Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking statements
This annual report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements.
The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties, including, without limitation, statements as to:
• the effect and consequences of the novel coronavirus (“COVID-19”) public health crisis on matters including global, U.S. and local economies, our business operations and continuity, potential disruption to our portfolio companies, tightened availability to capital and financing, the health and productivity of our employees, the ability of third-party providers to continue uninterrupted service, and the regulatory environment in which we operate;
• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the impact of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital; and
• the timing of cash flows, if any, from the operations of our portfolio companies.
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These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
• an economic downturn could disproportionately impact the market sectors in which a significant portion of our portfolio is concentrated, causing us to suffer losses in our portfolio;
• a contraction of available credit and/or an inability to access the equity markets could impair our investment activities;
• interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy; and
• the risks, uncertainties and other factors we identify in the sections entitled “Risk Factors” in our quarterly reports on Form 10-Q, our annual report on Form 10-K, and in our other filings with the SEC.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in our quarterly reports on Form 10-Q and our annual report on Form 10-K, in the “Risk Factors” sections. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K. The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this annual report on Form 10-K.
Overview
We are an internally-managed, non-diversified closed-end management 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”), and has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
Our investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and equity-related investments, and to a lesser extent, income from debt investments. We invest principally in the equity securities of what we believe to be rapidly growing venture-capital-backed emerging companies. We acquire our investments through direct investments in prospective portfolio companies, secondary marketplaces for private companies and negotiations with selling stockholders. In addition, we may invest in private credit and in the founders equity, founders warrants, forward purchase agreements, and PIPE transactions of SPACs. We may also invest on an opportunistic basis in select publicly traded equity securities or certain non-U.S. companies that otherwise meet our investment criteria, subject to applicable requirements of the 1940 Act. To the extent we make investments in private equity funds and hedge funds that are excluded from the definition of “investment company” under the 1940 Act by Section 3(c)(1) or 3(c)(7) of the 1940 Act, we will limit such investments to no more than 15% of our net assets.
In regard to the regulatory requirements for BDCs under the 1940 Act, some of these investments may not qualify as investments in “eligible portfolio companies,” and thus may not be considered “qualifying assets.” “Eligible portfolio companies” generally include U.S. companies that are not investment companies and that do not have securities listed on a national exchange. If at any time less than 70% of our gross assets are comprised of qualifying assets, including as a result of an increase in the value of any non-qualifying assets or decrease in the value of any qualifying assets, we would generally not be permitted to acquire any additional non-qualifying assets until such time as 70% of our then-current gross assets were comprised of qualifying assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances.
Our investment philosophy is based on a disciplined approach of identifying promising investments in high-growth, venture-backed companies across several key industry themes which may include, among others, social mobile, cloud
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computing and big data, internet commerce, financial technology, mobility, and enterprise software. Our investment decisions are based on a disciplined analysis of available information regarding each potential portfolio company’s business operations, focusing on the portfolio company’s growth potential, the quality of recurring revenues, and path to profitability, as well as an understanding of key market fundamentals. Venture capital funds or other institutional investors have invested in the vast majority of companies that we evaluate.
We seek to deploy capital primarily in the form of non-controlling equity and equity-related investments, including common stock, warrants, preferred stock and similar forms of senior equity, which may or may not be convertible into a portfolio company’s common equity, and convertible debt securities with a significant equity component. Typically, our preferred stock investments are non-income producing, have different voting rights than our common stock investments and are generally convertible into common stock at our discretion. As our investment strategy is primarily focused on equity positions, our investments generally do not produce current income and therefore we may be dependent on future capital raising to meet our operating needs if no other source of liquidity is available.
We seek to create a low-turnover portfolio that includes investments in companies representing a broad range on investment themes.
Name Change to SuRo Capital Corp.
Articles of Amendment
On and effective June 22, 2020, the Company changed its name to “SuRo Capital Corp.” from “Sutter Rock Capital Corp” (the“Name Change”) by filing Articles of Amendment (the “Articles of Amendment”) to its Articles of Amendment and Restatement, as amended (the “Charter”), with the Department of Assessments and Taxation of the State of Maryland to effect the Name Change. In accordance with the Maryland General Corporation Law and the Charter, the Company’s board of directors approved the Name Change and the Articles of Amendment. Stockholder approval was not required.
Second Amended and Restated Bylaws
In connection with the Name Change, the Company’s board of directors also approved an amendment and restatement of the Company’s Amended and Restated Bylaws (the “Amended and Restated Bylaws”) to reflect the Name Change. The Amended and Restated Bylaws became effective on June 22, 2020 and did not require stockholder approval.
For more information regarding the foregoing events, please refer to the Company’s current report on Form 8-K filed with the SEC on June 16, 2020.
Internalization of Operating Structure
On and effective March 12, 2019 (the "Effective Date"), our Board of Directors approved internalizing our operating structure ("Internalization") and we began operating as an internally managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Our Board of Directors approved the Internalization in order to better align the interests of the Company's stockholders with its management. As an internally managed BDC, the Company is managed by its employees, rather than the employees of an external investment adviser, thereby allowing for greater transparency to stockholders through robust disclosure regarding the Company's compensation structure. Prior to the Effective Date, we were externally managed by our former investment adviser, GSV Asset Management, LLC (“GSV Asset Management”), pursuant to an investment advisory agreement (the “Investment Advisory Agreement”), and our former administrator, GSV Capital Service Company, LLC (“GSV Capital Service Company”), provided the administrative services necessary for our operations pursuant to an administration agreement (the “Administration Agreement”). In connection with our Internalization, the Investment Advisory Agreement and the Administration Agreement were terminated as of the Effective Date, in accordance with their respective terms. As a result, we no longer pay any fees or expenses under an investment advisory agreement or administration agreement, and instead pay the operating costs associated with employing investment management professionals including, without limitation, compensation expenses related to salaries, discretionary bonuses and restricted stock grants. See “Part II, Item 8—Note 11—Stock-Based Compensation” in this Form 10-K for more information.
Except as otherwise disclosed herein, this Form 10-K discusses our business and operations as an internally-managed BDC during the period covered by this Form 10-K.
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Recent COVID-19 Developments
In March 2020, the outbreak of the novel coronavirus (“COVID-19”) was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such pandemic. The pandemic has become increasingly widespread in the United States, including in the markets in which the Company primarily operates. As of the year ended December 31, 2020, and subsequent to December 31, 2020, the COVID-19 pandemic has had a significant impact on the U.S. and global economy.
We have and continue to assess the impact of the COVID-19 pandemic on our portfolio companies. We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, the effectiveness of governmental responses designed to mitigate strain to businesses and the economy, and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. While several countries, as well as certain states, counties and cities in the United States, have relaxed initial public health restrictions with a view to partially or fully reopening their economies, many cities world-wide have since experienced a surge in the reported number of cases, hospitalizations and deaths related to the COVID-19 pandemic. These increases have led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue to lead to the re-introduction of such restrictions and business shutdowns elsewhere. Additionally, as of March 2021, travelers from the United States are not allowed to visit Canada, Australia or the majority of countries in Europe, Asia, Africa and South America. These continued travel restrictions may prolong the global economic downturn. In addition, although the Federal Food and Drug Administration authorized vaccines produced by Pfizer-BioNTech and Moderna for emergency use starting in December 2020, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition. Though the magnitude of the impact remains to be seen, we expect our portfolio companies and, by extension, our operating results to be adversely impacted by the COVID-19 pandemic and, depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and may possibly default on their financial obligations to us and their other capital providers. Some of our portfolio companies have significantly curtailed business operations, furloughed or laid off employees and terminated service providers, and deferred capital expenditures, which could impair their business on a permanent basis and additional portfolio companies may take similar actions. We continue to closely monitor our portfolio companies, which includes assessing each portfolio company’s operational and liquidity exposure and outlook; however, any of these developments would likely result in a decrease in the value of our investment in any such portfolio company. In addition, to the extent that the impact to our portfolio companies results in reduced interest payments or permanent impairments on our investments, we could see a decrease in our net investment income, which would increase the percentage of our cash flows dedicated to our debt obligations and could impact the amount of any future distributions to our stockholders.
In response to the COVID-19 pandemic, we instituted a temporary work-from-home policy in March 2020, pursuant to which our employees have and continue to primarily work remotely without disruption to our operations. This policy will remain in effect until it is deemed safe to return to our office. As of March 11, 2021, there is no indication of a reportable subsequent event impacting the Company’s financial statements for the year ended December 31, 2020. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.
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Portfolio and Investment Activity
Year Ended December 31, 2020
The value of our investment portfolio will change over time due to changes in the fair value of our underlying investments, as well as changes in the composition of our portfolio resulting from purchases of new and follow-on investments and the sales of existing investments. The fair value, as of December 31, 2020, of all of our portfolio investments, excluding U.S. Treasury bills, was $280,779,774.
During the year ended December 31, 2020, we funded investments in an aggregate amount of $31,242,228 (not including capitalized transaction costs) as shown in the following table:
Portfolio Company Investment Transaction Date Gross Payments
Neutron Holdings, Inc. (d/b/a Lime) Junior Preferred Convertible Note 4% Due 5/11/2027 5/11/2020 $ 506,339
Rent the Runway, Inc. Preferred Shares, Series G 6/17/2020 5,000,001
Palantir Lending Trust SPV I Collateralized Loan 15% Due 6/19/2022 6/19/2020 6,870,000
Coursera, Inc. Preferred Shares, Series F 7/15/2020 2,838,354
Blink Health, Inc. Preferred Shares, Series A 10/27/2020 4,999,995
Blink Health, Inc. Preferred Shares, Series C 10/27/2020 4,999,987
Enjoy Technology, Inc. Convertible Note 14% Due 1/30/2024 11/30/2020 521,112
GreenAcreage Real Estate Corp. Common Shares 12/17/2020 503,220
GreenAcreage Real Estate Corp. Common Shares 12/29/2020 503,220
Residential Homes for Rent, LLC
(d/b/a Second Avenue) Term Loan 15% Due 12/23/2023 12/23/2020 3,000,000
Residential Homes for Rent, LLC
(d/b/a Second Avenue) Preferred Shares, Series A 12/23/2020 1,500,000
Total $ 31,242,228
During the year ended December 31, 2020, we capitalized fees of $190,799.
During the year ended December 31, 2020, we exited investments in an amount of $31,245,944, net of transaction costs, and realized a net gain on investments of $16,441,223 (including U.S. Treasury investments and adjustments to amounts held in escrow receivable) as shown in following table:
Portfolio Company Net Proceeds Realized Gain/(Loss) (2)
Parchment, Inc. (3)
$ 10,876,621 $ 6,785,364
4C Insights (f/k/a The Echo Systems Corp.) (4)
807,952 (628,452)
Palantir Technologies, Inc. (5)
11,671,878 8,357,068
Palantir Lending Trust SPV I (6)
7,889,493 988,892 (7)
Total $ 31,245,944 $ 15,502,872
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(1) The average net share price is the net share price realized after deducting all commissions and fees on the sales, if applicable.
(2) Realized gain/(loss) does not include amounts held in escrow receivable or any realized gain/(loss) incurred on the maturity of our U.S. Treasury investments.
(3) On January 31, 2020, Parchment, Inc. closed a merger with Credentials Solutions. As a result of the transaction, we received $10,876,621 in net proceeds. As of December 31, 2020, we received all escrow proceeds of $90,275.
(4) On July 29, 2020, SuRo Capital Corp. exited its investment in 4C Insights (f/k/a The Echo Systems Corp.). In connection with this exit, SuRo Capital Corp. received 112,374 Class A common shares in Kinetiq Holdings, LLC in addition to cash proceeds and amounts currently held in escrow. As of December 31, 2020, we have received $12,900 in escrow proceeds, and expect to receive $43,223 in additional escrow proceeds in 2021.
(5) As of December 31, 2020, we held 4,618,952 remaining Class A common shares of Palantir Technologies, Inc., all of which were subject to lock-up restrictions.
(6) The Palantir Lending Trust SPV I promissory note was initially collateralized with 2,260,000 Class A common shares of Palantir Technologies, Inc. The collateralized loan to Palantir Lending Trust SPV I matures on June 19, 2022 and includes a 15% interest rate. Through the collateralized loan, SuRo Capital Corp. participated in additional upside in a future Palantir Technologies, Inc. liquidity event by receiving a percentage of the share price appreciation as captured in the Equity Participation in Underlying Collateral security. As of December 31, 2020, the balance of the loan and all guaranteed interest has been fully repaid, and SuRo Capital Corp.
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retains the right to upside on 1,312,290 shares as captured in the Equity Participation in Underlying Collateral security. The net proceeds figure does not include accrued guaranteed interest received of $782,125.
(7) The realized gain from SuRo Capital Corp.'s investment in Palantir Lending Trust SPV I is generated by the proceeds from the sale of a portion of the shares collateralizing the promissory note to Palantir Lending Trust SPV I and attributable to the Equity Participation in Underlying Collateral.
During the year ended December 31, 2020, we did not write-off any investments and our CUX, Inc. (d/b/a CorpU) Series D preferred warrants with a strike price of $4.59, expired on February 14, 2020.
As the COVID-19 situation continues to evolve, we are maintaining close communications with our portfolio companies to proactively assess and manage potential risks across our investment portfolio.
Year Ended December 31, 2019
During the year ended December 31, 2019, we funded investments in an aggregate amount of $25,530,000 (not including capitalized transaction costs) as shown in the following table:
Portfolio Company Investment Transaction Date Gross Payments
Neutron Holdings, Inc. (d/b/a Lime) Preferred Shares, Series D 1/25/2019 $ 10,000,000
Aspiration Partners, Inc. Convertible Promissory Note 5% Due 1/31/2021 8/12/2019 $ 280,000
GreenAcreage Real Estate Corp. Common shares 8/12/2019 $ 7,500,000
Treehouse Real Estate Investment Trust, Inc. Common shares 9/11/2019 $ 7,500,000
Stormwind, LLC Preferred shares, Series D 11/26/2019 $ 250,000
Total $ 25,530,000
During the year ended December 31, 2019, we capitalized fees of $39,685.
During the year ended December 31, 2019, we sold investments in an amount of $65,603,252, net of transaction costs, and realized a net gain on investments of $19,179,340 (including U.S. Treasury investments) as shown in following table:
Portfolio Investment Net Proceeds Realized Gain/(Loss) (2)
Declara, Inc. (3)
$ — $ (12,334,151)
Spotify Technologies S.A. (4)
32,547,633 22,545,550
Dropbox, Inc. (5)
19,723,591 6,066,664
Knewton, Inc. (6)
51,511 (5,083,701)
CUX, Inc. (d/b/a CorpU) (7)
— (109,331)
Lyft, Inc. (8)
13,280,517 8,983,623
EdSurge, Inc. (9)
— (1,002,161)
Total $ 65,603,252 $ 19,066,493
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(1) The average net share price is the net share price realized after deducting all commissions and fees on the sale(s), if applicable.
(2) Realized gain/(loss) does not include amounts held in escrow or any realized gain or loss incurred on the maturity of our U.S. Treasury investments.
(3) On March 11, 2019, Declara, Inc. entered into a definitive agreement to be acquired by Declara Holdings, Inc., a subsidiary of Futuryng, Inc. Despite the existence of an earn-out provision, as a result of the transaction, the Company does not expect to receive any proceeds. The exit of Declara, Inc. included a 12% Convertible Promissory Note with a principal value of $2,334,152.
(4) As of May 2, 2019, all remaining shares of Spotify Technologies S.A. held by us had been sold.
(5) As of September 19, 2019, all remaining shares of Dropbox, Inc. held by us had been sold.
(6) On May 31, 2019, a sale of substantially all of Knewton, Inc. to Wiley Education was completed. As a result of the transaction, we received $51,511 in net proceeds in 2019 and $26,254 in escrow proceeds in 2020.
(7) On October 24, 2019, CUX, Inc. (d/b/a CorpU) completed a recapitalization, which amended our investment in the Senior Subordinated Convertible Promissory Note. As a result of the recapitalization, the principal amount of our Senior Subordinated Convertible Promissory Note was reduced by $109,331, the interest rate was reduced to 4%, and the maturity was extended to February 14, 2023.
(8) As of November 4, 2019, all remaining shares of Lyft, Inc. held by us had been sold.
(9) As of December 12, 2019, all remaining shares of EdSurge, Inc. held by us had been sold in a transaction with the International Society for Technology in Education (ISTE). As a result of the transaction, we do not expect to receive any proceeds.
During the year ended December 31, 2019, we did not write-off any investments.
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Year Ended December 31, 2018
During the year ended December 31, 2018, we funded investments in an aggregate amount of $10,636,685 (not including capitalized transaction costs) as shown in the following table:
Portfolio Company Investment Transaction Date Gross Payments
Ozy Media, Inc. (1)
Promissory Note 10% Due 2/12/2018 1/12/2018 $ 100,000
SharesPost, Inc. (2)
Common shares 6/15/2018 100,221
Knewton, Inc. Unsecured Convertible Promissory Note 8% Due 12/31/2019 7/23/2018 134,405
Nextdoor.com, Inc. Common shares 9/27/2018 6,326,790
Nextdoor.com, Inc. Common shares 12/19/2018 1,390,373
Nextdoor.com, Inc. Common shares 12/27/2018 2,284,896
NestGSV, Inc. (d/b/a OneValley, Inc.) (3)
Unsecured Convertible Promissory Note 12% Due 12/31/2019 12/31/2018 300,000
Total $ 10,636,685
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(1) During the year ended December 31, 2018, Ozy Media, Inc.’s obligations under its financing arrangements with us became past due. Effe ctive April 9, 2018, the term of Ozy Media Inc.'s notes were extended through the issuance of a new convertible promissory note, which extended the maturity date of the existing notes to October 31, 2018 and then to December 31, 2018 once certain conditions were satisfied. Effective August 17, 2018, Ozy Media Inc. executed an additional debt amendment, which expanded its borrowing limit. In consideration for amending and restating the existing notes, we were issued warrants exercisable for 295,565 shares of Ozy Media Inc.'s common stock. Subsequent to December 31, 2018, Ozy Media Inc.'s obligations under its financing arrangements with us became past due. On September 11, 2019, we agreed to convert the Convertible Promissory Note due 12/31/2018 to Ozy Media, Inc. and all related accrued interest, into 683,482 shares of Ozy Media, Inc.'s Series C-2 preferred shares.
(2) On June 15, 2018 we exercised our 770,934 warrants to purchase shares of SharesPost, Inc.'s common stock, with a $0.13 strike price.
(3) Effective July 31, 2018, we agreed to extend the Convertible Promissory Note to NestGSV, Inc. (d/b/a OneValley, Inc.) until December 31, 2018, with a new interest rate of 12%. Previously accrued interest will be capitalized into the principal of the extended note. On December 31, 2018, we extended the maturity of the Convertible Promissory Note to December 31, 2019, compounded the previously accrued and then-outstanding interest, and invested an additional $300,000. The Convertible Promissory Note continues to accrue interest at 12%. In consideration for the extension and additional investment, the 500,000 Series A-3 Preferred Warrants due April 4, 2019 and the 187,500 Series A-4 Preferred Warrants due October 6, 2019, were extended to April 4, 2021 and October 6, 2021, respectively. We also received an additional 250,000 Series B Preferred Warrants due December 31, 2023.
During the year ended December 31, 2018, we capitalized fees of $32,350.
During the year ended December 31, 2018, we sold investments or received repayments from portfolio companies in an amount of $32,395,839, net of transaction costs, and realized a net loss on investments of $7,433,619 (including U.S. Treasury investments) as shown in following table:
Portfolio Investment Net Proceeds Realized Gain/(Loss) (1)
Chegg, Inc. (2)
$ 9,446,315 $ 3,437,847
NestGSV, Inc. (d/b/a OneValley, Inc.) (3)
592,129 (680)
Avenues Global Holdings, LLC 5,923,795 (4,228,059)
General Assembly Space, Inc. (4)
7,820,191 3,292,552
Lytro, Inc. (5)
791,596 (9,711,762)
SugarCRM, Inc. (6)
2,645,183 (4,332,777)
DreamBox Learning, Inc. (7)
5,176,630 2,916,251
Total $ 32,395,839 $ (8,626,628)
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(1) Realized gain/(loss) does not include amounts held in escrow or any realized gain/(loss) incurred on the maturity of our U.S. Treasury investments.
(2) As of February 22, 2018, all remaining shares of Chegg, Inc. held by us had been sold.
(3) Represents repayment of the 12% Unsecured Promissory Note Due 1/15/2018.
(4) On April 16, 2018, Adecco Group, a Swiss staffing company, announced that it was acquiring technology education provider General Assembly Space, Inc. for $412.5 million, including debt financing. We have received approximately $7.8 million in net proceeds as a result of the transaction, with approximately $1.5 million of additional proceeds held in escrow. We have received approximately $1.4
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million and $0 in escrow proceeds in 2019 and 2020, respectively, and expect to receive $60,557 in additional escrow proceeds in 2021.
(5) On March 27, 2018, Lytro, Inc. announced that it was preparing to wind down the company over an unspecified period of time. Google LLC acquired Lytro, Inc.’s intellectual property and certain other assets. As a result of the transaction, we have received $0.8 million in net proceeds and expect to receive approximately $0.4 million in additional proceeds held in escrow. We have received approximately $170,000 and $168,000 in escrow proceeds in 2019 and 2020, respectively.
(6) On June 14, 2018, SugarCRM, Inc. entered into an agreement to be purchased by AKKR Candy Holdings, Inc. As a result of the transaction, we have received $2.6 million in net proceeds and expect to receive approximately $0.3 million in additional proceeds held in escrow. We received all escrow proceeds as of December 31, 2019.
(7) On July 18, 2018, DreamBox Learning, Inc. entered into a definitive agreement to be acquired by a wholly owned subsidiary of DreamBox Learning Holding, LLC, an entity owned by The Rise Fund Deneb, LP. As a result of the transaction, we have received $5.2 million in proceeds and expect to receive approximately $0.3 million in additional proceeds held in escrow. We received all escrow proceeds as of December 31, 2019.
During the year ended December 31, 2018 we did not write-off any investments.
Results of Operations
Comparison of the years ended December 31, 2020, 2019, and 2018
Operating results for the years ended December 31, 2020, 2019, and 2018 are as follows:
Year Ended December 31,
2020 2019 2018
Total Investment Income $ 1,824,127 $ 1,495,724 $ 1,617,836
Interest income 1,006,510 995,724 992,836
Dividend income 817,617 500,000 625,000
Net Operating Expenses $ 16,338,543 $ 10,946,792 $ 9,252,413
Incentive fee waiver — — (5,000,000)
Management fee waiver — — (892,421)
Total Operating Expenses $ 16,338,543 $ 10,946,792 $ 15,144,834
Management fees — 848,723 5,199,900
Incentive fees/(Reversal of incentive fee accrual) — (4,660,472) 382,387
Costs incurred under Administration Agreement — 306,084 1,702,047
Directors’ fees 445,000 383,370 345,000
Professional fees 2,962,781 5,290,329 1,587,578
Compensation expense (1)
8,801,841 4,286,972 —
Interest expense 2,247,817 2,372,570 4,545,471
Tax expense 43,574 33,825 482,994
Other expenses 1,837,530 2,085,391 899,457
Net Investment Loss $ (14,514,416) $ (9,451,068) $ (7,634,577)
Net realized gain/(loss) on investments 16,441,223 19,179,340 (7,433,619)
Realized loss on partial repurchase of 5.25% Convertible Senior Notes due 2018
— — (397,846)
Net change in unrealized appreciation/(depreciation) of investments
73,410,631 13,339,859 9,641,050
Benefit from taxes on unrealized depreciation of investments — 885,566 6,716,735
Net Change in Net Assets Resulting from Operations $ 75,337,438 $ 23,953,697 $ 891,743
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(1) For the year ended December 31, 2020, this balance includes $1,962,431 of accelerated recognition of compensation cost related to the cancellation of unvested options on April 28, 2020. Refer to "Note 11— Stock-Based Compensation" for more detail.
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Investment Income
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
Investment income increased to $1,824,127 for the year ended December 31, 2020 from $1,495,724 for the year ended December 31, 2019. The increase was due to an increase in dividend income received from GreenAcreage Real Estate Investment Trust, Inc. and guaranteed interest from Palantir Lending Trust SPV I, partially offset by a decrease in accrued interest income due to the placement of some debt investments on non-accrual status and decreased Treehouse Real Estate Investment Trust, Inc. dividends, relative to the year ended December 31, 2019.
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
Investment income decreased to $1,495,724 for the year ended December 31, 2019 from $1,617,836 for the year ended December 31, 2018. The decrease was due to decreased dividend income received from SPBRX, Inc. (f/k/a GSV Sustainability Partners, Inc.) during the year ended December 31, 2019, relative to the year ended December 31, 2018. The decrease was offset by dividends received from Treehouse Real Estate Investment Trust, Inc. earned in the year ended December 31, 2019.
Operating Expenses
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
Total operating expenses increased to $16,338,543 for the year ended December 31, 2020, from $10,946,792 for the year ended December 31, 2019. The increase in operating expense was primarily due to the accelerated recognition of compensation cost related to the cancellation of unvested options on April 28, 2020, as well as reversal of the incentive fee accrual as a result of the Internalization. The notable increase was partially offset by removal of management and professional fees related to the termination of the Investment Advisory Agreement and Administration Agreements.
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
Total operating expenses, net of waiver of management and incentive fees, increased to $10,946,792 for the year ended December 31, 2019, from $9,252,413 for the year ended December 31, 2018. The increase was primarily due to an increase in legal and audit fees, and the addition of temporary licensing fees and consulting fees, and compensation expense incurred in relation to our Internalization during the year ended December 31, 2019, relative to the year ended December 31, 2018. The increase was primarily offset by the removal of management fees, removal of previously accrued incentive fees, and removal of costs incurred under Administration Agreement in relation to Internalization in the year ended December 31, 2019. The increase was partially offset by a decrease in interest expense due to the extinguishment of the Convertible Senior Notes due September 15, 2018, as compared to the year ended December 31, 2018.
Net Investment Loss
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
For the year ended December 31, 2020, we recognized net investment loss of $14,514,416, compared to net investment loss of $9,451,068 for the year ended December 31, 2019. The change between periods resulted from the increase in operating expenses, as discussed above, and an increase in total investment income between periods.
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
For the year ended December 31, 2019, we recognized net investment loss of $9,451,068, compared to net investment loss of $7,634,577 for the year ended December 31, 2018. The change between periods resulted from the increase in operating expenses, as discussed above, and a decrease in total investment income between periods.
Net Realized Gain on Investments
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
For the year ended December 31, 2020, we recognized net realized gain on our investments of $16,441,223, compared to net realized gain of $19,179,340 for the year ended December 31, 2019. The components of our net realized gains/losses on
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portfolio investments for the year ended December 31, 2020 and 2019, excluding U.S. Treasury investments, are reflected in the tables above, under “—Portfolio and Investment Activity.”
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
For the year ended December 31, 2019, we recognized net realized gain on our investments of $19,179,340, compared to net realized loss of $7,433,619 for the year ended December 31, 2018. The components of our net realized gains/losses on portfolio investments for the year ended December 31, 2019 and 2018, excluding U.S. Treasury investments, are reflected in the tables above, under “—Portfolio and Investment Activity.”
Net Change in Unrealized Appreciation/(Depreciation) of Investments
For the year ended December 31, 2020, we had a net change in unrealized appreciation/depreciation of $73,410,631. For the year ended December 31, 2019, we had a net change in unrealized appreciation/depreciation of $13,339,859 For the year ended December 31, 2018, we had a net change in unrealized appreciation of $9,641,050. The following tables summarize, by portfolio company, the significant changes in unrealized appreciation and/or depreciation of our investment portfolio for the years ended December 31, 2020, 2019, and 2018.
Portfolio Company Net Change in Unrealized Appreciation/(Depreciation) For the Year Ended December 31, 2020
Palantir Technologies, Inc. (1)
$ 66,368,123
Coursera, Inc. 16,772,218
Course Hero, Inc. 9,405,053
Forge Global, Inc. (1)
7,513,356
Palantir Lending Trust SPV I (1)
2,550,762
Nextdoor, Inc. 1,968,755
4C Insights (f/k/a The Echo Systems Corp.) (1)
1,414,905
Aspiration Partners, Inc. (1,334,698)
StormWind, LLC (1,342,526)
NestGSV, Inc. (d/b/a GSV Labs, Inc.) (2,326,760)
Treehouse Real Estate Investment Trust, Inc. (4,063,112)
SharesPost, Inc. (1)
(4,693,514)
Ozy Media, Inc. (5,585,800)
Neutron Holdings, Inc. (d/b/a/ Lime) (6,515,508)
Parchment, Inc. (1)
(6,895,603)
Other (2)
174,980
Total $ 73,410,631
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(1) The change in unrealized appreciation/(depreciation) reflected for these investments resulted from the full or partial sale, repayment, capital transaction (merger), or write-off of the investment, which resulted in the reversal of previously accrued unrealized appreciation/(depreciation), as applicable.
(2) “Other” represents investments (including U.S. Treasury bills) for which individual change in unrealized appreciation/(depreciation) was less than $1.0 million for the year ended December 31, 2020.
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Portfolio Company Net Change in Unrealized Appreciation/(Depreciation) For the Year Ended December 31, 2019 Portfolio Company Net Change in Unrealized Appreciation/(Depreciation) for the Year Ended December 31, 2018
Declara, Inc. (1)
$ 12,334,151 Lytro, Inc. (1)
$ 8,387,816
Ozy Media, Inc. 12,218,812 Lyft, Inc. 5,486,237
Course Hero, Inc. 11,567,394 Coursera, Inc. 4,751,216
Coursera, Inc. 10,458,012 SharesPost, Inc. 4,401,790
Parchment, Inc. 4,745,425 Avenues Global Holdings, LLC (1)
4,243,435
Aspiration Partners, Inc. 3,511,682 Course Hero, Inc. 4,065,198
Knewton, Inc. (1)
2,979,116 SugarCRM, Inc. (1)
3,753,157
Enjoy Technology, Inc. 1,155,396 Palantir Technologies, Inc. (1,022,365)
CUX, Inc. (d/b/a CorpU) (1,804,892) Knewton, Inc. (1,576,151)
Palantir Technologies, Inc. (2,471,310) Declara, Inc. (1,715,261)
A Place for Rover Inc. (f/k/a DogVacay, Inc.) (2,548,128) Ozy Media, Inc. (2,070,561)
NestGSV, Inc. (d/b/a OneValley, Inc.) (3,663,624) Chegg, Inc. (1)
(2,151,532)
Dropbox, Inc. (1)
(4,219,119) Spotify Technology S.A. (4,015,707)
Stormwind, LLC (4,343,218) General Assembly Space, Inc. (1)
(4,840,905)
Lyft, Inc. (1)
(11,313,418) Curious.com, Inc. (5,514,077)
Spotify Technology S.A. (1)
(16,711,276)
Other (2)
1,444,856 Other (2)
(2,541,240)
Total $ 13,339,859 Total $ 9,641,050
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(1) The change in unrealized appreciation/(depreciation) reflected for these investments resulted from the full or partial sale, repayment, capital transaction (merger), or write-off of the investment, which resulted in the reversal of previously accrued unrealized appreciation/(depreciation), as applicable.
(2) “Other” represents investments (including U.S. Treasury bills) for which individual change in unrealized appreciation/(depreciation) was less than $1.0 million for the years ended December 31, 2019 or 2018.
Recent Developments
Portfolio Activity
Please refer to “Note 12—Subsequent Events” to our consolidated financial statements as of December 31, 2020 for details regarding activity in our investment portfolio from January 1, 2021 through March 11, 2021.
As the COVID-19 situation continues to evolve, we are maintaining close communications with our portfolio companies to proactively assess and manage potential risks across our investment portfolio.
We are frequently in negotiations with various private companies with respect to investments in such companies. Investments in private companies are generally subject to satisfaction of applicable closing conditions. In the case of secondary market transactions, such closing conditions may include approval of the issuer, waiver or failure to exercise rights of first refusal by the issuer and/or its stockholders and termination rights by the seller or us. Equity investments made through the secondary market may involve making deposits in escrow accounts until the applicable closing conditions are satisfied, at which time the escrow accounts will close and such equity investments will be effectuated.
Dividends
On January 26, 2021, the Company’s Board of Directors declared a dividend of $0.25 per share paid, in cash, on February 19, 2021 to stockholders of record as of the close of business on February 5, 2021.
On March 8, 2021, the Company's Board of Directors declared a dividend of $0.25 per share payable on April 15, 2021 to stockholders of record as of the close of business on March 30, 2021. The dividend will be paid in cash.
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Conversion of 4.75% Convertible Senior Notes due 2023
Effective as of February 5, 2021, the conversion price applicable to the 4.75% Convertible Senior Notes due 2023 was adjusted to $9.25 per share (108.0505 shares of the Company’s common stock per $1,000 principal amount of the 4.75% Convertible Senior Notes due 2023) from the most recent conversion price of $9.42 per share (106.1681 shares of the Company’s common stock per $1,000 principal amount of the 4.75% Convertible Senior Notes due 2023), which had been in effect since December 30, 2020. The adjustment to the conversion rate of the 4.75% Convertible Senior Notes due 2023 was made pursuant to the supplemental indenture governing the 4.75% Convertible Senior Notes due 2023 as a result of the Company’s cash dividend of $0.25 per share, paid on February 19, 2021 to stockholders of record as of the close of business on February 5, 2021.
Redemption of 4.75% Convertible Senior Notes due 2023
On February 19, 2021, the Company caused notices of redemption to be issued to the holders of its 4.75% Convertible Senior Notes due 2023 regarding the Company’s exercise of its option to redeem, in whole, the issued and outstanding 4.75% Convertible Senior Notes due 2023, pursuant to the Indenture, dated as of March 28, 2018, between the Company and U.S. Bank National Association, as trustee, and the First Supplemental Indenture, dated as of March 28, 2018, between the Company and U.S. Bank National Association, as trustee. The Company will redeem $38,215,000 in aggregate principal amount of the issued and outstanding 4.75% Convertible Senior Notes due 2023 on March 29, 2021 (the “Redemption Date”). The 4.75% Convertible Senior Notes due 2023 will be redeemed at 100% of their principal amount ($1,000 per note), plus the accrued and unpaid interest thereon from September 30, 2020, through, but excluding, the Redemption Date.
Holders of the 4.75% Convertible Senior Notes due 2023 may surrender such notes for conversion into shares of the Company’s common stock in lieu of receiving cash at any time prior to the close of business on the business day immediately preceding the Redemption Date.
A copy of the notice of redemption was included as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 19, 2021. Please refer to that Current Report on Form 8-K for additional information.
As of December 31, 2020, $38,215,000 in aggregate principal amount of the 4.75% Convertible Senior Notes due 2023 were outstanding (the “Outstanding Amount”). Hypothetically, assuming all holders of the 4.75% Convertible Senior Notes due 2023 voluntarily submit the Outstanding Amount for conversion into shares of the Company’s common stock prior to the Redemption Date in accordance with the terms of the First Supplemental Indenture at the current conversion price of $9.25 per share (108.0505 shares of the Company’s common stock per $1,000 principal amount of the 4.75% Convertible Senior Notes due 2023), approximately 4,129,150 shares of the Company’s common stock would be issued. The dilutive effect of such conversions on the Company’s net asset value per share of $15.14 as of December 31, 2020 would be approximately $1.01.
COVID-19
The Company has been closely monitoring the COVID-19 pandemic, its broader impact on the global economy and the more recent impacts on the U.S. economy. Subsequent to December 31, 2020, the global outbreak of the COVID-19 pandemic, and the related effect on the U.S. and global economies, may have adverse consequences for the business operations of some of the Company’s portfolio companies and, as a result, may have adverse effects on the Company’s operations. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, remain uncertain. The operational and financial performance of the issuers of securities in which the Company invests depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Company’s investments and negatively impact the Company’s performance.
As of March 11, 2021, there is no indication of a reportable subsequent event impacting the Company’s financial statements for the year ended December 31, 2020. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.
Liquidity and Capital Resources
Our liquidity and capital resources are generated primarily from the sales of our investments and the net proceeds from public offerings of our equity and debt securities. Our $12.0 million senior secured revolving Credit Facility with Western Alliance Bank (the "Credit Facility") matured and expired on May 31, 2019 and no amounts were outstanding under the Credit Facility as of such date. See “Note 10—Debt Capital Activities.” In addition, on March 28, 2018, we issued $40.0 million aggregate principal amount of 4.75% Convertible Senior Notes due 2023, as discussed further below and in “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2020.
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Our primary uses of cash are to make investments, pay our operating expenses, and make distributions to our stockholders. For the year ended December 31, 2020, our operating expenses were $16,338,543, including compensation expense related to the cancellation of the options granted under the 2019 Equity Incentive Plan. For the years ended December 31, 2019 and 2018, our operating expenses were $10,946,792 and $9,252,413, net of fee waivers, respectively.
Cash Reserves and Liquid Securities December 31, 2020 December 31, 2019 December 31, 2018
Cash $ 45,793,724 $ 44,861,263 $ 28,184,163
Borrowing availability under the Credit Facility (1)
— — 12,000,000
Securities of publicly traded portfolio companies:
Unrestricted securities (2)
— — 44,589,406
Subject to other sales restrictions (3)
94,635,398 — —
Securities of publicly traded portfolio companies 94,635,398 — 44,589,406
Total Cash Reserves and Liquid Securities $ 140,429,122 $ 44,861,263 $ 84,773,569
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(1) Subject to leverage and borrowing base restrictions and other requirements under the Credit Facility as of December 31, 2018. The Credit Facility matured on May 31, 2019. Refer to "Note 10—Debt Capital Activities" to our consolidated financial statements as of December 31, 2020 for details.
(2) "Unrestricted securities" represents common stock of our publicly traded companies that are not subject to any restrictions upon sale. We may incur losses if we liquidate these positions to pay operating expenses or fund new investments. As of December 31, 2020, this balance was $0 as we were not holding any publicly traded portfolio companies that were not subject to other sales restrictions. As of December 31, 2019, this balance was $0 as we were not holding any publicly traded portfolio companies. As of December 31, 2018, this balance represents our shares of common stock in Spotify Technology S.A. and Dropbox, Inc.
(3) As of December 31, 2020, this balance represents our shares of common stock in Palantir Technologies, Inc. that were subject to certain lock-up restrictions.
During the year ended December 31, 2020, cash increased to $45,793,724 from $44,861,263 at the beginning of the year. The increase in cash was primarily due to proceeds from the sale of our common stock, interest income, dividends, and escrow proceeds received from our investments, offset by cash used to purchase investments, pay dividends, repurchase our common stock under the Share Repurchase Program, make interest payments related to our 4.75% Convertible Senior Notes due 2023, and pay operating expenses.
Currently, we believe we have ample liquidity to support our near-term capital requirements. As the impact of the COVID-19 continues to unfold and consistent with past and current practices, we will continue to evaluate our overall liquidity position and take proactive steps to maintain the appropriate liquidity position based upon the current circumstances.
Contractual Obligations
A summary of our significant contractual payment obligations as of December 31, 2020 is as follows:
Payments Due By Period ( in millions)
Total Less than
1 year 1–3 years 3–5 years More than
5 years
Payable for securities purchased (1)
$ 134.2 $ 134.2 $ — $ — $ —
Convertible Senior Notes (2)
38.2 — 38.2 — —
Operating lease liability 0.8 0.2 0.4 0.2 —
Total $ 173.2 $ 134.4 $ 38.6 $ 0.2 $ —
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(1) “Payable for securities purchased” relates to the purchase of U.S. Treasury bills on margin and repurchase of our common stock under the Share Repurchase Program. This balance was subsequently repaid in early January 2021, when the $150.0 million United States Treasury bill matured and the $15.8 million margin deposit that we posted as collateral was returned.
(2) The balance shown for the "Convertible Senior Notes" reflects the principal balance payable to investors for the 4.75% Convertible Senior Notes due 2023 as of December 31, 2020. Refer to “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2020 for more information.
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Share Repurchase Program
During the year ended December 31, 2020, we repurchased 1,655,848 shares of our common stock pursuant to the Share Repurchase Program. As of December 31, 2020, the dollar value of shares that remained available to be purchased under the Share Repurchase Program was approximately $9.6 million.
Under the Share Repurchase Program, we may repurchase our outstanding common stock in the open market provided that we comply with the prohibitions under our insider trading policies and procedures and the applicable provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended. For more information on the Share Repurchase Program, see "Part II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities".
Off-Balance Sheet Arrangements
As of December 31, 2020, we had no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices. However, we may employ hedging and other risk management techniques in the future.
Equity Issuances & Debt Capital Activities
At-the-Market Offering
On July 29, 2020, the Company entered into an At-the-Market Sales Agreement, dated July 29, 2020 (the "Initial Sales Agreement"), with BTIG, LLC, JMP Securities LLC, and Ladenburg Thalmann & Co., Inc. (collectively, the "Agents"). Under the Initial Sales Agreement, the Company may, but has no obligation to, issue and sell up to $50,000,000 in aggregate amount of shares of its common stock (the "Shares") from time to time through the Agents or to them as principal for their own account (the "ATM Program"). On September 23, 2020, the Company increased the maximum amount of Shares to be sold through the ATM Program to $150,000,000 from $50,000,000. In connection with the upsize of the ATM Program to $150,000,000, the Company entered into the Amendment No. 1 to the At-the-Market Sales Agreement, dated September 23, 2020, with the Agents. The Company intends to use the net proceeds from the ATM Program to make investments in portfolio companies in accordance with its investment objective and strategy and for general corporate purposes.
During the year ended December 31, 2020, the Company issued and sold 3,808,979 shares under the ATM Program at a weighted-average price of $13.36 per share, for gross proceeds of $50,900,326 and net proceeds of $49,882,319, after deducting commissions to the Agents on Shares sold. As of December 31, 2020, up to $99,099,674 in aggregate amount of the Shares remain available for sale under the ATM Program. Refer to “Note 5—Common Stock” to our consolidated financial statements as of December 31, 2020 for more information regarding the ATM Program.
4.75% Convertible Senior Notes due 2023
On March 28, 2018, we issued $40.0 million aggregate principal amount of 4.75% Convertible Senior Notes due 2023, which bear interest at a fixed rate of 4.75% per year, payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2018. We received $38.2 million in proceeds from the offering, net of underwriting discounts and commissions and other offering expenses. The 4.75% Convertible Senior Notes due 2023 mature on March 28, 2023, unless previously repurchased or converted in accordance with their terms. We do not have the right to redeem the 4.75% Convertible Senior Notes due 2023 prior to March 27, 2021.
During the year ended December 31, 2020, the Company issued 174,888 shares of its common stock and cash for fractional shares upon the conversion of $1,785,000 in aggregate principal amount of the 4.75% Convertible Senior Notes due 2023.
Refer to “—Recent Developments” and “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2020 for more information regarding the 4.75% Convertible Senior Notes due 2023.
Distributions
The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this Form 10-K for a list of our past distributions, including dividends and returns of capital, if any, per share that we have declared since our formation through December 31, 2020.
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Critical Accounting Policies
Critical accounting policies and practices are the policies that are both most important to the portrayal of our financial condition and results, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. These include estimates of the fair value of our Level 3 investments and other estimates that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reporting period. It is likely that changes in these estimates will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ materially from such estimates. See “Note 2—Significant Accounting Policies” to our consolidated financial statements as of December 31, 2020 for further detail regarding our critical accounting policies and recently issued or adopted accounting pronouncements.
Related-Party Transactions
See “Note 3—Related-Party Arrangements” to our consolidated financial statements as of December 31, 2020 for more information.
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