Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During
the year ended December 31, 2022, 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, 2022, approximated its carrying value. On March 10, 2023, Silicon
Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, and the Federal
Deposit Insurance Corporation (“FDIC”) was appointed as receiver. The standard deposit insurance amount is up to $250,000
per depositor, per insured bank, for each account ownership category. In addition, on March 10, 2023, the Bank of England (the
“BOE”) announced that it intended to seek the placement of Silicon Valley Bank UK Limited (“SVBUK”), an
affiliate of SVB, into a Bank Insolvency Procedure, and on March 13, 2023, HSBC announced the acquisition of SVBUK. We maintain
no deposit or other accounts with SVB or SVBUK.
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.
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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