Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During
the year ended December 31, 2021, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions.
The fair value of our cash and cash equivalents at December 31, 2021, approximated its carrying value.
Investment
and Interest Rate Risk
We
are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current
and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between
our assets and liabilities and the effect that interest rates may have on our cash flow.
As
we seek to provide capital to a broad range of life science companies, institutions and investors with the majority of our finance receivables
portfolio paying interest based on floating interest rates with a LIBOR floor, our net investment income is dependent, in part, upon
the difference between the rate at which we earn on our cash and cash equivalents and the rate at which we lend those funds to third
parties. As a result, we are subject to risks relating to changes in market interest rates. We may use interest rate risk management
techniques in an effort to limit our exposure to interest rate fluctuations by providing capital at variable interest rates. We do not
currently engage in any interest rate hedging activities. We constantly monitor our portfolio and position our portfolio to respond appropriately
to a reduction in credit rating of any of our investments.
During
2018, we entered into a revolving credit facility. As we borrow funds to make additional investments, our income will depend, in part,
upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we are subject
to risks relating to changes in market interest rates. In periods of rising interest rates when we have debt outstanding, our cost of
funds would increase, which could reduce our income, especially to the extent we continue to hold fixed rate investments. We generally
seek to mitigate this risk by pricing our debt investments with floating interest rates to maintain the spread of our portfolio over
the cost of leverage. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to
interest rate fluctuations, which we have not done. Adverse developments resulting from changes in interest rates or hedging transactions
could have a materially adverse effect on our business, financial condition and results of operations. Accordingly, there can be no assurance
that a significant change in market interest rates will not have a material adverse effect on our investment income, net of borrowing
expenses.
Inflation
Certain
of our partner companies may be impacted by inflation. If such partner companies are unable to pass any increases in their costs along
to their customers, it could adversely affect their results and impact their ability to pay interest and principal on our loans. In addition,
any projected future decreases in our partner companies’ operating results due to inflation could adversely impact the fair value
of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce
carrying value of our net assets.
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