized appreciation and depreciation of our investments is
based on the fair value of each investment as determined in good faith by our
Board. The following table summarizes the change in net unrealized appreciation
or depreciation of investments for the years ended December 31, 2021, and 2020:

                                                             Year Ended December 31,
(in thousands)                                                2021             2020

Gross unrealized capital gain on portfolio investments $178,947 $221,301
Gross unrealized amortization on portfolio investments (154,635 )

(148,238 ) Reversal of prior period net unrealized appreciation (depreciation) upon a realization event

                         (19,461 )   

53 163

Net unrealized appreciation (depreciation) on debt, equity, warrants and fund investments

                              4,851     

126 226

Other net unrealized appreciation (depreciation)                 (1,540 )   

Total net unrealized capital gains (losses) on investments

                                               $       3,311     

$126,226

Over the years ended December 31, 2021 and 2020, we recorded approximately
$3.3 million and $126.2 million net unrealized appreciation of our debt, equity, warrants and investment funds, respectively. The following table summarizes the main factors of variation in net unrealized appreciation (depreciation) of investments for the years ended December 31, 2021and 2020:

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                                                            For the year ended December 31,
                                                   2021                                         2020
                                            Equity, Warrants                              Equity, Warrants
                                                   and                                           and
(in thousands)                     Debt     Investment Funds      Total         Debt      Investment Funds      Total
Valuation appreciation
(depreciation)                   $ (3,847 )            28,159   $  24,312     $ (23,443 ) $          96,506   $  73,063
Reversal of prior period net
unrealized appreciation
(depreciation) upon a
realization event                  (1,150 )           (18,311 )   (19,461 )      40,002              13,161      53,163
Other net unrealized
appreciation (depreciation)             -              (1,540 )    (1,540 )           -                   -           -
Net realized appreciation
(depreciation)                   $ (4,997 ) $           8,308   $   3,311  

$16,559 $109,667 $126,226

Income tax and excise

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.

Net change in net assets from operations and earnings per share

For the years ended December 31, 2021 and 2020, we had net increases in net
assets resulting from operations totaling approximately $174.2 million and
approximately $227.3 million, respectively. The basic and fully diluted net
change in net assets per common share for the year ended December 31, 2021 were
$1.50 and $1.49, respectively, whereas the basic and fully diluted net change in
net assets per common share for the year ended December 31, 2020 were $2.02 and
$2.01, respectively.

For the purpose of calculating diluted earnings per share for years ended
December 31, 2021 and 2020, the dilutive effect of the 2022 Convertible Notes,
Service Vesting Awards, and Performance Awards was considered. As disclosed in
"Note 9 - Earnings Per Share", the dilutive impact of the 2022 Convertible Notes
includes only the portion expected to be settled in stock in the calculations of
diluted shares outstanding for the year ended December 31, 2021. The effect of
the 2022 Convertible Notes was excluded from these calculations for the year
ended December, 31 2020 as our share price was less than the conversion price in
effect which results in anti-dilution.

Advisor Hercules LLC

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 years ended December 31, 2021 and 2020, no dividends were
declared by the Adviser Subsidiary.

In March and July 2021, the Adviser Subsidiary 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.

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Financial situation, 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 subsidiaries. This
"Financial Condition, Liquidity and Capital Resources" section should be read in
conjunction with the "COVID-19 Developments" section above.

During the year ended December 31, 2021, we principally funded our operations
from (i) cash receipts from interest, dividend, and fee income from our
investment portfolio, (ii) cash proceeds from the realization of portfolio
investments through the repayments of debt investments and the sale of debt and
equity investments, (iii) debt offerings along with borrowings on our credit
facilities, and (iv) equity offerings.

During the year ended December 31, 2021, our operating activities provided
$128.6 million of cash and cash equivalents, compared to $207.8 million provided
during the year ended December 31, 2020. The $79.2 million decrease in cash
provided by operating activities was primarily attributable to increased
purchases of investments of $580.6 million (net of assignments to the Adviser
Funds), which was offset by a $401.8 million increase in principal and fee
payments received on investments and $79.1 million of proceeds from the sale of
equity investments.

During the year ended December 31, 2021, our investing activities used $106
thousand of cash, compared to $137 thousand used during the year ended December
31, 2020. The $31 thousand decrease in cash used by investing activities was due
to a decrease in purchases of capital equipment.

During the year ended December 31, 2021, our financing activities used $229.9
million of cash, compared to $85.0 million used during the year ended December
31, 2020. The $144.9 million increase in cash used by financing activities was
primarily due to repayments of $99.0 million of SBA Debentures related to
Hercules Technology III, L.P. ("HT III"), and an aggregate total $506.0 million
paid during the year to retire the April 2025 Notes, the 2027 Asset-Backed
Notes, and the 2028 Asset-Based Notes. The debt repayments were offset by $525.5
million of new debt issuances related to the March 2026 B Notes, September 2026
Notes, and HC IV SBA Debentures (See "Note 5 - Debt"). Additionally, we
distributed $175.5 million in dividends during the year ended December 31, 2021,
which was an increase from $152.4 million distributed during the year ended
December 31, 2020. Lastly, we issued $10.6 million of common stock during the
year ended December 31, 2021, which was lower than the $77.2 million issued
during the year ended December 31, 2020.

As of December 31, 2021, net assets totaled $1.3 billion, with a NAV per share
of $11.22. 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 cash and capital resources at December 31, 2021

As of December 31, 2021, we had $627.7 million in available liquidity, including
$133.1 million in cash and cash equivalents. We had available borrowing capacity
of $70.1 million under the SMBC Facility, $400.0 million under the Union Bank
Facility, and an additional $24.5 million available via our SBIC, subject to
existing terms, borrowing base, advance rates, regulatory requirements and
regulatory approval, as applicable. Furthermore, the Credit Facilities each have
accordion provisions through which the available borrowing capacity can be
increased by an aggregate $250.0 million.

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 December 31, 2021, our asset coverage ratio under our regulatory
requirements as a BDC was 218.9% 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 204.6% as of December 31, 2021.

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As of December 31, 2021, we had $29.9 million outstanding under our Credit
Facilities, which are floating interest rate obligations. During the year ended
December 31, 2021, we terminated our $75.0 million Wells Facility, and entered
into a new $100.0 million multi-currency facility, the SMBC Facility. The
remaining $1,220.5 million of debt outstanding are all fixed interest rate debt
obligations. During the year ended December 31, 2021, we issued $375.0 million
of new debt through the capital markets. On March 4, 2021, we issued $50.0
million in aggregate principal amount of March 2026 B Notes. The sale of the
March 2026 B Notes generated net proceeds of approximately $49.5 million.
Aggregate estimated offering expenses in connection with the transaction,
including the underwriter's discount and commissions, were approximately $0.5
million. On September 16, 2021, we issued $325.0 million in aggregate principal
amount of unsecured notes, the September 2026 Notes. The issuance of the notes
generated net proceeds of approximately $320.1 million, which was primarily used
to repay the remaining outstanding principal and accrued interest related to the
2027 Asset-Backed Notes and 2028 Asset-Backed Notes in October 2021. 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.

In addition to the above capital market transactions, we have access of up to
$175.0 million of capital through our SBIC. During the year ended December 31,
2021, we borrowed $150.5 million of the available capital, and have $24.5
million remaining available for draw. As of December 31, 2021, we had one active
SBIC, HC IV, to which we have contributed $87.5 million of regulatory capital.
During 2021, we completed the wind-down of HT III, by paying down the remaining
$99.0 million of SBA Debentures, and on June 15, 2021, we surrendered our SBIC
license for HT III.

Lastly, as of December 31, 2021, $3.2 million of cash was classified as
restricted cash. Our restricted cash relates to amounts that are held as
collateral securing certain of the Company's financing transactions. Refer to
"Note 5 - Debt" included in the notes to our consolidated financial statements
appearing elsewhere in this report for additional discussion of our debt
obligations.

As detailed above, our diverse and well-structured balance sheet is designed to
provide a long-term focused and sustainable investment platform. Currently, we
believe we have ample liquidity to support our near-term capital requirements.
As the impact of the COVID-19 pandemic and 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.

Share distribution agreement

On May 6, 2019, we entered into the 2019 Equity Distribution Agreement, which
was subsequently terminated on July 2, 2020, when we entered into a new ATM
equity distribution agreement with JMP (the "2020 Equity Distribution
Agreement"). As a result, the remaining shares that were available under the
2019 Equity Distribution Agreement are no longer available for issuance. The
2020 Equity Distribution Agreement provides that we may offer and sell up to
16.5 million shares of our common stock from time to time through JMP, as our
sales agent. Sales of our common stock, if any, may be made in negotiated
transactions or transactions that are deemed to be "at the market," as defined
in Rule 415 under the Securities Act, including sales made directly on the NYSE
or similar securities exchange or sales made to or through a market maker other
than on an exchange, at prices related to the prevailing market prices or at
negotiated prices.

During the year ended December 31, 2021, the Company sold 0.6 million shares of
common stock. As of December 31, 2021, approximately 15.6 million shares remain
available for issuance and sale under the 2020 Equity Distribution Agreement.
During the year ended December 31, 2020, the Company sold 6.3 million shares of
common stock, of which 6.0 million shares and 306,000 shares were issued under
the 2019 Equity Distribution Agreement and the 2020 Equity Distribution
Agreement, respectively.

Equity offerings

There were no equity offerings during the years ending December 31, 2021 or
2020. On June 17, 2019, we closed our underwritten public offering of 5.8
million shares of common stock, including an over-allotment option to purchase
an additional 750,000 shares of common stock (the "June 2019 Equity Offering"),
that generated net proceeds, before expenses, of $70.5 million including the
underwriting discount and commissions of $2.2 million during the year ending
December 31, 2019.

Stock Repurchase

We may from time to time seek to retire or repurchase our common stock through
cash purchases, as well as retire, cancel or purchase our outstanding debt
through cash purchases and/or exchanges, in open market purchases, privately
negotiated transactions or otherwise. Such repurchases or exchanges, if any,
will depend on prevailing market conditions, our liquidity requirements,
contractual and regulatory restrictions and other factors. The amounts involved
may be material. Our Board authorized a stock

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repurchase plan permitting us to repurchase up to $25.0 million of our common
stock until June 18, 2019, after which the plan expired and was not renewed. We
had no common stock repurchases during 2019, 2020, or 2021.

Commitments and obligations

Our significant cash requirements generally relate to our debt obligations. As
of December 31, 2021, we had $1,250.4 million of debt outstanding, which
includes $380.0 million due within the next year, $105.0 million within 1 to 3
years, and $765.4 million beyond 3 years. As disclosed in "Note 14 - Subsequent
Events", we have refinanced both the 2022 Convertible Notes and 2022 Notes which
were due within the next year through our issuance of the $350.0 million January
2027 Notes.

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 December 31, 2021, we had approximately $286.8 million of unfunded
commitments, including undrawn revolving facilities, which were available at the
request of the portfolio company and unencumbered by future or unachieved
milestones, as well as uncalled capital commitments to make investments in a
private equity fund. This excludes $34.9 million of unfunded commitments which
represent the portion of portfolio company commitments assigned to or directly
committed by the Adviser Funds. We intend to use cash flow from normal and early
principal repayments, and proceeds from borrowings and notes to fund these
commitments.

We also had approximately $275.0 million of non-binding term sheets outstanding
to five new companies, which generally convert to contractual commitments within
approximately 90 days of signing. Non-binding outstanding term sheets are
subject to completion of our due diligence and final investment committee
approval process, as well as the negotiation of definitive documentation with
the prospective portfolio companies. Not all non-binding term sheets are
expected to close and do not necessarily represent future cash requirements.

The fair value of our unfunded commitments is considered to be immaterial as the
yield determined at the time of underwriting is expected to be materially
consistent with the yield upon funding, given that interest rates are generally
pegged to market indices and given the existence of milestones, conditions
and/or obligations imbedded in the borrowing agreements.

Indemnification agreements

We have entered into indemnification agreements with our directors and executive
officers. The indemnification agreements are intended to provide our directors
and executive officers the maximum indemnification permitted under Maryland law
and the 1940 Act. Each indemnification agreement provides that we shall
indemnify the director or executive officer who is a party to the agreement, or
an "Indemnitee," including the advancement of legal expenses, if, by reason of
his or her corporate status, the Indemnitee is, or is threatened to be, made a
party to or a witness in any threatened, pending, or completed proceeding, to
the maximum extent permitted by Maryland law and the 1940 Act. We and our
executives and directors are covered by Directors and Officers Insurance, with
the directors and officers being indemnified by us to the maximum extent
permitted by Maryland law subject to the restrictions in the 1940 Act.

Distributions

Our Board maintains a variable distribution policy with the objective of
distributing four quarterly distributions in an amount that approximates 90% -
100% of our taxable quarterly income or potential annual income for a particular
taxable year. In addition, at the end of our taxable year, our Board may choose
to pay additional special distributions, so that we may distribute approximately
all

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of our annual taxable income in the taxable year in which it was earned, or may
elect to maintain the option to spill over our excess taxable income into the
following taxable year as part of any future distribution payments.

Distributions from our taxable income (including gains) to a stockholder
generally will be treated as a dividend for U.S. federal income tax purposes to
the extent of such stockholder's allocable share of our current or accumulated
earnings and profits. Distributions in excess of our current and accumulated
earnings and profits would generally be treated first as a return of capital to
the extent of a stockholder's tax basis in our shares, and any remaining
distributions would be treated as a capital gain. The determination of the tax
attributes of our distributions is made annually as of the end of our taxable
year based upon our taxable income for the full taxable year and distributions
paid for the full taxable year. Of the distributions declared during the years
ended December 31, 2021, 2020, and 2019, 100% were distributions derived from
our current and accumulated earnings and profits. There can be no certainty to
stockholders that this determination is representative of what the tax
attributes of our 2022 distributions to stockholders will actually be.

We maintain an "opt out" dividend reinvestment plan that provides for
reinvestment of our distribution on behalf of our stockholders, unless a
stockholder elects to receive cash. As a result, if our Board authorizes, and we
declare a cash distribution, then our stockholders who have not "opted out" of
our dividend reinvestment plan will have their cash distribution automatically
reinvested in additional shares of our common stock, rather than receiving the
cash distributions.

Shortly after the close of each calendar year information identifying the source
of the distribution (i.e., paid from ordinary income, paid from net capital
gains on the sale of securities, and/or a return of paid-in-capital surplus
which is a nontaxable distribution, if any) will be provided to our stockholders
subject to information reporting. To the extent our taxable earnings fall below
the total amount of our distributions for any taxable year, a portion of those
distributions may be deemed a tax return of capital to our stockholders.

We expect to qualify to be subject to tax as a RIC under Subchapter M of the
Code. In order to be subject to tax as a RIC, we are required to satisfy certain
annual gross income and quarterly asset composition tests, as well as make
distributions to our stockholders each taxable year treated as dividends for
federal income tax purposes of an amount at least equal to 90% of the sum of our
investment company taxable income, determined without regard to any deduction
for dividends paid, plus our net tax-exempt income, if any. Upon being eligible
to be subject to tax as a RIC, we would be entitled to deduct such distributions
we pay to our stockholders in determining the overall components of our "taxable
income." Components of our taxable income include our taxable interest, dividend
and fee income, reduced by certain deductions, as well as taxable net realized
securities gains. Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in the recognition
of income and expenses and generally excludes net unrealized appreciation or
depreciation as such gains or losses are not included in taxable income until
they are realized. In connection with maintaining our ability to be subject to
tax as a RIC, among other things, we have made and intend to continue to make
the requisite distributions to our stockholders each taxable year, which
generally should relieve us from corporate-level U.S. federal income taxes.

As a RIC, we will be subject to a 4% nondeductible U.S. federal excise tax on
certain undistributed income and gains unless we make distributions treated as
dividends for U.S. federal income tax purposes in a timely manner to our
stockholders in respect of each calendar year of an amount at least equal to the
Excise Tax Avoidance Requirement. We will not be subject to this excise tax on
any amount on which we incurred U.S. federal corporate income tax (such as the
tax imposed on a RIC's retained net capital gains).

Depending on the level of taxable income earned in a taxable year, we may choose
to carry over taxable income in excess of current taxable year distributions
treated as dividends for U.S. federal income tax purposes from such taxable
income into the next taxable year and incur a 4% excise tax on such taxable
income, as required. The maximum amount of excess taxable income that may be
carried over for distribution in the next taxable year under the Code is the
total amount of distributions treated as dividends for U.S. federal income tax
purposes paid in the following taxable year, subject to certain declaration and
payment guidelines. To the extent we choose to carry over taxable income into
the next taxable year, distributions declared and paid by us in a taxable year
may differ from our taxable income for that taxable year as such distributions
may include the distribution of current taxable year taxable income, the
distribution of prior taxable year taxable income carried over into and
distributed in the current taxable year, or returns of capital.

We can offer no assurance that we will achieve results that will permit the
payment of any cash distributions and, if we issue senior securities, we will be
prohibited from making distributions if doing so causes us to fail to maintain
the asset coverage ratios stipulated by the 1940 Act or if distributions are
limited by the terms of any of our debt. Our ability to make distributions will
be limited by the asset coverage requirements under the 1940 Act.

We intend to timely distribute to our stockholders substantially all of our
annual taxable income for each year, except that we may retain certain net
capital gains for reinvestment and, depending upon the level of taxable income
earned in a year, we may choose to carry forward taxable income for distribution
in the following year and pay any applicable U.S. federal excise tax.

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Significant 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:

(in thousands)           Change in unrealized
Basis Point Change    appreciation (depreciation)
(100)                $                      20,986
(50)                 $                      10,557
50                   $                     (10,955 )
100                  $                     (21,943 )

For a more in-depth discussion and disclosure of key inputs and considerations related to this estimate, see “Note 3 – Fair value of financial instruments” included in the notes to our consolidated financial statements elsewhere in this report.


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